The world is filled with recommendations and research on what works best in the money game. But when you reduce the sea of study down to the essential lessons, we’re left with rule number one—diversify within and across asset classes, i.e., asset allocation—and number two—rebalance.
There are other rules, of course, and some of them are actually useful. But for most individual investors, and perhaps many institutional investors, these two rules are the foundation of intelligent money management. That’s another way of saying that it’s hard to succeed in investing if we ignore or abuse these rules.
Granted, it’s possible to violate these rules and still earn big returns. But finding success on this path requires that you’re smarter than everyone else and/or willing to take big risks that will sink most investors. For the rest of us, asset allocation and rebalancing are the building blocks of prudent investing. Intelligent investing needn’t end there, but it’s a valuable beginning.