I’ve spent many hours reading about asset allocations and which have the best risk-adjusted returns. What I have come to realize is that nitpicking about asset allocations is meaningless without first questioning those things which we might be taking for granted.
In the years leading up to the Korean War, people preferred to keep all their money buried as gold coins in their backyard, just as they buried pots of kimchi underground to keep it cool in the absence of refrigeration. Burying gold coins allowed people to protect their assets from confiscation from unfriendly forces and to protect their assets from currency devaluation. Indeed many people around the world have survived war and devastation and started a new life by hoarding gold.
While I feel strongly that individual investors should pay as close to $0 as possible in fees and taxes as part of their investment strategy, I know very well that plain vanilla global asset allocation strategies don’t sit well with many people. Nothing is more personal than what you do with your rainy day money, and Sharpe ratios will not convince them.
Those of us who do not fear unfriendly regimes, war, and devastation may seek returns superior than offered by gold coins. In fact, with so many people who have made millions or billions by being invested in one stock, it’s easy to fall into the trap of saying, “I could totally do that.”
Well, shareholders of LinkedIn, the much-admired business networking behemoth, woke up on 2/5/16 to find that their holdings fell by nearly 50% overnight. Devastating drawdowns like this make the guy who buries gold coins in his backyard look pretty smart.
Yes, you CAN get rich in stocks with concentrated bets. But you need a stomach of steel to win. I would argue that regardless of your investing orientation, it pays to ask, “What is MY boogeyman?” For some in the world, the boogeyman is the government looking to devalue the currency by 90% like Venezuela. For others, it’s your spouse who will walk away with half. And for some, it’s panic selling after losing half your investment. Only after identifying your boogeyman should you place your bets.