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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, July 5, 2009 Real dummies ignore their 401(k)s By Michelle Singletary 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 choices ranging 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 completely clueless about the various asset classes in which she was dicing her money. She had just heard that she should diversify. This woman, along with many other novice investors -- and that really encompasses 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 by Wiley. It's a little off-putting for me. 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 because it can be intimidating. But Jerry Miccolis, a certified financial planner and co-owner of Madison, N.J.-based Brinton Eaton Wealth Advisors, and his co-author, Dorianne 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. I will never forget the stories of Enron employees and retirees who put the bulk of their retirement accounts into the company stock. When Enron went bankrupt, their wealth evaporated. The Enron employees and retirees violated one of the immutable laws of sound investing, Miccolis and Perrucci write. "Never, ever put too many of your eggs in one basket." Getting the right asset mix can account for more than 90 percent of investment results, the authors report. In 321 pages, not including the index, Miccolis and Perrucci walk readers through the ins and outs of asset allocation in bite-sized, digestible chapters. The paperback book is separated into five sections covering, among other things, the basics of asset allocation, and how to fill your investment basket with specific asset classes. You'll learn about weighing risk and return, why you need to rebalance your portfolio and alternative investments (commodities, real estate) and how taxes affect your choices. The authors list the most important asset classes with their historical rates of return. Don't skip the 10 common asset allocation mistakes. I know a lot of people have pulled back from investing. I understand why. The stock market has been so frightful and losses so great. Some have even declared asset allocation failed them in the recent market downturn. "Asset allocation was never designed or intended to avoid loss in all conceivable (let alone inconceivable) situations," says Miccolis. "It is designed to get you the best result given your risk tolerance. Virtually everything you could invest in -- save some categories of Treasury bonds -- lost considerable value at the same time. The nature and extent of that massive combined downturn was in many ways unprecedented." With apologies to Winston Churchill, Miccolis admits asset allocation is a flawed system. But "it's just worlds better than whatever is in second place." Washington Post Writers Group Join in chat Join a live discussion at 9 a.m. Pacific time July 30 at www.washingtonpost.com. Authors Jerry Miccolis and Dorianne Perrucci will be available to take your questions about asset allocation. Every month, as a bonus, Singletary randomly selects readers to receive a copy of the selected book, donated by the publisher. For a chance to win "Asset Allocation for Dummies" send an e-mail to colorofmoney@washpost.com. Please include your name and address. READER COMMENTS Be the first to comment. You must be a registered user and verify your e-mail address to post comments to blogs or articles on HeraldNet. To register, click here. To read other terms and conditions, click here. Log out

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