More Options, More Problems: How to Get to the Investment Decision

Episode 008: Asset Allocation

Synopsis

In this episode, Jared Bowers explores the concept of Asset Allocation, arguing that it is the single most important function of a portfolio manager—and of anyone trying to manage a meaningful life. Jared moves past the myth of "lack of opportunity," suggesting that for most of us, the problem is actually a surplus of choices that leads to paralysis. By understanding the professional mix of Equity and Debt and applying it to our "Life Macros" (Time, Energy, and Money), we can stop making emotional, haphazard decisions. This episode provides practical frameworks, like the "Heck Yes or No" rule and the "80% Known" analysis, to help you narrow your choice set and start getting the compounding returns you’ve been missing.

Detailed Sequential Outline

I. The Human Element: Overachievers vs. Underachievers

(0:45) The Architype Exercise: Jared asks listeners to think of two people: the "privileged underachiever" (wasted potential) and the "self-made overachiever" (zero head start).
(1:40) The Psychology of Success: Human nature leads us to see underachievement in others and overachievement in ourselves. In reality, we are all a blend of both—overachieving in some areas (like money) while wasting opportunities in others (like health or relationships).
(3:30) The Myth of "No Opportunity": Many people blame failure on a lack of options. Jared argues that if you truly had only one mediocre opportunity, you would invest in it aggressively. For most people in the first world, the issue isn't a lack of opportunity; it's a lack of Allocation.

II. Defining Asset Allocation: Financial Foundation

(5:52) The Bridge: Asset allocation is the bridge between intention (what we want) and outcome (what actually happens). It is the most important step in financial investing, determining future returns and volatility.
(7:35) The Goals: Maximizing returns and managing risk. Allocation doesn't eliminate risk—it allows you to choose which risks you take.
(8:51) The Two Currencies of Money: Fundamentally, there are only two ways to put money to work:
1. Equity: Owning a piece of an asset (stocks).
2. Debt: Lending your money to someone else in exchange for a promise (bonds).
(10:45) The Complexity Trap: Jared warns against the "flavorful" side of investing (NFTs, options, complex hedge funds). Real experts simplify; complex products often exist only to justify high fees. Fundamentally, everything is still just a mix of equity and debt.

III. Life Application: Value on the Calendar

(14:17) Allocation as a Statement: Every allocation decision is a statement of what you value. You do not get the life you want; you get the life you have allocated toward.
(15:15) The Choice Set: Asset allocation answers: What matters more? What matters less?
(16:45) The Burden of "Good" Options: Stress often comes from refusing to narrow down our choices. We try to pursue every "good" thing, which results in spreading our resources (Time, Energy, Money) too thin to be impactful.

IV. The Grocery Store Analogy: The Curse of Choice

(18:25) The Modern Market: Historically, options were limited and seasonal. Today, the sheer volume of choice creates paralysis.
(19:50) The Tomato Can Lesson: Jared recounts a trip to buy one can of crushed tomatoes. Facing dozens of brands, glass vs. tin, and bulk discounts, a simple task becomes an exhausting analytical exercise.
(21:30) Paralysis and Regret: Massive choice sets lead to suboptimal decisions. Even if you pick a "good" option, you're left wondering if a "better" one was on the next page of Amazon. This indecision prevents the actual investment from being made.

V. Frameworks for Decision Making

(24:11) Knowing Your "Why": Purpose is the filter that narrows the "what" and the "how."
(25:52) Heck Yes or No: If a choice isn't a "Heck Yes," it should be a "No." Most of us fail to say "Yes" to the right things because we refuse to say "No" to the mediocre ones.
(28:13) Action Over Analysis: Average returns achieved today will almost always beat "excellent" returns that were delayed by years of research. Analysis paralysis is often just a cover for a fear of commitment.

VI. Opportunity Cost and The Degenerative Disease of Cash

(30:30) The Cost of Uninvested Resources: Time and Energy that aren't invested are gone forever.
(31:41) Inflation as Termites: Cash has a "degenerative disease" called inflation. It doesn't have an expiration date like energy, but it loses value every day it sits idle.
(32:30) Real-World Allocation: Jared shares that he owns only 40 companies. To buy a new one, he must sell an old one. That is asset allocation in practice—managing the trade-off.
(34:50) The Alignment Test: Always ask your advisor: "Do you own the same assets you are putting me in?" Jared and his clients own the exact same 40 companies. Total alignment is non-negotiable.

VII. Reframing Sacrifice and Trade-offs

(38:30) No Free Lunch: You cannot have perfect stability and maximum growth. You cannot eat trash and have abs.
(40:15) Choosing Doors: We cannot keep all options open forever. Closing doors is an empowering act that allows you to focus on the doors you actually walk through.
(41:40) Concentration vs. Diversification: Narrowing focus increases volatility, but it is often exactly what is needed for high-impact results.

VIII. Practical Application Exercises

(43:16) The "Removal" Exercise:
1. What am I trying to accomplish?
2. Which choices in front of me do not help me in that direction?
3. Remove them immediately.
(45:02) The 80% Known Rule: If you are 80% certain of your analysis, pull the trigger. Stop looking for the final 20% of information that likely won't change your decision anyway.

