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The entire financial industry is designed to take money out of your pockets. Its unfortunate, but brokers and financial advisors are looking for commissions, fund managers are taking home huge paychecks for mediocre performance, and all at your expense. Recently, this has gotten worse with hedge funds. Most take 2% of asset value per year as a management fee and then a 20% take of the profits and last year the average fund underperformed the S&P 500. Disgusting.

But what they won’t tell you is that 90% of your return doesn’t depend on the hundreds of analysts working for them in their ivory towers. It depends on asset allocation. Which means that 90% of your returns does not depend on whether you’re invested in Google or Enron, it matters if you’re invested in domestic, international and developing country equities, treasuries, inflation protected treasuries and real estate (these are the core asset classes).

Now why wouldn’t the financial industry tell you this? They don’t want to lose your money. They want you to keep paying your high performance fees, or high management fees while they build their vacation homes and pools. So what can we do to keep more money in your pocket and out of theirs? Create a mechanized approach to investing.

 What you want to do is to create an asset allocation that fits your situation. If you’re not comfortable researching what is appropriate for you then pay a financial advisor a one time fee to set one up for you. Make sure you get references and don’t let him talk you into fancy approaches. David Swensen, a renown endowment fund manager from Yale, suggests that no asset should take up no more than 30% of your money. The following is a sample portfolio he suggests (although this would not be suitable for really young people or almost retired, it’s a decent set up):

30% Domestic equities
15% International developed country equities
5% International emerging market equities
20% Real Estate
15% US Treasuries
15% US Inflation Protected Treasuries

 Now to achieve this buy index funds. Whether they are mutual index funds or ETF’s will depend on when you are purchasing. I would suggest buying ETF’s when you are rebalancing your portfolio (should be done once per quarter to ensure proper allocation). For your regular purchases an index mutual fund will work better as you don’t have to pay a fee for each transaction.

If you would like to read about asset allocation I would highly suggest Unconventional Success by David Swensen

or The Only Three Questions that Count by Ken Fisher.

They’re both terrific books by investment gurus and they won’t try to tell you that you can pick the next Microsoft. They’ll keep you safe and rich.

 If you have any additional thoughts or tips please leave a comment.

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