More on investing bankroll

[Izverg04]

Sorry for starting a new thread on this subject, but I will try to make up by asking ineresting questions that might excite the financiers on this forum.

Currently my idea of bankroll and risk tolerance is heavily influenced by poker and other constant-stakes gambling games. I know that my risk tolerance is linked to risk-of-ruin, it grows slowly, and quantitatively I know it very well. I can comfortably tolerate risk of losing $10k with probability RoR=10^-3.

Now to make transition to investing, I have about $50k available to invest. If I assume the same risk tolerance that I have in poker, and I don't see why it is any different with investing, I realize a couple of things.

1) Stock market is quite risky by itself to me. Really, if I want to keep RoR($10k)~10^-3, I can't invest more than $20k even when I invest in a diversified stock market index.

2) Surely, I will not do any stock-picking in foreseeable future, cause even if it is possible to learn it, I've got way more profitable things to do with my time.

3) I need a hedging diversification strategy that looks beyond the equity market, if I want all of my investing bankroll to work for me. If I can come up with a portfolio of anti-correlated investments, spending maybe 50 hours/year on research and implementation, using all of my investing budget, this is worth my time.

So, how do I do make the most of my investing bankroll within my risk tolerance budget and time budget?

[gvibes]

I'm a big fan of diehards.org (the vanguard diehards). The are all about finding low-cost, easy to manage portfolios with non-correlated asset classes.

I recently prepared an asset allocation for a friend of mine who only has ~40k in a 401(k), as follows.
Bonds (30%)
15% - Vanguard Inst Total Bond Mkt Index VITBX
15% - Vanguard Inflation-Protect Sec Inv VIPSX

REITs (7%)
7% - Vanguard REIT Index Fund Inv VGSIX

Equities - Domestic (46%)
11.5% - Vanguard Inst Index Fund Inst Plus VIIIX
11.5% - Vanguard Value Index Fund Inv VIVAX
11.5% - Vanguard Small-Cap Index Fund Inv NAESX
11.5% - Vanguard Small-Cap Value Index VISVX

Equities - International (17%)
4.25% - Vanguard Developed Markets Index VDMIX
4.25% - Vanguard Emerging Mkts Stock Index VEIEX
4.25% - Vanguard International Value Fund VTRIX
4.25% - Vanguard Internatl Explorer Fund VINEX

As a side note, these things get much more difficult if they are in a taxable account, as tax efficiency becomes a huge concern.

A good, simple tax-friendly portfolio would be something like 30% tax-exempt short or medium term bond fund, 50% in a total-stock market type index, and 20% in an international index.

Diehards.org will help you with all your problems.

[midas]

I'm assuming with 40K in a 401K you friend is young. Why are you allocating so much in bonds and REITS given a young portfolio and historically low interest rates?

[GeorgeF]

Invest in vanguard TIPS and short term bond, and perhaps and internetional bond fund. Hope that the stock market collapses. Then buy, else keep waiting. If the stock market neever collapses well, you know ...

[gvibes]

[ QUOTE ]
I'm assuming with 40K in a 401K you friend is young. Why are you allocating so much in bonds and REITS given a young portfolio and historically low interest rates?

[/ QUOTE ]

Basically, she is highly risk averse, and I'm trying to keep variance low.