IX. Closing Thoughts

(48:18) The Matching Problem: Life is about matching the proper inputs with desired outputs.
(50:23) The Asset of Attention: Be ruthless with where you allocate your attention (the combo of Time + Energy). If someone gets your attention, they can easily get your money.

Quotes to Remember

"The issue is not whether we have opportunities to invest in. It is how we allocate our limited resources amongst all the opportunities that we already have."

"Asset allocation is the bridge between intention—what we want to happen—and outcome—how we are more likely to make it happen."

"Real experts do their best to simplify rather than complicate. If someone uses complication as proof of expertise, be skeptical."

"You do not get the life that you want. You get the life that you have allocated toward."

"Average returns allocated early enough will beat excellent returns allocated much later."

"Cash has a degenerative disease called inflation. It doesn’t just sit there forever without consequence."

"Concentration is not a bad thing. Diversification is not always a good thing. Concentration results in the volatility you might actually need for returns."

Next Episode: Understanding Financial Security—It isn't an amount of money; it's a direction and a process.

Full Transcript

Good day, investors.

008 - Asset Allocation

Full Transcript

The Capital Allocator's Lens

(0:14)

Good day, investors. Welcome to vested with Jared Bowers. Still me, professional capital allocator, at least when it comes to money, amateur capital allocator, when it comes to most other areas of life, struggling capital allocator, to be fair, in certain areas. Before we get into our topic, I want to say that I really appreciate that you are listening to this. I hope you find it valuable. If you do, would you consider sharing it with a friend? My mission is to help people invest better across the areas of life that they care about. And if we and those around us do more of that, invest better, that's going to be better for all of us, right? That's about as close to an ad read as I'm going to get, at least for now. Let's start with an exercise. Think about somebody that you know who was born into a privileged position, had a head start.

The Underachiever vs. The Overachiever

(1:36)

This person has incredible opportunities available to them, but they don't do much with them, haven't done much with them. They are vastly underachieving based on their potential and based on the head start that they were given. Incredible opportunity not taken advantage of, and therefore, wasted. Many of us know people like this. Now I want you to consider the reverse. Think of a person who did not have a specific advantage or a head start in an area or in general in life, but yet this person achieved. Think of someone who was not born with a silver spoon or a head start, but they worked hard and they are doing well in a particular area. Maybe they're achieving in life better than most other people who have been born with an advantage or had things handed to them. Does someone come to mind for this example? And those people are on two extremes. They're quite different, right? It's unlikely that you thought of the same person for both sides of those examples.

The Human Nature of Achievement

(3:08)

But in my experience, and behavioral psychology suggests that this is true, in that second example, those overachievers, who we think of, or at least consider if it applies, is ourselves. Whereas most of us don't even consider whether we might be in that first category of underachievers. But we're happy to do that with the second one. There's nothing about what I described in this exercise. That would instruct you to do such a thing. That's human nature. That's how we are built. But the reality is that we are all a blend of both of those people. If I set this thought exercise up to consider just ourselves, we should be able to come up with examples on both sides, where we are underachieving and where we are overachieving. Maybe overachieving on the money side, but underachieving in relationships. Maybe we're overachieving in our health, but we are underachieving in our career. Yes, we are a blend of both of those people. Not entirely one or the other, probably leaning more in one direction than the other, very rarely perfectly down the middle. We are all some version of both the overachiever and the underachiever, depending on where you put the lens, what area of life you consider. We are all swimming upstream against the current in certain areas, but we are still making progress in spite of that. We have all overcome difficulties that we weren't handed solutions to. And yet, at the same time, we all have opportunities and advantages in some areas that we are not progressing in. I can confidently say that we are all wasting opportunity and advantages that are clearly available to us. I know I am. Yeah, I'm doing well in a number of areas, but I am a waster of opportunity in many others.

Opportunity vs. Allocation

(5:13)

And I started off with this exercise because something I hear quite frequently from people who are struggling is that they just don't have opportunities available to them. They don't have good options to choose from. And if they did, they would be succeeding, for sure. They would be crushing it. I'm sure that they have disadvantages that they're facing. But if they were so limited in opportunities, and that was what was really holding them back, they would be investing heavily, aggressively in any opportunity that they had. Even the small ones. Even the mediocre ones. But the ones who complain about a lack of opportunity usually aren't investing in much of anything. If opportunity was the most limiting thing, investment would still be happening on some level, even in the absence of great opportunity. You'd see evidence of investment somewhere. Because that makes it even more important that our resources are invested in any chance that we get, in any opportunity that we have. And for those of us who live in the first world and listen to podcasts, just knowing those two things about you, it is rare that the issue is that we don't have enough opportunity available. When you consider what much of the world has to do just to have access to opportunity that we have surrounding us, that should shift our perspective. People leaving their countries, leaving their families, risking their lives for opportunity. For the rest of us, it's quite the contrary. We are surrounded by opportunity. More often, the bigger problem is that we have too many opportunities that are available to us. Too many good choices. Too many uses of our time, our energy, and our money. So the issue is not whether we have opportunities to invest in. It is how we allocate our investment resources, amongst all the opportunities that we have. How we allocate our resources is what determines our outcomes, much more so than whether we had an advantage or not, whether we had a head start or not. And great opportunities or a head start that is not invested in, does not, cannot amount to anything. We clearly see that, recognize that as a waste. And limited resources or a start that is at or below zero can be turned into something meaningful with the proper investment, the proper allocation of resources.

