[jively]

Congratulations on taking the passive approach. You should have a very good long-term investing experience without having to make any forecasts or rely on the forecasts of others.

I am a financial advisor, and recommend passive investments for my clients. I am going to respond to this in a few posts, and perhaps if it is judged good enough could be added to the FAQ, like my 401(k) responses.

The most important decision is how aggressive or conservative you'd like the portfolio to be. You are young and OK with some risk, but you don't sound like you want an extremely aggressive portfolio. The more aggressive portfolios should have a higher average return, but more frequent losing years and larger losing years. The best portfolio is one that you can live with during the bad times - where you can sleep at night and won't tweak/change your allocation.

Take a look at these 6 portfolios, especially the losses, to see how aggressive you want to be (I apologize for the lack of columns that line up):

POTENTIAL ODDS OF WORST WORST
AVERAGE LOSING MONEY YEAR OF YEAR OF
RETURN IN ANY ONE YEAR 80 YEARS 35 YEARS

Portfolio A 11.0% 1 in 3 -47% -25%
Portfolio B 10.5% 1 in 4 -42% -22%
Portfolio C 9.8% 1 in 5 -38% -19%
Portfolio D 8.5% 1 in 6 -29% -13%
Portfolio E 7.5% 1 in 7 -23% -9%
Portfolio F 6.3% 1 in 8 -16% -4%

Column 1 is the portfolio name: Portfolio A is the most aggressive (with the most amount of stocks), and Portfolio F is the most conservative (with the least amount of stocks, and highest amount of fixed income). Column 2 is the expected return for the portfolio after investment expenses.

Columns 3, 4 and 5 have to do with the risk. How frequently does this portfolio have a losing year? Portfolio A loses about 1 out of every 3 years, but Portfolio F only loses about 1 out of every 8 years.

Column 4 is what a really bad year could look like, and it is the worst year in the last 80 years (which includes the crash of '29 and the Great Depression). Portfolio A lost 47% in a year. Portfolio F, with a lot of fixed income, still lost 16% in one year (when interest rates shot up in a big hurry).

Column 5 is what a typical bad year looks like, and it is the worst year of the last 35 years. Portfolio A lost 25%, and Portfolio F lost 4%.

So, concentrating on the loss columns, what kind of losses would you feel comfortable with? Risk and reward go together, and to get a higher return, you have to be willing to accept periodic losses.

When you have an idea of what kind of losses you'd be able to handle, then you can convert the portfolios to target allocations:

Portfolio A: 100% stock
Portfolio B: 90% stock, 10% fixed income
Portfolio C: 80% stock, 20% fixed income
Portfolio D: 60% stock, 40% fixed income
Portfolio E: 45% stock, 55% fixed income
Portfolio F: 30% stock, 70% fixed income

Note: These are all globally diversified portfolio of index mutual funds.

I think for someone 32 who can handle some risk, perhaps portfolio C would be best for you, 80% stock, 20% fixed. You certainly would not want E or F. You might go halfway between C & D, with 70% stock and 30% fixed.

I will continue with the allocation and specific investments in the next post.

-Tom