Efficient Frontiers
Our Efficient Frontier chart illustrates the benefits of diversification. The Efficient Frontier, using historical data, shows various portfolios invested in bonds and stocks. The vertical axis shows average annual returns. (Past performance figures, of course, do not guarantee similar performance in the future.) The horizontal axis measures risk. As you move rightward along the horizontal axis, risk increases. Take a look at the diamond labeled “30% bonds / 70% stocks.” It shows a return of 7.7% and risk of 13.3%. Now look at the diamond labeled “100% stocks.” The return is not much greater for the all-stock portfolio. Your return improves only modestly, while greater risk is assumed.
Where do you best fit along an Efficient Frontier? Each investor has a different goal, and each mix of assets will vary. But in general, if you are in your 20s or 30s, you will achieve comfort and success in the upper right-hand corner of the chart. If you are in your 70s or older, you are most likely best served on the left-hand side of the chart. Those of you in your 50s and 60s fall somewhere in between.
Note: We have made our calculations using a 10 year U.S. Treasury total return index from Young Research and a Large Capitalization Stock total return index from Young Research for the period 1871-2008. Young Research used data from the U.S. Treasury Department and Standard and Poor’s to calculate their indices. The efficient frontier was calculated using annual returns and assuming annual rebalancing. Past performance is not indicative of future results.
FEATURED TRENDS
Following is a description of trends and themes that are of current interest to us.
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