Chapter Two
Asset Allocation Short-Cuts
“Take 100, subtract your age. That’s what you should have in stocks. Easy!”
Humans love short-cuts. Even in investing! We want to believe there’s an easier way. Just look at the proliferation of “lose-weight-fast” gimmicks. And there are a million “get-rich-quick” schemes (which are mostly scams—more in Chapter 17).
A popular short-cut in financial planning circles is the idea you can take 100, subtract your age, and that’s how much you should have in stocks. You can read that rule of thumb in magazines, blogs—even some professionals adhere to it!
There are variations—some say “take 120.” (Already you should be skeptical of a rule of thumb with an inherent 20% swing in asset allocation depending on which one you follow.)
This bit of investing non-wisdom persists because it seems simple. Concrete! Straightforward. It’s a fast and easy solution to the very serious issue of asset allocation. But be wary of anything regarding your long-term financial planning that seems fast and easy. More broadly, investing rules of thumb should be regarded with severe cynicism, if not ignored outright.
The Critical Asset Allocation Decision
Long-term asset allocation decisions are, in fact, important. Most investing professionals today agree the long-term asset allocation decision is the most critical one investors make. Many point to an academic study that found about 90% of a portfolio’s return over time can be attributed to asset allocation—the mix of stocks/bonds/cash/other ...
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