Diversification

You shouldn't put all your eggs in one basket.

Unless you have only one egg.

Well, I now have more than one egg in my retirement investment portfolio, and so I should have more baskets. I've been doing some research and almost everyone agrees. You need:

* stocks and
* bonds

Sounds like two baskets to me. Can I have more?

* gold
* collectibles
* art
* cash

Bleh.

Well, I can settle for stocks and bonds in my retirement investments but diversify elsewhere. Here are ideas I've heard on how to diversify elsewhere:

* buy a house
* buy extra real estate and rent it out
* have a three year's supply of food on hand
* learn how to do more things yourself so you don't have to depend on being able to pay others
* keep your job skills up to date
* moonlight
* start side businesses

But back to the investments. This is one of those topics that changes over time. For example, look at what I learned from Benjamin Graham's classic, The Intelligent Investor: A Book of Practical Counsel. In 1914, investing meant corporate bonds, usually railroad issues, with a return of 4.5 - 5.5%. By 1947, US savings bonds were better than top-grade corporation bonds (much safer and with similar returns).

Before 1930, most college endowment funds were restricted to bonds and real estate. As late as the late 1940s, most people knew nothing about common stocks or thought they were risky. But by 1958, 50% of college endowment funds had investments in stocks. By then, common stocks were considered reasonable investments for your portfolio because a) capital gains were taxed at half the rate of dividends, b) diversification between stocks and bonds tends to improve profit and c) stocks were considered a hedge against inflation.

I have the 1959 edition of that book. Since that time, discount brokerages made investing in stocks possible for people without that much money. Mutual funds existed back then (though they were called "investment trusts"), but only later were no-load funds and index funds invented. Now (for a short while, at least), dividends are taxed less than capital gains.

Inflation-indexed government bonds have been invented, but I think government bonds are back to being comparable to corporate bonds.

And only in the very recent past have advisers started recommending foreign stocks and bonds to US investors as any real percentage of the portfolio.

So, even using just stocks and bonds, there are quite a few directions to go.

Making Stuff Last: Dairy

* cheese - "To keep it from getting moldy, store your cheese in an airtight container with a couple of lumps of sugar." (p. 6, Make It Last) I haven't even seen lumps of sugar in a very long time. Or "moisten a paper towel lightly with vinegar and store that with the cheese. Don't be too generous with the vinegar, or it will affect the taste of the cheese." (p. 6) I've had pretty good luck by keeping the cheese wrapped up in its original plastic packaging and then putting the whole thing into a sealed plastic container. You can also freeze it. That cheese that I bought at Costco a while back, some of which I stored in the freezer, kept very well and I was able to use it all in the normal way.

* milk - I've heard this can be frozen, but it might separate. I'm not clear on whether shaking the milk brings it back to a good condition or whether you should use the milk only for cooking at that point.

* yogurt, cottage cheese, sour cream - I've heard that once you have opened a package, leaving the plastic wrap on, under the lid, lets it spoil more quickly than removing it. I also vaguely remember hearing that once you open things things, storing them upside down helps somehow. Mostly it's pretty easy to eat these things before they start growing mold.

* ice cream - If your ice cream is too hard to serve, some people have told me you can microwave it briefly to soften it.

Asset Allocation

The most important factor in how big your retirement savings will be is how much you invest.

I think I read that the second most important factor is asset allocation or what you invest in. Over the long term, stocks have returned more than bonds. Over the short term, who knows what will happen? Either way, whatever you pick will have the second most impact on your returns.

Then I think the third most important factor is how much your fees are.

There are all kinds of studies saying how hard it is to time the market. And so you can use dollar cost averaging to make sure that if you're buying at a good time, you're buying more stuff, and if you're buying at a bad time, you're buying less stuff. Basically, you invest the same amount at regular intervals, and if what you're buying is pricy, you can't afford much of it, but if it's cheap, you can afford more. If prices go up steadily (as they do over time), then it will have been better to have invested all the money earlier if possible. But to the extent that prices fluctuate, you can get some benefit from spreading out your buying.

