I am offering the online chapters of the book using "The Honor System." Tip options at the bottom of the page.
In addition to whatever you own, you have been given $10,000. You are now asked to choose between:
A. A sure gain of $5000
B. A 50% change to gain $10,000 and a 50% chance to gain nothing.
Asset allocation is generally the primary determinant of both risk and return in most portfolios. Asset classes can be classified in broad terms like stocks, real estate, bonds, and cash, and they can be subdivided further into large-cap and small-cap, value and growth, international, and combinations of each. Bonds can be subdivided into short, intermediate, and long term, tax-free, high-yield, convertible, and international classifications...
The question at the start of the chapter is a slightly modified version (by a factor of 10) of the question asked by Daniel Kahneman and Amos Tversky in their 1979 paper.8 In the question at the start of the chapter, 84% chose A. However, the question from Chapter 5 is phrased differently, but is identical in terms of net cash to the subject. 69% chose B in that question, which tells us that people were heavily influenced by how the question was framed even though the net results were the same.
Generally Accepted Investment Principles
Some useful links and references9
Vanguard has several investor questionnaires that will lead you through a series of questions and make a suggested allocation that investors can compare to their current portfolios or other suggestions.
American Association of Individual Investors Asset Allocation Models
Recommendations from four robo advisers and four human advisers for a hypothetical 35-year-old investor (Marketwatch, May 2, 2015)
Nacubo Asset Allocations for U.S. College and University Endowments and Affiliated Foundations
Callan Target Date Index (Glidepath Allocation)
Public pension fund asset allocations
Public pension funds may not be especially comparable to individual portfolios for multiple reasons, but they can provide an interesting reference for many investors to keep in mind. They had a median 56.69% of their holdings in equities as of September 30, 2017 according to Wilshire Trust Universe Comparison Service, as compared with 54.37% a year earlier. They also had 23.3% in bonds, down from 25% a year earlier.10 The following are some examples of large plans that publicly report their asset allocation and they are also interesting to consider in the context of the next chapter, which broadens the discussion to the major investment options and the global investing universe.
California Public Employees' Retirement System (CalPERS)
California State Teachers Retirement System (Calsters)
Virginia Retirement System
San Bernardino County Employees' Retirement Assnn
Houston Firefighters’ Relief and Retirement Fund
I am offering the online chapters of The Peaceful Investor using "The Honor System." If you don't plan to purchase a version of the book, yet you think it was worth your time and you learned a significant amount, you can tip or compensate me in a number of ways. This will probably not be tax deductible for you, but I will report and pay taxes on any payments.