Investing is very personal because it involves risk and risk is very personal. In my 20+ years of being a hobby stock market investor, I have learned a few things that have worked and tried many many things that did not work.
I'll share some examples over time of lessons learned, but for this post I wanted to share what has helped make me a better, more at ease investor. You see, investing is also highly emotional. We work hard for our savings but because of inflation, savings is not enough. We need to invest that savings to ensure we don't lose purchasing power over time. But investing introduces the risk of losing your savings, let alone trying to keep up with inflation. There is nothing more irritating or quite frankly depressing than losing your hard earned savings.
This is where a balanced allocation comes into play. There is not a single investment that has worked since the beginning of time to preserve wealth, but there are several types of investments that have shown to have the best shot at doing just that. The secret is to own them in balance because what tends to happen is as one allocation starts to struggle, another might start to really perform balancing each other out.
There is a professional investor, Chris Cole, who wrote a fantastic paper called The Allegory of the Hawk and Serpent where he studied 100 years of investment history to determine the ideal allocation. The picture above is actually from this piece and shows all the various ways to invest and things to worry about as investors. His conclusion is that the ideal allocation is roughly 20% in stocks (equities), 20% in fixed income (bonds), 20% in gold, 20% in commodities, and 20% in long volatility (think of this last one as insurance protection against a drop in markets).
This allocation might be ideal for professional investors but it can be very difficult to replicate for retail investors. I've followed the principal of this but have tweaked my ideal allocation to the following:
- 20% U.S. stock market
- 20% Non U.S. stock market
- 20% interest earning investments (bonds, real estate, etc.)
- 20% scarce things (gold, precious metals, Bitcoin)
- 20% cash and/or insurance