This is More Important than Stock Picking!

Recently, I was talking to a cousin who had moved to Canada a few years back. Like many others, he too had gone there to earn more than what was possible in India for his industry/domain. His life, his decision, his priorities.

But since he is earning more now, he started experimenting a bit.

He told me about a stock which he picked a few months back and which had doubled. He was happy. And rightly so. Who wouldn’t be happy with doubling money?

But when I asked him how much he had put in that stock, he told me that it was a risky one and hence, he only put a few thousand rupees in it.

It was a face-palm moment.

Doubling money is good.

But the impact this doubling had on his finances was negligible.

Why do I say so?

Because I know that he has a financial asset base (excluding real estate) of little less than a crore. But more than 95% of his money is parked in debt instruments, mostly bank fixed deposits. In fact, I am very sure the figure would be closer to 99 percent! So doubling a few thousand rupees won’t matter much on his close-to-a-crore portfolio.

I tried explaining to him why he has a wrong asset allocation for his age (he is 38) and circumstances and that he should be more in equities (here is a simple example of how equity wealth creation happened in reality here).

But the discussion was difficult as he already had a lot of preconceived notions about what was right and what wasn’t. Nevertheless, his recent doubling adventure in a single stock helped matter a bit from my side of the discussion.

But I don’t want to bore you about our discussion.

The core idea here is that having the correct asset allocation is key to managing your wealth. And sadly, most people don’t understand this.

No doubt the stock investment doubled for my cousin. But if you compare it with his overall wealth, then was it going to make any difference to his wealth?


Asset allocation doesn’t get the importance it deserves. 

And I have come to realize this more and moreover the years of being an investment advisor myself.

People think that asset allocation is an academic topic. It doesn’t impact them. But in reality, that is what impacts 90% of their wealth! Even more.

Unfortunately, most investors spend a lot of time looking for the right stock and in picking the good mutual funds. But eventually, they don’t allocate much money to these high-return potential assets. As a result, even if these equity products do well, it has a very small impact on their overall portfolio.

Following proper asset allocation is extremely important to meet your financial goals on time. And if you don’t have the confidence or clarity about whether your investments can help you achieve your goal in your chosen timelines, then what is the point of investments?

Money should make your life predictable. And if picking the right stocks doesn’t help that goal then there is something inadequate about just picking the right stocks. What is actually required is to invest the right amount and more importantly, have the right asset allocation.

For most investors, correct asset allocation will do most of the heavy lifting of your financial life.

You may not agree to this or you may not know this. But this is a fact.

So go ahead and do individual stock picking. But remember that proper asset allocation is what matters more than just picking stocks: The choice of a mix of assets has a far greater impact on your financial success than your stock picking or timing the markets.

This also reminds me of something that Barry Ritholtz said here. And it may sound wrong to many but it’s still valid for most investors – Stock picking is for fun. Asset allocation is for making money over the long haul.

While most investors spend most of their time trying to pick the best stocks or the best mutual funds, these decisions mean almost nothing compared to decisions about asset allocation.

I told my cousin to continue his stock-picking in India and also in Canada if he wishes to do it to understand how equity markets actually work. But eventually, what he really needs is a well-thought-out asset allocation to build his investment portfolio.

So what about you doing direct stock investing?

You can do it too. But consider investing in direct stocks only if you understand how to pick stocks correctly and more importantly, you have the time and skill to monitor the stock portfolio proactively. Otherwise, it’s better to create a diversified portfolio of mutual funds that can be funded regularly using mutual fund SIP. Many SIP success stories prove that regular investing can help you make a portfolio of crores. The good news, however, is that there are many portfolio trackers to use for your investments.

It must also be mentioned that asset allocation itself is not the same for everyone. It differs based on the profile of each investor’s income, goals, risk appetite, financial responsibilities, return expectations, time horizon and several other things.

I am of this strong view that not only is asset allocation different for different people, it should also be dynamic and be market aware. There are times to be heavy in equity and there are times to not be heavy in equity. And that is something that a prudent and dynamic asset allocation strategy does.

Asset Allocation tends to be the most ignored aspect of investing. But asset allocation almost always completely determines success or failure in financial life for most people. I have no doubt in saying that your asset allocation decisions will eventually dominate your long-term portfolio outcomes.

And I will also go on to say that if you get your asset allocation wrong, then above-average stock/fund picking is irrelevant.

I leave you with a thought that might seem repetitive.

Asset allocation is the single most important decision you will make about your wealth. So don’t mess it up just because you were busy looking for random stock picks. Make your asset allocation decisions deliberate and strategic.

And if you follow a solid and dynamic asset allocation strategy, then you will increase your probability of investing profitably in the long term.

And if you don’t know what to do or want a second opinion, always take the help of competent and trustworthy fee-only investment advisors.

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