Wall Street Has It Backwards

I think we can all agree that Wall Street spends a lot of time and money trying to determine how to invest and beat the market. If you don't believe me, check out this recent article from the New York Times which determines that investors spent nearly $100 billion in 2006 trying to beat the market.

Compare this article to the chart above (click image for a larger version) which illustrates that the most important investment decision revolves around the time horizon associated with your investment strategy. Following the time horizon decision are 3 more factors which are part of asset allocation. And finally, the decision that has the smallest impact on investment performance -- investment selection -- is listed.

Yet, it is this last decision -- again, the one with the smallest impact on long term performance -- that gets all the time and attention from Wall Street, the media, investment newsletters, and cocktail party conversation.

I admit, Jim Cramer's Mad Money wouldn't be nearly as exciting, and probably would be much less irritating, if he spent time with each caller discussing their time horizon and asset allocation.

But the big question is, do you want to be entertained or do you want an investment approach that works?

For more on the entertainment vs. investment issue, check out page 5 of the Behavior Gap Snapshot from my friend Carl Richards.