Fat gets a bad rap but it’s amazingly efficient for storing energy.  Having no fat is a serious and painful genetic disorder.   Muscles let us do things and live our lives; nobody talks down Muscle but that’s a different thing from maintaining that muscle.

But we do things as nonsensical as eliminating all fat and losing all muscle and that’s what I want to talk about in celebrating Frank Armstrong Day.  It isn’t a national holiday (yet) but together we could make it happen!  Consider the success of  International Talk Like a Pirate Day.

Armstrong’s online book, Investment Strategies for the 21st Century engagingly and simply teaches you investing step by step.  Chapter 6 talks about Asset Allocation.  What does Asset Allocation do for us?  And what does this have to do with fat or muscle?  Asset Allocation is your plan for what kinds of investments you own.  But why not just buy the absolute best investment?  Because you can’t predict the future, although you’re better than professional investment advisers who can’t predict the future either, but they charge you for it.

AA is the time honored principle of “don’t put all your eggs in one basket.”  Since you can’t know the future, your safest approach is to own multiple good investments.  Any individual investment may do poorly one year but could easily be next year’s star.  Most people chase last year’s winner only to discover they have this year’s loser.  Then they do it again and again and again.

What are the traditional options?  Cash, Bonds, and Stocks.

• Cash:  Having no cash is a big problem if you need money and your stocks are down that year.  Think of the cash as fat reserves–a little bit gives you quick energy when you need it.  You don’t make any money on cash, but that’s not its job.  Its job is to be easily available and very predictable.
• Bonds are not what they used to be (low returns, high risk).  Someday the Federal Reserve may quit pumping up the supply and reducing the returns but it’s hard for me to get excited about bonds right now.
• Stocks:  Or better–index funds containing many stocks to reduce your risk.  Stocks are the muscle of your investments because over time they’ve produced the greatest returns (and been safe over the long run).   Stocks get a bad rap because they’re not as predictable moment to moment as cash but who goes around wishing they were all fat and no muscle?

Asset Allocation is the healthy approach with a balance of investments.

AA can be done easily by using  low cost index funds or ETFs (thank you Vanguard for U.S. and Franklin for international).  Every year or two you can sell what went up and buy what went down.  That means you buy low and sell high, unlike most private investors.

Frustratingly, no one tells you exactly what percentage to put into exactly which investment but what I’ve done is buy index funds based on the exchanges % of total Market Capitalization (throwing out countries with poor rule of law and smaller exchanges).  Precisely what you pick exactly is not as important as picking a variety of good low cost index funds, maintining some cache, and rebalancing to your planned percentages.  For more guidance look at Armstrong or Ferri.  who suggest a variety of Asset Allocation options, some very simple.