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TRUMP UNIVERSITY WEALTH BUILDING 101

Over the next six months, I increased Bob’s fi xed-income investments,
sold more equities, and kept his cash reserves high. In March 2002, because
of our concerns about the worsening geopolitical situation, we further reduced
Bob’s equity exposure to under 20 percent, enabling him to largely avoid the
dramatic decline of the next six months. We laid low until the spring of 2003,

when a new bull market finally began, and then we steadily increased his
equity exposure while trimming his cash.
The reason I told you this story is to illustrate that sometimes, there are
periods when it’s only good sense to set aside an allocation plan and reduce
your risk by moving more of your investment wealth to bonds and/or cash. It
has nothing to do with trying to outsmart the market, which is impossible.
Rather, it’s all about lowering your risk, when necessary, to protect yourself.
The world’s financial markets offer huge and exciting profi t potential. Yet

limiting your financial risk is vital in any situation, including investing. Fortu-
nately, disasters almost never happen overnight in the financial markets. They

build gradually. For example, the Dow Jones industrial average tumbled a
stunning 22 percent on October 19, 1987. But the Dow had already lost
15 percent in the previous nine trading sessions. There was plenty of time for
a vigilant investor to protect against catastrophic losses. True, sharp but short
declines can occur almost without warning, particularly during a bull market.
That’s the nature of fi nancial markets. But it’s the risk of major loss that you
need to be vigilant about.

Allocate First, Then Diversify

That’s why I want to discuss asset allocation and portfolio diversifi cation in
this chapter. If you can grow your wealth at a reasonable rate over time while
limiting major losses, the power of compound appreciation will deliver very
impressive results for you. To achieve that, you need only do a reasonably
good job of allocating your investments assets and diversifying your
portfolio.
Many investors spend too much of their time on trying to find the best

stock or fund, and not enough time on allocation and diversification. Yet his-
tory has shown that asset allocation is the single most important factor in
determining your returns from investing. Asset allocation is directly related
to risk and potential reward. The second critical element is how you diversify
your investments, primarily in equities.
The asset allocation that works best for you depends primarily on your
answers to these two questions:

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