Investing: a beginner's guide

Asset allocation

I will not talk about all academic studies written on the subject, but more about experience.

First point to remember, asset allocation represents approximately 80% of performance, the choice of securities a mere 20%. So focus on asset allocation since this is the only strategic decision to be made, all the rest is tactical.

Broadly speaking there are 8 asset classes:

• Cash (including time deposits)
  
• Bonds: investment grade or junk (high yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging markets
• Stocks: value or growth; large-cap versus small-cap; domestic, foreign, emerging markets
• Real estate
• Foreign currency
• Natural resources (soft commodities, metals, energy)
  
• Precious metals
• Luxury collectibles such as art, fine wine, automobiles, etc.

The following hierarchy of where time MUST be spent in investment management is borrowed from Global Thematic Investors (it is a fee paying newsletter really worth its money), which is, as I am, a great believer in thematic investments.

1. Strategic asset allocation
2. Tactical asset allocation
3. Methodology/style of fund/manager
4. Stock ideas/stock selection
5. Timing
6. Discounts or deals
7. Tips and hot ideas
   

Do not spend time on 5, 6 and 7 but on 1, 2, 3 and 4;

In 2008, only tactical asset allocation was really important: move to cash.

Psychology

In the future, if you do not want to belong to the tens of million of savers who lost $50 trillion in 2008:

• Take out emotion
• Be focused
  
• Be disciplined
• Design your own personal strategic neutral
• Do not be disturbed by media noise
• Do not go beyond your risk appetite

In a forthcoming article I will discuss about thematic investments.