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The Only Thing That Matters in Investing: Asset Allocation
While I agree that asset allocation is a key factor that determines end rewards, I believe that total time in the market is even more significant.
The commitment to “stay the course”:when times are hard and returns have disappointed makes a huge difference. On average, the equity market is positive only slightly more than 50% of the time, and down day losses are slightly larger than up day gains. These stats are discouraging in terms of staying-the-course. It is,the long term commitmen rather then trading often that yields great end wealth. Time in the game is the most significant factor when investing.
- time in markets (ie long-long-long term perspectives)
- AA of sizes/sectors according to my own due diligence, not some arbitrary number or recommendation (both wrt individual stocks and fund compositions) [1]
- quality of the stock/fund in question (my own due diligence)
- does it all let me sleep well at night at any given point in the economic cycle?
[1] for example, I hold zero financial stocks and am very cautious w/what financial stocks are in the top-10 holdings of my funds
The data demonstrates just how critical time-in-market (TIM) really is. Performance persistence is a very controversial subject when considering mutual fund selection.
The article is a few years old but I suspect that its conclusions are still valid in today’s marketplace. As a crude measurement, short term is 1 year or less while long term is greater, perhaps much greater, than a single year. Here is a critical finding:
“Over the long term, there is no meaningful relationship between past and future fund performance”
Remember that these are only statistical observations. They suggest potential odds, and not any certainty. When investing, it never gets better than that. Risk always exists.
The referenced report is rather long but well worth the time to read it.
ADDED LATER
I neglected to make this comment in my original post:
“A recent study by Morningstar’s Russel Kinnel demonstrated that a simple screen for low-cost funds can significantly improve investors’ odds of success.” Costs always matter! Lower costs improve the success odds.
Taleb stresses rule number 1 is do not go to zero. A lot of emphasis is placed on growth and asset allocation rightly so. But more important IMHO is withdrawal strategies (a myriad of these belief systems abound). If you get the growth and AA right, you can still go to zero with wrong withdrawal education/philosophy. Also, very little is discussed about investor portfolios that do not go to zero but get close enough to zero that the portfolios can never grow to a meaningful contiburion towards household budgets. Sequence of return risk must be managed.
Comments
While I agree that asset allocation is a key factor that determines end rewards, I believe that total time in the market is even more significant.
The commitment to “stay the course”:when times are hard and returns have disappointed makes a huge difference. On average, the equity market is positive only slightly more than 50% of the time, and down day losses are slightly larger than up day gains. These stats are discouraging in terms of staying-the-course. It is,the long term commitmen rather then trading often that yields great end wealth. Time in the game is the most significant factor when investing.
Time, time, time!
Best Wishes
For me the three most important elements are 1) time invested 2) asset allocation and 3) good mutual fund choices.
1) time
2) AA
3) owning the entire domestic and foreign stock markets via index or ETFs
- time in markets (ie long-long-long term perspectives)
- AA of sizes/sectors according to my own due diligence, not some arbitrary number or recommendation (both wrt individual stocks and fund compositions) [1]
- quality of the stock/fund in question (my own due diligence)
- does it all let me sleep well at night at any given point in the economic cycle?
[1] for example, I hold zero financial stocks and am very cautious w/what financial stocks are in the top-10 holdings of my funds
The data demonstrates just how critical time-in-market (TIM) really is. Performance persistence is a very controversial subject when considering mutual fund selection.
Here is a Link that explores the issues:
http://www.fwp.partners/wp-content/uploads/2016/09/Performance-Persistence-Morningstar-2016.pdf
The article is a few years old but I suspect that its conclusions are still valid in today’s marketplace. As a crude measurement, short term is 1 year or less while long term is greater, perhaps much greater, than a single year. Here is a critical finding:
“Over the long term, there is no meaningful relationship between past and future fund performance”
Remember that these are only statistical observations. They suggest potential odds, and not any certainty. When investing, it never gets better than that. Risk always exists.
The referenced report is rather long but well worth the time to read it.
ADDED LATER
I neglected to make this comment in my original post:
“A recent study by Morningstar’s Russel Kinnel demonstrated that a simple screen for low-cost funds can significantly improve investors’ odds of success.” Costs always matter! Lower costs improve the success odds.
Sorry for my late revision.
Best Wishes
I invested part of my rollover IRA into one five years ago as an experiment, and was pleasantly surprise how well it works.