At the risk of sounding alarmist, how you allocate your retirement savings may well be the most important decision of your life. Making the decision to fully participate in your 401(k) or other investment vehicle gets you into the game. Keep in mind, though, that deciding to take control of your financial future is just the beginning. An old Wall Street rule of thumb is to allocate your portfolio between stocks and bonds as a factor of age. Simply subtract your age from 110, and that is the percentage that you allocate to stocks. At age 20, you should be 90% in equities, the rule states. At age 80, you should be 30% in stocks with the remaining 70% in bonds. This is better than nothing, and it does take an important variable into account, but we can do better.
This final section deals with the sacred part of your investment portfolio that you must be the most conservative with. This is your 401(k) plan, the money that will keep you from eating Alpo when you are old. This money is too important to gamble with. It is too important to invest based on television’s talking heads, brokers that have their corporate master’s best interests at heart and not yours, the latest mutual fund scam, or what some “analyst” you have never heard of happened to say. For the important task of allocating assets in our retirement accounts, we will look to the advice and strategies of the Investment Titans. We, my friend, are going unicorn hunting. We will examine the investment advice of the rare breed of investors that have consistently beaten the market regardless of market conditions. We will use that advice to develop an allocation strategy.
I suppose that if you wanted to become a great stock picker, then this book has been disappointing. We’ve pretty much established that you can’t beat the market. Those that can are unicorns, and we, my friend, are no unicorns. We need a strategy that grows our money using the magical power of compounding, and that controls for all foreseeable risks. If we understand asset allocation from that perspective, then the basic philosophy of designing our portfolios becomes straightforward.
The basic foundation of my strategy is that we want to spread our investment risk across several different individual securities and types of securities while keeping costs exceedingly low and controlling for risk and taxes. If you take away one piece of advice from this book, let it be this: Don’t try to divine market movements. You will fail in the end. That failure will cost you dearly. You cannot control the direction of price movements, and you cannot control the magnitude of those moves. You can’t even predict them. The secret to making money with as little risk as possible is to control what you can control: To some significant degree, you can control costs, you can control taxes, and you can control risk. After you have done that, you can rest easy. The market will do what it does, and you will grow rich over time.
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Last Updated: 6/25/2018