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money health weekly

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Investing Success = Allocating and Locating Your Money


 

"The stock market is a giant distraction to the business of investing."


-John Bogle

 

Are you interested in learning the secret to investing success? I've got news for you; contrary to popular belief it doesn't involve picking hot stocks, getting into cryptocurrencies, or picking next year's top performing mutual fund. It comes down to asset allocation and asset location. 


asset allocation and asset location

Distractions


Financial distractions are everywhere. Headlines in newspapers, articles in magazines, talking heads, and so on and so on and so on. They want us to think that the secret to investing is picking the next top mutual fund or exchange-traded fund. They urge us to trade our accounts to make sure we pick the next hot stock before we miss out. They publish lists of last year's top investment managers (mutual fund managers) because they know many of us will buy those thinking their success will repeat. 


The truth is that none of these things will help you achieve a healthy financial life or success with your investments. The main driver of your long term investment returns is your mix of stocks and bonds...your asset allocation. 


Asset Allocation


Your mix of investments is called your asset allocation. That is, the allocation of your money among different types of investments. There are some important considerations that go into what kind of asset allocation is right for you, such as how much you follow financial news (hint: the less you watch the higher your stock allocation can be) because if you have too much exposure to stocks and there is a market downturn, you may be tempted to sell out at the exact wrong time (the media make it sound like the world is ending). So being honest about how it feels when you see the value of your investments drop is important to consider. Another consideration is how much of your money you will need to spend in the next few years. You can't have money sitting in stocks that you will need, because you don't want to run the risk of the market falling right when you need to get your money out. 


Your asset allocation is a set percentage of the different investments. For example you could have an asset allocation of 70% stocks, 25% bonds, and 5% cash. Or, you could have an asset allocation that is 50% stocks, 40% bonds, and 10% cash. The factors above dictate what your asset allocation will be, but once it's set, then you have a policy. You will always keep your investments at this asset allocation (unless some