Do you check how your investments performance and compared it to the market? How about comparing it to your peers? Do you take solace when your investments losses is less than what S&P 500 losses last year?

I know personally I compare my investments against how S&P 500 does. But when I sit down to think about it, it really DOES NOT matter what our investments relative performance is.

The goal of investing should not to beat the market. We invest to reach a certain goal, such as for retirement, college educations, etc. If doesn't matter whether we trail the market or beat the market, as long as the investments bring you closer to reaching your goal, that is what matters. If your investment beat the market last year, but overall portfolio values is still down, it is only a small consolation the fact that your losses was less than S&P 500. The fact would still be that you are further away from your goal.

In fact, there are potential perils in comparing your performance against the market.

• Temptation to tinker with your investments.  If your investments trail the market performance, you may be tempted to start making changes to your investments. You may start questioning whether you need to take more risks and may be taking additional risks.  You may start questioning your ability and stop trusting yourself.
• Unrealistic optimism and overconfident about your abilities. Being confident is fine, but being overconfident could lead you to underestimate the risks involved with investing. You may start putting extra money to your best performing funds or stocks.
• Focus on short term performance and let your investment strategy effected by your emotion due to current environment. Whether you are ahead or trail the market, you may start looking short term and forget about that the goal for investment should be long term.  If you are ahead of the market, you may start to think the conditions will continue for foreseeable future.  This may lead to the first peril I mentioned above, the temptation to start making unnecessary changes to your strategy.

How often do you compare your performance against the market?  Do you see any other potential dangers of relative performance?

* Photo by Mike Johnson - TheBusyBrain.com

Investopedia definition for Target-Date Fund:

A mutual fund in the hybrid category that automatically resets the asset mix (stocks, bonds, cash equivalents) in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement.

Target Date Funds have come under fire recently, such as mentioned on here.  I personally think it is unfair.  I think the problem lies with investors not doing their homework.  One of the most common mistakes by funds investors is not reading the funds prospectus.  By the name, most people think they will not understand the information provided in the prospectus, while in fact, prospectus is written mostly in plain English.  By not reading the prospectus, many investors do not understand the risks and expectations involved in investing on target date funds and the fact that target date funds DO NOT guaranteed positive returns. I think overall, Target Date Fund is a good choice for people that have no clue about investing.  However, those people needs to realize the risks involve with Target Date Fund.

Having sort of trying to defend the target date funds, I don't necessary it is the best options for everyone or even for most people.  As I mentioned earlier, a lot of investors are confused by the name and think that they will have enough money during that target date.  They think it is guaranteed.  But again, those are minor.  Another con is that target date funds assumed that everyone with the same target retirement date has the same risks profile.  That is far for reality.  Your risks tolerance may be different than others risk tolerance funds that have the same target retirement date.  And another negative in my mind, the reason that I moved away from Vanguard Target Retirement 2045, is that I don't think most target date funds offer enough diversification.  For example, Vanguard Target Retirement 2045 asset allocation is about

• 72% - Vanguard Total Stock Market Index Fund,
• 9.2% - Vanguard European
• 4.9% - Vanguard Pacific
• 4.1% - Vanguard Emerging Market 
• 10% - Vanguard Total Bond

I don't mind the 10% in bonds, since I think everyone should have some amount in bonds.  But on the equity side, about 80% of it is in domestic stock and only 20% in international stock.  I personally think the allocation in international stocks should be higher.  And I would also prefer more small cap and value in the domestic stock than what Vanguard Total Stock Market Index offers.

Remember, a lot of this is very personal and will be different for everyone.  But I think all you need is a little bit of homework and you can come up with better asset allocation option than what target date funds offers.  However, if you don't want to do your homework and at the same time doesn't want to pay for professional advices, then instead of simply leaving your money on savings account, then I would consider looking at Target Date Funds.  If you simply want several model portfolios, I would suggest looking at Paul Farrell's Lazy Portfolios.  However, do not simply copy one of these portfolios simply because of its past performance without understanding its goal, objective and your own risk profile.  This should be used as guidelines only.

* Photo by leeroy09481

I am currently reading Straight Talk on Investing: What You Need to Know, written by Jack Brennan, Chairman of The Vanguard Group and previously the CEO and Chairman of The Vanguard Group. So far, I really like this book. In one of the early chapters, Jack Brennan discuss about whom to trust in the act of investing. He listed four things:

Trust Yourself

A lot of people has problem trusting their own judgement about investing. That is why I think a lot of people follow the like of Jim Cramer and follow his stocks recommendation. When they hear someone, such as their friends, make a killing on an investment, they envy it. I was in this situation before I learn the hard way that trading is not investing. When my colleague used to tell me that the stock he is investing right now is doing well, I have a tendency to put my money in the same stock. But it was too late then. And when my other co-worker got into option trading and making profits, I tried it too. Again, I lost money "investing". The problem was that I didn't trust myself. I didn't think that I could make sound investment decisions.

