Allocation of Assets

Returning to the "stashing something away for a rainy day", Forbes Magazine presents a pithy think-piece on Asset Allocation (which should be the foundation for how you invest) ...

Five Myths About Asset Allocation

There is no perfect allocation and no absolute protection in a bear market. But it's still worth diversifying and rebalancing once a year.

Myth 1: Asset allocation protects you from the bear. ... Asset allocation reduces the probability of a large loss in a down market, but it doesn't prevent a loss. In an economic downturn your portfolio will go down according to the amount of total risk you hold. ...

Myth 2: Tactical allocation is best in volatile markets. ... Tactical asset allocation is the biggest con game on Wall Street. ... To be blunt, tactical allocation is just a form of market timing, which for average investors is a losing game ...

Myth 3: There is an optimal strategic asset allocation. The perfect allocation doesn't exist, at least not one that can be known in advance. ...Finding an appropriate asset allocation requires you to know your own financial and life situation and yourself.

Myth 4: Constant rebalancing is needed. Not true ... Over the past ten years a broadly diversified portfolio that included U.S. stocks, international stocks, REITs and bonds that was rebalanced annually returned one percentage point more a year, on average, than a portfolio that wasn't rebalanced.

Myth 5: More funds equals more diversification. Being diversified means owning asset classes that have fundamentally different risks. These asset classes should also have expected returns that are higher than the inflation rate. U.S. stocks and U.S. government bonds have expected returns higher than inflation. The same is true for REITs and international stocks....

Here's the story I tell to 401(k) enrollees:

Be broadly diversified, and keep it simple. (Target funds, anyone?)

Keep your costs down.

Be disciplined. Don't freak out every time the market takes a dive. You're putting money in now with years ahead of you, so if you're buying into a down market, you're buying at a discount.

(Genius that I am, I don't always follow my own advice. A few years ago, I made the mistake of buying Goldman Sachs shares, then bailed out hurriedly as everything went to hell in a hand-basket during the Fall of 2008. If the Bush Administration hadn't gone Socialist all of a sudden, GS would have gone from $80 per share to $0 in about a week. Happily, Hank Paulson and G.W. Bush did decide it was okay for the State to intrude on the Free Enterprise system, and everything is fine now. At least for Goldman Sachs ...)

So I have learned, even as I have dispensed information. Now I stick with diversified, low-cost mutual funds and leave the stock-picking to Warren Buffet.