DETERMINACIÓN EXPERIMENTAL DE LA FUNCIÓN DE TRANSFERENCIA CON

Many market professionals believe that getting your asset allocation right is more important than the individual assets you buy. The theory is that different asset classes react differently under the same market conditions, so the right allocation will flatten out the peaks and valleys in your port- folio over time.

By definition, this means you will not get the “best” return that cor- rectly timing the market brings—but we’ve already seen that no one can consistently time the market correctly, and you will also avoid the worst losses.

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If you have substantial assets, or find this all too overwhelming, you may want to engage a financial planner to help you with your asset alloca- tion. If you finish this book, you’ll be ready to ask the important ques- tions an advisor should answer.

MORE THAN DIVERSIFICATION

Asset allocation is diversification on steroids. Both strategies offer some protection in an unstable market. Diversification looks at spreading your

investments over different assets. Asset allocation takes that a step further and suggests how much of your portfolio to put in each asset class and how to split it up within each class.

For example, diversification might suggest you have 75 percent of your assets in stocks. Asset allocation takes that total investment in stocks and structures the percentage of domestic, foreign, growth, value, and so on.

Some market professionals don’t make a distinction between diver- sification and asset allocation. You may read information about diversifi- cation that sounds just like what this book says about asset allocation. The specific terms are less important than the strategy behind them.

INVESTING IN HISTORY

There is no shortage of market soothsayers quick to tell you how you should have profited in the latest market move. Clearly, it’s easy to know where to invest in the historical market: When the Nasdaq was up 87-plus percent in one year, where should you have invested your money?

Of course, that’s not the whole picture. Imagine that the 87-plus percent increase occurred in one 12-month period and had a straight-line growth rate from the beginning to the end. A graph would show the line originating at the bottom left and going straight across to the top right, as shown here. Almost any point along that line would have been an okay place to buy because the market was always going up.

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The following graph shows the same final result: The market ended up 87 for the year. However, there was only a brief period at the beginning of the year when you could get in for less than 87. Any other entry point and you would have broken even, at best, unless you sold before the year was out.

Looking back, it’s easy to see where you should have entered the market. The same strategy would not have worked for both markets represented by the two charts. Unfortunately, you can’t invest in history, and neither chart tells us anything about how the next year is going to look.

Although these charts are obviously for illustration, they make a point: The market doesn’t move in a straight line like the first chart. The following chart is very real. It shows the closing of the Nasdaq Compos- ite Index on the first day of trading of each year. Of course, with just three data points, we do get straight lines. The point is that your entry and exit points determine how much you make or lose.

This looks so simple—and that’s the danger of dealing with historical numbers. The market almost doubles in one year, then loses all its gains in the next year. Actually, it was even worse than that. On March 10, 2000, the Nasdaq closed at 5048. In the last nine months of 2000, the Nasdaq Composite lost 2757 points, almost 55 percent. This chart should be a sobering reminder to those who thought the market could go no- where but up forever.

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If you had the time, patience, and data, you could construct a bear-proof marketing plan for this time frame—but we aren’t going to see this mar- ket again. And in the unlikely event that we did see this market again, you wouldn’t know it until it was already over. Looking at historical data can help you understand how different asset classes perform under different circumstances, but it’s impossible to know when those circumstances will appear again.

SETTING REALISTIC GOALS

Unless you just put your portfolio on automatic pilot, you should expect to do better than the market (S&P 500 index). The problem arises when investors try to wring every last penny out of the market. The market timers we discussed in Chapter 6, “Market Timing: The Two Most Dan- gerous Words in Investing,” attempt to get in at the bottom and out at the top of a market. Very few do, and then only rarely.

If you aim for returns above the market, over time you will do quite well. If you aim for huge returns, over time you will probably do worse than the market.

I’ve told the following story in other books, so if it seems familiar, “bear” with me. One year, when I was a youngster playing Little League baseball, my friend’s father decided to help the two of us with our hitting before the season. He had played major league baseball in his younger

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days, so he knew what he was doing. We worked on our hitting for sev- eral weeks, and his instruction took hold.

My batting average that year was a league-leading .797. For you non- baseball fans, a .300 batting average is good for professionals. Another way to look at it is for every 10 times I came to bat, I got a hit eight times.

The professional had taught me to focus on just making contact with the ball. That season I never hit a home run, and I had only one triple. In fact, most of my hits were singles. The point is that my “un- spectacular” year was the best in the league, because I focused on small gains rather than large ones.

The analogy isn’t perfect, but the lesson is right on: Aim for better- than-average gains, and over the long term you have a much better chance for success than trying to hit a home run every time. Market timers swing for home runs. Investors focus on their long-term success.