Now I am a lot more confidence on my investment strategy.  I invest in passively managed index funds.  I have set up an asset allocation that I can be comfortable in.  During this recent downturn, I continue to believe in my strategy and has continued to contribute more money in my investments, both in my tax deferred accounts and my taxable accounts.  I no longer pay attention to hot tips or try to follow the trend.  I actually view the current market as buying opportunity. I don't spend a lot of time doing research on each of my individual investments.  If I heard someone makes a lot of money on certain stock, I don't envy them because I have my own investments goals and objectives.  And I know it will be hard for that person to keep the performance and continue to beat the market in the long run.

Trust the Financial Market

If you don't think the growth will occur in financial markets over time, then you shouldn't even have money in the market.  You should stay with those safe options, such as money in savings or certificate of deposits or may be U.S. Treasury bills.

I believe U.S. economy will continue to grow.  And I believe international economy will continue to grow too, especially the emerging market.  However, there is risks in investing in stocks.  And there will be up and down in the economy, but over the long period of time, the world economy will have an upward trend.

Trust in Time

Time and the power of compounding are investment best friend.  Albert Einstein said:

“The most powerful force in the universe is compound interest”

It is best to start early to reap the most benefits of the power of compounding.  Jack Brennan emphasizes that you must reinvest all the income and dividends, instead of taking them in cash (which is one reason why I prefer mutual funds instead of ETF since it is much easier to reinvest all the income and dividend with mutual funds. I will try to do a comparison of Mutual Funds vs ETF in the future).

Find a Financial Provider You Can Trust

If you don't know about the financial provider and can't trust them, why put the money with them.  If you are going to have a financial provider to handle your investment, you may want to understand how your money is managed.  Don't be a victim, such as those that invested with Bernie Madoff.  Jack Brennan listed four information that a trustworthy provider of financial services should be able to provide upon request:

• A clear and complete explanation of the fees you'll be charged.
• A record of the company's past investment performance.
• An explanation of how the performance of your own investments will be reported to you.
• A clear understanding of how the company will respond to any questions you have.

It is amazing how the things listed above would have helped most people avoid Bernie Madoff or other investment fraud.

Finally...

How about you? Do you trust in yourself, in the markets, in time and in your financial provider? If not, then do some homework then get yourself to the proper investment strategy. And there right moment to start investing is always now.

* Photo by Joe Nangle

Do you invest in foreign stocks?  If you do, what is the percentage of your equities are in foreign stocks?  As I mentioned on Managing My Asset Allocation between Different Accounts post, foreign/international stocks account for 40% of my equities part of my portfolio.

Walter Updegrave, editor for Money Magazine, discussed about Dipping your toe into international waters on Money Magazine Ask the Expert column.  One of the reason for investing in foreign stocks is diversification.  While there is certainly correlation between international stocks and U.S. stocks, it is still different enough.  You also get currency diversification by investing in foreign equities. As you can see, the U.S. dollar over the past four or five years has seen declined when compared to currently such as Euro.  Thus the money invested in international stocks has seen some rises due to the rise in the value of Euro when compared to U.S. dollar.

Walter Updegrave also pointed out that U.S. stock market accounts for only 30% to 40% of global stock values.  That shows huge numbers of opportunity.  Also, there are likely more growth on those places, especially in emerging markets.  Those economies should have more upside than U.S. economies.  Of course it may come with more risks and more volatility, but I think with proper diversification and limited portion of your investments in riskier emerging markets and more toward developed market, you can manage those risks.

How should the money invested in foreign stocks?  Well, I am not financial advisors and not qualified to give advises, but I can share with you what I did.  I invest mainly in index funds and that includes international equities.  I don't invest in just global funds, such as Vanguard Total International Funds.  I think to get more growth, some portion should be in emerging market, some in International small cap and value.  You can look at my target asset allocation that I posted few days ago.

This time, it is slightly different.  It is the case for bond index funds.  Here is the snippet from the article Bond Indexes Beat Active Mutual-funds:

A study by Standard & Poor's found that on an asset-weighted basis -- measuring returns by the invested dollar rather than percentage of funds -- index returns beat actively-managed fund returns in all 13 fixed-income categories over one and three years, and in 11 of 13 categories over five year

For me personally, I follow FundAdvice.com recommendation and keep my fixed income securities in short term to intermediate term Treasury bonds and also in Treasury Inflation-Protected Securities (TIPS) as I am not looking at fixed income for growth, but as a way to reduce my portfolio risks.

