When people think about investments, they mostly think about stocks and bonds—this is usually because these are the most common assets types held by individuals. Just because these are the most common investments doesn’t necessarily mean they are the best in all market environments. There are many other asset types that you should consider when you’re allocating your investment capital.The prevailing theory of portfolio allocation is called Modern Portfolio Theory (MPT). MPT hails from the 1950s, where it quickly gained traction in investing circles. One of the primary concepts of MPT is that you can invest in riskier assets with a higher rate of return (such as stocks) when you are younger and that the older you get, the more you should allocate your portfolio to more stable assets (such as bonds).One of the biggest flaws of Modern Portfolio Theory is that most financial advisors only use stocks and bonds when creating an investment portfolio. When you limit your investment choices, the risk of portfolio underperformance increases because stocks and bonds don’t perform well in all market conditions—this is where holistic investing comes in.Holistic investing is where you allocate assets by their function and not necessarily by their name. For example, bonds are not the only stable, cash-producing assets out there. Dividends, real estate, REITs, and lending are other examples of cash-producing assets. So, if you’re aging like a fine wine and you’re looking to convert your investments into cash-producing assets, do your research and don’t limit yourself to bonds simply because they are easy to acquire.When constructing your portfolio allocation, identify the purpose you’re trying to fulfill and then allocate accordingly. For example, you need cash flow to replace your income when you retire, so a heavier allocation of cash-producing assets would be in order during retirement. However, if you are earning a steady income, cash flow isn’t a concern, so you should focus on compounding investments.No matter what, invest wisely.
