Asset Allocation Is For Losers

This lesson will get me in trouble…

We’ve spent several lessons on asset classes and asset allocation, but I’m going to let you in on a dirty little secret in the financial world that no one likes to admit to or talk about. Asset allocation, the process of choosing which asset classes and the amount to invest in, is for losers.

Yeah, you heard me right. Losers. Flunkies. Duds. Failures. Imbeciles. Morons.

Blasphemy! Asset allocation is sacred to investors and financial folks. How dare I discredit, desecrate, and defile this investment commandment?

What could possess me to do this? Well, the truth.

https://youtu.be/K2tbJPTRjNA

Forget about investing for a second.

Imagine you and your friends just arrived in Vegas. You have $500 to gamble for the weekend. You sit down at a roulette wheel (wait, do you sit at a roulette wheel? I don’t know. I guess you can tell how much I gamble!).

You put a little money on red, a little on 6, 18, 24, and 36. The ball spins, lands, and stops. You win or you lose. Whatever. That’s not really the point. You spread your money around the table. Why? Well, it would be pretty crazy for you to put all your money on say, 22. Chances are low (and for you statisticians out there, it would be a 1 in 38 chance) that the ball would land on 22. If it landed on any of the other 37 numbers, you’d lose it all. You’d be done for the weekend.

So, of course, you don’t do that. You spread your chips around the table so you don’t lose it all at once.

But what if I was with you at this roulette table, and I had a secret formula that could predict, with 100% accuracy, what number the ball was going to land on every single time?

Well, that would change everything, wouldn’t it?

Would you put your money on 6, 18, 24, and 36? Would you spread your chips around the table? No way! You’d put all your chips on the number I told you would win. Yes, every single last chip you had, you’d put on just one number because you knew it would win. If I told you 13 was going to win, would you put some on 13, but also some on 18, 27, and 31? Of course not! You’d put it all on 13.

Okay, now back to investing. Why do we split our money up into different asset classes?

Because we can’t predict the future. We don’t know which asset class is going to “win” or do the best. We don’t know if U.S. large cap stocks will produce the best return next year or if emerging market bonds will do better. So what do we do? We put some here and some over there and even more there.

But if we could predict what asset class would do the best with 100% certainty, our asset allocation would look like this:

So even though asset allocation is for losers, meaning some of what we invest in will not be the best performing asset class, it is still one of the most important things you can do as an investor to protect and build wealth.

In the next lesson I’ll tell you a true story that almost ended in a disaster…

The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.