Sid Roy
The word Asset Allocation comes up sooner or later once you get serious about saving for your retirement. Sadly, this is where most people hit a significant roadblock. I know I did. It took me a while to get over that hurdle. Let me address the five misconceptions I had around this topic. I hope my learning helps you to avoid the mistakes I made.
1. Asset allocation doesn’t need to be complicated. I wasted months in reading all kinds of books and browsing financial blogs to learn about all the different theories and model portfolios. In the end, I realized one grand truth. A complicated portfolio is not necessarily a better portfolio. The first principle of investment is – you understand what you are investing in. Therefore, the simpler your portfolio, the better it is to start with. So, start with the simple stuff instead of waiting around.
2. Do not make it a mentally taxing task. I was absolutely terrified of making any changes without understanding it. Over time, I managed to get over this hurdle by doing it bit by bit. The stakes were low enough that I did not stress out. I knew though every step was a step in the right direction.
3. Do not shoot for perfection. At some point, I thought of just going to someone who knows what they are doing. Thankfully, I had some friends around me to mentor me. I eventually understood that I was letting perfect be the enemy of good. You are probably unsure of your footing. So, give yourself a break, it is ok to be half right to start with and work on refining.
Figure out your broad goals before getting deep in the weeds of Asset Allocation
4. Avoid doing a lot of the research from scratch on every portfolio you run into. Fortunately, the most common portfolios (such as 60% stocks, 40% bonds) have been studied a lot. The risk and potential growth are fairly well researched. It is much better to learn from what exists on the well-known portfolios before you head down the path of more exotic ones.
5. First things first – Clarify your goals before the nitty-gritty details. This was probably my biggest mistake – I was losing the forest for the trees. I worried about all the details but did not have a clear idea of where I wanted to end up. It is a common mistake to get all swept up in the techniques and forget about the end goal. If you are not clear about your goals, then you are going to not feel confident about the “how” you get there.
So, what would I do differently if I could go back in time? First, I would focus more on my broad goals and worry less about getting the minute details right. Second, I would assess where I stand. Everybody has an allocation; the question is where that will lead you in time. Third, I would pick one of the most common portfolios that seem to align with my goals. Then, I would redirect all my new savings to make things go in the right direction. Now if you are not like me, you could get there faster. Hope this clears up some cobwebs and helps you get going towards your goals faster.