306: Three Approaches to Asset Allocation

Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 306. It’s titled, “Three Approaches to Asset Allocation.” 

Simplicity on the Other Side of Complexity

Jiro Ono is a Japanese chef and owner of Sukiyabashi Jiro, a Japanese sushi restaurant in the Ginza area of Tokyo. There’s a documentary on him and it came out in 2011, Jiro Dreams of Sushi. Jiro Ono is 94. He was in his mid-80s when this documentary came out, working closely with his son and other sushi chefs at his small restaurant in a Tokyo subway station. He’s been making sushi for decades.

He said, “I do the same thing over and over, improving bit by bit. There’s always a yearning to achieve more. I’ll continue to climb, trying to reach the top. But no one knows where the top is.” He continually tries to get better at what would seem like a fairly straightforward task to make sushi. But it’s not. 

I thought about investing in the same way. One of the first investing books I remember reading was a paperback book I found on the shelf in our basement by Howard Ruff. It was titled, How to Prosper in the Coming Bad Years. It was really kind of boring. I remember very little about it other than he talked about inflation and buy gold. 

But then I went to business school, a finance undergrad. I was introduced to modern portfolio theory as a way to go about asset allocation. I went to graduate school and got an MBA with an emphasis on finance. I used to wander the library and would actually sit and page through financial journals trying to absorb that knowledge.

I spent 16 years as an institutional investment advisor and money manager, allocating assets for university endowment foundations and other not-for-profits. And then for the last 6 years, I’ve been teaching individuals how to invest. How to allocate their investment portfolio while also managing my own assets. 

Former Supreme Court Justice Oliver Wendell Holmes referred to finding the simplicity on the other side of complexity. I’ve always tried to do that in investing. Investing is incredibly complex. Are there rules of thumb or principles that we can follow that simplify things? So I’ve spent a number of decades thinking about investing, thinking about the approach to how we save and invest for retirement and then drawdown those savings as we live in retirement. Those are really the 2 investing stages. Saving for retirement and retirement living. 

Retirement Saving Stage

In the first stage, saving for retirement, there are 5 key aspects. The portfolio objective is growth, growing your retirement portfolio. And as you continue to save there’s a natural dollar-cost averaging that occurs as you systematically invest in that retirement portfolio on an ongoing basis. During the saving for retirement phase you have time to recover from major market losses because if markets fall 50%, you will continue to add more savings and be able to buy at lower valuations. In saving for retirement you can be a more aggressive investor with a higher allocation to stocks because you have time to recover from market losses. 

The underlying question in saving for retirement is how much do I need to save? 

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