Gen Y - Retire Rich!

Post #64

Part 3: Money and Investing (continued)

What is Warren Buffet Doing?
Apparently, he is buying US stocks for his personal portfolio.  Here’s a link to read: Buy American. I Am.

Warren is a really smart guy.  His personal portfolio was in government bonds recently because he smelled that the market was due for a fall.  Now he’s buying stocks again.  I know I said a few posts back that I wasn’t going to do anything until I rebalanced in April, but seeing Warren invest makes me a little more bold.  I asked my spouse if she would consider rebalancing early and moving more money into stocks and she almost hit me with her frying pan (it happens in real life marriages, not just in Tom and Jerry cartoons).  She’s too scared to go against the grain, even though Warren is doing exactly that.  Most people will not do what Warren is doing because they are scared.  But he’s just following the sound principle of “Buy low, sell high.”

It’s too bad Warren didn’t send out a signal a few years ago telling us all that the market was about to dive like Greg Louganis.  He must have known something or his personal portfolio would not have been 100% bonds.  But he’s too smart to telegraph his moves ahead of time.  I have a sneaky suspicion that he’s already done his stock buying, so if this article serves to pick the market up, he will already have his positions locked in for a nice profit. 

Remember that Warren Buffett is the exception to the rule.  He buys stocks, or whole companies, instead of low cost index funds.  He makes big bets and times the market.  Even though I tell you market timing doesn’t work, understand that my rules don’t apply to him.  Warren doesn’t have an asset allocation plan that he will stick to religiously.  That’s because he is really good at predicting which asset classes will do better at given times in the economic cycle.  The rest of us can’t afford to try the things Warren tries.  We’re not smart enough.  We have to stick to the basics and not try to get fancy. 

At least it’s good to know that Warren has the same opinion as I have.  The world is going to continue to be a better place, and the long term trend of the markets is upward.  Now is a good time to be buying stocks, because they are relatively cheap.  So don’t stop investing because you got hammered.  Keep following the strategy I have laid out for you and you will be a successful investor in the long run.

Post #63

Part 3: Money and Investing (continued)

Hedge Fund Redemptions are Killing Rallies!
Here’s a piece of information that really opened my eyes: Rallies Met With Redemption Selling.

Back in post #58 I was trying to figure out what was responsible for the see saw effect in the market.  Every time the market started to move up, it got whammed back down.  This article gives us a little more information.  We already knew that the big funds and institutional investors were selling.  It turns out, hedge funds are also selling.

Hedge funds require their customers to give them notice 45 to 90 days before they want their funds back.  So the hedge funds are selling to meet redemption requests that their customers made in the recent past, and which have to be fulfilled in the near future.  The hedge fund managers are not stupid.  They are trying to eke any kind of advantage they can out of this market.  So they wait until it goes up a little, and then they sell.  This effectively kills the rallies. 

We should see continued selling into rallies between now and the end of the year.  Even if normal investors stand pat, the hedge funds still have to sell to pay back their investors who already have told them they want out.  Remember that there is a lag time with the hedge funds between when an investor tells the manager he wants his money back and when the manager has to give it to the investor. Eventually, the hedge funds will pay back their investors and the turmoil will die down.

So what is a hedge fund?  Check this link: Hedge Funds.

The key phrases in the link are “aggressive strategies”,  “exempt from many of the rules”, and “20%”.  The hedge fund manager doesn’t commit her own money.  She uses other people’s money to make big bets.  She works with little regulation, so she can really take chances.  If the bets pay off, she takes 20% of the profit.  If the bets don’t pay off, she loses the investor’s money and walks away free and clear.  For a scary story about a hedge fund that almost took down the economy in the 90s, read this link: Long-Term Capital Management.

I’m hoping that when the dust clears, the regulators will make sure that there are enough controls in place so that hedge funds and other investment companies can’t make bets big enough to bring down the house.

Post #62

Part 3: Money and Investing (continued)

Why you need to vote!
As a follow up to my last post, I want to make sure you all realize that Generation Y is in a battle with senior citizens.  This is not a pitched battle, waged with walkers and skateboards.  This is a battle for the money doled out by our government.  So far the old people are winning.

When a person is elected to the House of Representatives, or the Senate, their first thought is, “What do I have to do to get re-elected?”  The answer is quite simple.  Make sure your voting constituency likes you.  How do you do this?  By spreading as much money as you can beg, borrow, and steal from the federal and state treasuries around in areas where your voting constituency needs it.

