I would like to start off by issuing a clarification. I received a note from an alert reader regarding my column “Letter to Daughter Doing National Service Abroad” a few weeks ago. I spoke about how if the girls are doing national service abroad, and if they need extra money, they could babysit.
As my daughter is a dual US/Israeli citizen, it never occurred to me that for pure Israelis, it’s actually illegal to work, as their visa is solely for national service. I actually mentioned this to my daughter, and she said, “Yes that’s correct. During our seminar, they repeatedly mentioned that the girls in the US on visas are prohibited from working.”
Be careful, and sorry for the confusion.
I am writing this column from the North, as we are vacationing in Israel. I guess someone needs to vacation locally! We just got back from a nighttime activity, bowling. I will refrain from giving my opinion on the culture, or lack thereof, of bowling in this country. Bowling in flip-flops, someone from another lane walking in front of you as you are set to release the ball – hey, all is good!
When you bowl, the goal is to knock down as many pins as possible. It doesn’t really matter how the ball is rolled down the lane, as long as the maximum number of pins fall. We played with bumpers, which adds a new dimension to the game. Taking advantage of that help, my youngest, NEK, scored a personal best. A certain other child decided that standing backward and kicking the ball with a heel, or combining the game with American football and hiking the ball down the lane, would be most effective. Ultimately, it’s the result that is important.
Asset allocation: It's just like bowling
In certain respects, the same is true with your asset allocation. There may be many ways to allocate a portfolio, but most important is the result and that the investor’s goals and needs are achieved.
Mike Piper of Oblivious Investor writes: “When you make a cake, you start out with a bunch of dry powdery white stuff (flour, sugar, baking powder, salt), some eggs, and some butter. And when you’re finished, the final product doesn’t look anything like those ingredients with which you began. It’s magic. The whole is greater than the sum of its parts. And if you mess it up even a little bit (e.g., you leave out a teaspoon of baking powder), it can be a disaster. Many people in the investment industry will tell you that asset allocation is like baking a cake. If you get it just right, in precisely this way (and definitely not that way), you’ll have something magical.”
Like Piper, I strongly disagree with this approach. It’s really not like baking. If you leave out an ingredient, the cake may be ruined, but if you leave out a 3% allocation to emerging markets, your portfolio will be okay over the long term. All you need to do is Google “asset allocation models,” and you will find many different approaches on how to build various portfolios. Just like bowing, where you can use spin, roll it straight, roll it standing backward, or even rolling the ball down the lane as fast as you can, as long as you hit as many pins as possible, you are in good shape.
Piper continues: “Asset allocation is like making a fruit salad. If you put in more blueberries, nothing magical happens, nor is there any disaster. Your fruit salad just has more blueberries. We can’t even say whether that’s necessarily a good thing or a bad thing; it depends entirely on how you feel about blueberries. If you add more risky stuff, okay, now your portfolio is a little riskier. If you add more safe stuff, okay, now your portfolio is a little safer. That’s it. There’s no magic. If you choose to have just three to four ingredients in your fruit salad instead of seven, that’s fine. It will still get the job done. There’s not one single recipe that beats the others. There are plenty of functional recipes. And you don’t have to be super precise about it – a little more or less of something than you had intended is not a disaster.”
Getting the right asset allocation is more of a function of your personal financial goals and needs. Can the money sit and grow? Is it to be used to generate supplemental income? Maybe you need a combination of some growth and income. Do you plan on gifting to children? Buying an apartment in the next 18 months?
In many cases, each of these goals would be a cause to allocate assets differently. That’s why the first step, even before investing the money, is to sit down and define what it is that you want to accomplish with the money. Once you have successfully defined what your goals and needs are, then you can go ahead and allocate your investments.
The information in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.