[SARGE]

Efficient FrontierThe Online Asset Allocator



Edited by William J. Bernstein




What the Investment Industry
Doesn't Want You to Know


It's a fact: your investment performance is determined almost entirely by
only one factor -- your allocation of assets among broad asset classes.
Stock/mutual fund picking and market timing -- the things traditionally
thought to be critical to investment success -- turn out to be almost
irrelevant. How can this be?

Over 10 years ago, Gary Brinson, a noted finance academic and money manager,
studied a group of pension fund managers. He found that he could explain
over 90% of the differences in performance among these investment
professionals simply by classifying them according to how much of their
assets they placed in stocks, bonds, or cash. Stock picking or market timing
skill? Try as though he might, he found no evidence of either among these
investors practicing their craft at the apex of the profession. The
significance of this for small investors is profound; find the "right" mix
of foreign and domestic stocks and bonds, and your choice of individual
securities becomes almost irrelevant in the long run.

How the investor arrives at the "right" mix is called "portfolio theory,"
and until recently small investors have had precious little guidance in this
vitally important area. How difficult is it to find this "right" mix?
Surprisingly easy. Consider: If over the past 10 or 20 years you had simply
held a portoflio consisting of one quarter each of indexes of large US
stocks, small US stocks, foreign stocks and high quality US bonds, you would
have beaten over 90% of all professional money managers, and with
considerably less risk. The amazing truth is that over a long enough time
period almost any reasonably balanced indexed strategy will best the
overwhelming majority of "professional" managers.