Bottom Line/Personal: As an investor, you labor over which stocks to buy, studying and tracking companies. My guest today says that you spend too much time worrying about which stocks to buy and not enough time on a much more important question—how much of your money should be invested in stocks anyway?

I’m Steven Kaye, editorial director of Bottom Line Publications, and this is Bottom Line On Your Money, where our experts help you create, invest and protect your wealth.

Today I’m speaking with Vahan Janjigian, PhD, CFA. Vahan is editor of the MoneyMasters Stock Report newsletter, chief investment officer at Greenwich Wealth Management and author of two books, including Even Buffett Isn’t Perfect. Vahan is a legendary stock picker, but besides that, he has taught money management, financial theory and economics, so he understands the big picture for average investors and where they go wrong.

Vahan, welcome, and thank you for coming out for Bottom Line viewers. And let me just tell you that it’s a lot of fun to think about stocks and worry about stocks and try to pick stocks, so why are you saying that people should spend less time thinking about that?

Vahan Janjigian, PhD, CFA: Thank you, Steve. If you look at all of the academic studies on portfolio returns, it turns out that more than 90% of the volatility of portfolio returns is explained by asset allocation, and less than 10% is actually explained by the security selection. So that tells us that deciding how much of your money to put into stocks is a very important decision and much more important than which actual stocks to buy.

But people don’t do that. Like you said, people think it’s a lot more fun to pick stocks, and that’s what they want to focus on. In fact, many years ago I had lunch with the legendary investor Jack Bogle, who is a big proponent of index investing, and even he admitted that it’s a lot more fun to pick stocks than it is to put your money in an index fund.

So that’s why people do that. They like to worry about What stock should I buy?…they like to do the analysis. They think they’re doing something interesting and fun and important when they do all this research. But they really should spend more time thinking about What are my objectives? What are my constraints? And how much money should I have in stocks and bonds and cash and other asset classes to begin with?

Bottom Line: What about the idea that picking stocks is what can really set some investors’ performance apart from other investors? Some people don’t mind just going along with the market, and that’s why we have index investing, but for many people, that’s not what they want. They want to do better.

Janjigian: Correct, and I’m certainly not saying that security selection is not important. It is important to worry about what stocks to pick. I’m merely saying that it’s even more important to decide how much of your money to put into stocks in the first place.

Bottom Line: So you think if investors have a finite amount of resources—whether it’s time or attention or knowledge or whatever—that they should spend more of it thinking about their overall asset allocation?

Janjigian: The good news is that worrying about your asset allocation does not take that much time. It’s the more important decision, but it doesn’t really take a lot of time to decide what percentage of your assets should be in stocks. It’s a very important decision. Once you’ve made that decision, then you can start worrying about what stocks to buy.

Many people do it the other way around, and if you look at their portfolios, you often find that they spend a tremendous amount of time picking the stocks that they have, but they might only have 20% of their money in stocks or they might have 95% of their money in stocks. And neither allocation is probably appropriate for them.

Bottom Line: So there could be a lot of self-congratulations about how well my stocks are doing, but if I only have 20% of my portfolio in stocks, it’s really not helping me much in the long run, because there isn’t much money in there.

Janjigian: Absolutely, that’s right.

Bottom Line: So you can spend a little bit of time now thinking about your asset allocation, but then you just let it ride—you let it stay the same—and you can then focus on stocks?

Janjigian: Not necessarily, because your objectives and constraints might change. So your target asset allocation might have to be adjusted over time. We know, for example, as people get older, they might go into retirement and they might have less income. So they have to worry more about living off of their wealth and their investments, and they may not be able to bear as much volatility. So they might have to adjust that asset allocation once they retire.

Bottom Line: I can imagine that for some people who are poor stock pickers, having less in stocks than they should might actually end up being a benefit over time.

Janjigian: Well, it could be, but again, if you look at the academic studies, there really is no 30-year period of time, no matter when you start, where stocks did not outperform bonds. And if you look at periods of, let’s say, 10 years, there are very few 10-year periods where bonds have outperformed stocks.

Even when you retire—let’s say you’re 65 years old and you decide to retire—chances are you’re going to live into your 80s anyway, and that’s a pretty long period of time. So you should still have a healthy allocation to stocks.

Bottom Line: So spending some time now figuring out how much you should have in stocks, and then after that, worrying about which stocks you own, will pay dividends over the long run, and you’ll do much better as time goes by.

Janjigian: Absolutely. That’s good advice.

Bottom Line: Thank you. That’s your advice. Thanks very much.

Janjigian: Thank you, Steve.