In term of asset allocation, the ideal thing is to have your asset allocation from your different accounts to reflect the true asset allocation. But it is a hard thing to do when you have to deal with 401k, 403b or 457 accounts that have limited selection. This discussion is trigger by the article on FundAdvice.com - When your 401(k) plan doesn't have everything you need.

We have four different accounts where we invest our money

• Joint Vanguard Taxable account
• His Vanguard Roth IRA account
• Her Vanguard Roth IRA account
• His 457b Retirement account

I decided that I am going to look at each account separately and handle it that way. It is not ideal solution, but I think I still can get good diversification without over complicating my asset allocation. I modified slightly from FundAdvice.com suggested Vanguard Portfolio. Here is my target asset allocation for each account:

Joint Vanguard Taxable Account

Fund	Asset Class	Percentage
Vanguard Tax Managed G&I	LCB	15%
Vanguard Value Index	LCV	15%
Vanguard Tax Managed Small Cap Index	SCB	15%
Vanguard Small Cap Value Index	SCV	15%
Vanguard Tax Managed International	Intl LCB	10%
Vanguard International Value Index	Intl LCV	10%
Vanguard FTSE All-World ex-US Small-Cap Index Fund	Intl SCB	10%
Vanguard Emerging Markets Stock Index	EM	10%

For our joint taxable account, we invest in 60% US and 40% International. Yes, for some people, this is quite a lot of international equities. FundAdvice.com suggestion is actually 50-50 US-International. I feel comfortable with 60-40 US-International split. Again, remember that I am not financial expert and I do not even consult with financial professional for this asset allocation.

His or Her Roth IRA

Fund	Asset Class	Percentage
Vanguard 500 Index	LCB	8.40%%
Vanguard Value Index	LCV	8.40%
Vanguard Small Cap Index	SCB	8.40%
Vanguard Small Cap Value Index	SCV	8.40%
Vanguard Developed Market Index	Intl LCB	7%
Vanguard International Value Index	Intl LCV	7%
Vanguard FTSE All-World ex-US Small-Cap Index Fund	Intl SCB	7%
Vanguard Emerging Markets Stock Index	EM	7%
Vanguard Short Term Treasury	Bond	9%
Vanguard Intermediate Term Treasury	Bond	15%
Vanguard TIPS	Bond	6%

Similar to Joint Taxable Account, we have 60-40 US-International split on the equity portion. And fixed income portion of our allocation total to 30%. This may seems high for someone in early 30s, but since we don't have any bonds outside our Roth IRA, from our total investments, our bonds allocation is actually rather small, around 15%.

His 457b Account

Fund	Asset Class	Percentage
Stock Index Fund	LCB	30%
Extended Market Fund	MCB & SCB	18%
EAFE Equity Index Fund	Intl LCB	32%
Aggregate Bond Index Fund	Bond	20%

For my 457b account, as expected, the option is limited. There are other options available, but I feel this allocations is the best for me. I could have increase my extended market fund and decrease my stock index fund, thus moving toward my preference of small cap and value fund. However, I don't feel comfortable with that option for this account and funds selection. Also, you will notice 60-40 US-International split for the equity portion.

When I stumbled into the article My wife is an investing wimp on CNN Money, I can certainly relate to that. I am sure a lot of people can relate to this too, as the article mentioned. My wife is a lot more conservative in investing when compared to myself. As I mentioned earlier, I started my investing experience with investments in individual stocks. Those are very risky and event though I consider myself as not risk averse, I still understand the risk involve with investment in stocks. Thus the percentage of my money in equities is really small, may be around 15-20%. Not because I don't want to invest more, but that is the compromise to the level where my wife feel comfortable. But now I am investing mostly in index stocks and balance it nicely with bond funds, the percentage of our money in equities has increased. All our money not in emergency funds (we have about one year in emergency funds), we put it in our investments, which currently at around 80 to 85% in equities.

As mentioned in the article, communication in key. But beyond communication, here are several things that helps in my case (which may not necessary work for you, but may give you some ideas):

• Having enough in emergency funds. In my case, I have to raise the emergency funds level enough to cover our expenses for a year or more. Having that amount of money in our savings account give her more confident that we can survive downturn when necessary.
• In addition, I have to be more conservative in our retirement tax deductible account. The target allocations of equities vs bonds on our retirement accounts is based on 100-age. This is very conservative in a lot of people opinions, but the investment in our taxable account is 100% equities. This lead to another point. Bonds and REITs are not as tax efficient, thus by not having those investments in our taxable account, we managed our investment more efficiently from tax perspective.
• I gave my wife more knowledge about each of our investments. She understand the risk better and are more comfortable with the investments. Be careful here, do not make it as if those investments are less riskier than it is. She knows a lot of our investments are risky, but she also knows that we have a lot of investments in TIPS, short term, intermediate term treasury bonds that should reduce our risks. Also, while I used love following individual stock price, do research on it and take risks with my money, including investments in options, I no longer invest in those. That fact increase her confidence in our investments.
• Since I managed our money, I prepare a presentation slides, in this case using Google Docs, every 6 months with detail of our investments, our net worth, performance and plan for the following 6 months. It wasn't a long presentation at all. I can actually cover the whole topic in less than 10 minutes. I share the Google Docs presentation and spreadsheet to her so that she can look at it herself too.

