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This article was posted on June 1, 1999.
Effective Diversification Calculation
Motley Fool Rule Maker |
| No. |
Security |
Current
Value |
(V)
Relative
Value |
(R)
Beta |
(V x R)^2 |
Comments |
| 1 |
VMMXX |
$23,000 |
0.2300 |
0.05 |
0.00013 |
Vanguard Money Market Fund |
| 2 |
AOL |
$30,200 |
0.3020 |
1.75 |
0.279312 |
America On-Line |
| 3 |
AMZN |
$18,400 |
0.1840 |
2.34 |
0.185382 |
Amazon.com |
| 4 |
ATHM |
$7,000 |
0.0700 |
2.13 |
0.022231 |
@Home |
| 5 |
EBAY |
$5,800 |
0.0580 |
2.50 |
0.021025 |
E-Bay |
| 6 |
AMGN |
$3,800 |
0.0380 |
1.05 |
0.001592 |
Amgen |
| 7 |
IOM |
$1,000 |
0.0100 |
1.75 |
0.000306 |
Iomega |
| 8 |
SBUX |
$1,900 |
0.0190 |
1.25 |
0.000564 |
Starbucks |
| 9 |
GT |
$2,000 |
0.0200 |
1.15 |
0.000529 |
Goodyear |
| 10 |
CAT |
$1,900 |
0.0190 |
1.15 |
0.000477 |
Caterpillar |
| 11 |
DD |
$2,000 |
0.0200 |
1.00 |
0.000400 |
DuPont |
| 12 |
CHV |
$2,000 |
0.0200 |
0.67 |
0.000180 |
Chevron |
| 13 |
TDFX |
$1,000 |
0.0100 |
1.75 |
0.000306 |
3Dfx |
| - |
Total |
$100,000 |
1.0000 |
- |
0.51244 |
= Sum(V x R)^2 |
Effective Diversification, D = 1/(SUM (V x R)^2) = 1/(0.51244) = 2.0
Non-market Risk = 1/(SQRT (D)) = 1/(SQRT 2.0) = 71.58%
100% Safe Withdrawal Rate = 1.17%
95% Safe Withdrawal Rate = 1.47%
90% Safe Withdrawal Rate = 1.60%
Note (1): Safe withdrawal rates based on 40 year pay out period.
Note (2): The $77,000 stock portfolio is composed of the Motley Fool Rule Breaker stocks in thier approximate percentage of portfolio on May 12, 1999.
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