Introduction to Asset Allocation

Back in the 1700s, a series of unfortunate horse-cart accidents among poultry farmers led to a severe egg shortage. A cry rose up from the land: "Don't put all your eggs in one basket!" It made sense, but it raised questions: Which sets of eggs should go in which baskets? Thus, the birth of egg-set allocation.

Centuries (and one bad pun) later, the advice is still good: Don't put all your eggs in one basket. But now we're talking about nest eggs -- the savings you've spent years accumulating, and which you plan to rely on for the rest of your life. As the maxim implies, diversity is the key to protecting your investments. It would be great to know whether stocks, bonds, or real estate will perform the best (and which will crash) over the next year or two -- but that is impossible. However, you can apportion your portfolio in a smart way that will offer long-term upside yet protect you from catastrophic downside (so you can afford plastic surgery on your sagging backside).

In his book The Intelligent Asset Allocator, William Bernstein points out that from 1970 to 1996, the best asset allocations focused predominantly on a mix of American small-cap stocks, Japanese stocks, and precious metals. Of course, no one in 1970 could have foreseen this, and, as Bernstein says, "This is not a portfolio that any rational person would own." Further, if in 1983 -- halfway through the period, after more than a decade of spectacular returns -- you decided to implement this strategy, you would have lost most of your money over the following years.

Our goal is not to find the very best allocation, because no one knows what that will be. Instead, we will help you choose an allocation that has performed well in various scenarios and won't give you a heart attack. We'll start with our ...

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  • Report this Comment On February 15, 2011, at 8:47 PM, Gerald1944 wrote:

    DLB down another 2.3% today. Jan 3 was not a good day to buy this stock. Down 23.4 % so far. I may not live long enough to make any money on this one. Overall performance up 2.7 % on all those I bought that day so there is some room for optimism.

  • Report this Comment On January 18, 2013, at 12:42 PM, MONEYFA wrote:

    Where are my assets.I was stupid ...banet all scammers.

  • Report this Comment On February 01, 2013, at 6:16 AM, pankajjain wrote:

    Well, the article covers various asset classes. The reason am saying this is because I do not understand most of it. Really, at times, the comments turn out to be better than the post itself like "Where are my assets.I was stupid ...banet all scammers." ..:)

    I am primarily looking for more insights towards equities, found one resourse -

    Not sure how relevant would it be for today's times. On face this seems to be ideal for fundamental, long term investments decisions, best someone can suggest more,

  • Report this Comment On December 13, 2013, at 8:40 PM, Jeremy75 wrote:

    FSEVX & FSTMX for long term holdings, reinvesting div. & cap. gains has worked well for me over many yrs., my two biggest mut. fund holdings. ---low fees, good performance!

  • Report this Comment On March 06, 2014, at 12:18 PM, Shawn9i3 wrote:

    This is cool post and i enjoy to read this post - <a href="">wells fargo locations</a>

  • Report this Comment On March 13, 2014, at 11:12 AM, 4thethrillofit wrote:

    Anyone have any advice on ALU? It has been sucking lately but I still think it has potential. Anyone else?

  • Report this Comment On April 11, 2014, at 6:32 PM, FACOID wrote:

    Can I Take money from stock here

  • Report this Comment On May 13, 2014, at 1:08 PM, TomKL wrote:

    With companies like Chevron paying dividends of 3.4% and rising every year, why not put retirement 401k in one stock and just collect the dividends as income? This is much more reliable than bonds and the current interest rate.

  • Report this Comment On May 16, 2014, at 11:06 AM, Kaemel wrote:

    TomKL, That would be the "eggs in one basket" that this article starts with. You assume more risk on your "reliable" income from one source. Chevron may be one major oil spill away from bankruptcy, like BP had in 2010. Rare, but possible.

  • Report this Comment On October 21, 2014, at 2:10 AM, pramfinancial wrote:

    Interesting article, hope we all are careful enough to handle our assets & manage it in coordination with financial advisors. As allocating assets correctivly can easy actually ease pressure on us.

  • Report this Comment On March 12, 2015, at 4:00 PM, larry1951 wrote:

    pramfinancial wrote "handle our assets & manage it in coordination with financial advisors", which strikes me as pretty funny. The financial advisors I have tried to use in the past have made 2 or 3 times as much money off MY money as I have. They drive Aston Martins while I drive a Chevy.

  • Report this Comment On May 12, 2015, at 10:58 AM, BradleyC100 wrote:

    I have used a strategy of ETF manage funds with Schwab and self manage ETF, Bonds and a few stocks. Parking the cash has been a problem. I hate siting on the sidelines, something is better than nothing even with expenses. My solution has been PONDX, expense is .77 pays a nice yield 5.88% monthly. With the market being as it is today I am leaning toward a larger parking place anyone have a suggestion of where to park money during this mess of a market.

  • Report this Comment On September 09, 2015, at 2:00 AM, Diegoman19 wrote:

    Well, not to over simplify it but, the market follows the Business Cycle (

    So, at the very basic level of Asset Allocation, i.e. for those who are just starting investing, I would say go ahead and investigate buying a good old fashioned ETF (Something that follows the very boring S&P 500 sounds like a great start): You won't become a millionaire but at least you get to make some money and your probability of success is much higher than buying stocks, especially if you don't know what you're doing.

    With an S&P 500 ETF the asset allocation is already done for you (and your eggs are spread across 500 baskets!).

  • Report this Comment On December 17, 2015, at 12:25 PM, sinner wrote:

    my assigned Schwab CFP is pushing their advisor network on me, I think it is a scam where both parties make more money from my trust I just inherited. Am I paranoid?

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