More Straight Talk on Investing

7You Need a Personal Investment Policy Whether You're Starting with Zillions or Zip

The very first step in assembling an investment portfolio is to decide how to spread your dollars among stock, bond, and cash investments. This is your asset allocation plan and it is the most critical investment decision you will make. That's right—your asset mix will be a bigger factor in your investment returns than any selections you will eventually make of individual mutual funds or exchange-traded funds (ETFs). This statement may sound odd—after all, many people in the financial business want you to believe that your success depends on shrewd stock-picking or buying the right funds. But they're wrong. (I am purposely keeping real estate out of the discussion, as many individuals have exposure to real estate through home ownership but don't consider it an investment as such. I will note, too, that many broad stock market index funds offer exposure to real estate through holdings of real estate investment trusts [REITs].)

Think of your asset allocation plan as one of the most critical components of your personal investment policy. Just as multi-billion-dollar pension and endowment funds adopt investment policies based on a target asset mix, so should you. The idea is to develop a simple policy that you can stick with over time, modifying it only as your situation changes—not in response to the ups and downs of the financial markets. Be sure to put your policy in writing and file it away ...