As we mentioned earlier in Sec 4.2, instead of blank diversify, I think you should do smart diversify like this :
- 60% of your stock investment should be in companies and market that you know about;
- 20% in developing market (so called BRIC), as in Sec 4.5;
- 10% in IPO stocks, as in Sec 4.4;
- and 10% in the risk pool that you are fine to loss it all.
For the 20% in developing market, we talked about ETF as the best strategy, unless you are familiar with exactly what's going on in any of the companies from BRIC. Of course, the focus of developing market itself is evolving. People now think that, as BRIC matures, their grows will slow down and the new place to chase growth is Africa.
The other dimension you need to look at is stock vs. fixed income (i.e. bond). In my mind, I also combine commodity ETF (e.g. GLD and USO) with bond. Usuaully, bond, especially treasury bond, offers much stable but lower return than stock. And commondity usually goes up over time, assuming you are not buying at the peak of the market. So, those are excellent vehicle to balance against the risk of stock.
When you start young, most of your investment should be in stock. When you get older, you should put more into less risky investment. Let's say you start investment when you are 20 years old, and you plan to retire by 65. There are 45 years of investment. At age of 20, your investment should be 100% in stock. At age of 65, your investment should be 20% in stock and 80% in combination of cash and fixed income. Any age in between, you can simple run a linear interpretation in between. That would be your targeted balance.
Of course you need to adjust along the way. When there is the end of the downterm, you should put more in stock to rip larger return. That's easy to understand. The key is to resist your temptation when the stock market has grow for couple of years and it still seems hot. Do not allocate more than you should in stock market at that time. You are running too much risk if you do so.
Profilio management is basically a mind game, more than anything else. Define your strategy, and resist the temptation. That's the key for successful investment.
