Investing Based On Long-Term Averages
For the past 50 years, most advisors have relied on how a particular mix of assets perform over the long haul when making investment decisions. The average “moderate” portfolio is typically a 60/40% mix between stocks and bonds. Regardless of whether markets are underpriced, fairly priced, or overpriced, the portfolio doesn’t vary much. This has typically been supported with the explanation that it’s impossible to know where markets are headed. It was believed “staying the course”, according to the asset allocation model dictated by a client’s risk tolerance, established predictability of returns over the long run. This may have been true in the 1950s when mathematical models could not adequately assess the risks in the market.