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

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 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.

The unfortunate mathematics of a 75% decline requires an investor to realize a 300% gain just to get back to even – the equivalent of compounding at 4.8% for 30 years!

When talking about stocks for the long run, then, it must mean something

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

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

This is one of the problems with investing in just one security, country, or asset class.

Currently, your ten-year nominal return for buying U.S. government bonds will be around 2.25% if held to maturity.