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Good idea, but eject the DRIPS and metals. Metals are worthless and cost money to get in and out, plus they have no rate of return and are not backed by anyone. DRIPS are too much hassle, and the first share of stock is too expensive to buy. Stick with expense-efficient funds, and you will do at least as well, and not have to jump through any hoops.

-john-

In general, diversification means dividing your money into various types of investments, usually ones that have different risk levels and characteristics. This is usually called "asset allocation". The exact manner in which you achieve the allocation is less important that the classes you select, or so the theory goes.

The classic method is to determine your overall risk tolerance, and need for risk. That is geared towards deciding your broad division between fixed income and equity investments. Portfolios with higher amounts of fixed income are less volatile, but have a lower expected return over the long run. Of course, sometimes the long run can be rather long. That's why determining when the proceeds will be needed factors in.

people take a very simple approach, with a few broad index funds. An aggregate bond fund, a total US market suit many, and maybe add a broad international fund. Others like to use finer gradations, or overweight certain subclasses. This topic fills entire books, so I'll keep it short.

If you mean individual stocks with reinvestment, I wouldn't bother. You can get reinvestment with most mutual funds, and most brokerages will reinvest at no charge. DRiP programs used to be a way for small investors to get in without fees. Now there are inexpensive brokers and mutual fund companiew where you can invest for little or nothing in the way of fees.

It's hard to judge your proposed program without knowing a lot more. Like, how big a portfolio, how old you are, when you will need money along the way (plan to buy a house in five years? Have a kid or two?)

Do you have a 401(k) plan available from work? For many that will constitute a big portion of their investments, so the fund choices will be important.

Brian

Before accepting advice to stay out of DRIPs, I would suggest you research that topic a little more. Have a look at some of the internet sites that discuss DRIPs, such as

A Google search should turn up a lot more. Perhaps read one of Charles Carlson's books.

I would also suggest you take the idea of diversification still further and explore real estate. Owning rental property, as well as second homes or vacation homes, can be very profitable in the long run. If managing property is not your cup of tea, at the very least you should strive to own your own home as soon as possible, and that will add a lot to your diversification and security.

Diversification, dollar cost averaging and buy and hold for the long term are sales pitches used to generate broker commissions. People doing all three have been recently punished.

I particularly like the last one because the person who loses you a bunch of money can say "you'll thank me in ten years (now go away)". I've seen terms of 6 - 8 years, 8 - 10 years and 10 - 15 years. I've never really understood it. What if you invest $100,000 at age 40. How old are you when you take the money out if you want to retire at

66? What if the day before that happens the stock market drops 50%? Do you still take the money out? Of course the day after you take the money out the stock market could go up 50%.

The cruel truth is that you make money buying stocks that go up (and generate dividends).

Not necessarily. If you add "watch your investment costs" in with the above prescription you come very close to my suggestions/beliefs, and I am not a broker. As for "recently punished", if by that you mean their accounts have shrunk you are correct. But their accounts have shrunk because the market is down, and the market will come back, leaving "punishment" only for those who got out when the market was down.

True. Which reminds me of Will Roger's advice to "Buy stocks. If they go up sell them. If they go down don't buy them."

-HW "Skip" Weldon Columbia, SC

On May 15, 4:16 pm, StarWulf wrote: .

Asset allocation is more important than which equities and bonds you buy.

For equities I buy the mutual funds recommended by a top rated newsletter.

Frank

It means I am betting on the economy as a whole: that the population will continue to rise; that people will always need food, clothing, and shelter and want to live longer; that people for the greater part have an instinctive need to seek ongoing improvements in all of the latter. This results in a continuous growing of the economy. As long as I can stay invested for the long term and am diversified, my investments will keep up with inflation. To seek more than keeping up with inflation requires taking on more risk or taking on more paid labor.

Do you dispute that historical statistics support this strategy?

Your qualifying this statement with "recently" is a contradiction of your first statement's reference to the "long term."

In what context? See some of the calculators at moneychimp.com

I've

Well if one does not increase one's high grade bond allocation as one ages, anticipating a 50% drop in stocks, then one has the wrong adviser.

No one should invest in stocks if they are thinking about the short term and that stocks are just a "lucky bet" for same. Anyone not understanding that the basis for stocks is the workings of an economy should not buy stocks, since they are bound to either (1) be disappoointed; or (2) acquire a gambler's mentality and lose all his/ her savings quickly.

On average you get the average return if you buy a bunch of average stocks. When I first started saving for investment that was 12% a year. That is no longer true. Things change. People have specific investments. Those specific investments have to go up in value. Losing 50% of your retirement savings isn't a physcological conditiion, it is reality. Lot's of boomers were planning on retiring very soon. You can't always wait another 10 years and another 10 years. Owning Citi, BAC, Wamu, Enron, Golden West, GM and Chrysler isn't going to average out for people if they just hold on for the long term. Oh, and what is the historical record for Obama presidents with trillion dollar deficits? I want to make sure I use the historical lesson.

OK, they have been punished repeatedly.

Answer the question, answer the question. I can come up with somebody who stayed in just a little too late. Everybody starts and ends on a different date. Some will win, some will lose. At any point in time you don't know if the market is going up or down. Predicting the future is notoriously difficult. Even if you diversify you have to buy investments that go up in value, and not ones that go down in value.