Defining Asset Allocation

(8:04)

I've used that phrase, proper allocation of resources, a few times already in past episodes. And today is the day that we get to dig into it. Because this brings us fully to our topic. The portfolio management concept of asset allocation. How we apply our resources of time, energy, and money toward the opportunities that we have to get the outcomes that we want. How to make deposits and withdrawals strategically with purpose to grow the accounts that we want to grow and shrink the ones we want to shrink. And this is not just a money concept, as is our theme. It is a life concept. Asset allocation is always happening, whether we acknowledge it or not. The question is not, are we allocating resources? The question is, what resources are we allocating, to where, and are we doing it intentionally? Because not investing is not an option. You are already a capital allocator, a resource allocator. And just like we've established that we are all portfolio managers of our lives, the main function of portfolio management is allocating resources. Asset allocation is the bridge between intention, what we want to happen, and outcome, how we are more likely to make it happen.

The Goals and Risks of Allocation

(9:22)

Alright, let's get some financial grounding on asset allocation before we move into life application. First, let's set the stage on the money side, as asset allocation is a foundational investment concept. Then we are going to, as we do, apply it to the portfolios of life. Asset allocation is simply how we apply our investment resources to achieve the outcomes we're trying to get. Simple to say, probably more complicated to do. In the world of financial investing, this is the most important step. Your chosen investment allocation is the biggest factor in determining your future returns and your volatility, the ups and downs along the way. More broadly, in the world of managing a business, asset allocation and resource allocation expands beyond simple debt and equity. It becomes a question of what you're going to direct your resources toward amongst all the options available to you. Your resources being human capital, equipment, real estate, expertise, intellectual property, processes, how you use your resources and tools to build and get the things that you want. And the goals. Let's bring it back to financial allocation. Building a portfolio of money investments, what are the goals of asset allocation? Those would be to maximize investment returns, limit and manage risk, and achieve the appropriate mix that you're looking for. That also very directly ties into diversification. And on that topic, we should note that asset allocation, even excellent asset allocation, does not eliminate risk. There are no risk-free portfolios. And I want to make sure that we get this across. But what asset allocation does is it allows you to decide which risks you are taking and which risks you are avoiding. We need to choose the risks that we have rather than the risks just showing up and surprising us. And that is a key purpose of asset allocation. Remember that very important question that we ask. Why are you surprised? Don't be. And good asset allocation should result in very few surprises. Not just with financial portfolios, but also with our portfolios of life.

The Basic Binary: Equity vs. Debt

(11:48)

So, back to the money side. What does asset allocation look like? Well, when it comes to money, you are choosing between the two basic ways that you can invest your money, put it to work. You can buy something, own something, and we call that equity ownership. Or, you can lend your money out to someone who will then take your money and presumably buy something with it. We call that debt. And the borrower in that case could take your money and lend it to someone else, creating layers of credit, which does happen, but that's a topic for another time. We're going to keep it simple today. And I'll note that lending your money out is technically still owning something. You own the promise that you will be paid back by the person who is borrowing from you. But you yourself didn't buy something with it. You didn't buy something with your money as you did with equity ownership. With debt, you lent it out so that someone else can buy something with it.

Cutting Through the Complexity

(13:03)

And this is important to know as it relates to financial investing. I want to make it clear that debt and equity are the only two ways that we can put our money to work. Owning something or lending our money out. It is pretty simple in that regard. Hearing me say that money investing is simple might be surprising. Because financial investing can seem really complex. There are all sorts of different financial products out there that you can invest in. Looking at the investment landscape, it can appear that there are layers upon layers of complexity and different ways that you can invest your money. And to be fair, that's true. There are stocks and bonds on the simple end. Then one layer deeper, you have mutual funds and ETFs, which are mostly collections of stocks and bonds that you can buy. Then you have real estate, hedge funds, private equity. Then you can get into commodities, currencies, things like that on the even more flavorful side of investment products that exist on the investing menu. You have things like options, cryptocurrency, NFTs, things that are on the very flavorful and highly speculative side of investment products in the market. I can and likely will share my stance on many of those at some point. Complexity in financial products often exists to justify higher fees and create a perceived sense of expertise or exclusivity. That is very common in the world of financial products and financial services. And always remember, I may not say this often, but I think it's important to point out. Real experts do their best to simplify rather than complicate. And so if you come across people in any industry, investing or otherwise, that are using complication as an overt or suggested proof that they are experts and that they have something special, be skeptical. Because again, real experts and real expertise simplifies. At least does their best to do so. I hope that what we are going to do here on these podcasts. You can let me know. I'd love to hear from you. You can shoot me an email. Feedback at VestedJB.com.

