Spoiler: It’s not stock market volatility

Photo by Jurica Koletić on Unsplash

Your asset allocation — how much you invest in risky assets like stocks vs. safer assets like bonds — is one of the most important decisions you’ll make as an investor.

Everyone and their dog has advice on how you should allocate the assets in your portfolio. A recent survey conducted by (Choi Robertson 2020) asked 1,013 retail investors in the U.S. what drove their decisions on how to invest their money.

In this post, I review their answers and provide some tips on how to use this information to make better investment decisions.

If you type in “how to allocate my investments” into Google, you’ll get a bunch of generic statements you’ve heard a million times before, like “consider your risk tolerance and time horizon.”

But, the survey found that one of the most important factors in determining your asset allocation is your income.

Specifically,

  1. How you make
  2. How secure your income is
  3. How likely you are to be sick or injured for a prolonged period of time

In my book, The Rational Investor, I discuss in detail why your income is the most important factor to consider when determining your asset allocation.

Think of your total wealth as financial wealth + human capital.

  • Financial wealth is your assets like cash, stocks, bonds, and real estate.
  • Human capital refers to how much more income you will earn for the rest of your career.

Ask yourself questions like:

  • How many paychecks will I collect before I retire?
  • By what amount will my income increase each year?
  • How secure is my job?
  • How correlated is my income to the stock market?
  • What is the likelihood that I will be unable to earn income for a prolonged period due to injury or illness?

People who make a lot of money and feel confident in the stability of their…

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