by Jeannette Di Louie, Investment U Research
Monday, April 30, 2012
“Nobody ever got rich off of asset allocation.”
That’s what Todd Schoenberger, Managing Principal at The BlackBay Group, told Yahoo! Finance readers recently.
Exxon, after all, has $60 billion in cash at its disposal and Apple has $110 billion, more than enough to let both of them coast for some time. Similarly, they’re both stellar companies with impressive assets to offer investors… from Apple’s amazing stock price run-up over the years to Exxon’s steady dividend payouts.
But what he forgets is that there is no “sure thing” investment in life.
Sure, both companies have performed excessively well so far. But the past can only offer so much insight into the future – a tough lesson investors often have to learn the hard way.
I wonder if Todd was advising people back in 1999 that the only stocks they needed were Enron and RadioShack (NYSE: RSH)…
Even a well-educated, highly experienced professional can get it wrong now and again. I would suggest Todd pick up a copy of William Bernstein’s book The Intelligent Asset Allocator or Alexander Green’s bestseller The Gone Fishin’ Portfolio – based on Dr. Harold Markowitz’s Nobel Prize-winning Portfolio Theory.
Politics, Disasters, Errors and Lies
People have always wanted to believe in a sure thing, something to keep them safe and sound in every possible situation that might arise. It’s perfectly natural to crave that kind of security, but it’s also completely unrealistic in most areas of life, including – and possibly even especially – in the stock market.
History is filled with examples of people who desperately wanted to think otherwise, and ended up crashing and burning. Here are just some of the more recent instances:
- The dot-com bubble saw the Nasdaq swell to 5,048.62 on March 9, 2001, before crashing to 1,114.11 over a six-month span… all because everyone thought that technology stocks were going nowhere but up.
- Enron, an energy company that Fortune Magazine named the year’s most innovative company five years in a row, was attracting investors left and right before the turn of the century thanks to rapid growth and stellar financial results. But in 2001, it turned out the company had been severely cooking its books and, by the end of the year, Enron was declaring bankruptcy.
- The U.S. housing market was making people money hand over fist up through 2006 on bad government policies and equally poor public thinking. But by 2008, prices were sliding so severely that they took financial institutions and the rest of the economy down with them. Even today, six years after it peaked, the market hasn’t been able to recover, proving that prices can’t continue skyrocketing forever just because “they’re not making any more land.”
- For decades, Bernie Madoff offered people moderate but guaranteed positive returns through his investment firm, Bernard L. Madoff Securities LLC. Bull market, bear market: It didn’t matter. The gains were consistent, something that Hollywood stars, bigwig charities and even financial institutions ate up like candy. But in December 2008, the SEC charged the lauded businessman with running a Ponzi scheme, and everything unraveled, ending badly for just about everyone involved.
Sometimes a company can even inexplicably fail through no fault of its own at all. But regardless of why “sure-thing” investment opportunities have failed in the past, the bottom line is that they can – and you can be sure that some ultimately will.
The Solution to Uncertain Markets: Asset Allocation
Truly successful investors don’t just fill their portfolios with a bunch of random stocks that look and sound good. They instead carefully allocate their portfolios among a number of assets, or categories, including stocks, bonds, funds and cash.
That’s because smart investors know that no single investment or even investment class ever goes straight up. And they also understand that when one group goes down, another usually goes up and vice versa.
Here at Investment U, we explain asset allocation this way:
“Asset allocation means diversifying among different classes of financial assets. Sometimes investors think of this as just dividing their money between stocks, bonds and cash. But true asset allocation goes much further.
“Within the category of stocks, there are large-caps and small-caps, foreign and domestic, growth and value, etc. Then, within the bond category, there are governments and corporates, high-grade and high-yield, inflation-adjusted treasuries, mortgage bonds, etc. And the beauty of asset allocation is that it allows you to take these non-correlated assets (assets that don’t move in tandem) and combine them in such a way that you maximize your returns while minimizing risk.”
And that’s the most important thing to keep in mind here: minimizing risk. This is your retirement, your child’s education, your livelihood at stake. Don’t risk it on two “can’t miss” stocks.
As Alexander Green has written in the past:
“Asset Allocation is a Nobel Prize-winning strategy. No other strategy shares this seal of approval.
“Research demonstrates that Asset Allocation accounts for approximately 90% of investment returns, making it nearly 10 times as important as stock picking and market timing combined. There is no other investment strategy that can boast the same.
“The world’s most successful and respected investors swear by it. As Paul Sturm of Smart Money puts it, Asset Allocation is “a simple strategy that comes as close to guaranteeing long-term success as anything I’ve seen.”
“Its benefits are unparalleled: significantly reduced expenses, protection against inflation, maximized returns with minimal risk-the list goes on.”
No Todd, asset allocation isn’t a “get-rich-quick” scheme. But for people who can’t afford to lose their shirts on investments gone wrong, it’s the most time-tested, successful method out there.
Jeannette Di LouieDon't Put All Your Eggs in AAPL and XOM,