I have been following the strategies in Ric Edelman's "The Lies About Money" for the past 3.5 years and it has worked for me. There are a bunch of suggested portfolios based on your age and a few other criteria, and I rebalance once a year. Worth a read I say.

In Berkshire Hathaway's latest letter to investors Warren Buffet argues that, a) people confuse volatility with risk, b) one of biggest risks to a portfolio is high fees and use of investment advisors, and c) cash is risker than stocks if your investment horizon is over decades.

Below is a part of an article from the March 5, 2015 Wall St.Journal.

The billionaire investor then goes after the dominant idea that stocks are riskier than cash investments because of their volatility – a lesson often taught at business schools based on assumptions that he says are “dead wrong”:

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.

He concedes that short-term ownership of stocks is more volatile and therefore it makes sense for certain types of investors, such as banks, to tie stock-price movements to risk.

However, for most other investors, he recommends that they invest over a “multi-decade” horizon and look to build a diversified stock portfolio that brings purchasing-power gains over time.

Cool article on optimizing asset allocation vs. optimizing fees:

http://www.ft.com/intl/cms/s/0/73ba7...#axzz3TdQF6tqz

The URL with fewer complaining pop-ups:

http://www.ft.com/cms/s/0/73ba77b2-c...44feab7de.html

I got this from audible.com and listened to it today, to and from work. I think its great so far...he talked an awful lot about asset allocation.

Some good thoughts in here, although I personally don't put much stock in number 2 for myself. I understand the idea, but history shows that a bunch of people who thought they were emotionally intelligent enough to sustain a downturn made big mistakes in 2008. I guess the problem is that there's no way to know in advance - the people who make big mistakes in a crisis can't self identify in advance, and would have said the exact same thing in 2007.

An interesting point about number 3 is that this works both ways - if your accumulated funds aren't enough that a material percentage loss hurts you then a material percentage gain doesn't help a hell of a lot either.

3. I haven't achieved a critical mass. Id only be starting out dumping 10k and add over time.

Correct, overtime the market should increase though so who cares. Given my investing time horizon I'm beginning to think volatility doses't even matter that much. Having said that, why subject myself to more risk then necessary if I could allocate my profolio in such a way I'm not going to take such sever downswing's while still maximizing my upside potential.

I'm not convinced that this is an achievable goal for an individual investor. Among the "plain vanilla" asset allocations the upside potential returns will come with more volatility. Moving outside of the plain vanilla world has real downsides: higher fees, complexity that can lead to mistakes, and hidden volatility.

Yes. Having a less diversified portfolio is probably going to bring you more risk, and buying more asset classes does expose you to higher fees, mistakes, volatility its far better then just simple stocks bonds long term isn't it?. One, your going going to make mistakes but hopefully you don't repeat the same mistake and plug the leak. Two. higher fees are ok, if I have a long term higher expected value. 3. In my opinion you can be right, you can be wrong, but doing nothing, is the worst thing you can do long term.

What is your advise to the individual investor? Where do you point them?

3/4 the way through book. Quite good, easy listen, the guys very enthusiastic which is good. He to have a no bull**** approach to things. A lot of american stuff in it though which I guess isn't bad to hear.

I'm still trying to figure out what the difference is between retail mutual funds and institutional mutual funds are...it seems he's all about his institutional funds thus far...

http://www.investopedia.com/terms/i/...tionalfund.asp

Sorry dumb question. Easy answer in simple Google search.

I believe he explains how to get this with out being a sophisticated investor, I should re listen. My bad.

For most individual investors, this isn't true if "doing nothing" is defined as investing in a simple, low fee, highly diversified portfolio of basic portfolio building blocks (i.e. stocks and bonds). History shows that the majority of people who try to do something else end up doing worse than if they had just picked a simple asset allocation and stuck to it.

I realize that this forum is full of lots of active investors who like to pick and chose individual investments and at least some of them are highly skilled at it. I don't profess that simple investment approaches will outperform all of them. But I am very confident that complicated investment approaches fail for most people. In poker terms, building a complicated investments strategy for personal savings often turns out to be a form of fancy play syndrome - over the long term it generates net losses vs. a straightforward simple approach but over the short term it can generate a lot of false positive signals that it is working.

That's why I recommend that most individual investors build a simple and executable portfolio based on the added value principals that are readily available to everyone - be diversified, pay low fees, be fully invested and as hands off as possible.

Allocating 25% to gold is (mostly) speculation, not investment.

Gold does generate some positive real return but it's not much higher than risk free. Considering gold is also one of the most volatile, it makes little sense for most people to invest in gold.

That said, slightly above risk free could be sufficient reason to buy SOME gold for diversification effects since gold has a beta of fairly close to zero. I just think it will be a very small percentage (Professor Ibbotson at Yale has done some work on this. Gold comes out to 2-5% if I recall correctly) before it becomes impossible for rest of the portfolio to diversify the idiosyncratic risk of gold away.

Basically I can see an optimal portfolio including something like 10% gold (and that's high) but I think the real number is much lower. 25% in gold sounds like lunacy to me.

He actually recommends ETF's mostly, you just haven't gotten to it yet. But I would suggest buying the actual book (used I got it for $7 I think) as it has all the various portfolios listed and not sure how they can do that with an audio book?

Totally agree.
It is trivial to run some data, figure out the long term drift of the index and realize that markets are efficient enough that you are not going to beat that return over a 40 year time horizon.

It is a much different thing though to not do something stupid when your real money draw down moves from -30% to -35%. Charlie Munger has said Buffet and himself have ate a 50% draw down 3 times in their career but I know I'm not Buffet or Munger. I know I will do something stupid so I don't bother with that strategy.

You can't discount either how many people intend to put on this strategy but end up selling at the bottom and then not getting back in until the next bull is mostly over, repeat.

Most of all though I really enjoy following markets and active investing. I will gladly eat some opportunity cost for that. I don't have a sharpe of 4 making it some kind of fools game to be passively index but it is not like I'm losing money in an absolute performance sense. The great thing about individual investing is you don't have to give two ****s about relative performance like a professional.

Markets are not efficient. Especially an index market cap.

Suppose you had 4 teams to choose to win World Series.

New York
Chicago
Philadelphia
Houston
or would you rather have

Baltimore
Los Angeles Angels
Washington Nationals
Los Angeles Dodgers

The later is 2014 performance based. The former based on population size - market cap.

http://finance.yahoo.com/echarts?s=RSP+Interactive# Assuming prices are efficient then this is the index you should use.
http://www.forbes.com/sites/rickferr...weight-sp-500/

They do not have to be. Costs matter.

Message to OP, take no notice of steelhouse.