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By Christine Benz | 03-04-2010 10:48 AM

Ibbotson: Asset Allocation Did Not Fail

The Ibbotson Associates founder and Yale professor says diversification did work in 2008. Plus, get his outlook for stocks today.

Christine Benz: Hi, I'm Christine Benz for Morningstar. I'm here at the Ibbotson Conference. It's early in the conference, but we already have lots of exciting takeaways. I'm here today with Roger Ibbotson. Roger is chairman and chief investment officer for Zebra Capital. He was also founder of Ibbotson Associates. He's also a professor at the Yale School of Management.

Roger, thanks for being here today.

Roger Ibbotson: Great to be here.

Benz: You posed a very important question in your keynote presentation this morning about whether asset allocation is still a viable concept. Did it fail us during 2008 when pretty much everything but long-term Treasuries went down and went down by a lot? What's your answer to that question?

Ibbotson: The answer is no, it did not fail. I think it actually did quite well, in the sense that stocks and bonds actually behave very differently from each other. Stocks went down, but bonds went up.

Also, cash was the other big part of the equation. Stocks, bonds, cash. Cash, of course, was stable over the whole period. So I think it actually worked. And certainly diversification worked, because individual stock portfolios were really volatile, whereas the more [bonds] you had in the portfolio, you ended up with a much less risky portfolio.

I must say, I'm frankly pretty confused as to why they could even think it failed. But it actually mostly stems from the fact that most of the equity markets all dropped in 2008.

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