| Jim Cramer's Asset Allocation Adventure
By James J. Cramer
9/15/97 12:00 AM ET
Eight years ago I penned an asset allocation model for a magazine I helped start, SmartMoney. For years since I have heard back from people who had found it valuable, more valuable even than the ones I had designed when I worked at Goldman Sachs.
But it had flaws. It was too complicated by a desire to coordinate precise bond and stock allocations. It misjudged the age during which people should stay in equities, in part because it misjudged the increasing longevity of the populace, and in part because so many folks in their 60s and 70s regarded themselves as young!!!! I agree with them.
Also, it wasn't sufficiently nuanced about investors' age. The logic behind the age-sensitive method of asset allocation is that if something terrible happens in the market, you have a chance to recoup if you are making a decent living and you are younger. Even if you are 100% long for a crash. Unfortunately, the older you get, if the market blows up, which historically it should at some point, you may not have enough time to get back the money you lost. Fact of life. But exactly how young you are makes a difference. Twenty five is different ball-game from 33, and that's a world away from 45.
Most important, the previous model DID NOT ENCOURAGE YOU TO PICK INDIVIDUAL STOCKS. Even seven years ago no one person working at home had the resources to "do-it-yourself." You had to go to a money manager or a mutual fund to get it right because the information simply wasn't available to you that was available to these big-money aggregators. It was unfair to urge the individual on the playing field with so many knowledgeable big boys out there.
That's all changed, and like the revolution Home Depot led, making even 10-thumbed people like me capable of fixing things, the personal computer can make you just as smart and just as knowing as the best fund managers. You have Web sites, including this one, that would never have existed before the proliferation of the computer. You can receive documents in a flash from the SEC. You can call up the Journal's stories about a stock as fast as I can.
But it's better than that. When you pick 'em at home you can choose when to sell your own stocks and incur your capital gains and losses. This capability may be more valuable than the hot new issues that your mutual fund may get. And you pay no fees beyond the lowly online commissions, commissions that are now below what I pay -- unheard of when I wrote the first allocation model.
I also wasn't a true believer in index funds at the time. But these funds have become the self-fulfilling method of investment for our generation, and to ignore them as an asset subset is to have your head in the sand. As the world has gotten more global, overseas investors look to these indexes as the way to get exposed to our market. And the emergence of the 401(k) market has put the S&P index funds on the menu at every investment table.
Some things haven't changed. My aversion to foreign investing for do-it-yourselfers remains as strong -- and as right -- as ever. When other countries enforce the securities laws and demand rigorous accounting the way we do in this country, I'll play. But if I won't venture overseas, given all of the resources I have at my command, why should I send you there? For the sake of "diversification?" I'm on the altar of profit, not diversity.
And, again, I don't want you to use this model for retirement money. The risk tolerance and future views would be weighted very differently if this were any IRA or 401(k) money we were talking about. For retirement money, even if you view the world as a rosy place, we have to give optimism a haircut. That will have to wait until the next model.
Finally, I have included many more age brackets and breakdowns than I could back then. Pretty simple: This is the Net, no one is telling me about space limitations or ugly graphics. We can be more personal, more right, than print journalism can ever be.
So go to
work figuring things out
, and I hope you have the same success with this model that thousands of other people had with its predecessor. | 
