Portfolio asset allocation is where many investors make investing mistakes. Studies show portfolio asset allocation will determine over 90% of your investment performance. How you choose to divide your portfolio on a percentage basis to asset categories is crucial to determining both portfolio risk and returns.
3 Top Portfolio Asset Allocation Investing Mistakes
Here are the three top portfolio asset allocation investing mistakes made by investors. If you can avoid these common mistakes it can significantly lower your portfolio volatility and increase your returns.
1. Ignoring Portfolio Asset Allocation
Most people really don’t understand the importance of asset allocation. Some investors completely ignore their asset allocation even though it is the single most important determinant of investment returns.
While picking individual investments, such as stocks, may be more fun than choosing your portfolio asset allocation, this is a big investing mistake. Asset allocation should be the first task for any portfolio manager. Choose your asset allocation; then pick the best individual investments to fit within your asset allocation.
2. Lack of Attention to Capital Preservation
The lack of attention being paid to capital preservation and portfolio volatility has been the most destructive of investing mistakes so far this century. For several decades financial advisors have attached increased importance to compounding growth, and as a consequence, recommend a portfolio asset allocation that is too aggressive for the majority of investors.
Reverse compounding is more destructive than compound growth is advantageous. In other words, a loss of investment capital that devastates future compounding can be more important than the rate of growth. If you lose 50% of your capital it takes a 100% gain to get back to break even. If you lose 10% of your capital it only takes an 11% gain to get back to break even.
3. Maintaining a Static or Passive Management
Maintaining a static or passive portfolio asset allocation is the third common mistake made by investors. A static asset allocation has been touted by many financial experts, financial blogs, and supported by the bull market of the 80’s and 90’s.
Buy and hold has failed. The volatility of the past 12 years has exposed the weakness of this philosophy and produced low or negative returns. The lack of flexibility inherent in a passive portfolio asset allocation strategy can work against capital preservation.
The Remedy – A Tactical Asset Allocation Strategy
The remedy for these 3 investing mistakes is a tactical portfolio asset allocation strategy. This allows the flexibility to invest aggressively when there are low risk opportunities available and be more conservative when valuations are high.