There certainly is some correlation between these, but it can vary dramatically. When hit with the same economic, political and social forces, different types of assets will react differently.

 

This is a troubling challenge for traders but a great opportunity for investors. It is considered a smart practice to lay out a disciplined investment policy for yourself, deciding in advance what percentage of your assets you wish to allocate to each asset class. That will depend, of course, on your individual tolerance for risk and other factors.

 

Then, as these different classes move over time, each in their own way, periodically REBALANCE them back to the original allocation, either with new money or adjustments in existing assets. In this way, you tend to avoid trends and manias and have a greater chance of having a lower concentration in asset classes that may correct downward and slightly more money in those areas that may have temporarily been out of favor.

 

We have seen an almost perfect example of how great an opportunity this can be lately. Over time, Large Cap Growth stocks and Large Cap Value stocks have tended to achieve the same returns. In the short run, however, it can be very different. In mid summer, the year-to-date returns differed by over fifteen percentage points. Huge! If you believe that long term averages will hold (look for a future article on "regression to the mean"), then clearly new investments should be directed in one direction over the other and balancing adjustments should be made.

 

Take a look at your total investment picture. This may be a very intelligent time to rebalance. Of course, if we have the privilege and responsibility of advising you on your money, you don't have to give it a second thought. We do it for you and we do it with as many as fourteen or fifteen different asset classes. That way, you can just sit back, enjoy the final weeks of summer and look forward to a beautiful autumn.