No. of Recommendations: 27
I thought about this for quite a while and while looking through your list, I have one major constructive criticism. There seems to be no sort of style behind your decisions. It's almost as if you are still relying on various investment managers to take care of your finances for you, except that instead of the old bunch, you're now using BMW, TMFAdmiral, etc., etc.

I think you need to do several things. First, I think you need to sit down and actually figure out how much money that you'll need throughout the rest of your life. You already have a pretty good grip on what it costs to life in "semi-retirement" since you're already there. Figure on some sort of reasonable increase over time due to health care cost increases. And then take a random stab at a conservative estimate of life expectancy. Since current life expectancies are north of 80, I've been using 90 as a benchmark.

Okay, make out a spreadsheet. In the first column, put your age from now until you expect to assume room temperature (die). In the next column, put your expected annual expenses in today's dollars. That's the easy part. Insert health care costs here, along with any expected major life expenses (buying/selling houses, paying for college for kids, etc., etc.).

Now in the third column, you need to make up a running inflation index. So if inflation is 3%, then this year is "1.0". Next year is "1.03*this year", and the following year is 1.03 times next year, and so on. So that the number gradually gets larger over time.

Multiply the second column by the third column. This gives you the amount of money that you'll need to live off of for each year that you expect to be we've converted today's dollars to future dollars.

Now, take your Social Security, pension, LBO, and other expected funds that you will be receiving and plug them into the appropriate years for column 5. And column 6 is column 4 (expenses) less column 5 (incomes).

If any of those numbers turn out positive (doubtful), then you'll have to consider it as extra savings down the road.

Okay, now let's do a quick check. Make a total of column 6. Compare it to the current cash value of your savings. Is it less than your savings? If not, then congratulations: there's no point in investing since you've got money to burn.

If not, then you've got some saving to do. Here's how I figure out the allocations. Add up the money you'll need over the next 5 years. This is the "low risk pool". You'll need this amount of savings, but you don't want to get it from say the stock market because there's a chance (however slim) that another Great Depression could happen. So the money that you'll be spending over those 5 years goes into "safe" things (CD's, T-Bills, short-term bond index funds, money market accounts, etc.).

Okay, do the same thing for years 6-10. In this case, if a Depression happens, you'll only be breaking even by the time you need the money. So you want to be conservative but still getting some growth out of this money. This requires blends such as 80% S&P 500 index fund plus 20% intermediate term bond index fund. To get a good idea of what a "conservative" mix looks like, use Chances are that you already have enough stuff in your portfolio that you just have to assign things to this category to cover it. Some other ideas are some of the "Lifestyle" funds at Vanguard or their "Asset Allocation" fund. Don't worry about the details...just look at what they did and copy the idea. For instance, I think the asset allocation fund is pretty close to exactly what I described (80/20 stocks & bonds).

Finally, we get to years 11+. In this case, even in the Great Depression, it took just 7 years for the "dip" to be erased and the end result was as if it didn't happen if people "just held out" for 7 years. Out here, you can afford to be very aggressive. So the remaining years are in the "aggressive" pool.

So summing it up, this already divides your finances into a "low risk", "conservative", and "aggressive" portfolio.

Okay, let's do some more calculating. The next 3 columns are going to show this profile. In the next 2 columns, make a column titled "low risk", and "conservative". In the first column, calculate the sum of the next 5 years from your last column (the "money I need from savings" column). This is how much money that you are going to be investing in "low risk" for that year. The conservative column is the same, except that you take the next 5 years out (6-10 years).

Okay, at the top of the spreadsheet, plug in your current net savings directly over the next column (which will be the "aggressive" column). The first cell equals your net savings less the "low risk" and "conservative" columns.

Okay, in the next column, we are going to calculate your "expected" returns. This is a little hard but there's a simple rule you can use if you are a bit conservative with the numbers. Multiply your "low risk" column by 3% (since you only want it to keep up with inflation). Multiply your "conservative" column by say 5-7% (since you are doing a lot of diversification to protect yourself here). You might have a better estimate from playing with for this column. For the third column, use a conservative estimate such as the average return of the S&P 500 (10.5%).

Using those percentages, calculate your new net savings as your current savings less the amount of money you expect to spend this year, plus the additional savings you generated in your various portfolio allocations (3%/6%/10.5%).

For the next column in the aggressive investment allocation, refigure it based on this new net savings number. Then copy the formulas down the spreadsheet to the bottom. You'll have to do some "fiddling" with the last 5-10 cells since at that point, everything should end up in the "low risk" column.

At the end, you should see just how much money you have left, or you need. If you still need more, then you have to either make some lifestyle decisions or sharpen your pencil with regard to how realistic your savings rates are.

At this point, you've got your savings goal all laid out. First, reassign all of your current investments into one of the 3 categories ("low risk", "conservative", and "aggressive"). Add a third category too ("unknown"). Chances are that you'll have some gaps or overflows where the dollars don't add up to what you expected for this year. You'll be fixing that later.

Okay, now make some of the easy decisions. Consider whether you want to reallocate anything into a Roth, move your 401K's into IRA's, change brokerages, etc. If you don't think managed funds are all they are cracked up to be, then sell them. They don't fit your style or your goals. The nice thing about index funds and ETF's and such is that the decision is pretty cut and dried. Stocks are much more complicated.

