Andy put together an aggressive portfolio of growth stocks because he wanted to earn the highest return possible. He invested 25% evenly in large-cap growth, mid-cap growth, small-cap growth, and foreign stocks (developed countries).

How did Andy do? From January 1995 to March 2003, Andy's IRA had an average annualized return of 6.0%. On the surface, that doesn't look too bad.  But looking a little closer, it's clear that Andy would have been much farther ahead had he not lost 7.7% in 2000, 12.3% in 2001, 17.0% in 2002 and 4.5% in the first quarter of 2003.  From January 2000 to March 2003, Andy's portfolio declined by a total of 35.8%, or $450,016! Andy is quite upset about losing that much money, and has finally decided to do something to reduce his investment risk.

Moderate Mary

Mary never had Andy's appetite for risk.  In December 1994, she had $500,000 that she inherited from her grandfather.  She couldn't bring herself to "gamble" with the money that Grandpa diligently saved all his life. Mary did some investigating, and discovered that attention to her asset allocation would help limit her risk by spreading her money around. She invested 10% each in different flavors of stocks: large-cap growth, large-cap value, mid-cap growth, mid-cap value, small-cap growth and small-cap value. Mary invested another 20% of her portfolio in foreign stocks (developed countries) and the remaining 20% in a money market fund (cash).

How did Mary do? From January 1995 to March 2003, Mary's portfolio had an average annual return of 6.4%, which is 0.4% more than Andy, even though she has a more conservative² portfolio.                                                                  <<  >>

²Judgment regarding the relative risk of each portfolio is based upon the historical standard deviation and semi-standard deviation of each portfolio.