The Number One Driver of Returns

(15:38)

But even with all this, all the financial products that are available to us, these different flavors of investing, fundamentally, each of them, all of them, are still just one of two things or a mix of those two basic ways that you can invest your money. Equity and debt. Owning something or lending your money out. It is that simple, even within all of those complicated products. And as it relates to asset allocation, the biggest driver of the returns that you get, the number one factor that determines your financial returns is simply the mix of those two things. And of course, taking one step back from that, whether you even put your money to work in the first place is the most important factor. Hard to get returns if you don't invest. But assuming that you're putting your money to work, when it comes to investing in the public markets, the biggest factor that determines your expected returns comes down to your mix of equity and debt. But then beyond your basic mix of equity and debt, there are all sorts of choices underneath those two. And again, to keep it in simple terms, as it relates to stock market investing, the question on the equity side is, which companies or which stock funds are you going to own? On the bond side, it is a similar question. Which bonds or which fixed income funds are you going to own? That describes the basic asset allocation process when it comes to financial investing. It can get much more complicated, and it often does. But that is laying things out on a high level. Someone's ideal asset allocation is driven by their risk tolerance, their specific goals, their current financial position. All those things are taken into account. This is a high-level description of asset allocation as it applies to financial portfolios. Determining that you are going to invest, and then determining your mix of equity and debt. And then the simple or complicated investments within each of those two. That is asset allocation in a nutshell.

Allocation Applied to the Portfolio of Life

(17:40)

Now that we have set the stage on the money side, let's talk about asset allocation as applied to life. Because what is asset allocation fundamentally? Well, you might be saying to yourself, we already covered that. But let's look at it from a different angle. Every allocation decision is a statement about what we want and about what we are willing to give up to get it. Or if not give up, because that's a negative frame, what we are willing to invest to get it. Asset allocation answers the following questions. What matters to me more? What matters to me less? And what is the mix of investments that I need to make to align those priorities? This means specific, intentional allocation of our resources. Our time, our energy, and our money. We do not get the portfolios that we want. We get the portfolios that we have built. This is true in financial investing and it is true in life investing. Therefore, you do not get the life that you want. You get the life that you have allocated toward, that you have intentionally invested toward. Asset allocation is simply how your values and your priorities show up in reality on your calendar, on your bank statement, in your energy budget.

The Curse of Too Many Options

(18:47)

And speaking of the opportunities and options that are available to us, we need to note and talk about the fact that we cannot allocate toward everything. Yes, we are already automatically limited by our choice set. But we probably shouldn't allocate to everything within our choice set. In investing, we don't get to own every single company. I suppose that's possible, but probably not desired in most cases. And in life, you don't get to pursue every good thing that is available to you. And at the same time, every bad or suboptimal thing that we pursue is a good thing or an optimal thing that we cannot allocate those resources to. And a lot of our stress in life comes from pretending otherwise. Lying to ourselves and telling ourselves that we can still get those good investment outcomes that we want even though we are applying our resources in a different direction. Sometimes even in an opposite direction. And many people struggle, not simply because they chose poorly based on the options that are available to them, but because they failed to narrow down the choice set and identify the trade-offs associated with them. Because again, most of us, probably all of us listening to this, have quite a few opportunities available to us. We have lots of options. The world we live in, in the present day, is an incredible result of generations before us increasing the opportunity set, the options available. And lots of options seems like a great thing. And they are, in many cases, but only if we can narrow down those options to the few things that we should actually be investing in.

The Grocery Store Example

(20:38)

Consider the example of a grocery store. Not long ago in our history, grocery stores didn't exist. On this podcast, you learn important facts like that. Yep, grocery stores are a relatively modern invention. There have been markets for a long time where people have gathered, where there was production, but it's only been relatively recent in human history where we have the types of markets that we see now. At all other times, through most of human history, our options were extremely limited in most cases. Seasonally, more abundant, but generally quite limited. I'm not saying anything that's groundbreaking, but with those limited options, my guess is that shopping trips, shopping in the market was a lot simpler way back when, and maybe even more enjoyable, assuming it was a time when there was enough to go around.

Canned Tomato Paralysis

(21:26)