This first pass may liberate some money. Reuse this money to either increase your existing investments or make new ones to fill in those gaps starting with the "low risk" category and moving up the line.

Okay, before we go further, let's talk about how diversification helps and hurts. Diversification is a two-edged sword. It helps because it reduces your potential losses. This is a good thing.

But taken too far, diversification also hurts you because it also reduces your potential gains. In the end, if you diversify too much, then you end up with your own synthetic index fund. No matter how many winners you may have, they are all offset by your losers. And you are in that situation right now. If you have 95% of your investments fully diversified so that you get an average return of 5%, your remaining 5% would have to achieve a return of over 200% to get a return of 10%.

In my case, I'll tell you exactly how I have my "aggressive" category set up. I don't have a "conservative" and "low risk" category yet since I'm a long way from retirement. In my aggressive category, my mixture is 20% large caps, 20% REIT's, 10% bonds, and 50% small caps.

How did I arrive at this mix? Well, bonds and REIT's are slightly negatively correlated to large caps. They help reduce variability in the returns and give me a slightly improved return overall. However, small caps in spite of their increased variability of results provide a long term return of about 2-3% higher than large caps so since I'm still looking very long term (more than 20 years), I've invested heavily in small caps while using the other asset classes mostly just to reduce variability in my returns.

As to actual allocations, I have found that I have not been able to consistently beat the market in any category except small caps. So if I can't beat the market, at least I can be average. Thus, the first 3 categories are all in index funds. In the small cap area, I split it 50/50 with a small cap index fund (I will probably switch to ETF's soon) and the rest (25% of the total) are 10 individual stocks.

This is a demonstration of where diversification helps. I'm using it as a tool to reduce the risk in the small cap arena without diversifying so much that I don't dilute my gains too much.

Okay, so pick your categories. These are personal decisions and you should be making them without regard to current market conditions (market timing has consistently shown to be a failure). It is more a matter of what you personally feel is the "right" mix of asset classes. I've given you my logic & allocations but it is somewhat Maverick and I don't even consider international investments (because I believe they have no proof of providing improved returns while they do increase variability). Just that once you pick your categories, unless you are doing it based on thinking about portfolio allocations (and NOT because of what you own right now or current market conditions), then don't adjust them further.

Okay, now let's get into the rest of your stocks. Go through each one at a time. Can you engage me in a 3 minute conversation about the company? Can you answer the following 4 questions with "yes" honestly:
1. Do you understand the company (there is a lot of snake oil out there)?
2. Can you trust the management (with your money)?
3. Is the company of good quality (cheap crap is still crap)?
4. Is it cheap?

As to #4...the answer depends on whether you are selling or buying. The goal of BUYING a stock is to buy something of good quality at a bargain price in hopes that you can turn around and sell it later for a higher price. The goal of selling is to sell a stock when it is overvalued or at least fairly valued.

The two pieces of information that you need for a buying decision are the current price and what you expect the stock to be worth in the future. The same two pieces of information are necessary to make a sell decision. Notice that the one piece of information that means NOTHING is what you paid for the stock when you bought it. This is a critical concept: the market doesn't care when you bought the stock or what you paid for it. The only things that matter are the price today and the potential price tomorrow.

With that in mind, sell anything when the stock becomes "expensive". It doesn't matter that the stock is selling at $2 and you bought it at $20. What matters is whether the stock is going to be $1 in the future or $3 in the future. If it's $3, then hold on. If it's $2 or $1, then SELL, SELL, SELL. Forget about $20. Nobody else cares and you shouldn't either.

With that in mind, go through all your stocks. For any stock that you "understand" (can hold a 3 minute conversation about it) and that you can answer all 4 questions honestly and without glancing at your notes, put it in the appropriate allocation category.

For everything else, now is the time to do that research. If it fails to meet all 4 criteria, sell it. Simple as that. I don't care if you have fantasies about a stock maybe getting better some day. If you want that, then maintain a portfolio of "fantasy stocks" on the TMF Personal portfolios. You can put in in your web browser's book mark list right next to your links to your fantasy football league.

If you STILL have too many stocks, then sort the remaining list in the order from "I would be an idiot for selling this" down to "no chance that this stock is going anywhere anytime soon". Sell from the bottom up until you are comfortable with the list.

As you go through the list and start selling things, you'll also be doing something else: you'll be defining your style and you'll be fully researching those stocks.

At this point, you'll have some gaps and some overflows in your portfolio allocation. So sell off what you need to sell and buy what you need to buy so that your portfolio matches the allocations you set up for yourself.

Finally, if you are having trouble making good decisions when you analyze what you've been doing, then I suggest setting up a "fantasy portfolio". In this portfolio, put in the real money that you would be using to invest in say bonds. In this portfolio, do the research anyways and buy/sell as if you are making real decisions (make sure to charge yourself brokerage fees). It is important to make the "fantasy portfolio" as real as possible since the goal is to make real decisions without hurting your actual finances. Run it for 6 months to a year and evaluate how well you did. I have run these for a number of times before I start running a new investing strategy. It's one of the reasons that I found out before making bad decisions that I stink at investing in large caps in general and financial institutions (banks & insurance companies). It saved me from having the pains of doing it "for real". It also gave me the confidence to branch out from the mutual fund world into investing directly in individual stocks.
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