Is picking stocks important? If you had invested $10 000 in Amazon $AMZN 10 years ago, you would have $230 000 today but an investment in Coca Cola would have yielded only $17 000. It is important to pick the winning stocks but you cannot know which stocks are going to be the best performers for the next 10 years. The probability of picking the right stocks is low. Most investors lose money in the stock market even if it is a winning game. What's more important to beat the market is portfolio allocation or asset allocation.
YTD the S&P 500 $SPX500 is down by 6.4% while my portfolio is down by only 0.5%. It is not because of picking the right stocks that I beat the market but because of the right portfolio allocation. When the market went into a bear market and crashed by 35%, my portfolio only crashed by 19% and didn't even go into a bear market.
Hedge fund manager Ken Fisher (son of Phillip Fisher) has a rule called in his book, the The Little Book of Market Myths, the 70/20/10 rule. According to this rule, 70% of your returns are determined by asset allocation, 20% by subasset allocation and only 10% by individual securities. In other words, it is more important for you to determine whether you want to invest in stocks or bonds, then determine the sector of these stocks and then only choose a specific stock. This is a top down approach to investing.
This is also something that Benjamin Graham talks about in the Intelligent Investor. Defensive investors are more likely to succeed if they just invest in some big companies without a lot of research. At the time, there were no index funds and ETFs but I'm sure, he would have liked them. This is the same advice that Warren Buffett gives. And we all know about the all weather portfolio of Ray Dalio.
But if you're like me and you love this game, then I'm sure you will still pick stocks. You can do it if you have the time for research. But give some importance to asset allocation. Most stocks are correlated with each other but they are not correlated with bonds or gold. During the crash, the bond and gold part of my portfolio were really what hedged me. I then had enough money to buy stocks cheaper.
You need a portfolio that works for you. You can just be 100% in stocks by investing in the S&P 500 but if the market crashes on the eve of your retirement, that's bad. If however, you have a big cashflow, it is not a problem for you to be 100% in stocks. It depends on your situation.
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