Our ongoing series of common investor errors continues. We have looked at Excess Fees, Reaching for Yield. and Behavioral Issues.

This morning we are going to ever so briefly look at mistake number four:

4. Asset Allocation Matters More than Stock Picking: The decisions you make as to your mix of assets has a far greater impact on your investing success than does your stock picking or market timing. This too has proven repeatedly in both academic studies and the real world.

I’ll save you the war story, but when I was on the Sell Side, I was a big Apple fan. When the first iPod came out, the company was trading at $15 (pre-split) with $13 in cash. I recommended Apple, the firm bought a ton at $15, and dumped most of it at $20 for a 33% winner.

Pretty smart, huh?

That was literally the worlds greatest stock — and it hardly mattered at all. The worlds’ greatest stock pickers all got crushed during the 2008 crisis. And a monkey could have thrown a dart at a stock list in 2009 and made a ton of money.

Consider this: If your allocation mix contained too little equities over the past few years, then you probably missed the 100% rally since stocks since March 2009. And a lack of bonds meant that during the 2008-09 crash, you had nothing protecting you as markets fell.

Stock picking is for fun. Asset allocation is for making money over the long haul.


Top 10 Investor Errors
1. Excess Fees
2. Reaching for Yield
3. You Are Your Own Worst Enemy


Top 10 Investor Errors
1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Asset Allocation Matters More than Stock Picking
5. Passive vs Active Management
6. Mutual Fund vs ETFs
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For

Category: Apprenticed Investor, Investing, Rules

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “Top 10 Investor Errors: Asset Allocation vs Stock Picking”

  1. Asymptosis says:

    I’ve been wondering forever, have never dug up any research answering (not sure the research is feasible):

    We know that people can’t beat the market by picking stocks.

    But can they beat the market by picking asset classes? Any studies of managers out there?

    And if yes, isn’t it really just market timing, choosing when to move in and out of different asset classes?

  2. RB says:

    I saw your post about lowering fees for smaller accounts. I’m interested to see what you come up with. I have a couple IRA’s that are pretty small, and my Edward Jones guy isn’t giving me a warm fuzzy. Can you post or Tweet if there are developments on the new fee strategy for us little guys?

    Please keep us informed with the details.

  3. CANDollar says:

    Consider 4 categories of financial asset:

    Cash and cash like
    Non equity correlated
    Equity correlated
    Absolute return

    Equity correlated includes preferreds, REITs, commodity, common stocks, MLPs and high yield bonds. Index funds are most efficient way to get exposure (and cheapest, and most tax efficient, and more likely over long time periods to be as close to index return than an advisor picking stocks will achieve)

    Abs Ret includes inflation indexed pensions, TIPs, real abs ret hedge funds, rate reset preferreds

    Rebalance every year or so. Use a risk management rule for equity correlated like Fabers 10 month moving average. Use value averaging to make new contributions. Only use ultra low cost index funds. Allocate to asset classes to maximize tax breaks.

    This portfolio should not cost, all in, more than 20-30 BP for 500K and half that for over 1000K (if it doesn’t use hedge funds)

    Do these things and you will beat 95% of Wall Street over the long haul.


    BR: What you define as Absolute Returns is not how we would.

  4. machinehead says:

    ‘Stock picking is for fun.’

    Yer, “busman’s holiday” kind of fun for quants and Excel nerds! Last year James O’Shaughnessy published the 4th edition of his What Works on Wall Street, detailing quantitative techniques to pick outperforming stocks. But you really need a seven-figure account (and plenty of computational horsepower and costly data feeds) to effectively distribute it among 25 or 50 selected issues — and the discipline to periodically weed that tangled garden.

    With a far simpler technique, one can switch between the cap-weighted and equal-weighted versions of the S&P 500 to extract an extra percentage point of annual return. Similarly, switching among the more coherent sector SPDRs (some of them are just grab bags of unrelated businesses) can really juice the return, without much extra risk.

    And in both cases, your portfolio remains brute simple — one ETF, pulling a one-horse cart. Giddy-up!

  5. wally says:

    Perhaps asset allocation, looking at the statistical bid picture, is the way to go. However, all the really big gains I have ever made came from stock picking.

  6. [...] Barry Ritholtz, “Stock picking is for fun. Asset allocation is for making money over the long haul.”  (Big Picture) [...]

  7. MayorQuimby says:

    “Asset allocation is for making money over the long haul.”

    Fallacious statement. He who “allocated properly” in ’99 got slaughtered over 10 years.

    There are no absolutes including the inflationary ponzi machine to perpetuate itself ad infinitum.

