Asset allocation beats stock selection every time.

I’ve been a huge fan of asset allocation.  When I meet investors I also ask them what their percentages are.  I can quickly tell the amateurs from the professionals with this one question.  Most people have no idea what asset allocation is.  Heck, most financial advisors don’t have any clue.  Which is scary.

92% of your return is determined by asset allocation, 6% my manager/stock selection, and 2% by timing.

As the above quote says asset allocation is very important.  Rebalancing your assets will lead to buying more least expensive class.  Novice people will hate this, thinking that you should buy more of the best performing asset class.  The problem with this is that soon your entire portfolio could be in one asset class and if that fails you’re screwed.

I’ve seen this happen to people.  $100,000 monthly lifestyle and then in one day broke…worse than broke in debt and over the next month they loose all their “assets” house, car, office, even wife because they can’t afford them anymore.

An asset allocation chart will balance your returns with the risk you want to take.  Then it’s just a matter of looking for deals and rebalancing occassionally.  Buying assets when you have the money and selling when you need the money.

So what is your risk level that you are comfortable with?  Everyone is different and everyone is wrong until something happens and you start losing sleep at night.

Mark Cuban was asked “Do you have any general saving and investing advice for young people?”

CUBAN: Put it in the bank. The idiots that tell you to put your money in the market because eventually it will go up need to tell you that because they are trying to sell you something. The stock market is probably the worst investment vehicle out there. If you won’t put your money in the bank, NEVER put your money in something where you don’t have an information advantage. Why invest your money in something because a broker told you to? If the broker had a clue, he/she wouldn’t be a broker, they would be on a beach somewhere.

2018 Update

Asset Allocation sample

This is my current asset allocation for my investments that WealthFront runs for me automatically. A few years ago I liquidated all my stocks and put them in WealthFront to manage for me. WealthFront handles getting the stocks, REITs, and bonds. Using tools that only billionaires had access to in the past.

Goto WealthFront that is an affiliate link and you can get $10,000 managed for free. After that it is a super low fee better by far than any Mutual Fund.