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What’s the perfect investment allocation?

By Andrew Hallam - September 05, 2023

The Barkley Marathons might be the world’s nastiest running races.

Only fifteen people have finished the 100-mile-long Odyssey of brush and rock in under the 60-hours allotted.

Instead of using a starter’s pistol, the founder starts each edition by lighting his cigarette.

After each lap, runners who fail to pass the start/finish area under the prescribed cutoff time are kicked out of the race.

Based on my armchair assessment of bone-crunching rocks and roots, half of a Barkley marathon is equal to a lifetime of investing.

Could you efficiently pull this off?

I think so, with the right portfolio allocation.

Portfolio allocation represents the different categories of investments that you are invested in. It’s your mix of asset classes. For example, large American stocks (Large-Cap US stocks) represent one asset class. This includes companies like Coca-Cola and Apple. Small international stocks (International Small-Caps) represent another asset class.

Low-cost stocks (known as value stocks) represent another. Bonds represent yet another. In the case of a bond market index, a bond fund represents dozens or hundreds of small loans made out to governments or businesses in exchange for interest payments.

Global diversification reduces risk. It can also boost your wealth. Let me explain by going back to those marathons.

Plenty of runners might ask, “What’s the fastest way to complete a Barkley marathon?”

Notice the question doesn’t ask, “What’s the fastest way for me to complete a Barkley marathon?”

The answer to the first, impersonal question is simple:

Run naked.

Allocate nothing to clothing. No shorts. No shirt. These add extra weight. Some people could do that. Unfortunately, there’s one painful guarantee. You will snag your private parts on a blackberry bush or tree. Unless you’ve novocained your body or you’re Rocky Balboa, this will hurt a lot. Heck, if you tear enough flesh, your race could be over.

Running naked is like investing in a single, stock market asset class (racing naked without shoes is like adding a dash of crypto). Yes, from a long-term mathematical perspective, index fund portfolios with 100 percent in stocks beat diversified indexed portfolios of stocks and bonds.

But maths and spreadsheets don’t represent real people.

How an allocation performs, and how humans perform with a specific allocation are typically two different things.

Some people love to see stocks drop.

Meanwhile, many others would prefer a root canal, rather than see their portfolio values plunge. Such fear (maybe even pain) can prevent them from staying on course. It can cause them to sell or stop adding money. Those with more suitable allocations (like proper shoes and proper clothing in a Barkley marathon) often then run past those who overestimated their tolerance for risk.

So what’s the best allocation for you to make money?

That’s personal. In many cases, the answer is in your DNA.

In the gnarly marathon world, some might want the protection of a Michelin-man suit. This should protect you from painful spills, while keeping your private parts safe. But your pace would be slow. You would almost certainly be eliminated after just one lap. Based on the bulk, you might roll down a hill and remain there until spring.

The Michelin man’s investment is 100 percent in cash, savings accounts and/or short-term bonds. You wouldn’t feel pain when the markets crash. But you won’t build enough wealth to retire. Some risk is required, if you want to make money.

This brings us to a globally diversified portfolio of stock and bond market index funds. These are a Barkley marathoner’s sturdy trail shoes, a hat, kneepads, elbow pads, as well as high protective socks and a light, long-sleeved shirt. Yes, it adds a bit of weight. And yes, you will still feel pain when you slip on wet roots. But based on real people’s performances (and not a spreadsheet’s) you’ll beat most streakers and every padded suit.

Unfortunately, when investors are first trying to determine a suitable portfolio allocation, they don’t always think about what would be right for them. Some choose 100 percent stocks because that’s supposed to make more money. Others go Michelin because they’re afraid to take some risk.

Some say, “I’m young, so I can afford that risk.”

But when determining your allocation, age isn’t the only factor to consider. That’s why smart investment advisers don’t say, “All young people should invest 100 percent in stocks, or 80 percent stocks and 20 percent bonds.”

People aren’t machines. Personalities always matter. I’ve met 70 year olds, for example, with 80 percent stocks and 20 percent bonds. That’s considered a higher risk portfolio. But it was perfect for them. They had previously invested through half a dozen big market drops, and they always had the mettle to stay on course.

In contrast, I’ve met 20 year olds who are much better suited to 60 percent in stocks and 40 percent in bonds. “Wait!” You might say. “That portfolio won’t grow as much!” But this allocation might be great for someone like my young niece, Abby.

Based on Abby’s personality, she would likely make more money, over her lifetime, with fewer painful spills. That doesn’t mean her portfolio couldn’t fall, if she had 60 percent stocks and 40 percent bonds. It would have dropped about 17 percent in 2022.

But such a portfolio experiences fewer, large drops than those with higher stock allocations. In Barkley marathon-speak, Abby will still get bumps and scrapes. But her balanced allocation should help mitigate that pain, increasing the odds that she will keep moving forward.

Moving forward.

That’s the most important part. That means continuing to add money during market ups and downs.

And while Abby’s portfolio, on a spreadsheet, shouldn’t keep pace with that of a higher risk investor who’s metaphorically running naked, she could end up with a lot more money. If she is able to stay the course, keep adding money, and not sell, hesitate, or jump into a seemingly greener pasture, she’ll end up wealthier than most higher risk investors. After all, most investors overestimate their tolerance for risk.

Always remember: how a portfolio performs and how you will perform with a specific allocation are often two different things. Nobody (no matter who it is) should ever tell you what allocation would be best.

You are, after all, you.


Save and invest for a better life

Andrew Hallam is the best-selling author of Millionaire Expat (3rd edition), Balance, and Millionaire Teacher.