In my example of what a diversified portfolio looks like, I used a 70% Stock portfolio as an illustration. To save you the time and math, I’ve started a series of posts that look at a range of diversified portfolios from 100% Stock to 0% Stock. I’ll break these portfolios down in 10% increments. Today we’ll take a closer look at a 50% Stock portfolio.

       Here’s a pie chart depicting the asset allocation for a diversified 50% Stock portfolio:

       Click here to learn how to invest in a diversified 50% Stock portfolio. Keep in mind that you’ll need $75,000 to meet the fund minimums for this particular portfolio. If you invest at Vanguard, the total expense ratio for this portfolio would be 0.23%.

       Here’s a chart showing the historical returns for this portfolio from 1927-2007:

Now for some quick facts about this 50% Stock portfolio:

• The highest calendar year return for this portfolio was 44.3% in 1933.
• The lowest calendar year return for this portfolio was -25.4% in 1931.
• From 1927 to 2007, the average annual return for a diversified 50% Stock portfolio was 8.8%.
• During any consecutive 3 years from 1927 to 2007, this portfolio lost money 6 times out of a possible 79 periods. In 2 of those 6 times, it lost less than 4.2% of its original value.
• The two worst 3 year periods were 1929-1931 and 1930-1932 (Great Depression), when the portfolio lost about 39% of its original value.
• During any consecutive 5 years from 1927 to 2007, this portfolio lost money 5 times out of a possible 77 periods.
• This 50% Stock portfolio never lost money during any consecutive 7 year period from 1927 to 2007.
• This portfolio never averaged less than a 6.5% annual return during any consecutive 30 year period from 1927 to 2007.
• In 37 of the 52 possible consecutive 30 year periods from 1927 to 2007, this portfolio had a return higher than its historical average of 8.8%. Over 70% of the time, you would have had a higher than average return for a 30 year time period.

       My hope is that this information will prepare you for the possible risk of investing in a 50% Stock portfolio while giving you some perspective during tough times. I think it’s really important to emphasize those last two quick facts. If you have a time horizon of 30+ years, there is no historical period where you would have averaged less than a 6.5% annual return. (Even if you started just before the Great Depression!!!) And 70% of the time, you would have had a higher than average return over a 30 year time period. Take comfort in those facts when the media barrages you with doom and gloom news every day.

       My article, “A Closer Look at a 100% Diversified Stock Portfolio” was included in the most recent Carnival of Personal Finance hosted by Free From Broke. Here are some of the best posts this week, in my opinion:

• Earn What You Spend discusses Living Within Your Means. He talks about the Paradox of Thrift. It’s an interesting though, but I still think frugality is the best strategy for our future.
• Penny Cohen lists 8 Ways To Improve Your Life By Working From A Home Office. I like his thoughts, and these are some of the reasons I have thought about starting my own home-based financial planning firm.

       Also, J.D. Roth at Get Rich Slowly had a great post about When Less is More: The Importance of Perceived Value. J.D. has some great thoughts here, and value is the big difference between being frugal and being cheap.

       In my example of what a diversified portfolio looks like, I used a 70% Stock portfolio as an illustration. To save you the time and math, I’ve started a series of posts that look at a range of diversified portfolios from 100% Stock to 0% Stock. I’ll break these portfolios down in 10% increments. Today we’ll look at a 60% Stock portfolio.

       Here’s a pie chart depicting the asset allocation for a diversified 60% Stock portfolio:

       Click here to learn how to invest in a diversified 60% Stock portfolio. Keep in mind that you’ll need $63,000 to meet the fund minimums for this particular portfolio. If you invest at Vanguard, the total expense ratio for this portfolio would be 0.24%.

