Many of the richest people in the world got their money from stocks, bonds, investment trusts, real estate, commodities, and other forms of residual income. In this chapter, we'll talk about how important asset allocation is. Asset allocation is how you divide your money between different kinds of products (from safe to speculative).
When we talk about asset allocation, we're talking about the different ways we put our money to work. We can divide our assets into three groups: security, buy-and-hold, and speculative. It is recommended that about 70 percent of your assets go into the "security" bucket. This includes things like cash, ISAs, pension funds, your home, safe bonds, and government securities. These are the most secure things to own.
The next type of asset class is "buy and hold." These are usually safe investments that are made for a long time. In this group of assets are buy-and-hold stocks and mutual funds, as well as investment real estate. This type of asset is usually safe because the stocks have a good history and strong fundamentals that make the future look bright. About 15 percent of your total assets should be in the "buy and hold" part of your portfolio.
The last type of assets is speculative. These are high-risk products that you buy and sell quickly to make money in the short term. These include actively traded stocks (stocks you buy and sell within a few days or weeks), initial public offerings (IPOs), options and futures, warrants, and some of the more risky mutual funds.
Before you decide to invest in stocks, it's a good idea to make a plan so you can set your own rules for how your money will be split up (and discover where you are right now). In the end, the 70/15/15 rule for allocating assets will depend on the investor, how much risk they are willing to take, and how they think. You can change the numbers to better fit how you feel about risk.
Many experts think that the proportions of assets should change based on the age of the investor. For example, people under 40 may want to use a more risky strategy in which only 40% of their assets are in security and 30% each are in buy-and-hold investments and speculative investments. Again, your personal situation, how you feel about risk, and other factors should be taken into account before you come up with your own asset allocation numbers.
Your investment plan is the most important thing you need to make before you risk even one penny in the markets.
One of my online businesses helps other people start their own dot com businesses by giving them information and products they can use. One of the first things I tell my clients to do for their business is to make a plan. A plan brings together all of your ideas, combines them with real-world facts and figures, and gives you a map for how to get where you want to go in a structured and efficient way.
You've probably heard the saying, "If you don't plan, you plan to fail." This is as true of investments as it is of anything else in the world, if not more so.
Here are a few examples of things that should stand out in your personal investment plan:
- How will you find investments that are good for you? Will you learn about them on your own, or will you talk to an expert? (for example brokers or follow investment gurus).
- How you will deal with your emotions when your investments go wrong. A lot of what happens on the market is based on how people think and feel, and how you react to things can make the difference between winning and losing.
- How much money you have to invest and how this money will be split between the different types of assets.
- For each investment, a more detailed plan should be made that explains why the investment is being made and how to get in and get out of the investment.
Trying to invest without a clear plan is a surefire way to get into trouble.
Remember, before you even look at an investment report, you must decide how your money will be spent and then make a long-term investment plan that works for you.
