Beyond Diversification – What you need to know about Asset Allocation

Key Takeaways

• Determine your target stock-bond allocation first based on time horizon, risk tolerance, and how well-funded you are for retirement—this single decision has the biggest impact on long-term returns, not the choice between individual stock picks
• Diversification fails during market sell-offs because correlations spike; focus on stocks-bonds diversification (especially treasuries) which works in downturns, rather than relying solely on diversification between US/international stocks or value/growth
• Use tolerance bands (e.g., rebalance when allocations drift 5%) rather than calendar-based rebalancing, and lean into markets during sell-offs by buying when you're underweight stocks—studies show this contrarian discipline pays off over time
• Modernize a 60/40 portfolio by adding 12% alternatives to bonds, allocating 5-10% to risk-mitigated equity strategies that deliver 70-80% of equity returns with half the volatility, and dedicating 3-5% to long bonds as a crash hedge
• Don't replace asset classes with risk factors in portfolio construction, but use risk factor analysis to better understand hidden equity-like exposures (e.g., high-yield bonds behave like stocks in downturns) and assess true diversification