There a regular poster on the Bogleheads forum called Adrian Nenu who always posts the following, which is said to have origins with author Larry Swedroe.

I don’t know if I agree with the last part that says that your equity position should always be less than 50%. However, the first part seems to offer a good rule of thumb when it comes to investing in a target date retirement fund.

Let’s say you have the Vanguard Target Retirement 2050 Fund (VFIFX) and it currently contains 90% stocks. Using this rule of thumb would mean that a possible one-year loss for such a fund is 45%. You should ask yourself – can you handle a 45% drop in the value of your retirement assets, even if you have 40 years before you need it? The good thing about living through 2008/2009 is that you probably have a better idea of the truth. If you’re going to run for cover in cash, only to buy back in later (like now) when prices are 50% higher, then that’s something to avoid.

One thing that I recommend to my more conservative friends who still want a simple investment is to simply buy a different “date”. For example, if you could purchase the Vanguard 2025 Fund (VTHRX) which has 75% in stocks. Who cares if the label is 2025. Meanwhile, I encourage them to continue to learn more about investing so that the can understand the risks trade-offs better and adjust their tolerances accordingly (up or down).

If you don’t know the name David Swensen, he is an investment manager who is best know for managing Yale Universities huge endowment. What makes him interesting is that even though he does invest in some hedge funds and private equity, he doesn’t believe that the common investor should try to emulate this. An excerpt from a recent interview in the Yale Alumni Magazine sums it up:

That’s why the most sensible approach is to come up with specific asset allocation targets that you can implement with low-cost, passively managed index funds and rebalance regularly. You’ll end up beating the overwhelming majority of participants in the financial markets.

In his 2005 book Unconventional Success: A Fundamental Approach to Personal Investment, he proposed a model asset allocation using what he believes are the 6 “core asset classes” that an individual investor should own:

Asset Allocation For 70% Stocks/30% Bonds (with ETF examples)
30% Domestic Equity (VTI, IYY)
15% Foreign Developed Equity (EFA, VEA)
5% Emerging Markets (VWO, EEM)
20% Real Estate (VNQ, ICF)
15% U.S. Treasury Bonds (SHY, IEF)
15% Inflation-Protected Securities (TIP, IPE)

But in the Yale interview, he proposes a slight change that reduced real estate exposure in exchange for increased emerging markets holdings:

Today, Swensen says, economic conditions might call for a modest revision. He now recommends that investors have 15 percent of their assets in real estate investment trusts, and raise their investment in emerging-market stock funds to 10 percent.

This interview was printed in March/April 2009, so I’m not sure if you could call this performance chasing or not. I don’t follow his model asset allocation exactly anyway – I think the best idea is to read his excellent book and find out his reasoning for holding each asset class. The exact weightings you can hash out later. It definitely added another dimension to my investing views.

Berkshire Hathaway’s (BRK) recent announcement that it was buying railroad Burlington Northern Santa Fe (BNI) also included a provision for a 50-for-1 stock split of B shares so that smaller shareholders of BNI would be able to be converted to Berkshire shares and avoid capital gains. Warren Buffett has been trying to avoid this for years, so after some random web surfing — I mean… research, I figured I’d share my findings.

At the end of trading yesterday 11/18, Berkshire’s A shares currently cost $103,100 apiece and B shares were $3,430. After a 50-to-1 split, a B share would cost about $69. Several news articles are talking about how this brings the share price down to the “common man”. For a $69 investment, you should able to attend the Berkshire Hathaway Annual Meeting in Omaha this May, although you could also buy tickets for $5 on eBay directly from BRK.

But wait, you may already own a piece of Berkshire… or you may soon.

S&P 500
Right now, Berkshire Hathaway is not part of the S&P 500. Many folks (including me in the past) thought the S&P 500 was simply the largest 500 companies in the US, but not quite. I’ve read that BRK is likely excluded due to inadequate trading volume of their high-priced shares. If the stock split occurs, it is possible that BRK will become part of the S&P 500 and thus be bought by every S&P 500 index fund out there. I’m sure Wall Street traders have already begun the speculating.

As of 1/18, the market cap of BRK was roughly $160 Billion. Looking at this chart of S&P 500 components sorted by size, BRK would actually be #9 on that list, as it is worth more than even Chevron or AT&T. If included, BRK would constitute about 1.65% of the index.

Total Stock Market
However, you may already own a piece of Berkshire if you own part of a mutual fund that tracks an index following the “total” US stock market. For example there’s the Vanguard Total Stock Market Index Fund (VTSMX), which is held within all of the Vanguard Target Retirement Funds. By my rough calculations, BRK is approximately 1.3% of the broad US market. So for every $10,000 of VTSMX or VTI you hold, you own $130 of BRK already.

Sharebuilder
Of course, for years now you could own $1 or $50 or $500 of BRKB by buying partial shares of BRKB through Sharebuilder ($50 bonus). You wouldn’t want to go too small as the $1 to $4 commission would take too big a bite, but it can be one way to gradually accumulate BRK shares. I think I have about $45 worth right now, myself, mainly due to an opening bonus.

Speaking of LendingClub, I saw that they now offer a IRA with no opening fees and no annual maintenance fees. Previously, there was a $250 annual fee. However, it does now require an increased $15,000 minimum opening balance, which essentially restricts it to a 401k rollover or the transfer of existing IRA funds.

Since P2P loan interest is taxed at ordinary income rates like interest from savings accounts, the ability to place them in a tax-deferred account is attractive. But since person-to-person lending is such a new asset class, I would hesitate to make it larger than say 5% of my portfolio, which would require a total portfolio size of $300,000. So, I’m out.

It is interesting that the custodian EntrustCAMA allows a lot of options in their Self-Directed IRAs like holding physical precious metals, investing in private small businesses, and investing directly in real estate. I’m not sure if you can only hold LC notes in this free IRA.

Mentioned previously, the cash rebate promotion offered by Prosper person-to-person lending has been extended to December 31st.

Original promotion
– Invest $1,000 to $4,999 by November 15, and you will still receive your 1% cash bonus by December 4.
– Invest $5,000 or more by November 15, and you will still receive your 2% cash rebate into your Prosper account by December 4.

Extended promotion
– Invest $1,000 – $4,999 by December 31 and receive a 1% cash rebate into your Prosper account by January 22, 2010.
– If you invest $5000 or more, you will receive a 2% cash rebate into your Prosper account by January 22, 2010.

Schwab just sent me a press release announcing their new series of exchange-traded funds (ETFs) that have low operating expense ratios and passively track indexes.

The most commonly-noted drawback of ETFs is that you must buy them like a stock and thus pay trade commissions. However, if you buy these within a Schwab brokerage account, there are no commissions charged. Here is a chart comparing the new Schwab ETFs and their corresponding competitor from Vanguard. The ETFs don’t necessarily track the exact same index, but they are pretty similar.

This is definitely worth a second look. A possible criticism is that Schwab may increase expenses and reinstate trading fees in the future, which may lead to tax hits if you wish to switch back to other ETFs. Meanwhile, Vanguard has a long track record of rock-bottom expense ratios. However, it may also be that increased competition in this area by others like Fidelity and E-Trade will prevent this from happening.