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Speculation and diversification

- Alan Lavine and Gail Liberman

Even though it sure would be great to start the year with a fat profit in a hot sector of the mutual fund market, we suggest splitting up your money.

Remember these investment facts, based on Ibbotson Associates data over the past seven decades:

  • A 60 percent-40 percent stock-bond split historically has returned more than 8 percent annually since 1926.

  • There typically has been one bad year for every four good ones.

  • The average loss in a down year was -8 percent.

  • The worst annual loss was 28 percent in 1931.

  • A 60 percent-40 percent stock-bond mix is typically about half as risky on the downside as a 100 percent stake in the stock market.

A lot of investors with extra cash, however, want to profit from upcoming trends in the stock market.

Our advice: Set aside extra cash for speculation in the stock and bond markets. But keep this stash separate from your core holdings. Make this stash your mad money.

There are good ways and bad ways to speculate in mutual funds.

The bad ways:

  • Chasing after hot performing funds


  • Buying the same investments as your friends, neighbors and relatives.

  • Failing to do your investment homework.

The good ways:

  • Using moving averages and technical trends to invest in funds. When a fund's share price is above the funds average price over the past 200 days, it's a buy sign. When the share price falls below the average 200 day share price, it's a sell sign. You can check a fund's moving average at http://finance.yahoo.com. Fabian's Maverick Investor is a monthly newsletter that recommends funds based on moving averages.

  • Do your investment homework. Read economic and brokerage reports that forecast which sectors of the economy will do well or badly in the coming months. Read mutual fund reports on the market outlook.

  • Invest in funds that show the best track records for bouncing back after bad years.

  • Always have an exit strategy if you're speculating. For example, you may want to sell if an investment drops 10 percent to 15 percent in value. You can always offset any gains against losses on your income taxes.


Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is "Rags to Retirement (Alpha Books)." You can e-mail them at MWliblav@aol.com.

To read more columns, please visit the column archive.

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