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The past year has been brutal on majority of investment accounts. The sub-prime mortgage meltdown, the credit crunch have all strained liquidity out of the market and put enormous stress on businesses. The resulting macro-economic issues have worsened the pain on the average consumer. Amidst all this mess, most retirement accounts have taken a beating in stride with the market or even worse in some cases. It’s only natural to ask “How do I stop the bleeding?”. A recent article attempts to address and answer this very question.

One great call out in that article is about asset allocation or diversification strategy. We have heard it enough times already, but yet we don’t take the time and effort to implement diversification in our own accounts.

I am not an expert in the field of investing (either by professional education or licensing) but I have keen interest in investing for my own personal investing and I read a lot on the subject and talk to other experts in the field. So I couldn’t help but want to share this with our readers. You can take it for what it’s worth.

In my opinion, following is a strategy that would take us a long way

• Decide a Diversification strategy that is suitable for your risk tolerance: One needs to have exposure to stocks (domestic and international), bonds, commodity and real estate to name just a few and the percentage of your portfolio you are willing to invest in each category (To learn more about Asset Allocation from the SEC click here; or to use an interactive asset allocation calculator click here)
• Choose your picks for investing into each of the above categories. It can be individual stocks and bonds OR Mutual Funds OR Index Funds OR Exchange Traded Funds (ETFs) and so on. Each has its pros and cons. Based on my research, I prefer or recommend Index funds and Exchange Traded Funds because of their low overhead costs. There is a wide variety of these funds available. Click on the links above to find out your options and use the tools there to choose your index funds and ETFs
• Invest in the selected funds in the selected percentage amounts and
• Finally, discipline yourself to rebalance your portfolio at a pre-determined frequency you are comfortable with (For more insight on this topic, read this article on Motley Fool)

My rationale for the above approach is:

• Picking right stocks at the right time is called market timing and even the pros find it difficult to do it well consistently
• If someone’s portfolio went down a lot and they are asking how to stop the bleeding, then thinking they’ll be able (either in terms of knowledge, time or knack) to pick the winners this time around is a very big and risky assumption in my opinion 
• Funds with high overhead costs eat away a portion of your returns and reduce the amount available at retirement and can be substantial over an extended period of time
• Over long periods of time that one’s career lasts, market indices and funds based on those indices (or index funds) have returned more value to a patient investor and
• this approach limits the amount of time and energy one needs to spend doing their investing rather than enjoying other activities

This is my 2 cents on the topic. Please post your comments, thoughts and ideas on this subject.