2000 provided a reality check. If they don't go up, don't buy them. Deep down, most investors understand and accept that they cannot have it all maximum growth, maximum income, minimum risk and instant liquidity. Investors need to make difficult choices based on imperfect information. In the end, the answer is that what most investors are seeking is to meet their return objectives while taking as little risk as necessary.
Asset allocation is the process of optimizing portfolios to meet investors' goals.
Stocks, fixed income investments and money market securities may all have a role to play in portfolios, depending on investors' return requirements and risk tolerances. While risk was not rewarded last year as bonds outperformed stocks, we think that investors can look forward to a more normal pattern of returns over the next few years. Our projections for the major asset classes are shown in the chart below. For investors seeking maximum total returns, our judgment is that stocks as they have been over the long term clearly remain the asset class to favor. We continue to recommend a fully invested posture in equity portfolios.