The big decision each investor must make is the percentage of your money which should be invested in each of the four core investable assets: Stocks, Bonds, Inflation Protection, and Cash. My ‘Core 4’ Investment Allocation Model gives this basic percentage to apply to each of these asset classes. Inputs to the model include stock prices, earnings, bond yields, inflation, corporate profits, GDP and U.S. dollar values.
The Core 4 Model is ideal for managing a 401k Plan or a brokerage account where an index-only investment portfolio is desired. The Model is updated the first week of each month.
Investments: Each month, adjust your ‘Future Contributions’ to the percentages stated.
Cash: Use a money market fund or short-term bond fund for cash. Then when the opportunity is great, we will transfer a portion of our cash into one of the other 3 investments.
One study suggests that more than 91.5% of a portfolio’s return is attributable to its mix of asset classes. Individual stock selection and market timing accounted for less than 7% of a diversified portfolio’s return. William Bernstein says in his book The Four Pillars of Investing, that: “The ability to estimate the long-term future returns of the major asset classes is perhaps the most important investment skill that an individual can possess.”