Chasing market moves is the worst way to invest, says Steve McDonald. And piling everything into one asset class will not work either. Over time, you will always make more money with a balanced portfolio. That means a suitable combination of stocks and bonds. Steve comes up with a simple formula to find a portfolio split that works specifically for you.

This from Investor’s Daily Edge:

Reacting to market moves guarantees you will be on the losing end of the equation. Jumping in and out of investments as the market swings up and down is the absolute worst way to invest. It amounts to market timing with a broken clock.

Sometime around the late eighties, a real brain found a way to quantify what we in the investment business had been recommending for many years, a balanced portfolio. He called it asset allocation.

What asset allocation did for investors is to prove, once and for all, that investing over many asset classes, and leaving it alone, will make more money than putting all your eggs in one basket, or trying to time the market.

Essentially, a balanced portfolio, or asset allocation, means you don’t have all your money in one asset class. You spread it around over stocks, bonds, gold, cash, etc.

How much you put in each category is directly related to your age or your ability to assume risk, which goes down as you age.

In my experience, investors usually ignore this advice. The urge to get rich quickly is too great. But, the fact remains; you will make more money if you spread your risk around.

The market’s insanity over the past year was driving many investors to gold and cash, or money markets. People who would never have considered gold were pouring money into it. All they were doing was shifting the risk from equities to another investment class. And now that gold has fallen over 20 percent in the last four months, they have jumped off that ship too.  This is not a solution. This is another problem waiting to happen.

This type of activity is called, “detaching from fundamentals.” Everyone has forgotten everything we know about the markets and has just started following the noise of the herd in front of them.

In the ongoing destruction of the capital markets, no haven is safe. Gold… down. Blue chips… down. Utilities… down. Consumer staples… down. Cash? Well, maybe for a little while, but we all know the dollar is doomed.

As the markets recover, and they will, the same investors will run back into stocks long after they have been fully priced. Essentially, people are throwing money at the back of the money train. Too late!

As I pound the desk every week pushing you to look at bonds, it is with the assumption that you are using a balanced approach. That is, you have the appropriate percentage of stocks to bonds for your age.

The formula is very simple, the discipline and patience to make it work is not. Subtract your age from 100. The remainder is what you should have in stock; the balance should be in bonds, or other low risk investments. As you get older, the percentage in bonds should increase, a lot.

Here’s the problem. The get-rich-quick urge kicks in for just about everyone and no one is able to see beyond the end of his or her nose. The best advice available is thrown out the window and time horizons are about six days.

The reverse is also true. You can never have all your money in bonds. As the market churns out the timid it may seem plausible to think, “I will never invest in stocks again.”…

I will never recommend a portfolio invested entirely in bonds.

From an inflation standpoint, it is not recommended, but that’s another article.

Go back over your accounts for the past few years. I guarantee if you work a reasonable return for an appropriate percentage of bonds into the problem, you would have made more money in a balanced approach than in the get rich quick method.

If nothing else, bonds will give you a steady return on a portion of your portfolio when the markets are flat or down, which is most of the time. This investing thing is as much about finesse as information. Patience plays a big part in it as well.

While the markets spin their wheels, take a step back and evaluate what and how you have been doing things for the past few years. From here, it can only get better.

Keep your powder dry.

Source: A Balanced Approach