TaketheFifth 77way to preserve wealth. If 100% of wealth were allocated to stocks
and the stoc kmar ket overall dragged for a decade, total wealth would
erode. If a portion of the wealth were stored in bonds and the bond
market performed favorably over that time, much of the wealth
would be preserved.
One problem with investments made through tax-advantaged
plans is a lac kof diversification in the asset classes offered. Many
plan menus are weighted disproportionately toward stoc kfunds.
Many people simply elect an even allocation between the items on the
menu. Many others simply allocate 100% to the stoc kfunds. Either
way, assets are allocated heavily toward stocks. Heavy stock weight-
ing may be prudent for very young people and even for older people,
but only so long as other (non-plan) assets are in different classes.
Putting all your eggs in the stock market basket is imprudent
asset allocation. Once you have allocated your assets across different
classes, the portion you allocate to stocks need not be diversified. In
short, asset diversification is far more important than stoc kportfolio
diversification.
Beyond asset preservation, the ultimate issue in asset alloca-
tion—as in investing in general—is the prior and larger question of
opportunity cost. You want to invest your money in the assets most
likely to produce the greatest return in future periods. The general
principles for evaluating that likelihood are pretty much the same
across asset classes. The form of the asset itself guarantees nothing
about its relative attractiveness, a question that depends on its con-
text. That said, there are plenty of exotic asset classes that most
people are better off staying far clear of, ranging from innocuous-
sounding instruments such as convertible bonds to the more mys-
terious zones of private equity and hedge funds (more on this below).
The business analysis mind set is just as important in assessing
these alternative asset types as it is in investing in common stocks.
While each asset type warrants attention to the peculiar issues as-
sociated with it (the price of silver depends on supply and demand
for the metal, for example), a mind-set trained in thinking as a busi-
ness analyst about common stocks can easily adapt itself for appli-
cation to these other asset classes (that is why this boo kconcentrates
on common stocks).
Income Allocation
Asset allocation is less important than income allocation, but most
people get this backward too. People focus on how much they make