Because I have to say, I have to admit, I am fascinated by the grocery store, but I don't entirely enjoy it. Now admittedly, I don't do a lot of grocery shopping. Usually I can count on one hand the number of times that I go into a grocery store in a given year. Usually it's on vacation. My wife handles that for our family. I do often get my hands dirty on the cooking side of things, but on the ingredient procurement side, I leave that to the expert. But when I go to the grocery store, it's nearly overwhelming. The sheer number of options that are there. The beautiful and tempting and yet completely garbage foods. I remember, this was probably a few years ago, I went to the grocery store with the intent of buying a can of crushed tomatoes, because that's what was needed, a pretty simple shopping list, thinking that that was going to be a pretty easy exercise. But there are dozens of options of canned tomatoes, even in an average grocery store. Name brand, off-brand, size of cans, private label or specialty brand products that are in pretty glass jars versus the standard can. That makes you think, hmm, maybe I should consider one of those fancy looking ones. They've got to be better somehow, right? You can see the tomatoes through the packaging. If it's in glass rather than tin, that's got to be better, right? But it's two and a half times more expensive. Is it worth the trade-off? Is it worth the money? I could buy the regular size can, which I think is all we need, but the can that's double the size is only 30% more expensive. Shouldn't I buy the can that's twice as big but only 30% more in cost? Wouldn't that be a bad investment if I bought the smaller can for the higher price per ounce? Or what about this? I only need one can for the recipe, but I notice that they don't expire for what appears to be 50 years. So shouldn't I buy a few extra cans to stack up? It is a lot more complicated than it should be because of the incredible choices. And that's just one simple product, where even just 50 years ago in the grocery store, you had one, maybe two options for crushed tomatoes. You might have had zero options for crushed tomatoes, and you had to crush them yourself. And 50 or 100 years before that, your only option was crushing your own tomatoes when they were in season, probably that you picked from your own garden. Maybe not as good of an option overall, but much more limited, much simpler. And then on my way out of the grocery store, and I should note that I am one of the most disciplined people that I know when it comes to eating and what I decide to consume. But I want to grab everything that is on those end caps of those aisles. And I definitely want to grab everything in the tunnel of opportunity and temptation that is the checkout aisle and those products lining each side. But I don't. I just stand there and marvel at the number of choices and how good everything looks. And I think about marketing. I check the labels on who makes the best looking stuff, and then I look them up to see if they're publicly traded. You can maybe see why I don't go to the grocery store very often. It might just be me. Don't send an analyst to the grocery store, I guess.

Narrowing the Choice Set

(24:58)

But the reason I talk through the grocery store example is twofold. First, it is representative of much of life in that we are surrounded by an unbelievable amount of choice. Second, it's an illustration that an unlimited or massive number of options is often not better, and they often just create paralysis or indecision rather than better results. Too much choice can and does result in situations where you have to make a suboptimal decision. If there was a better decision that you could have made and you didn't make it, you are left feeling like you made a mistake. Even if the result was good. Even if the thing that you chose was better than what 99% of others in human existence ever had access to on their very best day. You're left feeling disappointed or feeling like you made a mistake. Or you're left wondering if a better decision was out there. Maybe you should have looked at the next page on Amazon. Maybe you should have read a few more reviews. Maybe you should have checked that other aisle or that other site. And I believe that the incredible choices that are available to us are often more of a curse than a gift. Those options are only good if we can narrow them down and then choose with confidence and without fear of regret. Otherwise, more options just create problems. Or they result in indecision and result in an investment not being made that could have been made sooner. And we know that trying to invest in everything often results in not getting much of anything in terms of returns. This ties into diversification, which we're going to talk about in much more detail very soon. We'll spend more time digging into good strategies for narrowing the choice set down. But the spoiler alert on that is that the most important and most impactful thing that we can do is know our why. Which is going to help us narrow down the what and the how. If you know your purpose, what you're shooting for, and make allocation decisions based on that, the choice becomes a lot cleaner, clearer, and you can narrow the choice set much more effectively.

First-World Problems and Framework Filters

(27:06)

And an area I struggle with a lot is narrowing down good or even excellent options. I think that the grocery store example applies to many areas of our lives. We are incredibly fortunate in that regard. So yes, we should acknowledge that. But we should also acknowledge that it is an issue, it is a problem. In my stock portfolio, there are a massive number of options to choose from. And that is true in many other areas of life as well. And that, yes, is a first-world problem, for sure. Oh no! We have way too many good options to choose from! Poor me! But it's true, and it doesn't change the fact that it is a challenge that we have to deal with. So yes, by nature of living in the modern world, our choice set is pretty amazing. Most of us do not suffer from a lack of options. And most investment decisions do not require extensive research or hero-level analysis.

The "Heck Yes or No" Framework

(28:06)

Our conscious investment choices, with our time, our energy, and our money, most do not require that much deep thought or analysis. This is true across most of the categories that we invest in in life. And those decisions can become clearer and more obvious when we have applied a good investment framework and filters. You might have heard a version of this talked about before because I certainly didn't make it up, but I do try to live by it. And that is, when it comes to choice, one framework that you can apply is if it is not a heck yes, then it should be a no. Often we don't say yes enough to the right things because we refuse to say no often enough. Maybe even in most things that we allocate our resources toward. And it's an interesting frame to consider. But yes, it becomes easier and clearer when no can be applied to everything else that doesn't fit, that is not aligned. My wife says no is an important and often helpful answer. And that applies whether we are giving it or getting it. And the way we get to that decision point quickly and accurately is to know our purpose, identify our priorities, and know what we value and what we are trying to accomplish. And the better you can know those things and the more aligned you are with your purpose, the faster you will be able to make allocation decisions. Because the faster you will be able to weed out the things that don't fit. That narrows the choice set dramatically.

