The Way In Which Asset Allocation Dovetails With Ancient Wisdom Is That It Turns Our Focus Inward Rather Than Outward

Category: Finance, Financial Planning.

Advances in investment theory have dovetailed nicely with ancient wisdom to present investors with a new and exciting paradigm for investing. Markowitz.

These advances, known as Modern Portfolio Theory, were developed by primarily by Nobel prize winning economist Harry M. Modern Portfolio theory emphasizes the importance of disciplined investing that focuses on proper asset allocation rather than on trying to pick winning stocks, or timing the market. Markowitz and others in the field of Modern Portfolio Theory have taught us that it is much better to create diversified, disciplined investment portfolios, efficient than to try to beat the market. Asset allocation is generally defined as the allocation of an investor s portfolio among a number of major asset classes. The way in which asset allocation dovetails with ancient wisdom is that it turns our focus inward rather than outward. Once we have determined an asset allocation that is appropriate for our risk tolerance, then our work is to stay centered and disciplined, to hang in there with our asset allocation strategy, and not get swept up by the hot tip of the day. It focuses us on our own investing behavior rather than on an endless chase to try to outsmart the market with hot stock tips, market timing and other such lures.

The new paradigm is that our focus is on a sense of centeredness, and discipline with, mindfulness regard to our investing. We don t need to outsmart others. We don t need to be in a competitive frame of mind to be successful investors. Instead, we enter into investing with the positive view that even as markets go up and down as they will, over the long haul, a maintaining a proper asset allocation is a sound strategy. This centeredness allows us to resist the allure of speculative buying when markets heat up. We become less focused on the daily ups and downs of the market, and stay centered and mindful, aware that wise investing is a long- term project. I remember in the late 1990 s talking with an old friend near the dizzying height of the internet stock bubble.

The headline trumpeted" Everybody s Getting Rich" "It s true" my friend asserted. "There s no limit to how much you can make off the stocks of these internet companies. He showed me a glossy financial magazine featuring a picture of a deliriously happy couple holding up handfuls of cash. The old rules don t apply to the new economy. " He urged me to invest in a high tech company that was just going public, assuring me that we would both make a killing. He was convinced it was" the new AOL" . He was certain his stock, a provider of online services, could not miss. Despite his enthusiasm, I declined to invest. It turns out that my decision was prudent, since the company he was touting is now in bankruptcy, with its stock value at zero.

I was committed to maintaining my portfolio s asset allocation. My friend had invested far too much of his portfolio on this gamble. The new investing paradigm helps us maintain our composure when markets go through their inevitable ups and downs. Like so many others, he got caught up in the financial euphoria of the tech bubble only to have the bubble burst in his face. We avoid the trap of chasing the latest hot tip, and learn that building wealth is a long- term project. With a sense of commitment and centeredness, we build true wealth over time.

We stay committed to a long- term strategy of maintaining an appropriate asset allocation, and do not over- react to market volatility.