Since old people always vote, they tend to get the lion’s share of the money in some form or another.  They are the true “voting constituency”.  People your age don’t vote as much, so you get shortchanged.  Kids don’t vote at all, so they get royally screwed.

Check out this article: Seniors get more than their share!  Seniors account for 12% of the population and get 35% of the benefits.  This trend will only get worse as me and my cohorts get older.  Notice that in the article, AARP (probably the biggest lobby organization in the country), tries to deflect the blame away from seniors.  Old people even have their own lobbyists.  You guys don’t!

Let’s assume that you are married and have two kids.  Your parents are both alive.  For every tax dollar collected, 35 cents is spent on things your parents need, while 65 cents is spent on things you and your family need.  If you are paying a lot more in taxes than your parents, you are doubly screwed.  On the other hand, if your parents are wealthy, they are paying more taxes than you are, and that kind of evens things out.  Be nice to them so you will receive an inheritance.  Instead, give nasty looks to all the seniors you see when you shop at Costco.  They’re the ones cutting in the food line, pretending they can’t see everyone waiting.

So, seniors use a lot more financial resources than they should, and you pay for it.  If we had more reasonable immigration quotas, there would be a lot more younger people helping you bear this burden.  But seniors don’t like immigrants for some reason, so they tell their elected officials to keep the doors shut and build a big wall.

Back to the pitched battle thing I started with.  You guys need to vote, vote, and vote.  Be like the Irish back in the 30s through 50s and vote multiple times in each election if you can.  You need to elect people who will make sure that you and your children get a few more pennies from those dollars you pay in taxes.  Obviously, we do want to take care of our aging population.  After all, in 10 years I’ll be a senior!  AARP is already trying to recruit me to join their ranks, by sending letters telling me how much money they are able to wangle out of the government for my benefit (not yours).  But government money should be there for the truly needy, and not for everyone with an AARP card.

Voting is not enough.  Every politician will say that they want to reduce spending and waste while they are running for office.  As soon as they get elected, they realize that spending and waste is what will get them re-elected, provided they can point that spending toward their own voting constituency.  So goodbye campaign promises and hello pork.  You have to watch your elected officials like a hawk.  If they start throwing too much money toward the boomers or the seniors, speak up for your children and say, “Hey, we need a little of that money over here!”

Post #61

Part 3: Money and Investing (continued)

Why you should be annoyed about the National Debt
Do you ever wonder how this $700 billion bailout and the cost of the Iraq war will affect your lives?  The bottom line it that the US doesn’t have money in the bank to pay for these things.  What our government is doing is selling more treasury bills to people and governments around the world to get the money it needs for these expensive endeavors.  These are debts that somebody will have to pay, somewhere down the road.  The national debt is the accumulated sum of all these treasury bills floating around the world that will eventually have to be repaid to the holders.  Here’s the link: National Debt Definition.

Why is the National Debt a problem for you?
Let me make an analogy.  Pretend your father Seamus and his three crazy brothers are big gamblers.  The banks won’t lend them any money and they have no savings.  So they go to the local loan shark, Larry Legbreaker.  Larry gives them each $10,000 and they give him their marker, which is an IOU that says they owe Larry $10,000, plus the vig.  If you don’t know what the vig is, watch more gangster movies.  (Vig, short for the Yiddish word vigorish, means the interest on the IOU).  Larry tells them to pay him back in one year.

Now Seamus and his brothers aren’t good gamblers.  They lose the money, or spend it on Viagra and Guinness.  One year later, they go back to Larry and tell him to roll over their debt for another year, and they ask for a loan of another $10,000 each.  Larry is happy to comply. 

Your father and uncles keep doing this for fifteen solid years.  They are having fun and they really don’t care about the mounting debt, since Larry hasn’t started breaking any body parts in an effort to get paid back.  Then they all die at a corned beef festival they are attending.  Turns out, the corned beef was made in China, and contained lead, melamine, and anti-personnel devices.  But that’s another story.

Larry isn’t concerned.  You see, Seamus and his brothers, between them, fathered 15 responsible children, who all grew up to be hard working people making good money.  At the funeral (four closed caskets), just as Father Mulcahy is giving his final blessing, Larry approaches the kids, shows them the markers, and tells them that they have ten days to pay up.  The kids don’t have a choice.  They have to pay up, or Larry will make the corned beef tragedy look like a day at the beach.  And if the kids can’t pay, Larry will keep rolling over the markers.  Their kids will pay.  Because when Larry gets old, he can sell what remains of those markers to the Russian mob for a nice profit.  The Russians are a lot more ruthless than Larry.  They will collect from the grandchildren.  They’ll get the principal, plus the vig, plus the vig on the vig, plus late payments, plus a few fingers.

