A is for Asset
Welcome to the Elite Investor Club’s A-Z of investing. I know that we have members who are new to investing as well as old hands who’ve seen it all before. So, in each episode, I’ll cover the basics of what each term means and try to include a nugget or strategy that will interest more experienced investors.
The first letter of the alphabet brings with it one of the most important topics in the whole investment universe – asset allocation.
Asset allocation is how you divide your hard earned cash across all the different types of investment available to you. There’s lots of historic data to suggest that these relatively high level decisions have a bigger impact on the returns you’ll achieve than the specific items you choose within each grouping. So for example having fifty per cent in the stock market is more important than whether you buy Apple shares or Marks and Spencer shares.
One of the most successful asset allocations of all time is Harry Browne’s Permanent Portfolio which is simply divided into quarters. Twenty five per cent in shares, twenty five per cent in bonds, twenty five per cent in gold and twenty five per cent in cash. Sounds pretty simple? Something you could probably get your head around, then set it and forget it? Well, over the last forty years Harry’s asset allocation would have given you an average annual growth of nine point six per cent.
Put another way, ten thousand pounds invested using this strategy in nineteen seventy two would have grown to four hundred and twenty nine thousand and forty one pounds. Compare that to the one per cent you’re earning on your savings at the moment and you can see how much you’re losing by failing to implement such a basic asset allocation approach.
Now, truth time. If you regard yourself as a savvy investor, have you averaged north of nine per cent across four decades? Me neither. So the advanced strategy for this episode is to put your pride and your ego to one side and go back to first principles. Get a straightforward asset allocation in place for a goodly chunk of your portfolio. This is not an Either/Or approach, it’s a Both/And approach. By all means have fun with ten or twenty per cent of your portfolio, but make sure you have the bedrock strategy in place that’s going to give you the basis of long term inflation-beating wealth creation.
If you’re watching this in your twenties or thirties, you are the luckiest person alive! Because you are learning this information at a point in your life when Albert Einstein’s Eighth Wonder of the World can still work its magic. Compounding happens in a hockey stick curve – the biggest gains are right at the end. That same ten thousand pounds invested in nineteen seventy two had reached a hundred and seventy six thousand four hundred and thirty one pounds after thirty years. Still very impressive, but look what happens in the fourth decade. In the last ten years it grows buy a monster two hundred and forty three per cent to reach four hundred and twenty nine thousand pounds. Imagine I you added a thousand pounds a month to these numbers – you’d be a deca-millionaire today!
So the magic ingredients are when you start, how much you save and the returns you achieve. The bulk of your returns will be achieved by asset allocation, not by individual selection of each investment. I would add property to the basic mix, especially high yielding commercial property, and I’m nervous of the bond markets being way over valued at present, but think of all the ups and downs, recessions and booms that Harry Browne’s strategy has been through. And tattoo that number of nine point six per cent on your forehead.
If you can get anywhere close to that level of return year after year, a lifestyle of wealth and luxury awaits you!