Forget “Tried-and-True”: Asset Allocation (Pt. 1)

People love being told what to do. 

Especially when it comes to nuanced topics like finance or fitness that they don’t want to devote too much time, effort, or mental energy toward.

Entire subsections of the financial industry exist because of this tendency.

But the basic problem I have with most wealth building and personal finance information out there is that it’s flatly prescriptive. 

That is, it sells you on a single approach. One path. 

“Just Do This One Thing and You’ll Become a Millionaire.” Etc. Etc.

Then throws in words like “time-tested” or “proven strategies.” 

As if the laws of wealth were chiseled on stone tablets in Aramaic, right next to the Biblical commandment against exploiting the poor with predatory interest rates.

I wish I lived in a world this simple…

Where I could just invest 60% of my money in “stocks” and 40% of my money in “bonds” and call it a day.

But any prescription about what someone should always do with their money completely ignores a stupidly obvious fact:

What worked before might not work again. 

Or, perhaps more accurate: What worked for one stretch of time might not work during a different stretch of time. 

(If you want proof, talk to anyone who hopped on the GameStop hype in March 2021.)

If it’s one thing I’ve learned working with a number of really rich people: Once they’ve climbed a ladder, they don’t pause to look down and make sure the rungs they climbed are still intact.

To be fair: This isn’t just a multi-millionaire problem.

People are terrible about challenging their assumptions or questioning just how universal their personal experience actually is.

This leads to people accepting a lot of received wisdom as true when, in reality, it ain’t.

But if you’re signed up for this newsletter, you know full well that Finance Daddy isn’t resting on his laurels. 

I’m still in the process of building my wealth and sharing what I’m learning along the way…

And if I smell BS, I’m going to tell you about it.

Here’s a good example…

You might read a personal finance book that harps on this old yarn by Andrew Carnegie:

“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”

If you were trying to sell financial products or courses related to real estate, you’d be smart to use that quote. 

But here’s the thing…

That might have been true in 1905… 

When the average yearly wage was $520 and you could buy a brand new home for $300 to $1500, and you could buy an acre of land for $20.

To put that another way, if you saved 10% of your wages in 1905, you could afford to buy two acres of farmland within a year or a house in six years.

Hell yeah that’s a great investment. 

Compare that to today: the average wage is $55,628 and the average home price in the U.S. is about $375,000.

You save 10% of your wages now, and it’ll take you 13.5 years… just to afford a 20% down payment on a mortgage!

Also: What reasonable alternatives were there for the average person? 

It’s not like it was easy for a wage laborer in 1905 to buy company stock. And perpetual bonds paid, what, 2.5%?

Ridiculous.

Here’s a fact about human psychology for you: 

People generally don’t go where they’ll actually get the best results. They move in the direction where they’ll experience the least amount of difficulty or friction.

Call this “loss aversion” or whatever…

But in 1905: Easier to buy land. Harder to buy stock.

So of course 90% of millionaires came from real estate, historically. That’s practically the only thing a regular person could invest in.

Nowadays?

Except for really good pockets of opportunity or handy folks with the patience to fix up a fixer-upper…

90% of people looking to invest or grow wealth should avoid buying homes. At least until they get richer by other means first.

The principles of wealth have remained the same… You need to put your money where your money can grow on its own. 

Big ol’ “Duh” there.

But the strategies you actually need to employ to grow your wealth? 

They’ve changed. They change every 10 to 20 years.

And that’s important to keep in mind…

Because getting stuck on prescriptions that are “tried-and-true” or “time-tested” can also lead you to ignore new assets and opportunities that don’t fit the mold.

Cryptocurrencies and NFTs are a good example. 

Any fogey can make a headline by talking about how cryptos or NFTs are a bubble, or a money laundering scheme, or worthless.

Heck, they might be right. 

I personally have about 20% certainty that cryptos or NFTs, in their current form, will continue to grow in price. 

I’ve yet to see a blockchain or NFT-related project solve a real world problem at a global scale, so I don’t yet have any faith that they’re “the future.” 

But as long as they’re inefficient and they benefit from network effects, they’re going to keep going up in price. 

So should someone invest in a speculative asset like crypto if they don’t have much money?

Well, the amount you should should gamble in highly speculative assets is a solved problem, with a mathematically proven formula:

This gets more complicated, but let’s keep it simple:

Let’s say you have $25,000 invested and you want to buy crypto…

And let’s say the payout is 100 to 1, and there’s a 20% chance crypto is going to stick around over the next 10 years.

That means the absolute maximum amount you should bet in crypto is 19.2% of your investable capital, or $4,800. 

(Play around with these numbers here.)

That’s it. You can bet less. But no more than 19.2% of the money you have to invest.

If you think some new crypto has a 5% chance of surviving, but will pay out 10,000-to-1 if it does, then your max bet should be 4.99% of your investable wealth. 

Place your bet and go look for other opportunities.

I did this when I turned something like $50 into $11,000 with a cryptocurrency called NXT… 

But I did that because I bought in mid-2016 and forgot I owned it until December 2017, when I sold it (which is a funny story for another time). 

That $50 I put in? It was a minuscule fraction of my investments and a total speculative gamble. 

I felt comfortable doing it for the same reason I’d be comfortable betting $50 on the number 14 at a roulette table.

I had no reasonable expectation that I’d win… but thought it’d be super cool if I did. 

And losing $50 would have no material impact on my quality of life.

Am I saying you must invest in crypto? 

No, I’m telling you that you should let the soft animal of your body love what it loves.

But if you’re in the U.S., it takes all of 30 minutes to download and set up a Coinbase account and buy $5 worth of Bitcoin.

The same is true for a brokerage account that will allow you to buy stocks and ETFs. 

That’s a whole lot easier than trying to buy a plot of land these days.

In fact, it’s entirely possible that the price of speculative growth stocks, the markets, and cryptos have been driven up in recent years because it’s easier than ever for normal people to buy these assets with the tap of a few buttons.

The point I’m trying to make is that, in good wealth building, you need to take a step back, check your prejudices and assumptions at the door, and take a hard look at reality. 

For the last 13 years, passive index investing was a money printer. 

But if you invested all your money in passive index funds the last time the market was this overvalued?

You had a dead decade. Your money basically went nowhere.

People freak out now when their stocks go down a few percent over a week. 

Just imagine investing your life savings and watching it decline or go nowhere for 10 whole years.

(Couldn’t be me.)

This is why I have been recently been pounding the table on: 

Consistency – investing a little bit, repeatedly over time.

And

Patience – taking a multi-decade approach to investing.

But in the future, I’m going to be harping on another, related topic:

Specifically, what different assets you should invest in, and how much you should invest in each asset.

For the dweebs who wear glasses and like tinkering with spreadsheets (like me), this is called “asset allocation.”

Another one of those supremely important concepts everyone should know, yet no one thinks about.

But I’m not going to be slapping you in the face with some fixed and finite decree about exactly what you should do…

I want to give you the things you should be thinking about, so you can make the best decisions for you, based on:

• How diversified you want to be

• How much risk you’re willing to take

• How much money you have

• How much time you want to spend managing your investments

• How old you are

• What’s going on in the economy

And so on.

Basically, I want to give you a framework for easily deciding where to put your money, based on your values and expectations.

And I think that’s more important than ever right now, since the data suggest we might be entering another dead decade when it comes to stock index returns.

In other words, being selective about your stocks and diversification are going to be more important than ever in the coming years.