Let’s take a few min­utes this month to talk about port­fo­lios and asset allo­ca­tion. I bet you just thought to your­selves “Wow, what an excit­ing top­ic!” Maybe not, but with all the news dom­i­nat­ing mar­kets this sum­mer, I think it’s a good oppor­tu­ni­ty to remind our­selves of some very wise invest­ment rules and strate­gies.


If you have attend­ed one of our sem­i­nars over the years you prob­a­bly got to meet John & Mary Smart. They began sav­ing and accu­mu­lat­ing wealth when they were in their ear­ly thir­ties. Their advi­sor told them to auto­mat­i­cal­ly invest from their check­ing account each month regard­less of the market’s cur­rent state. As a young, grow­ing fam­i­ly, there were months where cash would get tight and they would ques­tion their rig­or­ous sav­ings plan. One year at the office hol­i­day par­ty, John & Mary found out they were doing it all wrong.


One of Mary’s cowork­ers had been invest­ing for two years in an off­shore, inter­na­tion­al gem mine com­pa­ny. His mon­ey had grown three­fold and he was doing much bet­ter than John & Mary. A few weeks lat­er at their annu­al invest­ment port­fo­lio review, John & Mary asked their advi­sor why they weren’t invest­ed in such a suc­cess­ful invest­ment. Their advi­sors had them repeat togeth­er three lit­tle words: “Stay the course!” They were informed that stick­ing to their diver­si­fied and slow­ly grow­ing invest­ment plan would get them where they need­ed to be quick­er and with greater suc­cess than a spec­u­la­tive, for­eign gem min­ing com­pa­ny.


A few years lat­er the cou­ple found them­selves in a sim­i­lar sit­u­a­tion. Same per­son, same par­ty, same lucra­tive gem mine. Mary’s cowork­er now had 4 times as much saved as she and John and they left the engage­ment dis­traught after only a few cock­tails. Again they found them­selves repeat­ing those three words “Stay the course!” Their advi­sor also did some­thing inter­est­ing to John & Mary. The mar­ket had been per­form­ing quite well for the past few years and he took a good pro­por­tion of their increased stock hold­ings, and bought bonds. “Wait”, the cou­ple pan­icked, “Why are you sell­ing our best per­form­ers?” More cun­ning than your aver­age advi­sor, their advi­sor stat­ed “I can’t tell you all my tricks, or you wouldn’t need my ser­vices. Now head on home and stay the course.”


Over the next year or so John & Mary began to see some­thing increas­ing­ly sat­is­fy­ing about their invest­ments. While they were sav­ing the same amount as always and the stock mar­ket was per­form­ing no dif­fer­ent­ly, their invest­ments were grow­ing faster and faster. A quick call to their advi­sor informed them that they were now beyond the point of being “one to one”. What this meant was that there was enough mon­ey saved that it was earn­ing more return each year than they were putting in. It was time for a meet­ing with their advi­sor to ensure their asset allo­ca­tion and invest­ment selec­tion was in top shape because their money’s return now had more impact than their sav­ing dis­ci­pline.


At this meet­ing, some 15 years into their sav­ings plan John & Mary real­ized that while they were a long way from meet­ing their retire­ment goal, they could see how it was going to be very much achiev­able. Soon they would go from “one to one” to “two to one” and “three to one”. That year at the hol­i­day par­ty, Mary’s cowork­er was nowhere to be found. When they asked around the par­ty, the only sto­ry that any­one had heard was that the gen­tle­men had gone off to a far off place with oth­er investors to save his gem mine from a band of head­hunters and nev­er heard from again. It’s trag­ic some­times to see how tremen­dous greed can turn into such dis­as­trous end­ings.


John & Mary cer­tain­ly learned a lot dur­ing their invest­ing years. Some pieces of knowl­edge came from hav­ing a trust­ed advi­sor, and oth­ers came from sim­ply “Stay­ing the course” and watch­ing their mon­ey begin to work more and more for them. Let’s exam­ine some of the lessons that we all might have learned from the tale of John & Mary and how we can use them in our lives.


  • Invest a set amount every month from your bank account.
    1. This is called dol­lar-cost aver­ag­ing and ensures you are always buy­ing into the mar­ket whether it is high or low. The goings on in Greece and Chi­na have opened some oppor­tu­ni­ties to buy in at a dis­count, but it doesn’t last for­ev­er. The auto­mat­ic invest­ment fea­ture means the invest­ment is effort­less and even­tu­al­ly one nev­er real­izes they are doing with less.


  • Diver­si­fy your port­fo­lio to have many asset class­es and expo­sures.
    1. Each quar­ter a cer­tain sec­tor or mar­ket will always out­per­form the rest. By diver­si­fy­ing com­plete­ly you guar­an­tee your­self some expo­sure to that cer­tain sec­tor and dis­ci­pline your­self from try­ing to chase the next biggest boom.


  • Rebal­ance your port­fo­lio annu­al­ly to avoid over­ex­po­sure in any one econ­o­my or sec­tor.
    1. When the stock mar­ket booms your 60% stock, 40% bond port­fo­lio might look more like 70% stock, 30% bond. Reset things annu­al­ly to lock in your win­nings, force your­self to buy the under­per­form­ing sec­tor when it is afford­able, and min­i­mize your expo­sure to loss dur­ing the next eco­nom­ic turn­down.


  • Under­stand invest­ment con­cepts like the “Rule of 72”, where your mon­ey dou­bles every 7.2 years at 10% return or when you are “one to one”, or your mon­ey begins return­ing more than your annu­al sav­ings.
    1. These are good con­cepts to know for every investor. When we under­stand the “Rule of 72” its easy to see that while it might take a long time to meet your goal, it is very like­ly going to be achieved.
    2. Under­stand­ing when you are “one to one” means your return is more impor­tant than your sav­ings.   Don’t go beyond this point with­out mak­ing sure your assets are posi­tioned in the most effi­cient man­ner pos­si­ble


  • Lis­ten when a neigh­bor, busi­ness asso­ciate, or invest­ment advi­sor says to ‘Stay the course.”
    1. We tell chil­dren, new employ­ees, and stu­dents to take their time, make the best choic­es pos­si­ble, and remain com­mit­ted. Your invest­ment suc­cess will require all the same dis­ci­plines in order to meet your goals suc­cess­ful­ly.


In sum­ma­ry for all future investors, cur­rent investors, and life­long investors read­ing this month I have this tip. Be rea­son­able, pru­dent, selec­tive, and prac­ti­cal in select­ing your invest­ment plan and prod­ucts. Care­ful research, ongo­ing patience, and an open dia­logue with your invest­ment advi­sor will make you all the wis­er and your pock­ets all the green­er. This ulti­mate­ly will achieve your goals, appease your dreams, and help to make you pros­per­ous!