Everything you need to know about asset allocation

For most investors, the concept of “Asset allocation” is an alien term. Most often than not, they pick stocks or mutual funds based on the advice of distributors, advisors, friends etc and just invest or worse forget. Now, the problem with this investing approach is there is no real basis or methodology.

Here’s the Investopedia definition of asset allocation

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.

This begs the question, how do you go about defining your asset allocation. The obvious answer would be to consult a financial advisor. As easy as the advice is, finding good advisors is easier said than done. Especially in India where LIC uncles are dime a dozen. But in this information age, where good information is at your fingertips, do you need someone else to help you invest? I personally don’t think.

I had zero knowledge of what asset allocation means and I came across this book by Meb Faber while I was trying to learn about it. He is the co-founder and the Chief Investment Officer of Cambria Investment Management. He manages over a $ 1 billion across 10 ETFs.

In this book titled “Global Asset Allocation,” Meb brings to bear decades of market data to set the context. Then he looks at well-known portfolios, of wizards such as Ray Dalio’s, Warren Buffett, William Bernstein, Rob Arnott and other. This makes for a fascinating read and I hope you do read through because the learnings to be picked from this book are amazing.

While we are all busy paying close attention to our portfolio’s particular allocation of assets,
the greatest impact on our portfolios may be something we fail to notice altogether. In this case, the
so-called “gorilla” are the fees that we often fail to consider. In one shocking example, we find that
the best performing strategy underperforms the worst strategy when we tack on advisory fees.
Ultimately, smart investing requires that we not only monitor asset allocation, but of equal weight,
we focus on the advisory fees associated with the investment strategy.

Here’s the full book