Asset Allocation is Key To Investing – Investing in 12 Pictures
Asset allocation means spreading out your investments among various asset classes. Read on to learn how this applies to you!
Back in 2014, Carl Richards at Behavior Gap was gracious enough to share twelve of his best graphics with anyone who wanted them for absolutely no charge. His hope was that financial advisors could take these images and use them to convey the importance of using a disciplined process to reach your investing goals.
I've taken Carl's images and used them to explain how to systematically approach investing based on these twelve pictures. Hopefully, they will help at least one individual take the necessary steps to reach their personal, professional, and financial goals.
Without further ado, picture number nine . . .
Asset Allocation is Key to Investing
I’m sure more than a few of you reading this have heard about the “terrible 2000’s”—the decade where stock investors made absolutely nothing. Do you believe this? Have you seen the data?
The reality is that there WERE stock investors that made absolutely nothing. For example, investors in the S&P 500 from the start of 2000 until the end of 2010 had a compound annual return of -0.7%. That’s right, they actually LOST money! However, anyone stupid enough—yes I said stupid enough—to have all of their investments in a single asset class probably got what they deserved.
An investor who had a portfolio consisting of 40% large cap stocks, 20% small cap stocks, 10% REITs, 20% international stocks, and 10% emerging market stocks saw a compound annual return of 7.4%.
(Information on both series of returns may be found here. The standard disclaimer applies: Past performance is no guarantee of future performance / all investing involves risk, including the potential loss of your principal invested.)
Welcome to the lesson on asset allocation!
By asset allocation, we are referring to spreading out your investments among various asset classes. These asset classes include stocks, bonds, REITs, commodities, and cash. Further, they can be subdivided into domestic, international, large, small, growth, and value subsets.
When building an effective investment portfolio, it is critical that you combine the various asset classes into a well-diversified portfolio. Will asset allocation guarantee success? Absolutely not. However, if you look at history, it is the strongest path to obtaining solid returns with minimal risk.
One final thought on this topic: There is NOT a magical asset allocation. Rather there are literally 1000’s—if not millions—of potential allocations. The exact allocation is often not nearly as important as the investor’s ability to “stay the course” with their chosen allocation. We’ll cover more on this topic in lesson ten . . .
Each month, for twelve months, I will be publishing another picture to help people understand the investment process.
If you have any questions about the topics covered in this post, feel free to reach out to me at any point in time. At F5 Financial, we enjoy working with entrepreneurs, corporate executives, and families to define their goals and make sure they have plans in place to execute and achieve those goals.
Investing in Twelve Pictures - Previous Posts:
- Picture 1 - You Have to Start with a Goal
- Picture 2- You Need to Focus on What You Can Control
- Picture 3 – The Best Solutions Are Simple
- Picture 4 – It is NOT a Plan it IS a Process
- Picture 5 – Over Time, You Will Learn New Things
- Picture 6 – There Will Be Ups and Downs Along the Way
- Picture 7 - You Will Fail If You Succumb to Fear
- Picture 8 - Diversification
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Illustration credit: Carl Richards (Behavior Gap)
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