by Archie M. Richards, Jr.
October 29, 2007

Christen writes, "I recently turned 50, am self-employed, and have no investing experience. My income is quite sufficient, with no foreseeable changes for the next 10 years. To "catch up" with my investing, can I eliminate the 20-percent allotment of long-term bonds and divide the amount among the other categories in your suggested portfolio? I wouldn't mind the greater volatility."

Your overall return, Christen, probably won't increase much. Adding a modest amount of bonds and diversifying properly among various asset classes not only reduces volatility, it also enables the portfolio to attain very close to the annual returns of the highest-earning sector, this being the stocks.

Without investment experience, you don't know how you'll react when the news turns unexpectedly bad. What will you feel when the Dow falls 700 points (that's 5 percent) in a single day? The market fell 22 percent in one day in 1987!

Or let's say that the news stays bad for a long time, and your investment portfolio, having fallen by 30 percent, seems like it will go down forever. It always feels that way during long bear markets. Without investment experience and a go-against-the-crowd aptitude, it's hard to stop living in the moment and foresee the possibility of good times ahead.

Worse yet, imagine that during a long bear market, your business fails.

Many people say they want high returns. But when they're under stress, they realize they don't like risk - no, they don't like it at all.

Now, if you've never paid attention to the news, you don't watch television news programs, and you've never been risk averse, perhaps you'll be okay with just stocks. But except for the annual rebalancing, pay no attention to the fluctuations of values.

Do pay attention, however, to your reactions to bad news. If you feel a reaction, get yourself diversified fully. We're talking about the income you're going to live on in your old age. You're playing with fire!

Jerry sent me a list of his mutual funds, all acquired through a broker. The list includes 5 bond funds, 11 balanced funds, 9 funds of U.S. stocks, and 2 of foreign stocks. Eight of the balanced funds aim at specific retirement dates, covering every 5 years from 2010 to 2045. Jerry asks how closely his portfolio matches the recommendations in my website (archierichards.com > suggested portfolios).

It's impossible to tell, Jerry, just from the names of the 27 funds you gave me. Many of your funds probably hold the same stocks, which means you have less diversification than you think.

I note the 8 funds aimed at 8 different retirement dates from 2010 to 2045. How many lives do you have, anyway? Almost as many as a cat?

With so much duplication, it's impossible to rebalance among the asset classes I recommend (big growth, big value, small growth, small value, Europe, Far East, Emerging Markets, REITs, and long-term bonds.)

Your broker may be maximizing his commissions by keeping your investments under the "break points." For example, if your investment in a fund is under $25,000, the commission might be 5 percent. If the investment totals between $25,000 and $50,000, the commission might be 4 percent. And so on; the more you invest in any one fund, the lower the percentage commission.

The broker makes the most money by keeping each investment under $25,000. He may justify this to clients by stressing the need for diversification.

But it's false diversification, because many of the funds probably hold the same securities. The only way to be truly diversified is to hold index funds or exchange-traded funds, each of which holds the securities of a specific asset class and no others.

If you're following my recommendations, you don't need a commissioned broker. You might acquire my book, Understanding Exchange-Traded Funds. Also, visit www.napfa.org and find a fee-only financial planner in your area. Explain that you favor the suggestions in my website (assuming this is true) and ask what you should do.