An Investor’s Most Important Decision
By Martin Krikorian
Your employer is offering two investment presentations. All employees are required to attend one of the two presentations.
One presentation is “The stock market’s outlook for the rest of 2018.”
The other presentation is “The importance of asset allocation.”
Which presentation would you choose to attend?
With 23 years experience as a registered investment adviser I can say with a 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. However, 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 percent 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 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 eye lids start closing and yawns start breaking out.
The fact is that many investors make their investment decisions based 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.
When I first meet with a potential new client I will ask them to provide their answers (in writing) to the following three questions:
* What is your investment strategy?
* What is your portfolio’s asset allocation?
* Why did you choose this specific allocation?
The vast majority cannot answer these three questions.
I’ve discussed this before, but it’s worth repeating. Achieving your financial goals starts with making investment decisions based on things you can control, rather than things you have no control over. And asset allocation has more control over your portfolios chances of success than any other decision you will make. Your asset allocation selection will have a significant affect on your portfolios range of volatility, returns, and losses during both up and down markets.
The question investors need to ask themselves is, if the vast majority of my portfolios performance will be attributed to my asset allocation decision, shouldn’t I focus most of my attention on asset allocation and less on chasing after the best investments and guessing when to be in and out of the market?
Martin Krikorian is president of Capital Wealth Management, a registered investment adviser providing “fee-only” investment management services located at 9 Billerica Road, Chelmsford. He is the author of the investment books, “10 Chapters to Having a Successful Investment Portfolio” and the “7 Steps to Becoming a Successful Investor.” Martin can be reached at 978-244-9254, Capital Wealth Management’s website, www.capitalwealthmngt.com , or via email at firstname.lastname@example.org .