I’m an engineer by education. During my studies we were usually taught to use mathematical models to describe the world. Either to minimize or maximize some kind of metric. Make response time as fast as possible. Make customer complaints and bug reports as little as possible. We called it optimization, but it was actually trying to push the system to its limits given our limitations.

It took me a while on my investment journey to learn what optimization really means. I explored multiple asset types looking for the best investment vehicle for me. I read, modeled, tested and created a lot of calculations in Excel sheets. But eventually I figured out that the single best investment just doesn’t exist.

The Multi-Asset World

I’m very grateful for my stubborness in retrospect, because I had the chance to learn about a lot of different asset classes in action. Bonds, mutual funds, ETFs, individual stocks, different real estate strategies, crypto, derivatives and so on and so forth. But I had to realize that it is not an engineering school project. Maximum is not the real goal here. Optimum is. You have to find the distribution of assets that gives you an expected return that you are happy with. At the same time it provides you the feeling of security so you can stick with investing for the long-run.

There’s always going to be some fancy strategy with a higher return. The lucky breaks or extraordinary performances of the Microstrategies, Bitcoins and Nvidias of the world. You decide which one you consider for which category. But in my view a responsible investor should not shoot for the moon hoping for the best, but rather prepare for a strategy that works in most of the environments. This is what Ray Dalio calls “all-weather portfolio”. A configuration of assets that you are comfortable with regardless of the circumstances.

“Diversification is the only free lunch in finance.” — Harry Markowitz

Nowadays when I sit down every quarter to evaluate my investments, I really like the feeling that most of the time I’m looking at a larger pile. I always fooled myself with the concept that I could withstand any kind of volatility for the right return, but I think this is just not how human psychology works. It is easy to say it in hindsight, but you behave very differently when you are sitting through a market decline being 100% invested in an asset class. Experiencing the uncertainty and self-doubt.

They say real estate is the building block of lasting wealth.

Asset Classes

Let’s take a look at the largest asset classes, without aiming for completeness.

• Stocks: Stocks represent ownership stakes in companies and typically offer the highest growth potential but come with significant volatility.
• Real estate: Real estate is an asset class of land and buildings that provides income, growth, and diversification benefits to investors.
• Bonds: Bonds provide more stability and regular income than stocks but typically offer lower returns.
• Cryptocurrencies: Crypto is an asset class of digital currencies and tokens that offers high growth potential, volatility, and diversification for investors.
• Cash: Cash investments offer the most stability but typically provide the lowest returns.

Asset Allocation

But back to my portfolio. I like returns. I wouldn’t compromise them for making sure that every single time when I sit down I see a larger number. I have down quarters every once in a while. But most of the time I can see growth.

And this is where asset allocation comes in. In some quarters stocks do better, sometimes a real estate market soars, sometimes it is crypto. You’ll never know in advance. But if you have a nice mix of assets that matches your psychological profile, you don’t really have to. You can just sit back and watch enjoying the ride. Every time with a curiosity: “Which asset of mine will outperform this time?”

This concept is very close to the concept of diversification. That is what provides you the real benefit here, but in my view asset allocation is a bit more. Diversification is the knowledge that you should spread your bets. Maybe some rudamentary parameters like “I want to own at least 20 stocks” or “I don’t own an asset making up more that 5% of my portfolio”.

This is how stock ownership looked like in the “good old days”.

Strategy That Works for Me Now

Asset allocation is a strategy. It is a desired share of each asset type in your mind in your total holdings. I give you my current one:

• 46% individual stocks
• 46% real estate
• 2% crypto
• 2% cash

Some notes here:

1. You see 4 items, but there is actually way more. bonds, ETFs, commodities, derivatives etc. But they all appear with 0% in my specific case. That seems insignificant, but that is also a strategic decision, the decision of “I don’t need that asset class in my current investment phase”.
2. Does my actual investment portfolio looks like this? Hell no. With real assets and a real life this balance would be impossible to keep up, unless you use some kind of index to match imitate the ownership of these assets. But that is not a problem. This is a blueprint and not a regulation. I use it as a map to see where I should stir my investment boat. If I have a huge imbalance, e.g.: some cash piled up in my accounts: I buy something that is underrepresented compared to my allocation strategy. The previously mentioned 0% decisions are the only ones that you can match precisely all the time, you just don’t buy them.
3. Is this the right strategy? Should you copy it? Absolutely not. It depends on your age, your financial situation, your tolerance for risk and volatility and your experience. It is a very individual mix, that - bad news - you’ll have to figure out for yourself. Because nobody else can do it for you. We or many other sources can provide you tremendous help, but only you know what works for you. And figuring it out is one of the most important aspect of your investment journey.
4. Is this the right strategy for me? I don’t know. As mentioned above, it is not my first asset allocation. It was changing a lot over time. (Initially from 100% into something I like the most.) Now I see it as a constantly evolving guideline, that you have to revisit from time to time. As you get more experience, as you get older an your financial situation changes. Your old strategy might becomes obsolete and you’ll have to adapt. This is absolutely fine. This means you are improving as an investor. Actually I’d probably be more concerned if I look back and my strategy didn’t change an inch compared to a decade ago.

Conclusion

All in all, good asset allocation that fits your mentality can make your investment journey signifcantly smoother. I’d go as far that it can make or break the success of your long-term wealth building. Thus it is a very important topic that worth giving some thought to.

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