The Color of Money: Asset Allocation Made Simple
I met a woman who asked me to review her 401(k) portfolio. She was worried about how she had allocated her contributions.
I wasn't going to tell her where to put her money. She said she just wanted my opinion on whether she was diversified enough. Her employer's plan had about 15 investment choices, from conservative to aggressive.
This woman, bless her heart, was investing her contributions, which probably didn't total more than $100 a month, in all the choices. To make matters worse, she was clueless about the various asset classes into which she was dicing her money. She had simply heard that she should diversify.
This woman, along with many other novice investors -- and that really includes most of us -- could have used "Asset Allocation for Dummies" (Wiley, $24.99), which is my pick for the Color of Money Book Club for July.
First, let me say I'm not a fan of the word "dummies" in the branded series of books published by Wiley. I think it's a little off-putting. Yet I appreciate the intent of the series: Various authors try to explain, in the simplest terms, subjects that can be intimidating to a lot of people.
For so many, asset allocation is something they know they should do, but don't do, because it can be intimidating. But Jerry A. Miccolis, a certified financial planner and co-owner of Brinton Eaton Wealth Advisors in Madison, N.J., and his co-author, Dorianne R. Perrucci, a financial journalist, have done their best to simplify this investment strategy.
"We think it is crucially important right now, given the turmoil in the economy and in the financial markets, that people get back to basics in their investing," Perrucci said when I asked her why this book is important.
So, what exactly is asset allocation?
It's "deciding how to divvy up your investment dollars among various types of assets," Miccolis and Perrucci point out.
Like the woman I described, some investors take asset allocation too far.
"Simply choosing one of everything from your employer's 401(k) investment menu can be dangerous," Miccolis said. "It's akin to making a cake by throwing in everything you happen to see in the pantry. This would likely make for a pretty unappetizing cake."
Or people ignore asset allocation completely, putting all or most of their money in one stock or one asset class.