Investing Rules from an Old Guy

As the size of each asset grows, at some point you will want to diversify even further. To be conservative, use ETFs and Mutual Funds to diversify your portfolio or if you want to be more aggressive, you can buy and hold individual stocks. In any case, you should begin to diversify along one or more of these dimensions:

Companies

When you buy SPY (S&P500 ETF) or RSP (S&P500 Equally Weighted ETF) you are by definition diversified for US large cap companies. That is why the 1 ETF Portfolio starts here.

Further diversification along this dimension can be achieved by adding an ETF for mid-cap and/or small cap companies.

Asset Class
The Starter Portfolio adds diversification to the 1 ETF Portfolio with the addition of real estate, bonds (a.k.a. fixed income), gold, and cash. These asset classes can be further diversified by company size and company geography while maintaining the overall asset allocation.

• 20% Equities
• US Stocks
• Large cap
• Small cap
• International Stocks
• Emerging markets
• Large cap
• Small cap
• 20% Real Estate
• US REITs
• International REITs
• 20% Bonds
• US Core bonds
• Municipal bonds
• High Yield bonds a.k.a. Junk bonds
• 20% Commodities
• Only gold. I do not recommend trading in other commodities.

Industry

Within equities and bonds, you can also diversify by industry. These are Schwab’s industry classifications:

• Communication services
• Consumer discretionary
• Consumer staples
• Energy
• Financials
• Health Care
• Industrials
• Information technology
• Materials
• Utilities

Geography
Within equities, bonds, and real estate, you can also diversify by geography. These are Schwab’s regional classifications:

• US
• Canada
• Latin America
• Asia/Pacific (excluding Japan)
• Japan
• Western Europe
• Eastern Europe, Mid-East, Africa

Time

Even though one is not supposed to time the market, it is human nature to hesitate when buying a security out of fear that the price will decline in the short-run. In such a situation due to chaotic market conditions, and if you have the discipline, you can do what is called “dollar cost averaging.”

Basically, you purchase the security in small chunks over time. For example, if you want to spend $5000 on Apple Computer stock, you can buy $1000 every month for the next 5 months to effectively get the average cost of Apple over those 5 months.