The Little Book That Saves Your Assets
The bond market is the fundament off of which everything else gets priced.
Asset allocation, not guessing the direction of the market, is the key to financial success.
The key ideas to asset allocation are:
- Diversification
- Rebalancing
- Risk management
- Reinvestment
At its heart, the essence of asset allocation is the search for non-correlation.
You can choose to rebalance a portfolio either by price or by time.
Much like creating an escape plan during a fire prior to one occurring, developing a risk management plan before a crash is wise.
Bonds: income, reliability, predictability, growth, and satisfaction of known liabilities.
Stocks: ownership and linkage to value creation, economic gain, and profits.
Real Estate: tangibility, ownership, ego, gain, and income.
Commodities: exposure to the satisfaction of humans’ elemental needs.
Precious Metals: purchasing power protection, permanence, and a refuge during turbulent conditions.
Private Equity & Ventura Capital: capital growth and influence and control over corporate destiny.
Hedge funds find and take advantage of market inefficiencies.
Be realistic when assessing your own investment skills and weaknesses.
There are a number of risks when it comes to investing:
- Purchasing power risk from inflation.
- Price risk.
- Interest rate risk.
- Credit risk.
Maximizing your long-term investing gains requires compounding but compounding requires reinvestment.
Investments neither know nor care what price we pay for them, so entry prices shouldn’t influence our plan or our bias.
If you invest out of fear, you’ll be too afraid to act and never reach your goals.
As an investor, you need to ask yourself if any of your positions are part of a crowded trade. If they are crowded, who is the marginal buyer that will keep pushing the trend higher?