What's The Best Asset Allocation?
InvestorEducation /
Learning to Invest
Feb 03, 2015 - 03:45 PM GMT
By: DailyWealth
Dr. Steve Sjuggerud writes:
My friend Meb Faber just wrote the book on asset allocation.
His book comes out in a week or two.
One of the main conclusions was quite shocking, actually. I'll share that with you today.
Meb and I talked about the conclusions from his upcoming book, and much more, in the latest episode of my free podcast,
Inside True Wealth. (You can find that on iTunes or
right here.)
In my opinion, Meb Faber tested what works in allocation the right way...
His book is titled Global Asset Allocation: A Survey of the World's Top Asset Allocation Strategies. In short, he tested the long-term performance of 15 or 20 of the best-known asset-allocation strategies.
"Asset allocation" is answering this question:
How much should I have in stocks, bonds, gold, cash, etc?
That is the big question in investing.
So what is the answer?
Again, Meb studied 15 or 20 of the most famous asset-allocation models to find out.
The main shocking conclusion from Meb's book was that it didn't really matter which asset-allocation model you choose. Sounds crazy, I know. But here's what Meb told me on the podcast...
I like to compare this to baking – as long as you have enough of the key ingredients, so butter, flour, sugar, chocolate chips – the cookies end up being pretty good.
The same goes with the portfolios... As long as you have some stocks, some bonds/fixed income, and some real assets, then the portfolios actually perform fairly similarly.
If you go back to 1972, the difference between the best and worst [of the 15 or 20 asset-allocation models] was only about 1.5% a year.
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Without that much performance difference between the best and worst performing asset allocation models, Meb thinks that investors should focus on keeping their fees low as much as worrying about their allocations. He explained it on the podcast:
If you had perfect foresight back to 1972 and you picked the best performer... and paid your advisor 1% in fees on top of a 1.25% mutual fund fee... then you would have turned the best asset allocation strategy into the worst.
Most investors never see the fees. They get skimmed off the top. Investors don't see that because they don't go through the pain of writing a check.
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Meb says you need to pay attention to the fees. One way to "get it" is to visualize it...
Imagine walking into your investment advisor's office each year – with $20,000 in cash – to give him in fees...
Say you have a $1 million dollar portfolio, and you're paying 2% in fees a year, that's $20,000. In a $10 million dollar portfolio, that's $200,000...
Visualize – instead of it automatically coming out of your account – having to go take $20,000 cash to your adviser each year.
The thing to remember is that you can't control the returns you get... But you can control the fees you pay.
Of course, do your homework on asset allocation... Meb's book is a good place to start, as it shows which strategies have performed the best. But be just as diligent on doing your homework on the fees you're paying.
As Meb learned in his study, the fees you pay can turn the best-performing strategy into the worst.
Good investing,
Steve
P.S. In addition to talking asset allocation, Meb and I cover a lot of ground on what we've learned about what works in investing in my latest
Inside True Wealth podcast. You can check it out for free, at
StansberryRadio.com. And if you like it, share it. Thanks!
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