Make The Most Important Decision of Your Life

Section 4          Make the most important investment decision of your life

Chapter 4.1 The ultimate bucket list: Asset allocation

Chapter 4.2 Playing to win: The risk/growth bucket

Chapter 4.3 The dream bucket

Chapter 4.4 Timing is everything

From last week review of Money Master the game, we asked “Where do I put my money? What specific investments will maximise my upside and protect me against the downside?” This chapter seeks to educate the average investor on how best to invest their savings using the fundamental principles employed by seasoned investors including David Swensen (Yale’s portfolio manager who turned $1 billion into more than $23.9 billion) in making the most important decision of their life regarding money.

There are three tools important for reducing one’s risk and increasing the potential for financial success: Security selection, Market timing and Asset allocation.

Asset Allocation

However, Asset allocation is the most important investment decision of your lifetime, more important than any single investment you’re going to make in stocks, bonds, real estate, or anything else. Anybody can become wealthy; asset allocation is how you stay wealthy.

Diversification is a very important aspect of good portfolio management. Tony advocates for every portfolio, there should be 1) a security bucket, and 2) a risk/growth bucket.

The security bucket should contains investment that are not ‘risky’ such as cash in savings account, buying bonds, treasury bills, certificate of deposits (CDs), your house, pension, annuities, life insurance and structured notes.

While the risk/growth bucket should contain investments in equities- mutual funds, indexes and ETFs, high yield bonds, real estate (Nigerians will beg to disagree), commodities, currencies/forex, collectibles, and certain types of structured notes.

This section shows David Swensen’s ideal/model portfolio allocation which outperformed the stock market with an annual return of 7.86% between 1997 and 2014. It comprises 20% in Domestic stock, 20% in International stock, 20% in Real estate investment trusts (REITs), 15% in Long term US treasuries, 15% in TIPS (Treasury inflation-protected securities) and 10% in emerging stock markets.

Timing is everthing- Dollar-cost Averaging vs Lump sum investing

There are perfect times to enter the market. But because no one is God, we still have to enter at one point or the other- whether perfect or not. Some authorities advocate lump sum investing (entering with all your money at once), while some others say you should diversify over time with dollar-cost averaging.

If asset allocation is the theory, dollar-cost averaging is the execution/practical. Dollar-cost averaging refers to a systematically putting the same amount of money across your full portfolio in order to keep it balanced. And it is advocated that investors do it (rebalance their portfolios) at least twice every year. While this is already being done for people who have their money in pension funds by the managers of those funds, individual investors need to learn and practice it for themselves.

You need to have a goal you are saving for

You also need a dream bucket. You need to have a dream, a big financial goal that keeps you motivated and willing to go out and conquer the world. It is of no use trying to save without having a specific thing in mind you are saving for. The secret is to know what you truly want and why you want it, and make it a burning passion.

Marketing Psychology I found out recently

By the side, I discovered some interesting marketing concept during the week. I observed that a trader selling wares by the side of the road that had one or two people surrounding his wares was more likely to have more people come over to patronise him. It seems when people who already wanted to take an action saw others doing the same thing, they take that as go-ahead – a form of endorsement.

When you already wanted to do something but are hesitant or sceptical, seeing another person doing that same thing will encourage you to do it.