       Here’s a chart showing the historical returns for this portfolio from 1927-2007:

Now for some quick facts about this 60% Stock portfolio:

• The highest calendar year return for this portfolio was 52.1% in 1933.
• The lowest calendar year return for this portfolio was -30.4% in 1931.
• From 1927 to 2007, the average annual return for a diversified 60% Stock portfolio was 9.5%.
• During any consecutive 3 years from 1927 to 2007, this portfolio lost money 8 times out of a possible 79 periods. In 2 of those 8 times, it lost less than 1.2% of its original value.
• The two worst 3 year periods were 1929-1931 and 1930-1932 (Great Depression), when the portfolio lost about 46% of its original value.
• During any consecutive 5 years from 1927 to 2007, this portfolio lost money 5 times out of a possible 77 periods.
• During any consecutive 7 years from 1927 to 2007, this portfolio lost money only once out of a possible 77 periods. Even then, the portfolio only dropped about 3.45% from it original value.
• This 60% Stock portfolio never lost money during any consecutive 10 year period from 1927 to 2007.
• This portfolio never averaged less than a 7.1% annual return during any consecutive 30 year period from 1927 to 2007.
• In 43 of the 52 possible consecutive 30 year periods from 1927 to 2007, this portfolio had a return higher than its historical average of 9.5%. For nearly 83% of the time, you would have had a higher than average return over a 30 year time period.

       My hope is that this information will prepare you for the possible risk of investing in a 60% Stock portfolio while giving you some perspective during tough times. I think it’s really important to emphasize those last two quick facts. If you have a time horizon of 30+ years, there is no historical period where you would have averaged less than a 7.1% annual return. (Even if you started just before the Great Depression!!!) And 83% of the time, you would have had a higher than average return over a 30 year time period. Take comfort in those facts when the media barrages you with doom and gloom news every day.

       In my example of what a diversified portfolio looks like, I used a 70% Stock portfolio as an illustration. To save you the time and math, I’ve started a series of posts that look at a range of diversified portfolios from 100% Stock to 0% Stock. I’ll break these portfolios down in 10% increments. Today we’ll take a closer look at a 70% Stock portfolio.

       Here’s a pie chart depicting the asset allocation for a diversified 70% Stock portfolio:

       Click here to learn how to invest in a diversified 70% Stock portfolio. Keep in mind that you’ll need $54,000 to meet the fund minimums for this particular portfolio. If you invest at Vanguard, the total expense ratio for this portfolio would be 0.25%.

       Here’s a chart showing the historical returns for this portfolio from 1927-2007:

Now for some quick facts about this 70% Stock portfolio:

• The highest calendar year return for this portfolio was 59.9% in 1933.
• The lowest calendar year return for this portfolio was -35.4% in 1931.
• From 1927 to 2007, the average annual return for a diversified 70% Stock portfolio was 10.0%.
• During any consecutive 3 years from 1927 to 2007, this portfolio lost money 8 times out of a possible 79 periods. In 2 of those 8 times, it lost less than 5.0% of its original value.
• The two worst 3 year periods were 1929-1931 and 1930-1932 (Great Depression), when the portfolio lost about 54% of its original value.
• During any consecutive 5 years from 1927 to 2007, this portfolio lost money 5 times out of a possible 77 periods.
• During any consecutive 7 years from 1927 to 2007, this portfolio lost money only 2 times out of a possible 77 periods. These 7 year losing periods started in 1928 and 1929, near the beginning of the Great Depression.
• This 70% Stock portfolio never lost money during any consecutive 10 year period from 1927 to 2007.
• This portfolio never averaged less than a 7.6% annual return during any consecutive 30 year period from 1927 to 2007.
• In 44 of the 52 possible consecutive 30 year periods from 1927 to 2007, this portfolio had a return higher than its historical average of 10.0%. For nearly 85% of the time, you would have had a higher than average return over a 30 year time period.

       My hope is that this information will prepare you for the possible risk of investing in a 70% Stock portfolio while giving you some perspective during tough times. I think it’s really important to emphasize those last two quick facts. If you have a time horizon of 30+ years, there is no historical period where you would have averaged less than a 7.6% annual return. (Even if you started just before the Great Depression!!!) And 85% of the time, you would have had a higher than average return over a 30 year time period. Take comfort in those facts when the media barrages you with doom and gloom news every day.

       Diversification, index funds, low expenses, tax efficiency…they’re all so boring. Isn’t there a better way? Can’t I use research, insight, intuition, and intelligence to beat the market? Who actually believes this boring stuff anyway?

