Abstract
In Chapter 2, I discussed the importance of selecting an asset allocation plan that is appropriate to your needs. Now that you have determined what percentage of your assets should be invested in stocks, the next step is to determine how those equity investments should be structured. Studies have shown that if asset allocation drives 90% of the returns of a total portfolio, structure decisions, the next part of our arrow-shaped Road Map to Financial Success, determine more than 5% of the results. In this chapter and the one after it, I will guide you through the major considerations that both pension plans and individual investors face when it comes to constructing an equity portfolio.
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Notes
- 1.
The main explanation for the last place rank for the index in 1991–1993 and the first place rank in 1989 and 1995 is due largely to Japan. Japan at the time had a total market capitalization that started to rival the United States. Investment managers almost to a one were afraid of committing that much to a single market and universally underweighted Japan. When Japan did well, the index looked fantastic. When Japan did poorly, all managers who kept a lower-than-market weight in the country (almost all of them) outperformed the benchmark.
- 2.
Meaning that information about any company that might affect the stock price is more quickly disseminated to the marketplace and is rapidly reflected in the stock price. With openness and transparency come more rapid market reaction and less time for any individual piece of information to be used for personal gain.
- 3.
This is a real example. Yes, I know that market capitalization is a measure of worth and GDP is a measure of income and the two are not comparable. Please explain this to the news web site (which shall go nameless) that published this story or otherwise just feel free to share my frustration with the financial mass media.
- 4.
This is not a real example.
- 5.
Many, including “Small Cap Opportunity, Too Big to Ignore?,” Financial Advisor Magazine, June 19, 2012.
- 6.
The name of the Wilshire 5000 Index is a bit of a misnomer. Whereas the S&P 500 Index normally contains 500 stocks (sometimes a few drop out due to mergers or bankruptcies and are not replaced for a few weeks), the Wilshire 5000 Index simply contains ALL stocks in the United States and has ranged from 3,500 to 9,000 stocks over time, depending on how many are actually trading on exchanges. As a result, the Wilshire 5000 is generally considered to be the best measure of the entire US stock market.
- 7.
Neither Russell benchmark is adjusted on a daily basis. Stocks are added and deleted periodically as events warrant. As a result, some stocks in either benchmark may not necessarily be among the largest 1,000 or precisely the next 2,000 at any particular point in time.
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© 2013 Michael C. Schlachter
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Schlachter, M.C. (2013). Investment Structure for Stocks, Part I. In: INVEST LIKE AN INSTITUTION. Apress, Berkeley, CA. https://doi.org/10.1007/978-1-4302-5060-9_3
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DOI: https://doi.org/10.1007/978-1-4302-5060-9_3
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