Updated on February 21, 2018
Where Should I Invest My Money? [And The Fall Of The Greek Empire]
It’s the most common inquiry in the investment industry (neck-and-neck with, “When can I retire?”): “Where should I invest my money?”
While it’s a very simple question to ask, and admittedly an important, pertinent one, it’s quite ambitious to expect a thoughtful response in that narrow context. Asset allocation requires a complex alchemy of both science and art, applied to your specific circumstances. Given the popularity of this question, let’s pull back the curtain on the “Great and Powerful Oz” and define what steps are necessary to devise and apply an asset allocation model for you:
- Identify available investable asset classes with sufficient liquidity and volume for retail investors.
- Identify the investment vehicles that capture each class identified in step #1 with sufficient diversification at the lowest possible cost.
- Codify each asset class based on a 3-tier evaluation process:
- Expected future returns based on historical data
- Historical volatility
- Historical correlation with other asset classes
- Re-frame the expected return, volatility, and correlation of each asset class based on current and expected future macroeconomic and geopolitical trends.
- Filter and exclude asset classes based on the output of steps #3 & 4.
- Categorize each remaining asset class into risk tiers based on the results of steps #3 & 4.
- Determine an appropriate weight for each asset class per risk category.
- Define the appropriate risk allocation for the investor in question, taking into consideration his/her available assets, expected future earnings, liabilities and life goals. See: https://www.ebis-blog.biz/whats-the-appropriate-risk-level-in-your-investment-portfolio-order-a-tesla/
- Determine the tax circumstances and mix of account types (taxable, tax deferred, tax free) of the investor and adjust the allocation model accordingly.
Thus, synthesis and application of this process cannot be done without a significant modeling effort, and, most importantly, input from you. Further, it makes answering that ubiquitous investment question impossible in the span of an elevator ride. “Where should I invest my money?” should really be, “What process do I need to engage in to determine an appropriate risk allocation for my assets?”
Recall Alexander the Great. He was a military genius in the fourth century BC who failed to lose a battle in his expansion of the Greek empire to northern Africa, across Mesopotamia, and all the way to northwestern India, defeating barbarians, Berbers, Persians, and Ashvakas in the process. However, he can be faulted for his strategic planning, as his military expansion depleted Macedonia’s physical and human resources to the point that it fractured into four autonomous states following his death and ultimately fell to Rome after the third Macedonian War. And Alexander’s dying wishes? The further conquest of Arabia and the entire Mediterranean basin, followed by circumnavigation of Africa, a feat not accomplished for another 1,700 years until the Portuguese sailor Vasco da Gama turned the Cape of Good Hope during the Age of Exploration.
The Alexander metaphor applies to your financial affairs. In other words, don’t be overly ambitious with your investment approach. Realize that investing is an involved process that requires quite a bit of strategic planning and input from you: tax status, assets, life goals, etc. Looking for a quick fix like a hot stock or investment tip falls victim to the thirst for empire building that took Alexander to the far reaches of the earth and ultimately led to the fall of the Greek state. It circumvents a process that serves you best in the long-term; work with an investment professional to navigate the nine steps above knowing that your own preferences and financial variables, requiring your input, are some of the most important drivers of the solution.