       The guy in the fancy suit on TV doesn’t seem to believe it. The writers of financial publications are constantly telling us which funds are going to be hot this year, or month, or week. There are millions of investment ideas on the Internet which include all kinds of fancy charts and systems and fantastic results. It doesn’t seem like anyone believes in index fund investing and boring ideas like diversification. Everyone seems to have some secret for how they’re going to beat the market, so why shouldn’t you as well?!

Look Who’s Talking

       Before you begin to think that index fund investing is only for schmucks, let’s take a minute to look at who supports these various investment ideals. First, the side of active management, market timing, and various other strategies to “beat the market”:

• Stock Brokers and Investment Managers – For a fee or commission (or both!), these guys will help you pick the “right” funds or stocks at the “right” time so you get nice returns every single year. They’ll even send you a gift card or free sports tickets every once in a while just to show you how much they appreciate you!
• Some Mutual Fund Companies – Sure they charge higher expenses than Vanguard does, but they’re giving you access to the “best” mutual fund managers in the world. With their team of 5,208 researchers, they’re bound to uncover information that will give them the ability to beat the market. And don’t forget about those mutual fund companies with a long family background of managers. All that experience is sure to come in handy.
• Market Timing & Stock Picking Newsletters – In the do-it-yourself mood? Just subscribe to one of the many market timing or stock picking newsletters, and Slick Sam will tell you exactly when you should get in and out of which stocks. He might even set you up with a service where his recommendations can be traded automatically in your brokerage account. You don’t even have to do a thing and you’ll make a 389% return in a matter of months!
• The Investment and Financial Media – Dow drops 600 points! Stock futures headed down this morning because the commissioner has a cold! Is your portfolio safe? Ah, the financial media. They constantly keep us up-to-date on the latest market news and even give us advice about the next top mutual funds. All we have to do is keep watching their shows or buying their newspapers and magazines and we can reap the benefits of all their knowledge.

       Do you see what I see? Every single one of these players has a vested interest in selling you something—especially in selling it to you again, and again, and again. My father once told me everyone has something to sell, and he’s right. Even the most objective advisor has to get paid somehow. But we have to look carefully at the seller’s motives before we buy—more so when the product is financial advice.

       Now what about the side of index fund investing, diversification, low expenses, and tax efficiency? Let’s look at the supporters of these really boring investment ideas:

• Dr. Harry Markowitz – A Nobel Laureate in Economics for his pioneering work in the theory of financial economics. He helped develop Modern Portfolio Theory, which looks at the effects of asset risk, correlation, and diversification on investment returns.
• Dr. William F. Sharpe – Also a Nobel Laureate in Economics for his pioneering work in the theory of financial economics. His work revolved around the ideas of the risk and return model and the Capital Asset Pricing Model, which is part of Modern Portfolio Theory.
• Dr. Paul Samuelson – Another Nobel Laureate in Economics. His findings can be summarized as: market prices are the best estimates of value, price changes follow random patterns, and future stock prices are unpredictable.
• Dr. Eugene Fama – A professor in economics and finance at the University of Chicago. His research covers the randomness and unpredictability of stock market prices, the Efficient Market Hypothesis, and the Fama-French Three Factor Model, which explores the factors that explain an investment security’s return.
• Dr. Kenneth French – A professor of finance at the Tuck School of Business, Dartmouth College and former professor at MIT, the Yale School of Management, and the University of Chicago Graduate School of Business. He is most famous for his work with Dr. Eugene Fama on the Three Factor Model.
• Dr. Michael Jensen – Former professor at the University of Rochester and Harvard Business School. He found that only 26 of 115 actively managed mutual funds outperformed the market in his paper “The Performance of Mutual Funds in the Period 1945-1964″.
• Dr. Burton Malkiel – A professor of economics at Princeton University. He authored A Random Walk Down Wall Street, which discusses the randomness of asset prices and the Efficient Market Hypothesis.
• John Bogle – Founder of The Vanguard Group
• Warren Buffet – Famous Investor. He recommends the average investor put his/her money in index funds.

       What do you notice in this group? A few less marketing gurus and a few more academics? So whose advice are you going to trust for the future of your retirement? A fast-talking salesman who rushes through the facts, or a research-driven Nobel Laureate whose life has been dedicated to teaching?

I know who I’m going with.