So, in real life, Seamus and his brothers are our elected officials, who never balance the budget and spend more money than they have each year.  The markers are the treasury bills the US sells to finance all this spending.  The vig is the interest on these treasuries.  Larry Legbreaker and the Russian Mob represent everyone who owns the treasuries.  The children and grandchildren are you and your kids. 

Our current and previous elected officials will be long retired or dead when Larry or the Russian mob comes to collect the US National Debt.  So they don’t care how much debt they rack up.  They know it’s going to be your problem, or your children’s problem.  You will have to pay higher taxes, or accept lower wages (because your employer will be paying higher payroll taxes) in order to retire the national debt. 

It is very important that the US stop spending more money than it has.  Vote for people who you think will be financially responsible.

I used to think it was the Republicans, but I have come to realize that any politician will spend as many tax dollars as they can in their own district in order to get re-elected.  That is their primary goal, to get re-elected.  That’s why we have so may earmarks attached to bills, and bridges to nowhere.  That’s why President Bush expanded the Medicare benefits dramatically during his first term by adding a prescription drug benefit.  They don’t care about the national debt, because it’s a problem for the future generation. 

So, if you want to build a better tomorrow for yourselves.  Get active.  Tell your elected officials that you can’t afford the debt they are piling up.  Vote for those you think will be fiscally responsible, and throw them out if they are not.  And remember, the National Debt doesn’t even include the cost of Medicare and Social Security.

Post #60

Part 3: Money and Investing (continued)

This Crisis Is A Valuable Learning Experience
Sure, it’s painful.  But you guys are young.  You don’t have that much money committed and you’ve got plenty of time to recover.  I just read about someone who was due to retire in a few years, and has 75% of his portfolio in equities.  That guy is going to have to extend his retirement by ten years.

Let’s recap what we are learning:

• None of the experts saw this coming, so you can never believe anyone when they tell you what the future of the market will be.
• The markets, in the short term, are not rational.  People panic.  Just look at the ups and downs of the market.  Panic, panic, panic.
• Time will heal this wound.  In ten years (or less), you will be in the plus.  In twenty years, you will have forgotten what the commotion was all about.  Print this page and put it in a time capsule.  Open the capsule in twenty years to see if I’m right.  If I turn out to be wrong, you will find me on a food line somewhere, or working at the local fast food joint.
• Deciding how to allocate your money between equities and bonds/cash is the single most important choice.  I’ve said this a few times.  This current market is proof.  All equities have been hammered.  Bonds have had minor losses.  Cash is king.  Those who are 50/50 have suffered less than those who are 80/20.  But when the market starts to rebound, and it will, those who are 50/50 will not do as well as those who are 80/20.  Keep remembering that this is your key decision.  The other decisions, how much small cap, how much international, how much REIT, pale by comparison.  So get this decision right and don’t sweat the other ones as much.
• It is incredibly difficult to hold your ground when everyone around you is heading for the exits.  I am having the same inner turmoil as you guys are having.  My spouse is stocking up on spam, and cutting out all extraneous spending.  Luckily, I have Cabernet Sauvignon for backup.  She’d better not stop the shipments of $10 wine or she’s in trouble.

Here is a good article that should help you fight the nervousness in the pit of your stomach: Switching to Cash May Feel Safe, but Risks Remain.  This link does a good job explaining why switching out of equities won’t work.  The author gives you really excellent evidence that the upward moves in the markets occur on a very small number of days.

One important note in this article is that individual investors have been panicking.  I haven’t seen any sign of it among my friends, but apparently, lots of people have been heading for the exits.  This refutes an earlier post I made where I thought that most of the activity was due to the big money men and the day traders.  I stand corrected.

Post #59

Part 3: Money and Investing (continued)

Now That You See the Market Panic…
As you read this, either the panic has subsided, or it is still going on. 

You see how crazy people get when things start to go south?  Everyone heads for the doors.  Most of them sell their positions, simply because everyone else is doing the same thing.  It’s called the herd mentality.  Here’s a good link:  Herd mentality rules in financial crisis.  Worked really good back in prehistoric times, when the saber tooth tigers were chasing Alley Oop and his tribe.  Everyone ran.  Good idea.  That same evolutionary instinct is bad for us when it comes to investing. 

By the way, Alley Oop was a comic strip about a cave man that I used to read when I was a kid.

