In
this Step, we will review various mixtures of
risk exposures and show the long- term historical
returns of those portfolios. Now that you have
established a Risk Capacity™, you need
to evaluate risk before actually taking it.
This will complete the matching of Risk Capacity™
(people) and risk exposure (portfolios).
Step 11 : Program Overview
This
rule points out the value of the Modern
Portfolio Theory. It essentially tells trustees
that index funds are the prudent way to
invest trust assets. The rule acts as a
legal road map for estate planning attorneys,
trustees of all types of trusts, and investment
advisors.
The mix of indexes in your portfolio, or
your asset allocation, accounts for a little
more than 100% of your total return on average.
The "little more than" refers
to the negative returns of active management.
Active returns are near zero, but negative
on average. (see article)* This is also
referred to as your Investment Policy. As
Charles Ellis points out in his 1985 classic,
Investment Policy, it is the most important
choice an investor can make.
