The Number All Investors Should Follow

06/21/2012 9:45 am EST


Sheldon Jacobs

Author, Investing Without Wall Street, Five Essentials for Financial Freedom

Not enough investors know how much of their portfolio is invested in stocks, says Sheldon Jacobs, and he thinks it’s crucial that the percentage should be tracked weekly.

My guest today is Sheldon Jacobs and we’re talking about asset allocation and things he’s talking about here at the MoneyShow. Sheldon, what are you talking about in terms of asset allocation in your workshop?

Asset allocation is the most important thing you can do in investing—and probably the most neglected, because everybody thinks they know how to do it.

The truth of the matter is there’s an awful lot of people who don’t do it right, and it’s really a shame because asset allocation can account for up to 90% of your returns. Much more often, people get all involved with picking the individual fund or the stock tip of the day, which is nice but it isn’t as important as getting your asset allocation.

One of the things I do when I talk to people in speeches or just normal conversation is I ask them if they know what their equity allocation is. I say, "Take your financial assets; what percentage of your financial assets are invested in equities?"

That one figure is the most important figure there is in investing, and you’d be amazed at how many people don’t know it off the top of their head. They think they’ll find out, but they should track this number weekly and understand what is the right asset allocation for them.

Do you find that they’re usually underweight or overweight in that?

They can be both ways, but the most critical thing is people that are overweighted in equities. Actually, your asset allocation can range anywhere from 25% to 80%.

It’s a very personal thing. You have to look at your own situation, how much money you have, your age, all sorts of demographics. See what your risk tolerance is, all these sorts of things. There is no simple answer to the thing; but you have to think about it very carefully. It’s one of the things my book really emphasizes.

You say that in the beginning that most people do it wrong. Are they taking more risk than they should be?

You know, it’s not so much whether they take more risk or less risk, which of course happens. The point is, they don’t think about it.

That’s your starting point in good investing. What is my asset allocation? What happens with too many people is that they’ll get a tip on a stock or they will get a tip on a fund, and all of a sudden they never look at the overall picture.

I can remember a few years ago, I had a friend of mine who found out all of a sudden she was 75% in equities. Luckily in this case, she went to an investment advisor and he said no, the market is very treacherous. She was retired. She had no business being 75% in equities. She probably couldn’t begin to tell you how she got there.

You have to think about this. My asset allocation right now is 41% and I track it weekly. That’s more important than picking the best stock tip or whatever.

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