More Important Than Any One Stock

The Most Critical Investment Decision Is Not What You Think

This is Porter’s Daily Journal, a free e-letter from Porter & Co. that provides unfiltered insights on markets, the economy, and life to help readers become better investors. It includes weekday editions and two weekend editions… and is free to all subscribers.

Table of Contents

• The Most Critical Investment Decision Is Not What …

• Balance Your Risk Barbell

• Know Your Investment Horizon And Risk Tolerance

• Maintain a Reasonable Number Of Positions

• Embrace Change With Dynamic Allocation

• Putting It All Together

• [Watch Now] The All-In Summit – Your Next Move

• Three Things To Know Before We Go…

• And One More Thing… Lithium Market Recovery In Sig …

Editor’s note: We will not be publishing the Saturday Stock Screen and Sunday Investment Chronicles for the remainder of August. The two weekend Daily Journal features will resume publication on September 6 and 7.

As regular readers know, at Porter & Co., we provide world-class investment research for individual investors. We write about the stocks and bonds of individual companies, their current and anticipated valuations, the timing of buying and selling them, and the risk involved in owning them.

But there is one more step involved to bring it all together… asset allocation, which is the topic of today’s Daily Journal, adapted from a Big Secret On Wall Street essay from March 2024.

The specific combination of assets in a portfolio can explain between 80% and 94% of its total return.

Asset allocation – how investors invest, or “allocate,” their capital across (and within) different asset classes like stocks, bonds, real estate, and commodities – is critical. In fact, research suggests that asset allocation can play a more important role in investors’ long-term success than which individual investments they own. 

However, proper asset allocation is also a highly individual matter. No one-size-fits-all allocation is appropriate for every investor in every situation.

The academic foundation of asset allocation dates to the early 1950s, when Nobel Prize-winning economist Harry Markowitz showed that investing in a combination of stocks and bonds produced better risk-adjusted returns than investing in either asset alone.

Markowitz’s research led to the development of the popular “60/40 portfolio” – consisting of a 60% allocation to stocks and a 40% allocation to bonds or fixed income – which is still widely recommended by financial advisors, more than 70 years later.

Of course, this is just one way an investor might assemble a portfolio. Another popular approach is the “100 minus your age” rule, which designates a gradually smaller percentage to stocks (and therefore, a larger percentage to bonds) as an investor grows older.