Speed to Action and Average Returns

(29:35)

And most of us, probably all of us, would be better off making more of our investment decisions faster once our direction is set and is aimed right. Much of life is an iterative process of inputs and outputs. And if we are slow on the input side, we are going to have slower outputs. If you wait years to make an investment with your money, those are years that you missed out on having your money growing and compounding. Even if all you did at the beginning was just make an average investment choice. Average returns are phenomenally better than no returns. Average returns allocated too early enough will beat excellent returns allocated too much later. One of the most important things we can do with our asset allocation framework and decision is to actually get to action, implement, actually invest. And a very common error that a lot of people struggle with is over-research, over-analysis, analysis paralysis, you've heard it referred to. Trying to find the optimal thing, the best thing out of a choice set that includes dozens or hundreds or thousands of choices, can result in slowing down to a halt and making no progress. Have you ever browsed through the thousands of shows on Netflix and come to the conclusion that there's nothing to watch? But yet when we were kids, with five channels on TV, I think we were much happier with our options. How about other examples? Looking for the perfect job when you've been out of work for too long. Looking for the perfect relationship when the relationship opportunity probably existed that could have been made into something great. Looking for that perfect stock when what you needed to do was get your money working in the first place. Invest it. And this is often also used as an excuse for procrastination. And it's also used as an excuse for a fear of commitment. I can't say it enough. Make sure you are actually investing. Investing our resources is a commitment to something. And that makes many of us nervous. Many of us are commitment averse. And this ties into wanting to avoid the costs that are associated with investing. And wanting certainty where certainty doesn't exist. Which is part of life, by the way. Because again, going back to what we were talking about earlier, asset allocation does not eliminate risk. It chooses the risks that we are willing to take.

The Cost of Uninvested Resources

(32:07)

But we need to keep in mind, resources that are uninvested are effectively wasted. And that is especially true when it comes to our time and our energy. Because you can set money aside for a very long period of time. Money doesn't have an expiration date in most cases. It does have termites that eat at it. And those termites are called inflation. If it remains uninvested, it does go down in value over time. Money has a degenerative disease. Cash, I should say, has a degenerative disease. It's just slow and it takes a while for it to lose significant value. So don't get tricked into thinking that money can just sit there forever without consequence. Inflation is a real cost. But we especially understand this to be true when it comes to our time and our energy. Calling back to our discussion on macros from episode 3, time and energy that is not invested is wasted. Our energy can be stored up to an extent, but if it isn't eventually invested, we lose out on it. We start to lose our capacity for it. We cannot store up energy forever without cap and then deploy it in the future. Any energy accumulated above our current capacity is effectively thrown away.

Opportunity Cost: The Commitment of Allocation

(33:23)

And a key part of asset allocation is identifying the cost. Everything comes at a cost. When you allocate your resources to something, those resources are no longer available to be invested elsewhere. That is called opportunity cost, which is a quiet cost that in many cases people ignore. But remember, investing is a commitment. Committing resources, actually allocating your assets, removes them, at least for a time, from being available to be invested elsewhere. It's true for money, it's true for time, our energy, our attention. We can split those resources in multiple directions. Or we can unlock them, free them up to be reallocated. But if they are currently allocated somewhere, they can't be allocated elsewhere without effort.

Professional Alignment and The Ownership Test

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And an example on the money side of things, I may have mentioned before that in my client portfolios, I own about 40 companies. They are the same 40 companies between me and my clients. That's very important to point out. As a side note, one of the best questions that you can ask your financial advisor or prospective financial advisor, is whether they invest their own portfolio in the same or substantially the same assets that they do or will invest your portfolio into. Individual risk differences aside, you might own more equity or more bonds than they do, because you might be more conservative or aggressive. But just looking at the equity portion, the business owning side of your portfolio, the question is, do they, your investment advisor, own the same companies or own the same funds themselves that they will be investing you in? Not a little bit, but all the way. You may or may not be surprised to hear that most financial advisors do not have that alignment. And that is a fundamental misalignment that you should probably run away from. I'll be talking more at some point in the future about financial advisors and whether you should probably fire yours. That'll be fun. Stay tuned. Controversy on the horizon.

Non-Negotiables in Analysis

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But back to my portfolio and my clients' portfolios. In the business owning portion of their portfolio, we own the same companies. But those are not the only companies that I like or believe in. That's the point that I'm getting at here. I have an active watch list of over 100 companies that I admire and would like to own. I'd be happy to own under the right circumstances, the right conditions. Now I don't own them for a variety of reasons. They may be a great company in a challenging industry. The company might have too much debt on their balance sheet or they're not profitable yet. Maybe they're exposed to too much political risk, which I hate. And in the last few years, some companies have become political that I did not expect. And most commonly, maybe the company is just too expensive. Valuation is the most common reason why I don't own a company that I admire. It's just too expensive. The second most common reason I don't buy a company is that they're not profitable yet. Fantastic company, maybe even growing revenue like crazy, maybe remaking their industry, but I have certain non-negotiables. The company has to have positive cash flow or be on a very clear path to achieving positive cash flow in the very near future for me to be willing to invest in it for myself and my clients.

