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December, 2007


First and foremost, invest in yourself or in you and your family. See the just coming out, well recommended Rob Reiner movie, "Bucket List" (about two old farts with terminal cancer, played by Morgan Freeman and Jack Nicholson, who work out what they still want to do before they kick the bucket), and then take action as appropriate!

Allocate your nest egg simply and practically. Decide on a level of risk diversification that fits your sleep index, i.e. that allows you to sleep well at night even when the markets are going a little crazy. A typical way of distributing assets, for instance, might be about 10% in money market accounts, 30% in TIPS (bond assets with a regular dividend plus assurance they will increase based on the official inflation rate) or in an intermediate maturity bond index fund with little or no commission and low annual fees, and 60% in stocks or no-load, low fee stock mutual funds.

Decide to mainly invest in either bargain stocks or in a few good growth and income mutual funds, not both. The decision would probably depend on how comfortable you are making individual stock picks yourself and/or how much time you have to devote to researching potential purchases. If at your current stages in life, finances, and investing experience you would prefer to leave the driving to someone else, well and good. This is the right choice for many and reflects that on average people mostly have better things to do with their time than figure out the debt to equity, price earnings to growth rate, free cash flow, dividend payout ratio, etc. of multiple stocks and then keep track of the ones bought based on such research till it appears time to sell.

If comfortable making stock picks, every other week select and buy the then best classic value asset you can find, aiming for a portfolio of 25 or so such securities. Hold these for a year and a day with a profit, till the company has been bought out, or till shares have been held for a couple years or so. Historically, after commissions and with dividends, such an approach has provided about a 17%+ average annual return. Some investors have managed to consistently get a 20-21% total return in this way.

Do not worry about a target MARKET value for your stocks portfolio. Insist on a target equity BOOK value instead. The market performs at times almost randomly and at others emotionally, reacting with wild positive and negative swings to relatively minor stimuli. As such, it is undependable except in the long-term, when happily the trend is upward. But one can buy stocks in such a way as to insure desired levels of book value (essentially net asset value). On average, in modern times the markets have tended to value equities at about twice their book value. So, if one has $50,000 in stock book value, the odds are that sooner or later the market value of the portfolio will reach $100,000. To retain a margin of safety for one's portfolio, I recommend an overall price to book value of 1.33 or below. If the portfolio P/Bk gets much above 1.33, look for low book value stocks to sell off. If much below 1.33, it means that stocks are tending to be undervalued, so now may be a great time to buy more.

Consider adding regularly, for instance with every paycheck through a 401k Plan or on one's own every quarter, to one's holdings. At a 10% annual return, each $1000 invested in a tax-deferred account (IRA, 401K, etc.) becomes $6728 after 20 years and $17,450 after 30 years. (So, if you are relatively younger, for a million bucks, invest a cumulative $57,307 at a 10% or better annual return, and hold in a tax-deferred account for an average of 3 decades.) Such investments can also usually lower taxes for the year for which they are invested, which in a way is like getting a bonus on top of the annual return. Sometimes an employer will also kick in an incentive amount for every investment made in a 401k or similar retirement plan. This is like free money!

Pay off debts faster than you acquire them. Certain exceptions are appropriate, like buying a house with a reasonable price and mortgage. But in general it pays to live within one's means, keep expenses lower than income (even if it means not staying up with the less frugal Joneses), and reduce one's indebtedness over time.

Get a membership in AAII! Incidentally, it makes a nice Christmas or birthday gift. The cost right now is just under $30 a year and a bargain for what is offered there. You can take computer courses on the basics of investing, create hypothetical or real portfolios, do stock research, get suggestions for equities or equity mutual funds, learn to develop an overall, long-term investment philosophy, and more. (Their best deal, if one expects to be around for more than a decade, is a $290 dollar lifetime membership.)

Suggested mutual funds:

CGM Focus Fund(CGMFX)recent price: $58.451-800-859-7714
Meridian Value Fund(MVALX)recent price: $31.731-800-446-6662

Suggested stocks:

Ace Ltd.ACE$60.11
American Financial GroupAFG$28.93
Arch Capital GroupACGL$67.17
Axis CapitalAXS$39.86
Endurance Specialty HoldingsENH$41.69
Old Republic International Corp.ORI$14.68
XL Capital, Class AXL$52.75

(In addition, though they do not meet the value and safety criteria I use, these growth stocks have recently been recommended by professional advisors and are of interest: AAPL; BLK; DECK; INTC; ISRG; JEC; POT; RSTI; TKC; WFR.)


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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