       If you’ve chosen one of the diversified portfolios I have discussed, you might be wondering how you can begin investing for your goals. I highly recommend using Vanguard to invest if at all possible. This could mean investing directly through Vanguard or buying their mutual funds in your retirement or brokerage accounts. Why Vanguard? They are by far the lowest-cost provider of Index Funds in the industry. Additionally, they have a long track record of great customer service. If you invest directly through Vanguard, you can avoid commissions and many other fees (especially if you sign up for their e-delivery option).

       So which Vanguard funds should you use to replicate the diversified portfolio you have chosen? Here’s the list (starting at the top and going around clockwise on the pie charts I’ve created):

       If you do not have enough money to meet the minimum investment amount for the portfolio you’ve chosen (so you can meet the fund minimums), then I recommend using one of Vanguard’s Target Retirement Funds until you have enough money in your account to implement the diversified portfolio you have chosen. You can view all of Vanguard’s Target Retirement Funds and find out more information here. You’ll need $3,000 to get started in one of Vanguard’s Target Retirement Funds.

       If you don’t have $3,000, you can begin investing in Vanguard’s STAR Fund with only $1,000. I’m not a huge fan of the STAR Fund for several reasons, but I’m using it myself until I get $3,000 in my Roth IRA to invest in the Vanguard Target Retirement 2050 Fund. Once my Roth IRA reaches $38,000, I’ll switch over to the diversified 100% Stock portfolio.

       If you don’t have $1,000 yet, I suggest you begin setting aside money every month in a high-yield savings account until you get there. I would recommend using The ING DIRECT Orange Savings Account. Great rates, no fees, no minimums. I personally use ING DIRECT and have had great satisfaction with their rates and service. Once you get to $1,000, you can open an account with Vanguard and begin investing in the Vanguard STAR Fund.

(Note:  I do not work for Vanguard and gain nothing if you decide to use them except for the satisfaction of knowing I have helped someone save a ton of money and invest wisely at the same time. For full disclosure, I do get a commission if you sign up with ING DIRECT using the link I provided above. However, I would recommend them regardless of whether I receive any compensation. Click here to go directly to ING DIRECT’s website if you don’t want me to earn a commission when you sign up.)

       Last week, we talked about Little Strokes in Benjamin Franklin’s The Way to Wealth. By diligently working towards our goals little by little, we can accomplish great things. Does all this talk about diligence, hard work, and industry make you feel like Franklin doesn’t expect us to ever take time for leisure? Here is today’s quote:

       Methinks I hear some of you say, must a man afford himself no leisure? I will tell thee, my friend, what Poor Richard says, employ thy time well if thou meanest to gain leisure; and, since thou art not sure of a minute, throw not away an hour. Leisure is time for doing something useful; this leisure the diligent man will obtain, but the lazy man never; so that, as Poor Richard says, a life of leisure and a life of laziness are two things.

The Way to Wealth – Benjamin Franklin

       Much of Franklin’s writing is devoted to the power of industry and frugality, but what about fun? Without hard work, you’ll never have much time at all for leisure and pastimes. If you don’t work hard enough to save some money while covering your basic expenses, how do you ever expect to be able to take time off for relaxing (and be able to afford it)?

       Instead of viewing leisure and laziness as the ultimate goal in life, focus on using your time well and profitably. Labor brings more comfort than idleness. When we’re bored or idle, we often get ourselves in trouble. And we can’t sit around on the couch all day forever—eventually, we’ll need to work for something lest we starve or go homeless. Though the life of idleness and no work sounds appealing, it often leads to a lack of meaning and complete boredom. This is why many people find out retirement isn’t as great as they had once thought while they were slaving away at a job they hated.

       Find useful things to do with your time that you enjoy and work hard at them. Once you begin to enjoy your work and the results of your labor, you may start to view leisure in a different light. Success is likely to follow your hard work, and you’ll get the leisure time you’ve been dreaming of.

       I just wanted to let you all know that Crackerjack Greenback is on Alltop now. I’m pretty excited about it! Alltop is an “online magazine rack” of popular topics all around the web. I used their Personal Finance section to keep up with other personal finance bloggers until I started using Google Reader. (If you don’t know what RSS is and don’t want to learn, you’ll like Alltop.) You’ll now see their badge and a Personal Finance news widget in my sidebar. Check it out!