Dec 2009
13
Truth be told, there are only a few things you can control in your investment portfolio, and market direction isn't one of them. Accordingly, Bogleheads don't try to outguess Mr. Market. Instead, Bogleheads create an "I don't know and I don't care" portfolio, and you can create one too. Here's how:
--Settle on an allocation between stocks, bonds and cash: Decide how much stock you wish to have in your portfolio over the next decade, assuming that you won't be able to sell for the duration, and assuming that you're likely to lose one-half the value at any given time during the decade. Keep enough cash to cover between six months and one year of living expenses.
--Diversify your holdings: Use various asset classes including US equities, developed foreign equities, emerging market equities, real estate (REITSs) investment-grade bonds and Treasury inflation protected securities.
--Choose low-cost, no-load mutual funds: Index funds and select exchange-traded funds (ETFs) are an ideal way to represent asset classes because they track the performance of markets very closely, less a small annual fee.
--Rebalance occasionally: Regular portfolio maintenance keeps risk in line with your target from Step 1. You can rebalance annually or as needed. For example, assuming a 50% stock target, you could rebalance when stocks hit 55% or 45%.
--Minimize taxes: Place tax efficient investments in taxable accounts and place less tax efficient investments in retirement accounts.
The five steps above provide the mechanics to create and implement an "I don't know and I don't care" portfolio, but that's the easy part. The hard part comes when a bear market strikes. Your brain is wired to protect your assets in times of trouble. Consequently, some people naturally want to mess with their "don't know, don't care" portfolio when they're losing money, and that's a sure way to lose even more money. When the urge to pull the plug on your stocks hits you in the face, do what John Bogle recommends, "Don't just do something, sit there!"
http://www.forbes.com/2009/12/11/stocks-reits-funds-asset-allocation-personal-finance-bogleheads-view-ferri.html
