3273: What Should My Asset Allocation Be by Wanderer of Millennial Revolution on Emotions as an Investor

Summary

Episode Overview

Theme:
This episode of Optimal Finance Daily, hosted by Diania Merriam, tackles a perennial question among investors—especially those new to the game: What should my asset allocation be? The discussion centers on a blog post by Wanderer of Millennial Revolution, “What Should My Asset Allocation Be? Nervous Newbie Edition.” The focus is on managing emotions as an investor, particularly for beginners uncertain about the right stock/bond mix. Diania adds her insights on asset allocation, emotional resilience, and practical strategies for mitigating investment anxiety.

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Key Discussion Points & Insights

Why Asset Allocation Matters

• Primary Question: "What should my asset allocation be?" is the most frequent inquiry Wanderer receives ([01:01]).
• Main Takeaway: Asset allocation (the balance of stocks to bonds/fixed income) is crucial for long-term investing success. Higher equities typically offer higher returns but with more volatility.

Diversified Index Investing

• Advocacy for Index Funds:
  Wanderer emphasizes “a balanced, diversified index investing approach using low cost ETFs that get rebalanced periodically…this is the only way the average Joe Schmo can reliably and safely invest in the stock market. It beats 85% of active fund managers and is championed by Warren Buffett himself.” ([01:27])

• Role of Asset Allocation:
  Academic research usually recommends “a higher equity exposure in your 20s, like 90 to 100%, and then gradually backing off as you get older” ([02:03]). This is because, over 10 to 15 years, the stock market’s volatility evens out. “The S&P 500 has never lost money over a 15-year period.” ([02:16])

The Emotional Side of Investing

• Reality Check for Beginners:
  Most people in their 20s are inexperienced investors and may feel overwhelmed—a relatable feeling likened to “taking off in a plane and learning to fly while it was in the air. Not fun.” ([02:31])

• Behavioral Risk:
  “While the cold hard math indicates the single biggest determinant of long term financial success is your asset allocation, in practice the single biggest determinant…is you, the investor. If you freak out and panic-sell…you’re gonna get burned and lose money during the next stock market crash. And it will crash.” ([03:01])

Wanderer's Step-By-Step Starter Strategy

Wanderer recommends a four-part plan for nervous first-time investors ([03:21]):

1. Pay Off High-Interest Debt: Especially credit card debt—“Investing makes no sense” otherwise.
2. Be Cash Flow Positive: “You’re saving money every month…your savings are growing, not shrinking.”
3. Start with a Small Investable Amount: Put, say, $5,000 into a 50/50 split of index equity and fixed income funds.
4. Keep the Rest in Savings: Gradually add to your investments over time.

• Purpose of This Approach:
  This is to help “get comfortable with the idea of investing while limiting the amount of money that they could lose over time” ([03:46]).

Learning Through Experience: The Value of Market Downturns

• Experiencing Volatility Safely:
  When a crash happens, you only have $5,000 at risk, so you’re “less likely to freak out” ([04:10]). Use this time to learn how to rebalance and watch your portfolio recover.

• Rebalancing in Action:
  “Figure out how many fixed income assets to sell to rebalance to your target 50/50 asset allocation, buy into the equity markets as they free fall, then sit back and watch your portfolio rebound…” ([04:32]).

• Historic Proof:
  “This simple strategy caused us to pull off a feat most of Wall Street couldn’t—it got us out of the great financial crisis of 2008 without losing any money.” ([05:06])

Overcoming Fear

• Fear is the Enemy:
  “The only thing you have to watch out for is your own fear, forcing you to do the exact wrong thing at the exact wrong time.” ([05:37])

• A Memorable Analogy:
  “The first time you ride a roller coaster, it’s scary... but when the ride’s over and you realize you’re okay, you’re not that scared the next time. Same with investing.” ([05:51])

• Standard Disclaimer:
  “We are not licensed financial advisors...The advice here is not based off fancy exams and certifications, but cold, hard math and the fact that it allowed us to become the youngest retirees in Canada.” ([06:18])

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Diania Merriam's Commentary & Key Insights

The Importance of Allocation Over Fund Selection

• “Many people ask more about which specific investment funds they should choose versus which asset allocation is right for them…but especially if we’re investing in index funds, what really matters is our portfolio allocation mix of types of investments like stocks, bonds and REITs.” ([09:13])

• “All reasonably well diversified 100% equity portfolios are going to perform at least 90% the same. Likewise…80/20 or 60/40 stock-to-bond portfolios are going to perform at least 90% the same.” ([09:25])

Why Hold Bonds?

