Simple Investment Plan

2007-07-12T21:40:00.000-07:00

Daniel R. Solin in The Smartest Investment Book You'll Ever Read presents four basic portfolios that illustrate the concepts of Diversify/Economize/Personalize. Conceptualize is not really discussed.

Here is the approach:
1. Open an account at a place with low cost (Economize) index funds that cover the U.S. market, the international market, and the bond market (Diversify). Three choices for the account are Vanguard, Fidelity and T. Rowe Price.

2. Determine your asset allocation. This will depend on your individual circumstances (Personalize). If your are young, investing for the long term, and do not anticipate needing the money right away then you can assume a fairly high risk allocation. If you are investing for the short term, then you should probably pick one that is less risky.

Here are two of the four allocations that Solin presents:
Medium Low Risk
Total Stock Market Index Fund--------------28%
Total International Stock Fund-------------12%
Total Bond Market Index Fund---------------60%

Medium High Risk
Total Stock Market Index Fund--------------42%
Total International Stock Fund-------------18%
Total Bond Market Index Fund---------------40%

He also shows lower and higher risk portfolios and the specific funds at the specific companies.

Then you rebalance every six months.

There is much about this approach to recommend it, in my opinion, and a few flaws. It is a simple, low cost approach to getting a diversified portfolio. I would recommend it for a beginning investor as it will get you started in the right direction and you will probably do much better than trying to pick individual stocks. One downside is that some important asset classes, such as real estate and commodities, are missing.

D E P C

2007-07-03T15:56:00.000-07:00

There is an Q and A in the June, 2007 issue of Money Magazine with Bill Sharpe, whose work on investment risk and return won him a Noble Prize. Sharpe says that 4 verbs summarize the principles of good financial advice. I agree. They are:

1. Diversify

The closer you come to owning the entire market, the higher your expected return for the risk you take.

2. Economize

Minimize management fees and investment costs.

3. Personalize

Take into account your personal situation and the risks you face outside of your investments.

4. Contextualize

If you think that the market is inefficient and you chose to invest in a single stock or sector, then you should be able to justify why the market is not right.

In my opinion, very insightful. The entire article is worth reading.

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Simple Investment Plan

D E P C