So in part 1, we studied the mechanics of the 403B; in part 2, we did a little bit of research into the funds of my 403B; in part 3, we'll go through the macro aspects of constructing a portfolio.

Constructing a basic portfolio is bit like making a stew or a curry - the idea is to make it rich (hah hah) and interesting. You need diverse ingredients, but you have to hit the basics, and the proportion of ingredients give you vastly different results.

All those funds that you can pick for a portfolio generally boil down to three types, two if you are unlucky, a rare four if you are lucky.

1. equities - individual stocks, mutual funds, index funds. (invest in the profit)
2. bonds - government, muni, currency, corporate, even a bond fund. (invest in the debt)
3. cash or ready asset
4. commodities (precious metals usually, other commodities tend to be very volatile).

A portfolio comprised of 100% of any of these 4 ingredients is a bad idea. This last month has taught many people why all in into equities (100%) is very risky. And 100% in company stock (often a company matches is in company stock) is geometrically more risky. A WaMu-er got triply hit: stocks are low, WaMu stock is 0, WaMu-er might not have a job. But 100% in bonds is bad - generally a bond is more stable than stock, but often the return isn't juicy enough and with this current credit crisis, investing in debt doesn't seem like a hot idea. 100% in cash and ready asset feels familiar, but again, its an electronic mattress - only a 1-2% return.

You tend to need at least two pieces: bonds and equities. You can make even finer adjustments with bonds, equities, and cash. Bonds stabilize returns, stocks juice your returns up (not this month), cash gives you a baseline and gives you flexibility to buy additional funds.

An old-style rule is that the % of bonds/cash should be about your age, rest in equities. I'm 46, so using the rule would be about 40-45% bond/cash and 55-60% stock. This is for an average to slight risk-adverse person. How much stock and bond is right for you is something that you have to establish on your own.

My current holdings are 60% bond/cash, 40% stock. I am a tinkerer, a watcher, and not that adverse to risk. So I'm investing like a 60-70 yr old woman and my portfolio could use a shot of Botox!

Another good strategy is to look inside your target year fund (eg Vanguard 2045 fund) by getting the ticker symbol, then putting it into Morningstar and seeing how much they put into equities and how much into bond.

Once you set the general proportion of bond vs. equities, its time to establish what kinds of specific funds you want to invest in. Next time.