July 3, 2012

Top 10 Investor Errors: Asset Allocation vs Stock Picking

Fourth of ten articles by Barry Ritholtz.

This is critical one, because it speaks directly to an aspect that needlessly turns off would-be retirement investors.

Asset allocation is simply where your money is invested across all markets: Stocks vs. bonds, foreign companies vs. domestic, large vs. small, gold and currencies vs. paper.

All of the investment advice I've ever read agrees that for long-haul investing (i.e. retirement), diversification is key. In other words, spreading the money around. Yet effective diversification used to require research: investors had to know where the could put their money before they decided where they should, which informed where they would.

Investment companies, in an effort to lure reluctant investors into the fold have since created targeted mutual funds incorporating a mix of assets in proportion to an investor's planned retirement year. It's now common to find companies promoting families of funds named "retirement 2025," "retirement 2030," etc.

By simply depositing to a fund named for the year nearest the planned retirement date, an investor's funds are fully diversified across markets, sectors and classes. What's more, the fund manager periodically rebalances the mix of assets, drawing the fund more conservative as the retirement year approaches. It's legitimate hands-off investing, which can help protect the investor from one market's melt-down.