Effective, evidence-based management of what intelligent investors can control. Article 2. ASSET ALLOCATION

Stock-picking is a much better choice for interesting cocktail party conversation but index investing and asset allocation have always been the most important factors for worry-free, effective investing.

Writing in his justly renowned book The Battle for Investment Survival, published over 80 years ago, Gerald Loeb says: “It is far better to let cash lie idle than to buy just to “keep invested” or for “income.” In fact, it is really vital—and just this one point, in my opinion, represents one of the widest differences between the successful professional and the loss-taking amateur.”

Echoing Loeb, the late, greatly respected David Swensen, chief investment officer at Yale University, states in his book Unconventional Success:

“…asset allocation accounts for the largest share of portfolio returns.”

Searching for “asset allocation” on the Internet will produce a large number of hits. Almost all of them will recommend a balance between stocks, bonds and cash. Such a balance was effective in the past, but this time is different.

Commenting in their extensively documented book This Time Is Different, Reinhart and Rogoff state that it almost never is. Financial crises have been common over the centuries. Remarkable similarities exist among them.

However, interest rates have never been as low as they now are. When they ultimately rise as they must, bond values will drop — a mathematical certainty. This time could be different. Bonds are no longer a useful aspect of asset allocation.

To balance their asset allocation, investors can choose between stocks and cash or near-cash, such as a money market fund.

And how can investors select stocks effectively? What is the right balance?