Continuing onward with our discussion of how diversification in investments, asset allocation and the process of rebalancing works, let's get re-acquainted with Joe Jones, our 45-50 year old composite.

Joe is hoping to retire in about ten years. He is not sure he has enough money saved. He is also concerned that because his savings are not what he thinks they should be, he may have to take on a lot more risk investing in capital markets in order to reach his goals. He is not sure he will be comfortable doing that, and he does not yet realize what risk in a bear market can mean to any investor.

Last week, we only assigned percentages to our allocations, this week we've put some numbers in front of the allocations. These are the facts we will use.

Joe has a hundred thousand saved, $80,000 is squirreled away in his pension plan, and he has about $20,000 in statement savings and checking. His pension allocations are as follows, and reflect the pie charts printed last week, February 2, 2002. If you would like to have those for comparisons, look to the new RG website to see if you can obtain a copy. Keep in mind one very important fact, Joe is managing his own pension money. It is not being taken care of by an outside portfolio manager.

It is one year later, the beginning of the year 2000, and capital markets have just been roaring. As investors love to say, "the bulls are way ahead and the bears are hiding in the caves". Joe is ecstatic. Look at how well his investments have done! Note, how the allocations have shifted dramatically because of the accelerated earnings in different sectors.

This portfolio does not even resemble his original portfolio, and he feels he is way ahead of the game. He is so pleased with his investment picking skills, not only is he not going to change his allocations but he is buying more technology sector funds, because they have done so well, he can't lose.

The year 2000 moves forward, the capital markets reach April 2000, and many investment sectors start a free-fall; will Joe succumb to Roller Coaster Investing? See the attached chart. Investor emotions very often sabotage the best investment allocations. They work something like this, here we will use the example of buying one stock on someone else's tip.

One - Curiosity, your friend tells you about a great stock tip, and you look it up on the Web.

Two - Anticipation, you become attached to the name and start watching it.

Three - Greed and desire to be a player, well, turns out it is a great tip, you buy it and hope to cash in as it continues to climb.

Four - Impatience, the stock makes some decent gains, in a matter of weeks, then activity stabilizes

Five - Concern, what is happening to this great stock? How could it drop in value?

Six - Fear, takes over as the value continues to fall

Seven - Panic, the value has fallen below what you have paid for it

Eight - Relief, you cannot hold on, so you fold and finally sell, cutting your losses

Nine - Anger, the stock price bounces back and starts to climb again

Ten - Anticipation, it is going up, you knew all along you had a winner, and you should not have sold out

Eleven - Greed, and you buy it again, at a new high, vindicated because you just know it will do well.

This is classic investor emotional psychology, buying at the high and selling at the low. The key to consistent investing is making good selections, setting up a diversified allocation strategy , and sticking to your game plan.

Next week, we look at Joe's portfolio at the beginning of 2001. Will it be higher or lower than 2000? and we discuss how rebalancing at determined intervals helps mitigate market volatility.

Martha Harris Myron CPA CFP is a Certified Financial Planner (tm) (US license) practitioner. She holds a NASD Series 7 license, is a US tax practitioner, and is the winner 2001 - The Bermudian Magazine - Best of Bermuda Gold Award for Investment Advice. Confidential Email can be directed to marthamyronnorthrock.bm The article expresses the opinion of the author alone. Under no circumstances are the contents of this column to be taken as recommendations to buy or sell investment products or as a promotion for financial planning. The Editor of The Royal Gazette has final right of approval over headlines, content, and length/brevity of article.