I remind you again to hold fast to your positions.  If you panic and sell, you will be locking in your losses.  You figure that you can get back into the market when it starts to go up.  How do you know when that will be?  Most people get back in too late.

My blogmaster, Aron, wants to know if now is a good time to commit additional money to the markets.  If I said yes, that would violate the principles I have been trying to explain to you.  My whole mantra has been:

• Save and invest in low cost index funds.
• Decide on an asset allocation and stick with it (unless you find that the allocation is so aggressive that you can’t sleep at night, in which case, you need to make some alterations).
• Rebalance once a year.

Let’s call these the Three Laws Of Blogotics. (Anyone who read Asimov’s Caves of Steel and its sequels will recognize this as a blatant rip-off of his three laws of robotics.  Just confirms I’m a nerd.)

On the other hand, referring back to post 57 and the words of William Bernstein, if the market dips by 25% or more, now is a good time to add 5% to your equity holdings.

Most of you should stay pat, like I said in post 57.  But some of you may be very aggressive and are hungry to make a killing.  For you aggressive few, go ahead if you have the guts.  Put the third law of blogotics on hold for now.  Rebalance ahead of schedule.  That will probably amount to a shift of more than 5% toward equities.  

If I rebalanced today, I would be moving from 45/55 back to 60/40, which is a 15% change for me.  I don’t have the guts to go against my own third law.  I’m living on my investments.  I’m not the swashbuckling daredevil I once was.  I will wait until my annual rebalance date in April. 

If you have money in a house fund, and you are thinking that you should commit that to the market to make a quick killing, think again.  You can make as good a killing by buying that house while prices are low (California, New York City and a few other places do not apply to this theory, but most other parts of the country do).  So I wouldn’t raid the house fund to buy equities.  I would try to buy the house within the next year or two.  Keep adding to the fund.

Post #58

Part 3: Money and Investing (continued)

How is it possible for the market to see-saw 500 points up and down each day?
When the market moves in a see saw pattern, it tends to get normal people really confused and anxious.  This happened a lot in the last few weeks.  One day it went down 500 points.  The next day it went up 500 points.  Then it went down again.  Then it went up again.  Then we had the really big drop of 777 points, and a 485 plus increase the next day.  You had to be asking yourself “Who is causing the market to yo-yo like this?” 

It takes a lot of money to move the market 500 points in either direction.  Were there hundreds of thousands of individuals going on-line and trading their money in and out of the market each day, depending on whether they thought the news was good or bad?

I’m sure there are lots of day traders who have been working like crazy, trying to stay one step ahead of the rest of us and make money in the process.

I haven’t been able to get a handle on how much daily trading volume is due to day traders.  Does anyone out there know??  Tell us.

Then there are the program traders.  These are big companies that use really complex computer programs to buy and sell tons of shares based on certain criteria being met.  According to the following link, program trading is accounting for slightly less than 20% of the volume on the NYSE.  Barron's Market Lab Table - Barrons.com  Note that Bear Stearns and Merrill Lynch are still actively trading.  Even though they are defunct, their trading desks are still operating (under the management of different institutions).

Plus, you have all those people who manage large pension funds, college endowment funds, hedge funds, and equity mutual funds.  These are the “institutions”.  They are responsible for a very high percentage of the trading volume each day, but I can’t get a handle on the exact figure.  These institutions have fund managers who are paid for short term performance.  They are worried about how their portfolio looks this quarter, as opposed to how it will look for the next 20 years.  So they are pulling out all the stops to try to put some lipstick on their holdings right now.

A perfect example of high volume institutional trading happened between 1:40 PM and 1:45 PM on September 29.  During these five minutes, the bailout vote went from slightly positive too slightly negative.  The market moved down 400 points in this five minute period.  This incredible move had to be due to institutional trading.  Imagine a bunch of highly paid fund managers, who command billions of dollars.  They all have their fingers on the sell button.  As soon as they see the Congressional vote go negative, they push the button.  The market dives.  That’s what happened.

The people who aren’t doing a lot of trading are individuals like us.  I’m sure a bunch of normal people panicked during the past month and sold a big chunk of their equities, but that should have been a one time thing.  I can’t imaging the next day they had a change of heart and went back into the market full tilt, only to sell everything again the day after that. 

But it seems that most individuals have kept their cool to some degree.  Otherwise, I would see all sorts of stories on the evening news of people telling Joe Anchorperson that they put all their money in the mattress. 

