It's a common formula in the investment business. Determine a person's risk tolerance, and set their asset allocationGlossary: How a portfolio is split among kinds of investments, such as stocks, bonds and cash. Rebalancing brings the mix back to its target after markets move it. based on the historical risk/reward characteristics of financial markets.
At Sherman Research, we'll be among the first to tell you that historical data contains valuable information about how markets are likely to behave. However, our familiarity with that data also helps us understand the limitations involved in using it.
Understanding both long-term market performance and how much the market can deviate from the norm at times creates opportunities. It can help investors to pursue better returns and manage risk even when markets don't live up to their past returns. Since dramatic turns in performance can have a lasting impact, it's important to do more than simply trust that everything will come out right in the long run.
Investments are broadly divided into asset classes such as stocks, bondsGlossary: A loan you make to a government or company. It pays interest on a set schedule and returns the amount you lent when it matures. When interest rates rise, existing bonds lose value., cash, and more. These asset classes are impacted by different economic factors, which makes them perform differently from one another.
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