But overall, the major thing that helps in our case is not investing in individual stocks. She felt as if we were gambling with our money when we invest in stocks. While we make some money, we lose a lot too. In addition, I was spending too much time following stock market and doing research. With our current investments strategy, I don't have to do more research daily or weekly. I just need to rebalance our portfolio and review our strategy every 6 months to a year.

The longtime manager of FBR Focus, a Kiplinger 25 fund, is leaving to start his own fund.

I found this article on Kiplinger that was published a few days back, so I know it is a little bit late. Anyway, Kiplinger article Future of Top Fund Suddenly Out of Focus shows another reason why I choose not to go with actively managed fund.

With actively managed funds, the changes in the fund manager will probably lead to changes in the fund investment style. While they may try to use similar strategy, there are still instinct part of the fund managers that I think make them unique or different. With passively managed index fund, I know the strategy clearly, follow the index as closely as possible. The changes in fund managers should have little or no impact to the fund investment strategy at all.

Now with FBR Focus, if I own the fund and for whatever reason the new fund manager is not good or at least I think is not good, I will probably decide to redeem the fund. And if I have this in taxable account, this could potentially mean capital gains now. I would prefer to delay paying the capital gain tax as long as possible.

I was reading WSJ article A Time to Let Go Of Overvalued Stock and it got me thinking. While I don't have individual stocks, the recent run up on the stock market has thrown my asset allocation out of whack!!! I don't think I should rebalance my portfolio every time we have market run up, but with my equity vs bonds ratio is close to 4% different that my target allocation, I decided to rebalance my portfolio. Earlier in the year, I actually have been doing rebalancing regularly, not through exchange, but by investing my Roth IRA contributions toward funds that have been lagging. But since I have reached my contribution limit for my Roth IRA for this year, I can no longer "rebalance" through purchase of those funds that have lag the other funds, thus I have to do it through exchange.

I know I probably don't have any readers that follow my blog yet, but in case if you stumble on this blog, how often do you rebalance your portfolio? If you do it once a year, do you stay the course when your asset allocations seems to be way off your target allocations, either due to market crash or market run up? I would like to hear people opinions on this.

Several of my co-workers know that I am really into personal finance topic. They know that I keep telling them to continue to invest their money in low cost index funds even as the market is going down. I told them that they need to buy low and sell high, not buy high and sell low....

Anyway, one guy told me that his adviser suggested that he puts some of his money to hyperinflation fund. He thinks US is going to reach hyperinflation period since the Fed has been printing money crazily. While I agree that Fed has been printing too much money, I don't agree with investing in Hyperinflation fund. I think he should just keep investing in diversified low costs index funds. But I don't have any proof, thus naturally, I go to FundAdvice.com to see if they have anything regarding inflation and what to do with it. And this is why I love FundAdvice.com, they have an article that I am looking for. FundAdvice.com - Inflation, politics, history and investments. If you want more detail research, check out FundAdvice.com - Inflation: Will your investments protect you? It is rather long, but really details.

As I believe, proper diversification and asset allocations has proven historically to help protect the risks of high inflation or even deflation. Of course there is no guarantee based on historical results, but I think it is the best we can do.

Consider this as disclosure about myself. I am a believer in index style investing. I invested almost all in index funds, primarily through Vanguard. To be more detail, I tried to follow Fund Advice model portfolio. My wife and I put most of our retirement money in Vanguard Roth IRA, following Vanguard Tax-Deferred Model Portfolios from FundAdvice. We also have taxable investments with Vanguard, again following FundAdvice's Vanguard Tax-Managed Model Portfolioo. I will disclose more information about our investments in the future.

As with the case with most people, I used to invest in individual stocks. I have lost quite a lot investing in individual stocks. I have also ventured to options, again while I make some, I lost quite a lot too. Then I moved to ETF, but I found the temptation of tinkering with my investment all the time, thus ended up with paying a lot of commissions and beat the purpose of keeping the investment costs low.

I don't invest in real estate, other than my own home with we own fully without mortgage. We paid it off two years ago, considering that I am only 30 years old at this time and my wife is 33 years old, that is quite an accomplishment.

I think that is enough disclosure about myself and I also don't want to bore you too much with information about myself.