Holding is an Active Decision

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And that is where opportunity cost comes in. If I want to own another company beyond the 40-ish companies that I already own, I need to sell one or I need to trim multiple companies that I already own. And that is the opportunity cost that I'm talking about. That is asset allocation in practice. In a portfolio where there are a great number of opportunities that I may want to own, I still cannot own everything. Most of the time, I make the decision to hold the companies that I currently have. That could be labeled as doing nothing, but doing nothing when it comes to asset allocation is still an active decision and it should be seen as such. Keeping the same portfolio, let's say all year long, which has happened in the past in my portfolios, is an intentional allocation decision. It is saying, I want to own what I already have more than I want to own other things. Not selling something is just as much of a decision as buying something new. Every week or month or year that I leave money invested in a company, I look at that as an active buy decision. If I would not buy that company right now, why should I continue to own it?

Life Application: Overcommitment vs. Focused Purpose

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That's getting a little bit deeper into actual portfolio management practices, but I hope it illustrates a point when it comes to asset allocation. Getting back to life application, most people say yes to things emotionally and refuse to say no to things explicitly. They overcommit. They spread their resources too thin. And that mismatch often creates overextension or overinvestment in poorly performing assets. Or else underinvestment in areas of high impact where they should be concentrating their investments. Instead, they spread it out and often without intention. We are always investing our resources, but it is a lack of specific and focused investment for a purpose that translates into mediocre returns. And that is the point that I want to emphasize as it relates to opportunity cost. The poor mindset avoids saying no. The poor mindset wants to act as though opportunity costs don't exist. The trade-offs don't exist. Whereas those who are cultivating a wealthy mindset say no to the things that are not clearly a heck yes. And they say yes more clearly, more firmly to those things that they should be allocating their resources to. Those areas of high impact. Remember that we covered that in our series on poor versus wealthy mindset. Episodes 4, 5, and 6 if you want to go back and give those a listen. Trade-offs and opportunity costs are always part of it. Everything comes at a cost. There is no free lunch. And this is not a pessimistic statement. It should be an empowering statement because if it is acknowledged and then accounted for, it is a powerful driver of returns.

Unavoidable Trade-offs: Stability vs. Growth

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Understanding that the trade-offs that we face have to be accounted for in every area of our lives. Trade-offs are part of life. I cannot have perfect stability and maximum growth. I can't have a portfolio of cash that doesn't go up and down and a portfolio that is going to be worth a whole lot more decades from now. And that's on the financial side and on the life side of things. I can't have everything that I want to eat and have the physique that I want. I can't eat a bunch of trash food every night and have abs. I cannot optimize every account simultaneously. Every investment account of life. Some things should be focused on whereas some things should be put on the back burner or ignored completely. Sold off from the portfolio. We can't be fully available everywhere. There are a lot of people that need us that want our attention. But we have to focus our attention and allocate it carefully. It's a trade-off. And there are a lot of opportunities that we give up. That we have to give up. Again, first world problem but it is for real. We cannot keep all options open forever. We have to close doors at some point. We have to walk through doors intentionally at some point. Refusing to acknowledge trade-offs when it comes to asset allocation does not remove them. Refusing to acknowledge trade-offs or act like they don't exist actually makes them more dangerous.

Reframing Sacrifice as Positive Investment

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Now I don't just like to frame everything negatively. So let's reframe to positive statements to close out this discussion on trade-offs. And that would be along the lines of I can get the outcomes that I intentionally allocate my resources toward. I can achieve the results I see other people getting if I apply a level of effort consistently for long enough. I can properly frame what I'm giving up as an intentional investment that makes it about the positive purpose rather than the negative sacrifice. What I am investing toward versus what I don't get to have or what I don't get to spend right now. And the limited resource reality is quite a constraint. There's only so much to go around. There's only so much time, energy, and money to go around. And we have to let go of the idea that we can make perfect allocation decisions.

Perfect Information vs. Progress

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There's only so much that we can know. There's only so much information that we have access to. There's only so much uncertainty that we can remove before we have to make a decision. And if we wait until all information is known and all uncertainty is removed we will never invest. We will never make the purchase decision and we will never progress. We'll never get returns. Progress requires acting without complete information. And it requires trade-offs. And we have to choose those trade-offs intentionally and face them in reality. Not pretend that they don't exist. Because we can't do everything. And I don't think that we want to because if we did everything just like if we invested our money across everything that is a recipe for mediocre results. At least with money investing you get to benefit from owning successful companies quite easily just by owning everything. In life it doesn't quite work that way. An over-diversified, widely distributed portfolio in life often doesn't even get us average results because we don't have enough invested anywhere for it to be impactful. And we've established already that you do not want average when it comes to most areas of life. The flip side, the trade-off is that concentration, narrowing your focus results in more volatility and risk. And that might be exactly what you need to get returns.