• “The purpose of having bonds in a portfolio is to smooth the ride of volatility in the stock market…especially as you get closer to tapping into your portfolio.” ([09:36])
• “If you don’t plan to touch that money for more than 10–15 years…smoothing volatility is more about the emotional benefit of not watching wild swings with your money.” ([09:44])

Diania’s Personal Approach

• “For me, I’ve solved for this by keeping a strong cash position and not watching my investments too closely. Because I have a 100% stock portfolio, I don’t need to rebalance, so I have even less of a need to look at it.” ([09:52])

Further Exploration

• Interested listeners are directed to episode 1700 for more on the benefits of an all-stock portfolio: “Why I Own 100 Percent US Stocks by a Purple Life.” ([10:05])

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Notable Quotes & Memorable Moments

• On Learning by Doing:
  “It was a bit like taking off in a plane and learning to fly while it was in the air. Not fun.” (Wanderer, [02:31])

• On Emotional Resilience:
  “If you freak out and panic, sell at the first sign of loss, then it really doesn’t matter what your asset allocation is.” (Wanderer, [03:09])

• On Market Corrections:
  “Why do I say if you’re lucky a stock market crash will happen? Because you’ll get to experience the deafening, screeching noise the media makes each and every time the stock market crashes…” (Wanderer, [04:00])

• On the Secret to Investing:
  “The trick about investing is that there’s no real trick to it. The only thing you have to watch out for is your own fear...” (Wanderer, [05:37])

• Analogy to Demystify Investing Fears:
  “The first time you ride a roller coaster, it’s scary… but when the ride’s over and you realize you’re okay, you’re not that scared the next time. Same with investing.” (Wanderer, [05:51])

• Diania on Allocation vs. Selection:
  “What really matters is our portfolio allocation mix… because all reasonably well diversified 100% equity portfolios are going to perform at least 90% the same.” (Diania, [09:13])

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Important Timestamps

• [01:01] Main topic introduction: "What should my asset allocation be?"
• [02:03] Academic recommendations for young investors
• [03:01] Why emotional behavior often matters most
• [03:21] Wanderer’s step-by-step starter asset allocation plan
• [04:32] Explaining the value and mechanics of rebalancing after a crash
• [05:37] The true enemy: Fear and behavioral pitfalls
• [09:13] Diania's commentary on fund selection vs. asset allocation
• [09:36] The role of bonds in a portfolio
• [09:52] Diania on her personal investing strategy

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Episode Summary

This episode delivers a thorough exploration of asset allocation for new investors, blending statistical wisdom with behavioral finance insights. Wanderer advocates beginning with a manageable, low-risk allocation while gaining experience with market swings. Diania echoes that the big decision is the portfolio allocation, not the choice of individual funds—reminding listeners of the emotional component of investing, and championing automation and a detached attitude as paths to financial independence and peace of mind.

Whether you’re a nervous newbie or a seasoned saver, this episode offers both practical strategies and the necessary mindset to thrive in the market—reminding us that ultimately, our greatest risks and advantages lie in how we manage our own emotions.

