How one Fool discovered a new passion for asset allocation.
When I started out as a personal financial journalist, there was a breed of investment analyst I would avoid quoting. They were the ones who kept banging on about asset allocation.
It was the late 1990s, and I wanted them to tip the latest hot technology stock or rampant growth fund. That's what my readers wanted as well. The asset allocators wouldn't play that game.
All they talked about was the importance of getting a balanced portfolio, and spreading your money between shares, bonds, cash and property, to reflect your attitude towards risk.
It made sense, but it also made lousy copy. So I dumped them for advisers who were happy to tell our readers to dive into, say, Aberdeen Technology, because dot-com companies were the future.
It's great when you allocate
My journalist's instincts were correct. The average Sunday newspaper reader didn't want to wade through dreary lectures on asset allocation. Everybody loves a good stock or fund tip.
Unfortunately, my investment instincts were rotten.
Years later, having watched the ups and downs of the markets and my own portfolio, I've switched sides. Now I'm with the asset allocators.
He shoots, he misses
I suspect most private investors tread a similar path. They start with a gambler's attitude to stocks and shares. And, like any gambler, they want a quick win.
They slowly discover that backing stocks and funds isn't like backing the horses or a football team. In the sporting world, last year's winners stand an above-average chance of being this year's winners as well.
If funds were like football teams, you could simply buy Manchester United, Manchester City, Arsenal and Chelsea, and come top of the league every year.
That's what fledgling investors were subconsciously thinking when they dived into technology in January 2000 or emerging markets in January 2011.
They bought the form team, wrongly assuming it would keep on winning. Then watched in horror as it was relegated to the bottom division.
Over time, we also learn about the investment cycle. Perhaps we wonder why our whizz-bang China fund hasn't made money for years. Or why our favourite fund manager has gone out of style,
Or maybe we puzzle over why stuffy old equity income funds are suddenly top of the pops. Or the US, even though everybody was writing it off just a few months ago.
Or we might be floored to see bonds trounce shares, as they did in 2011.
Stocks and sectors swing in and out of fashion. Nobody can consistently predict when the trend will change. The best thing you can do is have a little exposure to all of them.
Watch your attitude
So, I assessed my attitude to risk. As I'm investing for at least 20 years, I put myself down as a high-risk growth investor.
I accepted that no fund or sector would outperform for 20 years, so it made sense to spread my money around. I decided to learn more about the process and boned up on the Fool's rules for asset allocation.
Love the loser
This process has also cured my addiction to chasing the latest hot stock and rampant sector. If you want to build a balanced portfolio, you should be stocking up on your losers, not your winners. Plus, the investment cycle is on your side.
So where has this led me?
Most recently, to BlackRock Frontiers Investment Trust, which I bought in February.
I shunned frontier markets when they were the talk of the town a couple of years ago. I only embraced them last month, noting that the Arab Spring had hammered the sector. If you want to gain a foothold in a sector, the best time to do it is when prices are cheap.
It also led me to buy the Junior Oils Trust last summer, after the fund had dipped 25%. It had a little further to fall, but with a barrel of Brent crude recently topping $126 a barrel, it is now motoring.
I've done the same with stocks as well. I wanted a play on the ageing global population, and bought orthopaedics manufacturer Smith & Nephew (LSE: SN) last summer, but only when its knees were looking creaky.
I also sunk my spade into miner BHP Billiton (LSE: BLT) in last summer's slump, after waiting for a slide in commodity prices. Neither stock was hot or rampant at the time. Their day will come.
The track to trackers
Ultimately, asset allocation leads you to trackers. If you want to spread your money across different assets and sectors, you should do it as cheaply as possible. That's what Malcolm Wheatley discovered, in Asset Allocation Made Simple. Malcolm, by the way, likes to do it once a year.
Some people claim asset allocation is the most important thing an investor can do. So those boring old analysts had a point, after all.
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> Harvey owns shares in BlackRock Frontiers, Junior Oils, Smith & Nephew and BHP Billiton. The Motley Fool owns shares in BHP Billiton and Smith & Nephew.