1^st Quarter 2008 Investment Allocation Benchmark Re-Cap

By Kent E. Irwin

The eFinPLAN financial planning report provides combined historical investment returns for various market indices for each asset allocation category. This report recaps the results through the end of 2007. Use this report to help evaluate the performance of your investments.

Historical Returns: Savings accounts, bonds and stock versus inflation

Over the last approximately 100 years, savings accounts have earned around 3% and low risk bonds have earned around 5%. Inflation (increased cost of goods and services) averaged around 3.5%, therefore if you’d only invested in savings and bonds, your investments would not have really grown when you consider the “purchasing power” of your money.  Therefore you haven’t lost value, but only stayed even. To accumulate enough money to retire on, you will probably need to earn a rate of return much higher than inflation.

Diversification

The most common way to earn a higher rate is through taking more risk and investing in stocks. Looking back nearly 100 years stocks have averaged 8% – 10%. However since most people have some risk aversion, being diversified may help to lessen risk. Diversify through owning assorted stocks (different companies), and of various types (company size and industry), bonds and some cash.

Asset Allocation

An investment advisor and or software can help people determine the right mixture of ‘Assets’ stock types and bonds , and dollar amounts to ‘Allocate’ (how you have spread out your assets) according to an individual’s comfort and goals. This is in part where the term “Asset Allocation” comes from.

Research Indicates that over 91% of long-term portfolio performance is derived from the decisions made regarding asset allocation, not economic forecasting (market timing) and not stock selection. This means that it is more important to focus on Asset Allocation and not the economy or trying to pick that one great stock.

Although “Asset Allocation” provides no guarantees, adhering to one’s personal investment model during good times and bad, usually helps to lessen the impact of bad times in the stock or bond markets, and provides rates of return near expectations – over time. Employing a good investment manager is important too.

The 5 investment risk levels (Very Conservative to Very Aggressive) have different percentage amounts of Asset classes, which are cash, bonds and different types of stocks. For example, this table shows you a Moderate Risk portfolio made of 5% cash, 30% bond, 30% large company stock, 10% medium size company stock, 10% small company stock, and 15% foreign stock

This table provides historical rates of return for each asset allocation model using standard market indices (see footnotes). As with all tables of this type, since no one knows the future, past performance is not always an indication of future performance. In addition, there are many good investment managers who are able to do better than these rates of return, with the same or less risk – even after fees. Therefore, asset allocation investors could use this table to help with future expectations and to monitor their investments.

Conclusion: stock market fluctuation is normal, pay more attention to your particular asset allocation and keep a watchful eye and keep in contact with your investment manager. Consult a trusted professional investment advisor regarding your individual situation.

Footnotes: Returns are calculated December 31, 2007. Asset class indices used: Cash – Money Market (3-month CD), Intermediate Long Bond – Lehman Bros Aggregate Bond, Large Cap Value S&P 500, Mid Cap Russell, Mid-Cap Index, Small Cap – Russell 2000, International Equity – MSCI EAFE Equity Index. Returns assume no charges for transaction charges or any other fees.

Kent E. Irwin is CEO and founder of eFinplan, LLC. He is also a Chartered Financial Consultant (ChFC), a Chartered Advisor in Philanthropy (CAP) and a Chartered Life Underwriter (CLU). He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . For more information about eFinplan, go to the Web site efinplan.com.

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