A novice’s guide to the ins and outs of asset allocation and investments
I met a woman who asked me to review her 401(k) portfolio. She was worried about how she had allocated her contributions. I wasn’t going to tell her where to put her money. She said she just wanted my opinion on whether she was diversified enough. Her employer’s plan had about 15 choices ranging from conservative to aggressive.
This woman was investing her contributions, which probably didn’t total more than $100 a month, in all the choices. To make matters worse, she was clueless about the various asset classes in which she was dicing her money. She had just heard that she should diversify.
This woman, along with many novice investors, could have used “Asset Allocation for Dummies,’’ which is my pick for the Color of Money Book Club for July.
First, let me say I’m not a fan of the word “dummies’’ in the branded series of books by Wiley. It’s a little off-putting, yet I appreciate the intent of the series.
For so many, asset allocation is something they know they should do but don’t because it can be intimidating. But Jerry A. Miccolis, a certified financial planner and co-owner of Madison, N.J.-based Brinton Eaton Wealth Advisors, and his coauthor, Dorianne R. Perrucci, a financial journalist, have done their best to simplify this investment strategy.
So what exactly is asset allocation?
It’s “deciding how to divvy up your investment dollars among various types of assets,’’ Miccolis and Perrucci point out.
Like the woman I described, some investors take asset allocation too far.
“Simply choosing one of everything from your employer’s 401(k) investment menu can be dangerous,’’ Miccolis said.
Or people ignore asset allocation completely, putting all or most of their money in one stock or one asset class.
I will never forget the stories of Enron employees and retirees who put the bulk of their retirement accounts into the company stock. When Enron went bankrupt, their wealth evaporated.
The Enron employees and retirees violated one of the immutable laws of sound investing, Miccolis and Perrucci write. “Never, ever put too many of your eggs in one basket.’’
Getting the right asset mix can account for more than 90 percent of investment results, the authors report.
In 321 pages, Miccolis and Perrucci walk readers through the ins and outs of asset allocation. The paperback book is separated into five sections covering, among other things, how to fill your investment basket with specific asset classes. You’ll learn about weighing risk and return, why you need to rebalance your portfolio and alternative investments (commodities, real estate), and how taxes affect your choices. The authors list the most important asset classes with their historical rates of return.
“Asset allocation was never designed or intended to avoid loss in all conceivable (let alone inconceivable) situations,’’ says Miccolis. “It is designed to get you the best result given your risk tolerance.’’
Michelle Singletary is a columnist for The Washington Post. She can be reached at singletarym@washpost.com. 
