Professor Burton Malkiel of the Rebalance Investment Committee explains asset allocation in the context of a globally diversified portfolio and how diversification among stock markets leads to better returns. Read more about managing your IRA investments.
Well, asset allocation starts with the premise that you don’t want all of your eggs in one basket. And even if you think, “Gee, the U.S. stock market has been great over the long run. It’ll probably be good over the long run from now on,” you still don’t want all of your assets in U.S. stocks because we’re only about a third of the world’s economy. And there are many other countries — China, India, Brazil — that are growing much faster than the United States.
So what asset allocation is, it’s basically another way of saying you ought to be diversified. And you ought to be diversified in terms of having stocks and bonds and real estate. And you don’t want simply United States stocks. You want stocks that are broadly diversified internationally. And you — and that would include the emerging markets of the world, where we are getting most of the growth. Last year, in 2012, emerging markets were responsible for about 90% of world economic growth. So what you want to do is to be broadly diversified, and that’s what asset allocation is.