How to Achieve the Right Asset Allocation
It has been my observation that most investors focus on one aspect of investing more than any other—the recommendation, and by that I mean specific security advice.
That is because investors have been trained by brokers and the media from time immemorial to believe that recommendations are the primary road to investing success.
In this article
- The Basics
- No Single “Right” Allocation
- Diversify Within Asset Classes
- Style Diversification the Easy Way
- The Two-Fund Solution
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Yes, recommendations are important, but contrary to most people’s belief, they are only the final step in the investing process. Recommendations are less important than the proper asset allocation and diversification decisions that necessarily precede them. This article discusses these first two far more important steps.
If you go to Amazon.com and search the word “diversification” you will find over 2,500 books on the subject. And, of course, diversification has also been discussed in countless magazine and newspaper articles. Not only that, but the science of diversification, unlike many modern day investment strategies, has been an important topic for millennia.
The oldest recorded asset allocation advice may be from biblical times. The Talmud, a record of rabbinic discussions pertaining to Jewish law, ethics, customs and history (circa 1200 B.C.–500 A.D.) recommends: “Let every man divide his money into three parts, and invest a third in land, a third in business, and let him keep a third in reserve.” Today we would call these three asset allocations (or baskets) real estate, common stocks and money funds. You can clearly prosper with that advice right now.
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