What if you get heavily into bonds just as stocks take off on their historic rise that makes the average value work?

I agree with this. There is an inflationsary basis to the economy and anything tends to cost more dollars over time. Stocks tend to cost more dollars over time. Let me know when manufacturing jobs are coming back to the US. Again, Enron isn't coming back if we just wait.

You take a little bit out at 66, a little bit out at 67, etc. Here, "a little bit" might be 4%.

Dave

People who are diversified are punished less. People who buy and hold pay less commissions. People who are dollar cost averaging are buying bargains.

You don't take it all out on one day. You take a little at a time (4% a year is the local rule of thumb) over years. You also start moving gradually to less volatile investments years before you need it.

Cool How do I do that? Perhaps you could give us a model portfolio and we can track it for a year or two. Would you like to benchmark it against the S&P 500?

-- Doug

Of course this is the first time we've had Obama as president. But it's hardly the first time we've had a liberal Democrat. Of course this the first time we've had a trillion dollar deficit. But it's hardly the first time we've run large deficits.

Let's see. $1 trillion is about 7% of our $14 trillion GDP. So let's look at the graph here:

and try to find some big deficits vs. GDP.

It looks like we got to 5-6% in 1985, but that doesn't count. We were starting one of the best market rallies in history, but that doesn't count since we had a conservative Republican in office.

We can go further back. In 1944, we had a deficit of 30% of GDP and a liberal Democrat. So there is a good history point. That was also in the early stages of a first rate market rally.

-- Doug

I diversify by buying stock in various companies in various sectors.

That doesn't seem safe to me. It takes as much or more effort to evaluate a mutual fund as individual stocks.

It doesn't take much knowledge to make good choices. The idea is to avoid letting your emotions make those choices.

Learn how to read an income statement and a balance sheet.

Look at the technologies being developed and the products being made available.

-- Ron

Taking out 4% today is like taking out 8% September, 2008. There were a couple bad years after 2000. You would have been way better taking money out of the market at the top. You are always in the business of picking winners and avoiding losers.

If there was a perfect strategy that the average investor could use the sophisticated investors would game it and destroy it. I don't think a perfect strategy could actually exist and be used by the masses. You simply take your chances.

Wihout being paranoid, I think the big smart guys end up with a lot of the money the little guy put into the market. Old joke: In a token based economy the tokens are acquired by people whose only skill is acquiring tokens.

Yes, this is my point exactly! No one can tell you the correct strategy for the average investor.

In theory it is all easy. In practice you have to buy a specific investment at a specific time at a specific price. Same with selling. If you set a game plan ahead of time and don't incorporate the latest information you are at a disadvantage to other investors. If you do incorporate the latest information you are being pushed around by whims.

I'm sure all you gentlemen are intelligent investors. It isn't easy and there is no plan to guarantee you avoid loss. Many will make money, some won't.

Exactly. And if you do anything else, you run the risk of doing worse than average. Sometimes much worse.

I saw an article a few years ago that did the following experiment: Suppose we looked at all the investment newsletters out there and every year we invest our money according to the recommendations of the best performing newsletter that year. What would happen? If I remember correctly, $1,000 would become $100 million in 20 years.

Of course, there's a catch: You can't tell which is the best performing newsletter until it's too late. So let's modify our strategy: What if each year we invested according to the recommendations of the newsletter that had given the best performance during the *previous* year? Then it turns out that in 20 years, we'd be able to turn $100 million into $1,000.

In other words, even the professional investment newsletters can't do a good job of picking winners consistently But if you're willing to settle for average returns, you can avoid worse-than-average returns.

Now I think you are just messing with me. It is easy to find a perfect strategy by looking backwards. But it is not so easy looking forwards. As you point out, it is basically impossible. So don't.

Rather than focus on the perfect strategy, focus on a good strategy. A very simple, good strategy is to simply buy Vanguard Balanced Index as you save, then sell it as you spend (e.g. retirement). It's diversified, simple, and very low cost. (Which gets us back to the original topic.)

Certainly, there are lots of ways to tune and tweak that approach. Almost all of them add complexity and cost. In the spirit of full disclosure, my portfolio is much more complex than that, but I'm working on simplification.

Yep. Most of it from folks seeking the perfect strategy.

Part of investing is accepting risk. That means accepting the chance of loss. That means accepting loss on occasion.

-- Doug

Really? Why do you think so? Let's look, for example, at the granddaddy of index funds, VFINX. That fund tracks the performance of the S&P 500 index, and examining its history will show that it has managed to do so within a small fraction of a percent over many years. How much more effort than that do you need to evaluate this mutual fund?

This advice contains a fallacy: In order to be more succesful (i.e. to have more return per unit risk) in purchasing the stock of a single company than by purchasing the corresponding market-segment index, it is not enough to be able to identify a company that you believe will be successful. Rather, you have to be *more* successful at identifying that company than the *other* investors who are purchasing the same stock. Because the stock's price is not set by the company; it is set by the market -- which means that it reflects *all* investors' notions of how that company is likely to perform in the future.

Indeed, one can argue that a company that is making really hot products, and has an excellent balance sheet, is apt to be a poor investment risk. The reason is that its stock will be "priced for perfection" in the sense that lots of investors will be interested in it, and bid up its price to the point that if something bad and unexpected happens to the company, its investors will be sorry.