Friday, February 18, 2011


Somebody emailed, probably in response to one of the 401k posts but he didn't mention it explicitly, asking about FLG's approach to investing and diversification. Well, FLG isn't a financial expert, but he will share what he does with his 401k. He thinks he's mentioned this before.

First, FLG allocates between equity, bonds, and cash. He uses the 120 minus his age as a rough guide to how much to put in equities. The rest is mostly in bonds. A tiny percentage is in cash.

Ideally, he'd like to invest his money around the world according to each country's share of global GDP, but it's not really possible both because indexes are based upon market cap, not GDP, plus the lack of developed financial systems in every country. So, he ends up dividing it between an S&P 500 fund and an MSCI EAFE fund, with some developing market stuff thrown in there for good measure. With regard to bonds, FLG just puts that money in a fund tracking whatever the Lehman Bond Index is called now.

FLG rebalances on his birthday each year and revisits the overall allocation every 5 years.


Andrew Stevens said...

Only large caps?

FLG said...


I bit in a small cap fund, but I don't pay much attention to it. Which now that you mention it might be a mistake. But I've never been real happy with my small cap investments.

Andrew Stevens said...

I mention it because the rest of your post seemed to indicate that you were trying to match the total world equity market. But you completely omitted the midcap and small cap universes. Don't get me wrong, though. Your allocation is fine. (If anything I would just argue for more bonds/cash, but that would only be on a total asset basis so any cash/bonds you have in savings outside of your retirement investments would count. I generally think that everybody should have at least 20% of their total portfolio in bonds/cash, even if their risk tolerance is limitless.)

Personally, I'm an asset class junkie and have far more asset classes in my portfolio than I think any reasonable person ought to have. I have that many asset classes principally for my own entertainment and expect that I squeeze only a tiny amount of investment gain out of it (if any), certainly not enough to compensate me for the work involved, so it's not something I recommend to other people.

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