Today’s wisdom comes from the book “Money, Master the Game”. The author, Tony Robbins interviews some of the brightest minds in finance. Diversification is one of the most important aspects when deciding how to allocate your stock portfolio. According to Wall Street Journal, “More than 90% of active managers underperformed their benchmark indexes over a 15-year period. Actively managed funds charge management fees of about 1% a year. Thus, as a group, actively managed funds must underperform index funds by their difference in costs.”
Jack C Bogle (the creator of Vanguard and the father of the index fund), and many other finance gurus, recommend diversifying by purchasing an Index fund (which tracks a benchmark like the S&P 500). In “Money, Master the Game”, John C Bogle shares how he diversifies his personal stock portfolio. He has 60% in equities, and the other 40% is split between a bond index fund, and nontaxable muni bond fund (50%/50%).
David Swenson, the head investment officer of Yale’s endowment fund, advises individuals to “divide your money into five or six equal parts, and invest them into different asset classes.”
Rule of Thumb: Invest your age in bonds.
Example: 100-Your age= percent you should own in stocks. For example, if you are 30 years old, then your portfolio should be divided into 70% stocks and 30% in bonds.
Experts recommend that investors should rebalance their portfolio each year. This causes you to sell some assets when they are high (locking in your gains), and investing in things when they are low (meaning you have plenty of those shares for when they go up in value). Careful not to rebalance an asset that you have owned for less than 1 year, or else you get hit with ordinary income tax instead of capital gains tax.
In “Money, Master the Game”, several market experts list their personal asset diversification strategies, which I share with you below:
Ray Dallio‘s All Seasons Portfolio (net worth $17.7 billion):
- 30% stock index
- 15% intermediate 7-10 year bonds
- 40% in long term 20-25 year bonds
- 5% in gold and 7.5% commodities
David Swenson’s portfolio: (assets under management, 20 billion)
- 20% domestic stock
- 20%international stock
- 10% emerging markets
- 20% REITs
- 15% long term us treasuries
- 15% TIPs
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