One of the basic tenets of portfolio creation is that you should diversify. This is good advice — as long as you are truly diversified.

Unfortunately, it’s too easy to misconstrue what constitutes diversity. In many cases, investors divide up their portfolios between stocks and bonds, and call it good. While this can provide some basic diversity, you might not end up with true diversity.

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We all have biases. From politics to the way we view our own upbringing as “normal,” there are biases in our lives. And they affect more than just what they believe. They can also affect our behavior, and how we handle our finances.

Recognizing your biases is the first step toward overcoming them. This is particularly important if you want to keep your own biases from messing up your finances. If you aren’t careful, the things that you think are true can mess you over big time:

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I was logging into my Vanguard account when it told me that my current mix of investments differed from my target by more than 5%. A few years ago, sometime shortly after I opened the account, I set the target asset allocation based on the classic “120 minus your age” rule of thumb for your investment mix of stocks and bonds. I’ve seen the rule expressed as 120 minus your age, 110 minus your age, or a nice round 100 minus your age. The higher the first number, the more aggressive the investment mix.

Rules of thumb work well when you need an answer quickly. They are a terrible idea when you have the time to do a more rigorous analysis and you decide to use the rule of thumb because it’s easier. They’re also bad because they make you feel like you did the work when you didn’t. The best way to figure out your asset allocation, at least in my non-financial planner opinion, is to separate your money into “goal buckets” and then decide the rate of growth you need for each and then determine your allocation that way.

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We live in times where it can be difficult to be an investor. It’s hard to know what will happen next, no matter who you are, or where your money is invested. Every day, it seems as though there’s a big move one way or the other, and it always seem as though everything is on the verge of a meltdown.

If you want to find some measure of peace of mind as an investor, here are 4 things you can try:

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One of the ways that you can diversify your portfolio is to add bonds to the mix. There are a number of different choices when it comes to bonds. You can purchase bonds from the government, including foreign and city governments. Additionally, you can get bonds from corporations.

When many people think of bonds, though, they immediately think of U.S. Treasury bonds, often savings bonds, even though it’s possible to invest other types of bonds. It’s also common to think of bonds purchased in huge amounts, especially when it comes to institutional investors.

Average investors, though, can use bonds in their asset allocation by investing in baby bonds.

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Costco, one of my favorite companies (and one I am invested in), announced that it would be paying out a special dividend that would total more than $3 billion based on the number of shares outstanding. Companies don’t often pay out special dividends but given the uncertainty of tax rates next year, Costco is one of several companies paying out a special dividend in 2012, rather than 2013.

This highlights one of the long running myths of dividend investing – that you can buy a stock just before it pays out the dividend and then profit from it. It’s known as buying the dividend and it doesn’t work.

Unfortunately it’s not true. A broker might tell you that it’s a good strategy but it’s not for two reasons:
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One of the ways that investors — particularly beginning investors — add diversity to the portfolios is with the help of mutual funds. Mutual funds can provide you a way to get the benefit of a variety of investments without the need for individual stock picking.

However, before you get too excited about mutual funds, it’s important to have a handle on what you should know about these investments. Here are 5 things you should know about mutual funds:

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For the last few years, I’ve started investing in blue chip companies that offer nice dividends, as an alternative to high yield savings accounts (not a replacement alternative, more like a much riskier alternative), and one type of company I’ve stayed away from has been Master Limited Partnerships. I knew that taxes were going to be trickier with MLPs and I did some brief reading, enough to know it was trickier than simple reporting, but now I want to know more.

Today, we’ll describe what an MLP is, how it differs from a “regular” company, and the tax considerations when you invest in one.

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