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June 11, 2009


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Someone who is willing to read a simple but effective point of view that may seem unconventional at first but is logically sound, should read Intelligent Investor. Benjamin Graham recommends 50% stock/bond allocation as an all-weather policy that suits almost everyone across ages. I fully support that option...

I'm 100% cash+CDs right now - about $850k - but that is mainly from a lack of options I feel confident in. I'm somewhat sorry its in USD at the moment - I'd rather not invest here until my greencard comes through.

I believe strongly that we need to add valuations to the mix of factors we consider when setting our stock allocation.

Valuations have a dramatic effect on long-term returns. So there is no one allocation that makes sense both at times of low valuations and at times of high valuations.


I believe that investing in index funds is better than investing in individual stocks because of the benefits of diversification. Don't put all your assets in one basket.

Only putting money into stocks and bonds breaks this rule of diversification because you don't have exposure to gold.

Index funds invest in companies based on the value of the company. The bigger the company in terms of market capitalization the more money in the index fund is allocated to the company's shares.

The value of all gold in the world is roughly equal to the value of the world stock market, so your exposure to gold should be roughly equal to your exposure to the shares.

Furthermore, the idea that stocks are volatile in the short term but in the long term they are guaranteed winners over bonds is false. Stocks are not only more volatile than bonds but they are more risky and the risk does not diminish over the long run. Think about it this way. If you play roulette and spread your money all over the table, you are investing in bonds. Chances are your number will come up because you have your chips on so many numbers--but because you have spread your money out so much you will not make much. With shares you are essentially taking all your chips and putting it on one number. The potential for gain is huge but so is the potential for loss.

You cannot guarantee that stocks will go up in the long run because essentially stock prices represent net present value of future dividends. Dividends depend on profit. If shares continue to go up in value forever then it follows logically that corporate profits must go up forever. The only way companies can do this is if there is continually decreasing price of inputs (e.g. oil, metal, etc) or continually increasing technological progress that allows more output to be produced from less inputs. Perpetually decreasing cost of inputs or perpetually increasing technological improvement is definitely not guaranteed, neither in the short term nor in the long term.

I agree that the best way to make and protect money is to earn lots, spend little, and invest a lot. When it comes to investing, there is only one fundamental rule: diversify. Buy everything. Buy stocks, buy bonds, buy gold, buy property, and then buy all types of everything, e.g. physical gold, gold certificates, gold ETFs, bonds from different countries with different levels of maturity, stocks of different companies across different sectors across different countries from different brokers, etc.

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