We homo sapiens are a sorry lot in many ways. Here we are, with our handy opposable thumbs, and we don't use them to flip through our checkbooks to tally up our expenses and create budgets for ourselves. We put off setting up IRA accounts, even though in our hearts we know that they're kind of important for securing a comfy retirement. (Give our Rule Your Retirement newsletter a whirl -- for free -- and let us help you get started on that retirement plan.)

Another important financial topic that we often ignore, at our own peril, is asset allocation. Lest you think of it as just another fancy term that's perhaps hard to grasp, think again. An asset is something you own, such as money, a brokerage account, equity in your home, or your rare fishing rod collection. And allocation simply refers to the distribution of these assets. You might allocate all of your net worth in real estate, or you might divide it between mutual funds and rare coins. Within your mutual funds, you might further divide your nest egg between bond funds and international finds. It's simply all about where you park your hard-won worth.

Think about Berkshire Hathaway's super-investor Warren Buffett as an example. Buffett is often referred to as a master of capital allocation. This stresses how important it is to decide where best to deploy your funds. Investing isn't just about finding good stocks -- it's about making sure that your money is in the best places you can find, in suitable proportions, serving your goals. If you need income, you don't want the lion's share of your money sitting in the promising stock of companies that pay no dividend. (We're happy to point you to some solid dividend-payers.)

The survey says .
The folks at AllianceBernstein Investment Research and Management recently released the results of a survey that explored investor attitudes and practices related to asset allocation. (AllianceBernstein is the retail asset management arm of Alliance Capital (NYSE:AC), a Motley Fool Income Investor selection that's up some 67% since being featured in August 2004.) Some of their findings are quite interesting. Permit me to report on a few:

  • Among investors, 26% give themselves an "A" and 41% a "B" on how well they understand the concept of asset allocation. That's a total of 67%. But 77% say they're comfortable with their ability to create a proper asset allocation plan. This makes me scratch my head. It seems like an awful lot of people feel confident and ignorant at the same time. This doesn't seem like a recipe for success.
  • Some 30% of all investors don't have an approach to allocating assets and rebalancing their portfolio. That's not good. Rebalancing can be important when you're doing well. If one of your holdings swells to become 50% of your portfolio, you need to consider paring it down, to make the overall portfolio less dependent on the fortunes of just one company. This is an issue I've grappled with, thanks to having held shares of Time Warner (NYSE:TWX) for a decade or so. Over the years I've sold off some shares, to reduce the stock's weight in my portfolio and allow me to invest elsewhere. Whereas before I had, arguably, too much money in the media and communication arena, I've now got greater exposure to retail, through Home Depot (NYSE:HD) and Wal-Mart (NYSE:WMT), and to food and drink companies, such as PepsiCo (NYSE:PEP) and Coca-Cola (NYSE:KO). It seems that some 29% of investors generally don't rebalance, and 57% say they don't rebalance enough.
  • One in four investors believes that "asset allocation" is just an industry buzz phrase. (Dear, dear.) And 51% of all financial advisors queried in another survey report that their "typical client would be more likely to be able to explain the rules of Texas Hold 'Em Poker than they could the principles of asset allocation." Yikes.

What's behind all of this fiscal irresponsibility? Well, to some degree, it's our psychological makeup. Even when we know better, if we have a stock that's grown exponentially and earned our affection, and even if we know it's gotten ahead of itself, we often don't sell and rebalance, since we're hoping to eke out a few more dollars from that stock. (I'd be a lot richer today if I'd begun paring down my AOL shares when they were in the $60s instead of the teens.) The AllianceBernstein survey found that 61% of investors said it's harder to sell a winner than admit they're wrong to a loved one.

Meanwhile, if we have a stinker on our hands, it's often best to sell it and redeploy it into a stock in which we have more confidence. Why try to make back your loss in a stinker when you can more reliably make back that same amount elsewhere?

The price of ignorance
If you're not yet sold on the value of paying attention to asset allocation, consider this information. AllianceBernstein surveyed 567 financial advisors with more than five years of experience and at least $25 million in assets under management. These advisors estimated that "the right asset allocation plan would have added 68% to a portfolio's return over the past 30 years" -- that's 1.64% a year. And 83% of advisors think that such a plan "could have cut investor losses by at least half during the market correction of 2000-2001."

What's the big deal over 1.64% per year and 68%? Well, AllianceBernstein research has found that "an extra 1% of return over the course of a working life can provide more than 10 years of additional spending in retirement." To demonstrate what a difference that 68% makes, if after 30 years of investing you end up with a nest egg worth $1.5 million as you begin your retirement, it might have been $2.5 million, if you'd allocated assets more effectively.

Clearly, it's critical to get asset allocation right -- or at least less wrong.

Solutions
So what should we investors do? Well, obviously, we need to focus more on how we allocate our money. We can do this by reading up on the topic and taking more control of our financial interests. (AllianceBernstein offers some guidance, as do we in our Retirement center.) Or we can choose to let a trusted professional attend to these matters for us.

In Fooldom, we've long recommended that people manage their own finances, but the truth is that not everyone is wired to do so. Some of us just don't have the time, interest, or discipline. If you're one of these folks, I urge you to learn how to find a good financial advisor. Perhaps even try out our own inexpensive professional advisor service.

Advisors make a difference
The AllianceBernstein survey found that those with financial advisors were generally better positioned, financially:

  • "56% of investors with a primary financial advisor have a written financial plan; just 26% of direct investors -- that is, investors who do it themselves -- have one."
  • "75% of investors with a primary financial advisor say they have an approach to allocating and rebalancing -- 61% of direct investors say they have one."
  • "71% of investors with a primary financial advisor diversified their portfolio over the prior 12 months -- 54% of direct investors had done so."

Let us help you
So whether you go it alone or tap the services of a good pro, make sure you attend to your asset allocation. It should pay off.

You'd also be smart to take our Rule Your Retirement newsletter for a (free!) test drive. It can help you pave the way to a comfy and secure retirement, and it's no stranger to the topic of asset allocation.

Coca-Cola and Home Depot are recommendations of the Motley Fool Inside Value newsletter. Time Warner is a Motley Fool Stock Advisor pick.

Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library and Card & Board Games. She owns shares of Berkshire Hathaway, Home Depot, Coca-Cola, PepsiCo, Wal-Mart, and Time Warner. Formore about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.