Ask me your investing questions: An ideal portfolio

If the current crisis has a silver lining, here it is: Many investors now understand the present system simply does not work. They are searching for an alternative. Unfortunately, the securities industry has a vested interest in preserving the status quo.

The question I deal with in this column reflects a desire to find an investing strategy that will succeed. Unfortunately, the strategy chosen is unlikely to meet that goal.

Q. I have been continually buying during this downturn usually keeping my 401k deposits (around $800 every two weeks) in cash (BrokerageLink cash fund) until a bad day in the market. On such days I have been slowly buying stocks with dividends like PG, ADM, MON and some ETFs like EEM, EWZ, and USO. I tend to buy on the dip and average down my losses. I'm 35 and wonder if this is a good strategy?

A. Your goals are admirable, but your basic strategy is flawed. It relies on market timing and stock picking. There is no data indicating that anyone has the ability to successfully time the market or pick outperforming stocks over the long term. There is also no data indicating that stocks paying dividends will generate superior returns.

401(k) plans present special challenges because the investment options tend to be limited. My recommendation would be for you to first determine your asset allocation. You can do this by taking the asset allocation questionnaire on my website.

Once you know your asset allocation (which I suspect will be something like 80% stocks and 20% bonds, given your age), your goal will be to own a globally diversified portfolio of low cost index funds. The ideal portfolio can be constructed by simply buying three low cost index funds from Vanguard:

  • * The Total Stock Market Index Fund (VTSMX). Put 70% of the amount allocated to equities in this fund.
  • * The Total International Stock Index Fund (VGTSX). Put 30% of the amount allocated to equities in this fund.
  • * The Total Bond Index Fund (VBMFX). Put 100% of the amount allocated to bonds in this fund.

I recommend Vanguard because they are the leader in low cost index funds. Similar funds are available from Fidelity, T. Rowe Price and Charles Schwab.

Rebalance your portfolio once or twice a year to keep your asset allocation intact or to change it if your investment objectives or tolerance for risk have changed.

This is a strategy that has extensive long term data to support it.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read and The Smartest 401(k) Book You'll Ever Read. His new book, The Smartest Retirement Book You'll Ever Read, will be published in the fall, 2009. Visit his website at

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