The investment-advisory industry is a huge, multibillion-dollar business based on hard work, clever thinking, and sophisticated algorithms. But it's also based on one teensy-weensy lie.
The lie is that you can grow wealthy investing in stocks and bonds.
It's not a big, black lie. But the unfortunate truth is that the financial establishment rarely looks beyond stocks and bonds. And if you think about it, why would it want to? It makes its money by ushering you from one "hot" stock or "amazing" fund to the next.
Because they know that you have heard that "diversification of assets" is good, financial advisers give you the illusion of diversification by filling your stock portfolio with businesses that are "diversified" into manufacturing, retail, global trade, natural resources, etc.
But at the end of the day, it's all invested in stocks or stock derivatives. The result? More risk and less potential wealth gain for you…
If you can't reasonably expect to get rich with just stocks and bonds, what can you do?
You can model your investing behavior on the behaviors that have been proven, time and time again, to actually work.
I'm talking about asset allocation.
Asset allocation is the process by which you spread your wealth across different sorts of investments.
You might think that something so dull as asset allocation could not possibly be that important in acquiring wealth, but numerous studies have shown that it may be the most important factor.
Because of an early financial disaster, I became an emotionally compulsive diversifier of practically every dollar I could save, putting some of it in bonds, some in stocks, some in cash, some in real estate, and so on.
Over the years, I have made hundreds of individual financial decisions – buy this, sell that. Some of them were good, a few of them were bad, and most of them were in between. And yet, overall, my net worth has increased considerably and consistently, without any down years, for more than 30 years.
I could see very clearly that it was not particular buy/sell decisions that accounted for this good fortune. It was the general decisions about asset allocation that paid off.
Let me give you a bird's-eye view of what I do:
|1.||Stocks – I have several stock portfolios. The lion's share (maybe 80% to 90%) of my stock money is in what you might call "legacy" stocks – a handful of big, dividend-giving companies that I'm happy to keep on a "forever" basis. A smaller percentage is in dividend-giving companies with growth potential. And a tiny percentage are speculations – stocks I'm sure I'll lose all my money on, but that I want to own just for fun.|
|2.||Fixed Income – Historically, bonds make up this asset class. At one time, bonds (AAA-rated municipal bonds) represented as much as 40% of my net worth. My strategy was always to hold until maturity and buy them in "ladders," replacing them when they matured. But I haven't bought them since the rates dropped below 4.5%. Today, they represent about 5% of my net investible wealth.|
|3.||Direct Investments in Entrepreneurial Businesses – This investment class has given me by far the best results. If you do this right, you can expect terrific, steady income and the potential for tremendous growth. The trick here is to invest only in companies you understand and have some control over.|
|4.||Rental Real Estate – Next to business ventures, income-producing property investments have been the largest contributor to my success. I invest for the income and see appreciation as a bonus. Most mainstream real estate advice is bad. But if you do it properly – focusing on income – this asset class will do huge work for your portfolio.|
|5.||Chaos Hedges – This asset class is not an investment. It is, as the name implies, protection from times of turbulence – a market crash, bankruptcy, lawsuits, etc. In this class, I include gold, silver, and platinum coins (bullion and one or two "rare" types). I bought all I needed when gold was trading at about $400 an ounce.|
|6.||Collectibles – My preferred collectibles are fine art and first-edition books, but you can invest in anything from baseball cards to vintage cars to surfboards.|
|7.||Options – Although my cardinal rule is not to invest in something I don't understand, I found a way to trade options that I understand and also believe in. Like real estate and insurance products, most options strategies are speculations. I'd advise against them. But the way I do it – selling puts on high-quality stocks – has worked very well for me.|
|8.||Cash – I call this a "Cash Opportunity Fund." You keep a store of money you add to every year. That way, when the crash comes, you can use this fund to swoop in and buy a bunch of great assets at bargain prices.|
I don't think my own portfolio is the best possible example of diversification. But it does reflect my belief that one needs to go well beyond some combination of stocks, bonds, and cash to win at the wealth-building game.
Editor's note: Earlier this week, during a filmed roundtable discussion, Mark and a group of retirement experts discussed how to prepare for (or rescue) your retirement, including five ways to immediately boost your income. Watch a replay of this free event right here.