You’re right, it’s not for everyone. For those who don’t know anything about investments, or aren’t interested, I would simply suggest you invest in index funds. Those are the simplest and easiest to understand, and get an average return (they ARE the average).

However if you’re looking at a balanced portfolio, as you suggested, when you have $3000 that needs to be re-invested, then where should it go? I would say into your best performing asset.

Now please note that the best performing asset, which I didn’t really specify what that is, is NOT based on the capital appreciation! That is, you should not buy stocks into those that have increased in price the most!!!

Prices and intrinsic value are two completely different things. I believe you should be buying those stocks that have increased the most in their intrinsic value, NOT stock price!!!

I don’t want to push a sore point either, but the thing to remember is that when Nortel was selling at it’s high point, looking at it from a value investment perspective, it made no sense. I remember at one point, this is near it’s low, it was selling for a $1/share while losing $5/share in earnings! That’s insane! Who would buy a corner store that was for $100,000 that was losing $500,000 a year? But people all around me who were used to the sky high prices at the time were still flocking to Nortel because it was so cheap now… What!?! To me it was still way too expensive (the balance sheet was just as terrible at the time, if not worse)!

The problem with Nortel is that it was bought mainly on speculation and hearsay. I can tell you that of everyone I know who bought it here in Canada (it was very popular in Canada), not one person actually knew it’s intrinsic value. Not one person could actually give me any real numbers at all. They were all riding the wave of speculation. Now I’m not saying this is true of you too, I’m just saying these were my observations.

Also note that I bought the majority of my stocks holdings just as the dot com crash was starting and continued to do so until I cashed out everything to start LandlordMax Property Management Software. And I can tell you many people thought I was insane buying stocks as they were tanking hard. But I bought them based on solid fundamentals, and I made a good deal of money this way. I knew that based on the fundamentals the companies I chose would prosper.

I don’t really mean to be on a soapbox, but too many people keep pointing Nortel out to me here in Canada because they lost money on it. The reality is that very few actually knew anything about that stock, and if that’s the case, then you’re absolutely right, you shouldn’t be balancing your portfolio. You don’t have the knowledge, pure and simple. You should then be looking at index funds.

Great points, great numbers.

You are right. Asset allocation is premised on reducing volatility and chances of greater losses. Investing in a different asset class when one runs up. (Which usually is followed by a correction)

A way to participate in the theory of asset allocation and reduce transaction fees, and capital gains taxes, is to use new money to invest in the “lagging” class.

IE: You usually invest $3000/year. This year your $3000 goes into bonds, as the equities portion has gotten out of synch.

Asset allocation is a simple way to explain and reinforce the consumer that they need to look at whether their investments still fit their plans going forward. It is not as important to fit the rigid percentages prescribed by such and such a plan, but to know the reasons behind it, your personal goals, and timeline for your investment.

Had some Nortel, to name a sore point, and other tech savvy investors taken an asset allocation peek at their portfolio in they hay days of the tech boom… many of them would be sitting on a very comfortable, boring “non performing” real-estate/bond/”tech” equities portfolio in the 6 figures! Unfortunately, in those days few listened and now sit on a basket of tech stocks that barely make an interesting dinner party discussion.

Not all investment theories and styles fit everyone. (As you stated very clearly in your article.) Some, dare I say many, don’t understand the markets well enough to manage their own portfolios and can be served by the various products that are available. Granted not the best way to riches, but a much better result then stuffing their pillows with “what’s left at the end of the month” or investing strictly in Canada Savings or Victory Bonds.