Your employer is offering two investment presentations and all employees are required to attend one of the two presentations. One presentation is “The stock market’s outlook for the rest of 2022.” The other presentation is “The importance of asset allocation.” Which presentation would you choose to attend?
I can say with a fairly high degree of confidence that the vast majority of individuals currently reading this column would choose to attend the first presentation. Many investors are under the impression that knowing which stocks and mutual funds to buy and when to be in and out of the market is the key to investment success.
Nothing could be further than the truth.
Numerous studies and Nobel Prize-winning research over the last 50 years have demonstrated that more than 90% of your portfolio’s performance will be determined by your asset allocation decisions. In other words, asset allocation will have more to do with the success or failure of your portfolio than finding the best-performing individual investments. I know that flies in the face of most everything you see, hear and read about in the financial media, however the fact is that asset allocation is one of the most important concepts in investing.
The five benefits of asset allocation
1. Asset allocation keeps your portfolio within your risk tolerance level
2. It saves you from second-guessing yourself
3. It means ignoring most of everything you see and hear in the financial media about investing,
4. It has the biggest influence on your portfolio’s performance
5. It reduces most of the risk, stress and anxiety of investing
The big problem with asset allocation is that it is boring. Asset allocation doesn’t attract viewers to the cable business programs, or listeners to talk radio business shows. Asset allocation doesn’t sell financial newspapers, magazines and investment newsletters. Start talking about asset allocation in front of a group of seminar attendees and within a matter of minutes eyelids start closing and yawns start breaking out.
The simple fact is that many investors (whether they want to admit it or not) make their investment decisions based purely on hunches (“I think the market is going to …”) and the opinions of the pundits and talking heads in the financial media (“I heard someone on CNBC say …”). This is an investment strategy based purely on speculation.
During my 25 years as an investment adviser, the one question I have been asked more than any other is “what do I think the market is going to do?” And every year my answer is always the same: “I honestly don’t know.” I have opinions about the market, but I would never invest our clients’ retirement savings based on those opinions.
Successful investing should be based on proven investment techniques, such as asset allocation and diversification, rather than intuition and guesswork. An investment philosophy based on hunches and guesswork is a recipe for financial disaster, not financial security.
Martin Krikorian is president of Capital Wealth Management, a registered investment adviser providing “fee-only” investment management services located at 9 Billerica Road, Chelmsford. To schedule a free, no-obligation initial consultation call, 978-244-9254 or email firstname.lastname@example.org.