No. of Recommendations: 7
Hi All!

I just posted this in response to a question over at the BMW Board. Since much of this is a somewhat disorganized and unplanned update on " A Somewhat Random Walk Towards An Investment Strategy " which I posted here last October, I thought it might be of interest.

As always, any advice or observations you may have will be greatly appreciated!

How important do you think diversity is? And of course, do you think people SHOULD have more than a single basis for their equity investments (assuming of course one has enough in that "pool" to efficiently splash around)? ( IcyWolf )

In this sense, risk is very similar to "intrinsic value," it does not exist in the absolute, only in relation to the risk taker and his circumstances. It is relatively easy to model mathematically one side if the risk issue, but it is not easy, maybe impossible, to model the risk taker's side of the story. At a minimum, the risk taker's story is highly personalized as opposed to the stock's behavior.
( Denny Schlesinger )

Hi IcyWolf!

IMHO, the need for diversity directly relates to how much risk one can/should take to meet ones goals ( in my case, retirement )....and the issue of how much risk one should take directly relates to the amount of time one has to enjoy the fruits of that force that Einstein found to be the greatest in the universe...the power of money compounding over time.....and also how much time one has to recover from any mistakes/misjudgements.

As Denny rightfully points size can't possibly fit all ( all goals, ages, family status, income levels, inheritance levels, etc., etc. ). Further, I would modify your quote above to include all investable assets( versus just equity investments ).

As I am 58 years old, I find myself thinking more about what RWRocksOn said in one of his IV Value Masters Board posts ( #38 ) last year ( bold emphasis added ):

The first point to establish is that your goal shouldn't be to "beat the market". If the market tanks, and you tank just a little less, then you have still lost money. I doubt that scenario is satisfactory to most of us.

I would say that the real point of investing is to increase your chances of reaching your personal goals. Although this sounds simple, you first must establish your personal goals! If you don't, in the narrow context of investing, you may find yourself taking on more risk than you really need! In the larger picture, if you are spending most of your time at the computer researching First Data and your wife leaves you as a result, your return on life is going to suck!

Second point, is that investing in an index fund is NOT like buying an automatic rate of return. Such a rate of return (an automatic one) can be obtained from Treasuries or annuities. Sit down with your calculator. If you have sufficient capital to reach your personal goals with such rates of return (T bills/annuities), then you are taking unneccesary risk by investing in the market, indexing or otherwise...........

That last bold sentence really hits home to me! I just took back my personal investments from the Wall Street "pros" in mid 2003, when I became semi-retired. Pretty soon I was awash in TONS of terriffic info here at TMF and all over the internet....I loved it ALL! I was soon ( and still am to a lesser extent ) taking way more risk than I needed to reach my goals.

I am fortunate enough to have been the product of parents you taught me how to save, so I can fund a pretty decent retirement well into my 90's with only a average 5% after tax return on investable assets.

But I found myself caught up in the thrill/fun of the hunt for HG's and other small/micro caps, plus about every other type of investing ( SA, II, IV, BMW Method , bonds, REIT's,precious metals ,etc, etc, )that is known to man. It was fun and challenging to learn about all these areas and I was having a ball, but without the focus of gauging risk against reward....downside versus attaining my monetary goals.

At that point, I bared all in a Foolish Collective Post ( ) and was rewarded with tons of great advice. The best ( for me ) was the response by PaulEngr ( ), wherein he suggested organizing my investments into "pools" of money ( from short to longer term needs ) and to adjust the risk level of my investments accordingly.. That made common sense to me, so I followed Paul's outline about how to proceed ( that's how I found out I only need a 5% after tax return to meet/exceed my goals ). It was all then reinforced by RWRocksOn's reminder to focus on ABSOLUTE versus RELATIVE RETURNS.

In that context ( real versus relative returns ), I agree with Mauldin and many others that the total market indices are highly likely to underperform for the next decade. So, I first decided to stay with individual stocks, bonds and targeted/focused funds.

Next I began the process of gradually reducing the risk level of my overall portfolio by not only the types of investments I put in each time-defined "pool" of money, but also by the amount I allocate/over-allocate to each pool ( the further out in time a pool is targeted, the more "fudge factor" I build in ).

Interestingly, I still practice more diversification than many ( and probably more than I need to ) due to the real possibility of a major USA/worldwide economic disaster brought on by all the factors discussed by John Mauldin, Buffet and others.

However, I find a common theme is starting to be seen across the different investments I make....and that is " Value" with "Lower Risk". My choices and buying strategies in HG's/HGWatch/MicroCaps are driven with an eye toward value and low debt. Philip's Inside Value picks feature deeper value choices that I tend to cherrypick with an eye towards dividends and non-crushing debt. I find more of my resources seeking the lower risk and more predictable returns of solid dividend paying companies ( these are selections from TMF Income Investor and the BMW Method ). For example, since last October, the % return from dividends alone ( no interest ) has gone from 1.5% to 2.3% of all investable assets, including cash.

The way I have chosen to reduce my over-exposure to riskier small/micro caps is a combination of selling off the questionable ones, using the proceeds to add to any solid ones when/if they meet my conservative add-to prices ( like FARO, MIDD, MSA among others ) , and simply not adding any new money to this asset class until it is in proper balance to meet the risk reward requirements of each money "pool".

I am also reducing risk by keeping keeping a higher than normal cash position ( 20%+ ), which will be used to buy value/dividend stocks when the inevitable major downturn occurs. Further, I am ear-marking some of this and future cash for AAA, insured, non-taxable/non-AMT muni bonds when they reach the 5%+ return level. I don't need to worry about interest rate risk on these bonds, as they will be held to maturity.

Additional relatively low risk ( IMHO ) exposure comes in the form of well-managed MLP's ( APL, KMR....thanks Dr e! ) that return in excess of 7%, as well as targeted funds ( i.e Healthcare sector ) and selected non-mortgage REITS.

Now, does that mean I don't get to have any fun! Heck no! I will maintain to my dying day the "Murph's Mad Money" Fund...where I attempt to prove my brillance to myself, despite the fact that the attempt is doomed to failure. If this fund goes to zero it will not affect my retirement one bit. But the "psychic income" and learning experiences it affords?......priceless!

Well, what started off as a quick answer turned into a somewhat disjointed ramble. Suffice it to say that I am still learning at what I consider the very best Investment University in the world...The Motley Fool Community!

Best regards,


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