How to Prove Your Asset Allocation Works

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What's in Your Index?

Which benchmark you choose can make a big difference in how your clients judge your performance. Compare the most commonly used indexes in each style box, and you'll find a variance of at least 300 basis points and sometimes as much as 5,000 bps. If your performance is on the south side of the benchmark—and by a wide margin—maybe you're using the wrong index.

The Trouble With Benchmarks

One year, returns between five of the best-known indexes differed by an astounding 5,299 basis points within the same style box. In 2006 differentials were relatively thin, but it pays to compare your index to other market benchmarks from time to time—and explore why your benchmarks may deviate from the pack.

Sharpe Ratios: Risk-Adjusted Glory Can Be Fleeting

Maintaining high Sharpe ratios is tougher than it looks. There seems to be a ceiling that few stocks can break through on a sustainable basis. While Sharpe and other risk metrics might increase your comfort level with a stock or fund in the beginning, you still need to monitor what is driving the return.

Rebalancing: How to Calculate a Portfolio's Trigger Points

A good rebalancing model takes into account the behaviors of the various asset classes as well as the investor's risk tolerance and trading costs. A simple spreadsheet can help you determine the optimum time to rebalance the portfolio.