Insurance and Financial Information

We all want higher returns and less volatility from our investments. The problem is that we don't know what to do to get there. There is a constant barrage of information about the best funds or best money managers. Unfortunately, what's hot today may be icy cold tomorrow.

Look at your latest 401K statement (or old IRA for that matter) and see what your three and five year annual rate of return is (ARR). If your ARR is below 3%, read on, there is upside for you. Getting better returns with low risk does not require you to have detailed knowledge of investing and to endlessly study the latest trend. Better returns are a matter of having the right amount of diversification. If all of your money is in a small number of segments (e.g. US stocks, emerging markets and fixed income) then, over the long term, your returns are likely to be lower and more volatile.

SIB (Simpler Is Better) portfolios enable easy analysis and measurement created by MyPlanIQ: SIB portfolios are based on simple asset allocation implemented using market index funds that can be measured for performance. SIB can be used to understand the impact of having (or not having) a particular asset class. This will make it easy to understand the returns impact of asset allocation. The simplest form of this strategy is to 'buy and hold' (Strategic Asset Allocation or SAA) the assets and only rebalance the asset ratios periodically.

For example, if you start with 40% of the portfolio in bonds, 30% in US equities and 30% in international equities, after three months it is likely that the ratios are no longer 40/30/30 and you need to rebalance the funds to bring it back into the correct ratio. Recently, SAA has been augmented with a more active strategy Tactical Asset Allocation (TAA) which is a 'buy and modify approach. You keep the same asset classes but you may change the ratios depending on market conditions. For example a portfolio with 40% bonds, 30% US stocks and 30% international stocks may see the bond and US stock ratios increased at the cost of the international stocks when international economies are weak.

SIB portfolios were created for three, four, five and six asset classes.

The Three Asset Class SIB: has bonds US and international equities - heavy dependence on the US and the rest of the developed world. With a conservative strategic asset allocation strategy, the portfolio would consist of 60% fixed income and 20% each for US and international equities.

Four Asset Class SIB: Adds Real estate trusts (REIT)to the three asset class SIB. With a conservative strategic asset allocation strategy, the portfolio would consist of 60% fixed income and 13.33% each for US, international equities and REIT.

Five Asset Class SIB: The five asset class SIB is a strong platform for portfolio creation. It has broad diversification and, with tactical asset allocation, good returns. The five class SIB has bonds, real estate and equities from the US, international and emerging markets. Anyone using a five asset class portfolio, should be in good shape. However, it's still worth looking at the the six asset class portfolio because it will be important when inflation becomes an issue.

SixAsset Class SIB: Commodities are now added to the portfolio. This asset class and will helps broaden diversification. As adding another asset class does not significantly improve the result within the 5 year timeframe, it may be asked whether the extra effort is worth it. Broader diversification is good, but is it really necessary? In our view, the addition of commodities will be increasingly important as a hedge against inflation as the recovery slowly continues and there is increasing inflationary pressure.

The three asset category portfolio is out of date. Check your 401K and/or IRA to make sure you have at least five asset categories. This is not rocket science and you should be able to increase your returns and be in control of improving your returns. SAA should deliver in the 5-6% range and with a TAA strategy it is possible to get in the 10% range - remember an additional 6% over a decade will double your money.

Increasingly, the returns from our investments are going to be what pays for our retirement. Maximizing returns now will be vital later. By using this simple to understand approach, everybody should be able to improve returns and reduce risk.

MyplanIQ has more details on strategies and results for a wide number of plans.

Simon Napper is President and Founder of MyPlanIQ. MyPlanIQ the only provider of advanced investment strategies totally customized to personal risk profile and plan funds.