    If we saw DJIA 9500 next year the best move over 15 years would have been cash.

  8. faulkner says:

    Barry, Your closing comment, ‘Stock picking is for fun,’ bring this list right back to the Behavioral Issues. Picking stocks as picking ponies with all the associated excitement and self congratulations/regret. Something to talk about. So the industry puts most of its attention there: books, websites, software, etc. After all, CNBC doesn’t have ‘The Asset Allocation Hour.’ So, it’s a Social Issue as well that investors don’t understand or apply Asset Allocation.

  9. AHodge says:

    i m not completely against asset allocation
    but at its ultmate its 60-40 . put it away forever
    in which case we dont need “you”
    or to pay you 1-2% a year
    to put me into my very special custom designed for my personal risk profile
    38.6% bonds and 77.4% stocks rebalanced forever- because you my broker has learned my special needs

    i had these arguments with my roommate who sold this stuff
    if you overlay some basic recession timing it gets better even for home gamers
    are you saying that? couldnt tell.
    i handle risk by getting out when it looks bad- or being mostly in cash and the rest options-namely puts

  10. BlackCat says:

    Stock picking is fun, yes, but its also to make sure that what you buy dosen’t go to zero.

  11. GetReal1 says:

    Error #11: Not listening to BR.

    I’ll always remember that he pretty much nailed the bottom in 2009 (off only a week or so), and his guesses are usually in the ballpark of where the market is headed.

  12. larrr1 says:


  13. isitpossible says:

    >>>> Stock picking is for fun. Asset allocation is for making money over the long haul.

    Is it entirely true? Most novice/average investors “DO NOT” know how to time the market. “Time the market” is NOT a good term but lets use “market direction probability”. If you can do this (and YES, this can be done using public data available for free) then asset allocation in right investment vehicle at right time can make good amount of money. Lets say we are not talented enough to pick right stocks, so we stick to ETF or MF


    Bull market started in March 2009 – How do we know this? Breadth indicators is one place to start with…
    Asset allocation to equity funds/etf and away from bonds. Similarly when we get bear signal we move to bonds away from equity funds….


    BR: Asset allocation has nothing to do with market timing

  14. [...] Previously: Top 10 Investor Errors 1. Excess Fees 2. Reaching for Yield 3. You Are Your Own Worst Enemy 4. Asset Allocation vs Stock Picking [...]

  15. scottinnj says:

    the other part about asset allocation is maintaining that allocation even in the face of adversity. In my IRA/401k I maintain a fixed income/equity allocation (fixed income% at my age minus 15% – you can argue that at 30% fixed income in my mid 40′s is a bit high but it does give me the ‘sleep at night’ factor). So as the market soared until 2008 I was taking some money off the table, but putting money back to work as the market fell. I remember in around January 2009 telling someone i was upping my allocation to stocks as I was overweight bonds and I got the “ZOMG don’t you know the world is ending”. And I remember thinking hard about this but I didn’t think the world would end and there was a reason I have a target mix. Plus, I’m not getting killed on fees since I’m just switching between bond and equity Vanguard Admiral Funds

  16. boveri says:

    I looked forward to BR’s piece on asset allocation and to me it is the most important of the ten items but I wish the subject had received more than this brief look today.

  17. brokrbob1 says:

    Here’s hoping BR is still monitoring the responses to this post…

    “That was literally the worlds greatest stock — and it hardly mattered at all. ” BECAUSE YOU SOLD IT!!!!

    It seems to me that your definition of “stockpiking” is pretty darn limited if you’re only talking about picking the stock, and ignoring the rather important (IMHO) components fo trading such as exiting, revisiting, and buying back in. Traders have been talking about ‘cutting your losers, letting winners run’ since Livermore, which you obviously didn’t. What changed with Apple that justified getting out at $20. Certainly not the diminished prospects for the company. Just because your firm botched the trade, and didn’t fix its mistake, doesn’t discredit the concept of stockpicking as a key component of alpha generation. What is Buffett if not the world’s greatest stock picker? His forays into asset allocation have been infrequent and of little effect on his record. And using your anecdotal technique, his sale of gold hundreds of dollars ago is a more compelling example of the uselessness of asset allocation (sarcasm intended.)

    Just saying.

  18. VennData says:


    You state, ” However, all the really big gains I have ever made came from stock picking…”

    See the other installment
    ‘… We tend to forget our losers and over-emphasize our winners…”

    When you subtract out your losers, you underpeform.

  19. [...] Barry Ritholtz, “Stock picking is for fun. Asset allocation is for making money over the long haul.”  (Big Picture) [...]