So I guess we can blame the program traders, the day traders, and the institutional traders for the incredible volume of activity in the market each day.  They are the ones pushing the see saw up and down 500 points in either direction.  They are the ones giving you the sick feeling in the pit of your stomach as the market churns day in and day out.  Don’t blame the index fund managers.  They haven’t been doing much.  Just adjusting their holdings to match their target index. 

Post #57

Part 3: Money and Investing (continued)

Why it’s a good idea not to watch TV or read the newspaper!

I hate the media.  They make my life miserable.  I was away from Sept 4 through 15, traipsing through canyons with my wife.  No TV or newspapers for most of the time.  It was great.  I did see a headline in a newspaper about the Fed taking over Fannie Mae and Freddie Mac, but I was on my way out for an all morning hike, so I didn’t read any of the fine print.  Then I got home on September 16 and had to listen to the relentless storm of bad news from pundits and opinionators.  I wrote a few posts telling you to stay the course, and trying to reassure you that you will not lose everything by remaining in the market.  Yet the negative news from the press kept coming.

The more I listened, the more worried I became.  By September 23, I was a semi-basket case.  I went to the library and got out all of the books I have recommended to you, so I could re-read them.  I needed comfort.  I needed somebody to tell me that everything was going to be OK.

You may think it odd that I needed reassurance.  After all, I’ve been reassuring you.  Well, it turns out that I am just as fragile, psychologically speaking, as the next guy (or lady).  After hearing constant negative news day after day, I was getting a little crazy. 

Happily, after spending a day re-reading the words of John Bogle, Paul Farrell, Daniel Solin, and William Bernstein, I recovered my composure and confidence.  I shook off the torment of all that bad news.   I stopped listening to all the hype.  When the bailout was voted down on September 29, I did nothing, except assure my wife that things will get better somewhere down the road.

I hope you guys are sticking with your asset allocation plans.  Don’t crumble in the face of everyone else yelling “FIRE”.  William Bernstein says it best.  “At a minimum, you should not panic and sell out- simply stand pat.”  He actually goes on to say that if prices fall by more than 25% you should probably increase your percentage stock allocation by 5%.  But he cautions that only the bravest people should try to do that.  I’m a coward.  I’ll stay pat.  You should, too (read post 52 for the one exception – the person who cannot sleep at night because he started with an allocation that was too aggressive.)

What’s my point?  Well, there are a few points!

• If you get a constant barrage of bad news, even the strongest person will weaken.
• We all need someone to lean on when things get tough. 
• When it comes to investing, don’t listen to the politicians or the media.  Read the wisdom of the sages and follow their advice.

Post #56

Part 3: Money and Investing (continued)

Remember, I told you early in the blog that the financial people and the pundits don’t know anything!

If all those financial guys are so smart, why didn’t they see this train wreck coming?  This is a rhetorical question. 

The current crisis is the ultimate proof that you should never believe any prognostications the financial people, money managers, and talk show hosts tell you about the markets.  Less than two years ago everything was rosy.  Nobody saw a problem on the horizon.  Not the “experts” and not the “media”.

For the rest of your investing lives, remember not to trust anyone who predicts the future for the markets.  They simply don’t know.

The last few posts have been about not panicking and sticking with your plan.  I need to repeat that for you.

You are a generation Y person, with a job (I hope) and a plan to save and invest.  Because you are young and have lots of years ahead of you, the best thing you can do is keep working, saving, and investing.  I know I said that before, but you need to hear it again.   Since you are investing in a diversified portfolio of low cost index funds, you are buying manufacturing companies all over the world.  You are buying a piece of the oil companies.  You are buying a piece of the entertainment companies.  You are buying a piece of the health care companies.  These areas of the market are still reasonably solid, even though the financial sector is not doing so well.  Keep that in mind as you continue to save and invest.

Here’s a pep talk from the CEO of Vanguard: Vanguard CEO offers perspective on challenging times.

Let’s look at it this way.

Say you have $100,000 invested.

Pretend your portfolio winds up taking a 50% hit after all is said and done with this fiasco.  This doesn’t mean I think the market will go down that far.  I’m talking hypothetically to try to show you that even a 50% hit won’t hurt you too much over the long term.

Should this big hit make you change your mind about the fact that the world will continue to be a better place for everyone to live?  Of course not!  A huge financial crisis does not change the course of the world from progress to nastiness.  Twenty years from now, there will be less hunger, less poverty, less disease, less violence, and less intolerance than there is today, despite the fact that we are having a financial crisis.  In the short term, we may see problems we didn’t expect, but the long term trend for the world will still remain up!