There are also all kinds of studies saying how hard it is to stock pick. It's so hard that funds that just get some of everything tend to do better than funds that try to pick the best things. But, by splitting up your investments into different categories and rebalancing to keep the percentages in each category constant is "investing's only free lunch", according to Morningstar's Alan Rambaldini. By selling the things that have gone up in price to buy more of the things that have gone down in price, you're surely getting a bargain somehow.

But, which categories to pick? Ideally, you pick categories with low (preferably negative) correlations with each other. However, correlations change all the time and, as was demonstrated especially well during this last recession, correlations tend to go up during recessions (all prices go down together).

Here are some ways people like to split up their investments to take advantage of this rebalancing effect.
large-cap vs. small-cap stocks
growth vs. value stocks
domestic vs. international
stocks vs. bonds
anything vs. REITs
anything vs. gold

The permanent portfolio proposed by Harry Browne in Fail-Safe Investing recommends (according to J.D. Roth):

* 25% in U.S. stocks, to provide a strong return during times of prosperity. For this portion of the portfolio, Browne recommends a basic S&P 500 index fund such as VFINX or FSKMX.
* 25% in long-term U.S. Treasury bonds, which do well during prosperity and during deflation (but which do poorly during other economic cycles).
* 25% in cash in order to hedge against periods of “tight money” or recession. In this case, “cash” means a money-market fund. (Note that our current recession is abnormal because money actually isn’t tight — interest rates are very low.)
* 25% in precious metals (gold, specifically) in order to provide protection during periods of inflation. Browne recommends gold bullion coins.

I like the thinking behind this, but I don't like the idea of having so much in cash or precious metals because their long-term returns aren't too great.

I love the idea of having the same percentage in each category. If I want one category to be bigger than another, I can split it up into subcategories so that all the percentages can be the same.

I like index funds because they have low fees. And I've noticed that funds based on sectors (such as health care and tech) have higher fees than other kinds of funds. I like the idea of having all my funds with one company for easy and free transfers.

I thought maybe one of the funds should be a high-dividend fund, but I learned that one company's high-dividend fund had about the same dividends as their large-cap value fund and Pacific stock fund and lower dividends than their REIT fund and their European stock funds. So, I'll assume that's already covered.

It's taken me a while, but I now have an asset allocation plan to work toward:

* 10% large cap growth (VIGRX) (0.23% fee)
* 10% large cap value (VIVAX) (0.26% fee; better than growth 3/5 of time)
* 10% small cap growth (VISGX) (0.23% fee)
* 10% small cap value (VISVX) (0.28% fee)
* 10% REIT (VGSIX) (0.26% fee; very low correlation to general stocks)
* 10% European stocks (VEURX) (0.29% fee)
* 10% Pacific stocks (VPACX) (0.29% fee)
* 10% Emerging stocks (VEIEX) (0.39% fee)
* 10% bond fund (VBMFX) (0.22% fee)
* 10% TIPS/I-bonds (no fee)

That would leave 80% in stocks and 20% in bonds, which I think is reasonable for someone with a huge pension.

And it leaves me with 70% domestic funds and 30% foreign, which nowadays is considered not that scary anymore.

And looking at the Browne recommendations, I'm guessing I have about 10% that does well in inflation (inflation-protected government bonds), 20% that does well during deflation (the two funds with especially high dividends), 10% that does well during recessions (the bond fund) and 60% that does well during prosperity. Not so great, but could be worse. At least I might have something in each category.

Actually, though I say I don't like cash, I plan to have some when I retire outside the investments shown above. Once I start using money from my investments I'll withdraw a certain amount each year (probably 5%), and in the years where that's more than I need, I'll deposit the excess in some cash vehicle (probably a CD ladder), and in the years where I really wish I had more, I'll take more from the cash.

Currently, most of my money is still in a small- and mid-cap fund that I chose back when I had just the one egg. And it's with a different company. Which has new management that I don't really like. Should I just transfer this over all at once? Or transfer some each month or each year, trying to get advantages of dollar cost averaging? It probably depends on the fees the company has for selling things off.