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TwoCybers wrote:

1) put 1 year's income (say 6 or 7%) in a money market
2) put 3 years income in a bond fund (short to intermediate)
3) keep the rest in stocks (index or growth or what ever)

I guess he was writing at the same time I was. I didn't see his post until I finished my last one.

While this may be a great board, I must respectivly disagree. IMHO, this sounds more Wise than Foolish.

This aproach views loss in terms of absolute decline in value. It ignores other types of risks and losses and is too consertative. If the market takes a dive you have lost, period. You haven't made any income while it is diving. Thats an opportunity loss. Even if it recovers, you have lost in that you weren't earning any money while it was down.

If you need to sell a portion of your portfolio when the market is down, so what? Take your loss and sell. This rare situation is more than compensated for by much higher earnings over the long haul. Which do you prefer, to occasionally lose 10 or 20% but inspite of those losses you average over 20% per year. Or would you rather earn 4.5% each and every year and risk losing relative value to to inflation or absolute value due to rising interest rates?

If the market does drop when you need to be selling, you won't be selling everything and you will still have plenty to continue investing for better years. You may have a small loss in that year but overall your returns over time will be much greater than investing in money market funds or in Bonds.

Has anyone ever seen a "dive" last a year or more? In my 58 years I've seen some long flat markets, I've seen some very short periods when the market dropped significantly but recovered in a matters of weeks or months, not years.

Even the Crash of '29 was relatively short lived. It occured partly because of poor regulation. We now have much better regulations and safety nets that make a repeat fall highly unlikely. We now have a central bank, insured accounts etc. that weren't in place then. It was partly caused by and lasted as long as it did because of poor goverenmental economic policy. We know a lot better now. Investing in the stock market is hundreds of times more safe than it was then.

When the market drops not all stocks drop. If you have invested Foolishly, it is less likely that yours are the ones that are dropping. I haven't picked stocks Foolishly yet but while my Coke stock lost 20% my Sun SUNW has gained about 300%. Over all in these tough past few months, my portfolio continues to grow even though several of my stocks are continuing to drop.

So why hold money market funds for a year? Keep enough on hand to meet your needs for a quarter so you can weather out any temporary drop.

Three years of income in a bond fund!? I've never heard of the market droping and staying down for three years. It may have gone through some three year periods of relatively flat performance but those are usually during high inflation and high interest rate periods. High inflation and rising interest rates cause bonds to lose value.

Why accept the low yields of Bonds? People seem to think that Bonds are somehow "safe" but this is true only if long term interest rates don't rise. Bonds assume the risk of changing interest rates and high inflation. When rates rise, bond prices drop. Ever seen a period when long term rates have continually risen for three years? How about those sixties and seventies? If you were holding bonds through that period then you would continually see the value of your portfolio drop in both absolute terms, and because of excessive inflation, in relative terms.

Bonds can be very risky and require one to try to predict the trend of long term rates. Does anyone seriously think Allen Greenspan is predictable? Is Congress or the actions of the president predictable? They can all adopt policies that will have a big impact on long term rates.

Keep the rest in whatever??!! Pleassssssssssseeeeee
I suspose the advice is to go to your broker and pay huge commissions for poor performance that go with their advise. Not "whatever" but invest Foolishly!

I iterate that investing in the Foolish Four stratagy 4 times a year for a full year will give you the quarterly cash flow you need independently of what the Market does.

This stratagy is to hold selected stocks for a full year and a day and then to sell the stocks or roll them over into the next annual investment. This is done even if the market drops and even if you have a loss for the year. Each quarter then you can withdraw whatever portion you need for the next three months. This stratagy doesn't invest in any four stocks it invests in the four Dow Jones stocks most likely to increase in the next year. These are very large companies and the risk in owning them is very small. Read the book and read about the stratagy on this site.

Note too that the earnings are taxed at the much lower capital gains rates while interest income from bonds or mutual funds are taxed at the normal higher rates.

TwoCypers also wrote,

I found an excel spread sheet which gave a suggested distribution between bonds and stock based on your expected life expenctancy.

Please ignore the above suggestion it is a misuse of the actuarilly sound number. It has no place in determining stratagies for an individual.

Life expectancy is a tool used by actuaries and insurance companies. Insurance companies can reduce their risk by insuring very large numbers of people. The live expectancy is very accurate and useful for very large groups. But for an individual like yourself, this number has no meaning. Any individual may or may not live out their expectancy. Some of us will die tomorrow and some will live to be over 100. The insurance company doesn't care which of us does what. They know that in fact some of us will die tomorrow and some will live to be over a 100.

None of us know how much longer we will live. Basing individual investment stratagies on actuarial statistics can be very dangerous.

Sorry to get carried away but the previous post struck me with all due respect, as being very foolish.


Chuck O'Neil



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