Transcript

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This is Optimal Finance Daily. What should my Asset Allocation Be? Nervous newbie edition by wanderer of millennial-revolution.com what should my asset allocation be? This is the number one question we get in our pretty much constantly flooded inboxes. As this silly little blog continues to spiral out of control and our readership continues to climb, more and more people are writing to us and saying we've sparked something in them. A yearning, it seems, for life. Before it got so complicated and so dang expensive. And that's awesome. The first step in the Millennial Revolution is standing up and refusing to be beholden to these annoying little truths that we've all come to accept. BS Truths like you have to buy a house or you're a loser. So of course the next step is to learn what to do with your money. Instead, we advocate a balanced, diversified index investing approach using low cost ETFs that get rebalanced periodically. As we've said over and over again, this is the only way the average Joe Schmo can reliably and safely invest in the stock market. It beats 85% of active fund managers and and it's championed by none other than Warren Buffett himself. But one of the central pillars on index investing is to hold equities and fixed income in an asset allocation. That makes sense for you. Remember the effect that asset allocation has on your portfolio performance. The higher your equity allocation, the higher your long term returns will be, but at the cost of higher volatility. As a Result. Academic research focuses on asset allocation as a function of age. Over 10 to 15 year periods of time, volatility becomes irrelevant. Remember that The S&P 500 has never lost money over a 15 year period. So most studies recommend a higher equity exposure in your 20s, like 90 to 100% and then gradually backing off as you get older. Here's the problem. In your 20s, most people don't know what the hell they're doing when it comes to investing. We know we didn't. We had to learn all that s as we went in the middle of the worst financial crisis of our generation, no less. It was a bit like taking off in a plane and learning to fly while it was in the air. Not fun. So what's a beginner investor to do? Should they go 90% equity like the papers say? Or something more conservative like the 6040 split that we do? This is a tough question to answer. As any financial advisor will say it depends and there's no one size fits all answer. And that's true. But we here at the Millennial Revolution think we can do better. Here's the thing. While the cold hard math indicates the single biggest determinant of long term financial success is your asset allocation, in practice the single biggest determinant of long term financial success is you, the investor. If you freak out and panic, sell at the first sign of loss, then it really doesn't matter what your asset allocation is. You're gonna get and lose money during the next stock market crash. And it will crash. So here's our suggestion to those beginner investors. Number one, first, pay off any and all high interest debt. If you have any credit card debt whatsoever. Investing makes no sense. Number two, make sure you're cash flow positive, meaning you're saving money every month and your savings are growing, not shrinking. Number three, carve out a small amount of your savings, say $5,000, and invest it using low cost index ETFs or index funds such as the ones listed on Canadian Couch Potato. Use a portfolio allocation of 50% equity and 50% fixed income. 4. Leave the rest in a savings account and continue to sock money away into it. The purpose of this exercise for the nervous first time investor is to get comfortable with the idea of investing while limiting the amount of money that they could lose over time. Either the stock market will run ahead or if you're lucky, crash horribly knocking your 5050 asset allocation out of whack. Why do I say if you're lucky a stock market crash will happen because you'll get to experience the deafening, screeching noise the media makes each and every time the stock market crashes. They'll say that it's different this time, that the world is going to end as we know it and to sell everything and run for the hills. How do I know they say it every market crash. The great thing about this strategy is that you'll only have $5,000 in the markets when this happens, so you're less likely to freak out. Then, with the help of the soothing noises this blog will be emanating, you'll be able to watch your portfolio go down in value calmly without worrying where your next meal is going to come from. Figure out how many fixed income assets to sell to rebalance to your target. 5050 asset allocation buy into the equity markets as they free fall, then sit back and watch your portfolio rebound to a level higher than before. We know this will happen because it happens every market crash, but only if you follow the rules of index investing and rebalance the way you're supposed to. This simple strategy caused us to pull off a feat most of Wall street couldn't it got us out of the great financial crisis of 2008 without losing any money. And after you make it out of your first crash, you'll realize, like we did, that hey, investing isn't that hard. Market crashes aren't that scary. At that point, you can up your equity allocation to something more aggressive, as well as deploy all that cash you've been saving this entire time. The trick about investing is that there's no real trick to it. The only thing you have to watch out for is your own fear, forcing you to do the exact wrong thing at the exact wrong time. But what I believe is that fear comes from the unknown. The first time you ride a roller coaster, it's scary because a part of you doesn't know if you'll get hurt. But when the ride's over and you realize you're okay, you're not that scared the next time. Same with investing. And as usual, Standard disclaimer We are not licensed financial advisors and as such can't legally recommend individual ETFs. The advice here is not based off fancy exams and certifications, but cold, hard math and the fact that it allowed us to become the youngest retirees in Canada. You just listened to the post titled what Should My Asset Allocation Be? 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Learn [e-mail] TradeSmart Some great thoughts here on asset allocation. I find that many people ask more about which specific investment funds they should choose versus which asset allocation is right for them. But especially if we're investing in index funds, what really matters is our portfolio allocation mix of types of investments like stocks, bonds and REITs. The reason is because all reasonably well diversified 100% equity portfolios are going to perform at least 90% the same. Likewise, all reasonably well diversified 80, 20 or 6040 stock to bond portfolios are going to perform at least 90% the same. From my perspective, the purpose of having bonds in a portfolio is to smooth the ride of volatility of the stock market. This is super important as you get closer to tapping into your portfolio. You don't want the value of your portfolio to be highly volatile when you're drawing down from it. But if you don't plan to touch that money for more than 10 to 15 years, it seems to me that smoothing volatility is more about the emotional benefit of not watching wild swings with your money. For me, I've solved for this by keeping a strong cash position and not watching my investments too closely. Because I have a 100% stock portfolio, I don't need to rebalance, so I have even less of a need to look at it. If you're interested in hearing more about the benefits of an all stock portfolio, check out episode 1700 titled why I Own 100 Percent US Stocks by a Purple Life. That should do it for today. Have a happy rest of your day and I'll see you on the Sunday show tomorrow where your optimal life awaits.