Part 2: Stocks, Bonds, and Cash: A primer on asset classes

Editors Note:
Burt Mayer, a senior at Lakeside High School in Seattle, WA interned at Merriman this summer with the intention of creating educational material for young investors.  This three part series featured on is perfect for those investors who are looking to get started but need to know the basics first

Investors at all levels spend a tremendous amount of time and energy looking for hot stocks and attractive funds. They track fancy-looking graphs and complicated ratios because they’re fancy looking and complicated. Ultimately far more time is spent thinking about individual stocks and bonds than what percentage of their money is invested in stocks versus bonds.

Meanwhile, many academic studies by very smart people have concluded that the way we distribute investments across asset classes is far more relevant to a portfolio’s return than the specific securities or funds in that portfolio. A famous 1986 study by Brinson, Hood, and Beebower (he’s the smart one) called “Determinants of Portfolio Performance” concluded that a full 93.6% of the variation in a portfolio’s quarterly returns can be explained simply by what proportion of the portfolio is put in different asset classes. (more…)