As young people start investing, it is essential that they quickly understand that there’s a lot more to investing than finding some ‘hot’ picks on the stock market. Asset allocation (let’s call it smart diversification) is the foundational layer for investing, and many starter investors ill-advisedly overlook it. They want to buy stocks and buy them quickly, and they don’t give nearly enough thought to their mix of investments. Skip the asset allocation piece and dive into investing, and you might land up with the Leaning Tower of Pisa! Get asset allocation right, and you will be building your investments in a structured and balanced way, one which will likely stand the test of time.
Asset allocation should ideally be committed percentages of the total, split across investment types (e.g., shares, commodities, property, bonds, crypto, etc.) across geographies and industries. Some may like lower diversification (less than five), and others may like higher diversification (20 plus). Both camps have their proponents, but the important thing is making the rules that you feel comfortable with (after doing your research) and then sticking with your rules. Having solid investing rules also helps reduce the number of investment decisions made on emotional grounds, which invariably result in losses of one sort or another.
Tony Robbins’ book, Money, Master the Game, has an excellent section on asset allocation as recommended by investing legends Ray Dalio and David Swenson. It’s highly recommended reading!