Diversification and Concentrated Choices

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That might be the right thing to do. But it also needs to be approached and invested in with that understanding firmly in mind. Concentration is not a bad thing. Just like diversification is not always a good thing. But either one of them in an extreme can result in outcomes that we didn't intend, that we didn't want, or that can hold us back. We will be talking about diversification more specifically. We'll have an upcoming episode that dives deeper into that topic. And we'll talk about how we can use it to our advantage. Let's talk about how to apply this. We want to get to the impactful part. Making the investment decision and then allocating resources. Which means we need to narrow down our choice set. Because as we talked about, we probably have too many options. One of the most powerful things we can do is remove the number of choices.

Application Exercise: Remove the Options

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So with this exercise, here's what I'm asking you to do. Ask yourself two questions. What am I trying to accomplish? And what choices do I have in front of me that do not help me in that direction? Then remove those options. At least for some of them, you can make the decision that those are no longer options. Saying no. And that is what makes this simple exercise powerful. If we remove from our option set the things that do not help us achieve what we are shooting for, it doesn't matter what we choose from what's left. Because those will be the options that are more aligned with our goals. This is related to that Sherlock Holmes quote. Paraphrasing. If you remove the impossible, what is left, no matter how improbable, must be true.

The Diet Analogy: Remove the Garbage

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You know where this applies really directly? Food. Diet. Here's a good real world example of this. If you want to eat better, do you know the only thing you have to do to accomplish that? At least at home? Remove the garbage. Remove the bad choices. If all you have are better choices, you've won. You can still overeat on wholesome, nutritious food, but good luck overeating on lean meat, whole grains, fruit, and veggies. Remove the bad options.

Application Exercise: The 80% Threshold

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Okay, that was a quick exercise, at least to talk through. So let's do another. Most of us have decisions that we are ruminating on. Too much. We should have made the decision already, but we are dragging our feet. We're looking for more information or some sort of confirmation. Should I say yes or no? Do I make that purchase? Should I make the phone call? Do I really like that color? So here is the next exercise. If you can honestly say that you are at least 80% known on the analysis, make the decision, and then make the investment. Allocate your resources. Stop trying to gather more information. Be honest about when you have enough information that the decision probably won't change. Avoid analysis paralysis.

Permission to Pull the Trigger

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So much of the returns we miss out on in life is because we delayed or never made the investment. So you officially have my permission to stop ruminating, stop second guessing, and pull the trigger. And you know if you're shooting from the hip. Don't do that. But if you've gathered the information that you need, and you can honestly say more information probably won't change the decision, then make the decision and then make the investment. We'll be talking more about this in our upcoming episode on financial security. I think coming up next I'll have to talk to the scheduling board on that one to be sure. But as we conclude this current topic on asset allocation, I want to make clear that it is not about being perfect. Perfection is not the goal. Asset allocation is always about tradeoffs. It often requires sacrifice. But properly framed and aligned, it is an investment.

Final Advice: Alignment and Attention

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Asset allocation is not about removing all risk. It is about choosing the risk that we are willing to take. Asset allocation is not being stuck in an endless research loop where we are trying to find optimal. It is about actually putting our resources to work, allocating them intentionally. Asset allocation is about alignment. And the better aligned your allocations are with your purpose, the clearer your decisions become. The less regret that you experience and the faster you put your resources to work and therefore get the compounding results in the direction that you're targeting. We do not need perfect choices. We need consistent, well-defined, aligned allocation. Much of life is a matching problem. It's about matching the proper or necessary inputs with the desired outputs. It's about matching the proper solution with the proper problem.

(48:30)

Matching the proper investment with the proper opportunity. That is true in all areas of life. Relationships, money, career, fitness, the food we consume, they are all matching problems. But again, trying to not do this in a negative frame, we should instead frame them as matching opportunities. Call back to the beginning of our discussion today. That overachieving person you thought of in that exercise at the beginning of this episode, maybe that was you that you were thinking of, has figured out how to solve some very important matching problems.

(49:06)

Maybe not all of them, but enough of them well enough to matter. And on the other side, human nature points us toward considering other people as it relates to wasted opportunity, underachievement, based on their potential or their head start, or the opportunities that are available right in front of them. Just as human nature points us to considering ourselves when it comes to overcoming adversity, achieving even where we didn't have a head start, or where we had to fight a headwind. But again, keep in mind, we are all, we are each, both of those people. If we feel we are extremely limited in opportunity, then asset allocation becomes even more important. And an exercise that we have to do intentionally and get right.

(50:38)

But I suspect that most of us primarily fall in the category of having opportunities all around us. Whether we want to recognize that or not. Probably too many opportunities. Aligning our purpose, understanding your why, so that you can narrow your choice set and really nail the what and the how, is asset allocation at its core. And one final bit of advice, be especially careful where you allocate your attention to. Attention is a powerful combination of time and energy. And if someone or something can get your attention, they can much more easily get your money. More to dig into on that, but another time. Okay, thank you for investing in yourself and in those around you.

(50:39)

I will talk to you next time. I can't go to malls either. I walk around in awe of all the junk and I ask my family, who buys this stuff? I do love people watching though.

(51:05) [End of Transcript]

The full word-for-word transcript is available below for deep study.

Thank you for investing in yourself and in those around you.