Ultimately, smart investing requires that we not only monitor asset allocation, but of equal weight, we focus on the advisory fees associated with the investment strategy.

The reason many people will invest in both stocks and bonds is that they are often non-correlated, meaning, stocks often zig while bonds zag.

A 68-year long stock underperformance is almost the same as a human’s current expected lifespan in the U.S.

The Sharpe ratio is a measure of risk adjusted returns, and is calculated as: (returns – risk free rate)/volatility.

So what is an investor to do? The next step lies in what is called the only free lunch in investing – diversification.

The most venerable asset allocation model is the traditional 60/40 portfolio. The portfolio simply invests 60% in stocks (S&P 500) and 40% in 10-year U.S. government bonds.

Most individuals do not have a sufficiently long time to recover from large drawdowns from any one risky asset class.

Quick, what is the world’s largest financial asset class? Don’t know? Answer: Foreign ex-U.S. bonds!

The 60/40 allocation only spends about 22% of the time at new highs, and the other 78% in some degree of drawdown. Drawdowns are physically painful, and the behavioral research demonstrates that people hate losing money much more than the joy of similar gains. To be a good (read: patient) investor you need to be able to sit through the dry spells.