Weighing Asset Allocations

Here’s how you can project the performance of a portfolio with different allotments and assumptions.


To download the spreadsheet, type XLTP <Go>, tab in to the search field, enter ASSET ALLOCATION CALCULATOR and press <Go>. Click on the Open button.

FIXED INCOME HAS HAD A NICE RUN, RETURNING about 9 percent a year from 1991 through June 11, according to the Barclays index of U.S.Treasuries. That may be changing, as the bond market likely can’t continue to provide those healthy returns.

For example, the 10-year Treasury yield has dropped from almost 16 percent to less than 2 percent during the past 30 years. While bond yields may dip still further because the Federal Reserve has said it will keep its benchmark rate near zero through at least late 2014, it’s more likely that interest rates will rise as the economy improves, which would lower total returns in the coming years. That projected swing in performance highlights how important asset allocation is in determining investment returns.

Distributing your investments among stocks, bonds, cash, commodities, currencies and real estate matters much more than whether you invested in individual equities such as Apple Inc., Exxon Mobil Corp. and International Business Machines Corp. Some academic studies have found that as much as 85 percent of a portfolio’s performance depends on how it’s allocated among various asset classes. If bonds underperform, how will that affect total returns of your portfolio?

BLOOMBERG’S ASSET ALLOCATION CALCULATOR is a sample spreadsheet that lets you forecast future portfolio returns based on a set of assumptions that you can alter to test different scenarios. The spreadsheet forecasts portfolio performance based on probability-weighted return assumptions by individual assets or asset classes such as high-yield bonds, commodities, emerging markets, municipal bonds and more. To begin, use the Excel Template Library (XLTP) function to download the sample spreadsheet. Type XLTP <Go>, tab in to the field, enter ASSET ALLOCATION CALCULATOR and press <Go>. Click on the Open button.

Click on the Forecast Returns tab at the bottom of the spreadsheet. You can use the default settings highlighted in orange as a guide or use the historical data provided to adjust your assumptions.

The spreadsheet lets you compute potential returns using two methods: one based on portfolio-specific probabilities and the second using asset class–specific probabilities. For comparison purposes, the default return is set at 7.5 percent for the benchmark Standard & Poor’s 500 Index based on an assumption of an average long-term return of 6.4 percent over inflation for U.S. equities. That amount of return would cover U.S. core inflation, which has averaged about 1.5 percent during the past two years. Keep in mind that the models aren’t a guarantee of future performance.

YOU CAN SEE HOW THE TOTAL PORTFOLIO’S returns will be affected by the anticipated poor performance of fixed income. Portfolios with 5 percent in Treasuries and 5 percent in cash are forecast to return 3.5 percent and 1 percent, for those two assets, in a best case. That compares with a best-case one-year return of 18 percent for the S&P 500. The total portfolio return would be 3.93 percent.

You can adjust the various allocations and returns, creating multiple scenarios. For example, reducing the Treasuries allocation to 0 and increasing small stocks to 20 percent would increase the one-year return to 4.18 percent.

DOUGLAS EDLER, CFA, IS AN EQUITIES APPLICATION SPECIALIST AT BLOOMBERG IN NEW YORK. This email address is being protected from spambots. You need JavaScript enabled to view it.


Type PRTU <Go> to create, update or share portfolios.


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