So the hit you take to your portfolio this year shouldn’t change your outlook about the future direction of the world.  Therefore, it shouldn’t stop you from continuing to save and invest.  After all, the one big assumption behind this blog is that a better world means higher equity markets.

If you earn $50,000 and you are saving 20% per year, that’s $10,000 each year that you are adding to your portfolio.  If your portfolio has absolutely no growth for the next five years because all the markets stay flat, you will at least have saved back the $50,000 you lost. 

Eventually, the markets will perk up again and your investments will start earning some money for you.  By the time you reach retirement age, your pile of money will be pretty big. 

On the other hand, as I said during the first few posts, if you believe the world is getting worse, you should not be in the markets.  If this crisis absolutely makes you think that way, then you should not be an investor.   

Let’s look at it another way.  As Vanguard’s CEO reminded us in the pep talk you just read, in October 1987 the stock market went down 23% in a single day.  That really huge hit isn’t even remembered any more, because the market has risen a whole lot since then.  So as long as you have a 20 year time horizon, don’t worry, be happy!

Post #55

Part 3: Money and Investing (continued)

Are My Asset Allocation Recommendations the best ones?
In the midst of the current crisis, let’s revisit my asset allocation suggestions.  Vanguard just did a free financial plan for me.  They compared my portfolio to their “model” and recommended that I cut back on International/emerging market stocks and sell the REIT fund.  Let me explain their reasoning:

VANGUARD VIEW: Foreign stocks are needed for diversification, and you can achieve maximum diversification with a lower percentage of international stocks than I recommend.  Above that, you are increasing your risk without adding any more diversification benefits.  In other words, it’s not worth the extra risk to have more than about 12% of your portfolio invested in foreign stocks.

MY VIEW: I own a higher percentage of foreign stocks because I think that these more risky investments will do better over the long term than US stocks.  US large caps are down more than 15%, international are down 24% and emerging markets are down 30% year to date as of 9/22.  

VANGUARD VIEW: REITs are considered a sector fund by Vanguard.  Even though they offer lots of sector funds, the financial planners they employ apparently think you shouldn’t own any.  

MY VIEW:  I agree with the idea that you shouldn’t own sector funds.  I own REITs purely for diversification, as these equities do not move in tandem with other stocks.  REITs are down a little more than 1% this year (as of 9/22).    So owning REITs has helped me this year.

Am I going to follow Vanguard’s advice?  No.  But I wanted you to have the benefit of their thinking, because it is very sound.  You might be thinking that I am way too aggressive in my international stock recommendations.  Vanguard agrees with you.

Am I going to change my asset allocation strategy because I am getting hammered by international stocks this year?  No.  In the short term, my allocation is hurting me.  But I am a long term investor.  I don’t plan on changing my allocations.  Hopefully I will be right in the long run.  Unfortunately, I won’t know until I’m 85.

By the way, Vanguard gave me a free financial plan last year and told me I should put a larger percentage of my assets in equities.  They felt a 60/40 split was too conservative for me.  I didn’t listen then either.  Again, you might agree with them and decide on a higher allocation of equities than I have.

We won’t know which asset allocation is the best until we look back in 40 years.  There are lots of really smart people who recommend different allocations.

Read the books written by Dan Solin, Paul Farrell, John Bogle, and Dr. William Bernstein to see what they are suggesting, and why.  Decide on your strategy.  And stick to it.  Don’t change because you read another book that tells you something different.  Everyone I talk about in this blog agrees that as long as you have a reasonable strategy and you diversify using low cost index funds, you will beat the vast majority of “experts” and money managers and market mavens.  In the middle of all the market turmoil we are experiencing I wanted to remind you that this is still and always will be the best way to invest.

So what’s a reasonable strategy?  There is no universal agreement.  To repeat what I have said a few times before, the biggest decision you need to make is how much should go in equities and how much in bonds/cash.  This will account for between 80 and 95% of your returns.  

The next biggest decision is how to divide your equities between US stocks and International stocks.  When you read the other authors, you will see varying international suggestions, ranging from 10% of your portfolio to 40%.  I am on the aggressive side of this scale.  You need to decide what you want to do.

Once you make these decisions, then you can decide whether or not you want to slice and dice the portfolio further by adding small cap stock funds, REIT funds and Emerging Market Funds.

But again, your main decision, and the one that has the most impact by far, is whether to be 80/20 equities to bonds/cash, 70/30, 60/40 or some other allocation.  

By the way, aren’t you glad that I told you not to buy individual stocks?  What if you had bought Lehman Brothers?