It's not about picking stocks, but about portfolio allocation: My investment awakening after years of market ups and downs
A few days ago, I listened to a recording by Charlie Munger.
He said that truly outstanding stocks account for only about 4% of all stocks. Picking a good stock from thousands of companies is like looking for a needle in a haystack; if you don't find the needle, you'll even get your hand hurt.
What is the best approach? Buy the entire pile of wood. That is the S&P 500.
I have heard this statement many times.
But it wasn't until after several years of fluctuating in the market that I truly understood it.
At that moment, I suddenly comprehended his meaning completely.
Munger's words are not difficult to understand, but not many people actually follow his advice because they still have a bit of a fluke mind mentality， thinking that they will be the one who outperforms the S&P 500.
Because over the past few years， I have experienced ups and downs in the market. I have gone through chasing hot topics， chasing concepts， full-position trading， and mood fluctuations.
I have also firmly believed that I could select those "future winners" through diligent research， analyzing financial reports， and judging trends.
Until I gradually realized that...Selecting stocks is itself a low-probability game， especially for ordinary people.
I once thought that investing was "proving one's own intelligence".
When I first entered the market, my goal was very simple: to outperform others.
- Selecting the right stock and outperforming the index by a greater margin was a sense of achievement;
- Failing to choose the right stock but not being willing to admit it was a kind of obsession.
Later, I heard a teacher talk about investing in funds. Based on his nearly 10 years of experience, he eventually concluded that whether investing in funds through regular investment or not, the final return rate is almost the same.
What I understood at that time was the method: automatically buying every month or every week, and extending the period. But I didn't truly grasp the underlying logic behind it.
It wasn't until this time, when Munger once again emphasized the issue of probability, that I understood:
"Regular investment" is not a skill; rather, it is a rational choice made after acknowledging one's own capacity limits.
Most people actually lack investment education.
We are taught from a young age to study hard, find jobs, and save money.
However, very few people teach us - how to make money work.
Many people's understanding of investment only stops at the interest rate of bank deposits. Especially those who came from poor times, they are naturally wary of "risk".
"Safety first" is the inherent survival logic ingrained in their bones.
But the problem is:
When inflation exists and currencies depreciate over time, relying solely on bank interest rates actually means we are moving backward slowly.
What we lack is not effort, but the concept of asset allocation.
Stock selection is prediction, while portfolio allocation is structure.
Later, I began to rethink investment.
If the probability of truly outstanding stocks is extremely low,
what should ordinary people do?
Warren Buffett has repeatedly advised ordinary investors to purchase
S&P 500 index funds. The underlying logic is actually quite simple:
- Stock selection is predicting a single company.
- The index is betting on the entire economic system.
- Stock selection is a game.
- The index is probability management.
As long as the economy grows in the long term, as long as companies continue to generate profits, and as long as the world does not collapse, the index will eventually reflect this growth.
Volatility is inevitable. But time will smooth out most of the fluctuations.
Looking back over 10 or 20 years, many previously terrifying declines will turn into small waves on the trend chart.
True Awakening: Asset Allocation is More Important Than Stock Selection
Gradually, I realized that...
Investing is not about finding a "stock that doubles in value". Rather, it is about constructing a reasonable structure.
So, I began to think about the asset allocation logic for ordinary people.
I designed a three-layer structure for myself:
Layer 1 : Safety Layer
• Cash reserves (sufficient for 6 months of living expenses)
• Bank deposits
• Pension insurance
The purpose of this layer is not to generate income but to prevent extreme risks.
It ensures that you will never be forced to sell your assets in any market environment.
Layer 2 : Long-term Growth Layer
• Regular Index Investment
• Long-term holding
• Time for certainty
VOO、VTI...
This layer assumes the role of "participating in economic growth".
- It doesn't require you to judge the market conditions.
- It doesn't require you to predict the tops and bottoms.
- It merely requires you to continuously invest and hold for the long term.
Layer 3: Elasticity Game Layer
• A few individual stocks
• Theme investing
• The companies you truly believe in
The existence of this layer is actually for "human nature".
If there is no sense of participation at all, many people will be unable to resist and go all-in on the game.
It's better to control the proportion well and let the stimulation occur within a controllable range.
For example:
40% Safety Layer
40% Index Layer
20% Game Layer
The proportions can be adjusted according to age, income, and risk tolerance.
The key is not the numbers, but the structure.
The core of investment actually lies in emotion management.
When the market is rising, people become greedy.
When the market is falling, people become panicked.
If all funds are invested in fluctuating assets, emotions will be magnified.
If all funds are placed in the bank, one will worry about "not outpacing inflation".
The significance of asset allocation is not to maximize returns, but to allow you to sleep peacefully in any situation.
A truly mature investment is not to win every market trend, but to let the system make decisions for you.
From "Wanting to Win the Market" to "Accepting Probability"
When I was young, I always wanted to prove that I could pick the right stocks.
Later, I came to understand that admitting that the market is stronger than oneself is the beginning of maturity.
Investing is not about proving one's own intelligence; it is about being friends with time.
When I stopped being obsessed with stock selection, and started thinking about allocation, I became calmer instead.
Perhaps this is the true investment awakening for ordinary people.
Many years ago, reading "The Poor Charlie's Almanac" made me feel boring.
Today, when I open it again, it feels like meeting an old friend.
It turns out that many of the words were not incomprehensible at that time;
it was just that at that time, I hadn't reached that level.
Perhaps it's difficult for ordinary people to pick out that "needle" among thousands of companies.
But what we can do is to buy that pile of "firewood" and then live peacefully.
- As for tools, they are just tools.
- What truly matters is cognition.