Do you agree?

[Beppington]

1) None of us can consistently predict much of anything related to the future value of financial markets. Only that we're pretty darn sure the markets and the economy are going higher over the long term.

2) None of us can predict whether the U.S. or "Emerging Markets" or some particular country or sector will be the next to outperform others, therefore we should not waste time, effort and money trying to make such predictions.

3) Our savings and retirement accounts should be thought of as a battery that we charge and charge and charge to the best of our abilities during our working years, and then draw from during retirement. We don't want to gamble with our battery and risk getting stranded! But we should accept that other humans' actions, emotions, beliefs, fears, etc. will affect the economy and the markets, and therefore our batteries' charge level will flucuate somewhat during our working years and through retirement, and we can't do anything about it, nor should we try.

4) The cells of our battery: Index mutual funds. We should open several low-cost (low expense ratio) index mutual funds, establish an allocation percentage target for each fund for our working years, and an allocation percentage target change that will apply thru our retirement years (aka less and less in stocks and more in bonds, the older we get).

5) As soon as possible, put money into our new mutual funds per our newly established allocation target.

6) Save the same portion of our paycheck, each and every pay period.

7) Allocate this savings into our mutual funds in the way that re-balances our holdings back to our original allocation target, as closely as possible each and every pay period. This will absolutely guarantee each and every time that we buy low and sell high.

8) Stay the allocation course we've established. Don't put more into "International" this pay period because we "heard something" or "suspect something" and think it's going to continue to soar higher. Rather, if putting 96% into our "Small Cap" fund is what it takes to bring that "sorry" lagging fund back up to our established target, we do that because it means we got to buy shares cheap.

These are the things I believe, but if anyone disagrees I would love to hear about it because I'm always wanting to learn more. Thank you.

[disneysteve]

Generally a nice list.

I don't agree with #7. I don't think you should be trying to rebalance your portfolio with every regular contribution. In fact, for most people, that isn't even possible. Quarterly or even annual rebalancing is sufficient.

[Beppington]

Generally a nice list.

I don't agree with #7. I don't think you should be trying to rebalance your portfolio with every regular contribution. In fact, for most people, that isn't even possible. Quarterly or even annual rebalancing is sufficient.

I may have stated it wrong. I don't mean to re-balance by selling any shares, only to re-balance by putting the correct amount of money into each lagging fund so they're brought up to the allocation target ... unless the amount of savings available isn't enough to completely hit the allocation target, then you just bring the laggards up as high as you can in an even way.

Does that make more sense?

[disneysteve]

I understand what you are suggesting. I'm just disagreeing with it.

Let's say you get paid every 2 weeks and, with part of each paycheck, put money into your investments. You are suggesting that each of those bi-weekly investment contributions should go to whichever fund or funds have dropped below the target allocation you have set for them at that point. Is that correct?

If so, I think that is virtually impossible to effectively manage. First off, many people contribute through some form of automatic investment plan. If you participate in your company's 401k plan, you couldn't do this. You can't have each contribution be allocated differently and change it week to week. You have to pick an allocation and can probably only change it quarterly. The same goes for Roth accounts. If you have $416/month automatically debited from your account to go to your Roth, you need to set that up in advance. You can't decide each month where the money goes. Outside of retirement accounts, the same holds true. I have $200/month going into our S&P 500 fund, for example. I can't decide one month to send that $200 somewhere else, or only put $100 into that fund and $100 into a different fund because that monthly debit is automatic.

Aside from all of that, I don't know about you but I don't sit down and analyze my portfolio every week or two and check my asset allocation. I do that annually. I don't have the time or desire to start doing it every 2 weeks or even every month nor do I think there would be any benefit to doing so.

[Beppington]

You're correct about what I meant.

And, I do see what you're saying about peoples' holdings in 401k accounts where they can't change the allocation often. My plan would not work for such an account.

I don't have a 401k, so I wrote all that based on what I do, which is: I have a regular Individual account at Vanguard. I've made a spreadsheet containing all relevant data pertaining to the account. So, now, each pay period I can quickly open my spreadsheet, update the NAV prices (and quantities when necessary, after dividends, etc.) of all 10 funds, type in the new amount I have to allocate, and wah-lah, it tells me how much to put into each fund. It literally takes a total of about 7 minutes every two weeks.

As for your S&P 500 fund, I would suggest opening at least one additional index fund, maybe a Short-term Bond Index fund, and then you can do what I'm saying: Whichever is the laggard between the two gets more of your $200 to re-balance them.

While your dollar-cost averaging is an excellent step I agree with totally, and does reduce volatility, the purpose of my additional step is to further further reduce volatility by investing in funds that are correlated as low as possible, which over time causes your investments to far out-perform.

I'm not clear on why you can't decide where your $200 goes. If you would also open a money market fund, you could have the entire $200 go into that fund, and then allocate it directly from there into your S&P 500 and Bond funds.

I see no problem with taking a quick look at my investment account every week or two. First of all, it interests me. Second, its existence is one of the major reasons I work. I suspect it's folks who ignore their investments that are apt to get burned, or find out far too late that they've been ripped off in some way, maybe by fees they didn't know about, or some change in their account's fine print, etc.

If you would do the statistical math on how low correlation, and therefore lower volatility, positively affects your long term investment returns, you also might be more willing to take a quick look every two weeks.

[disneysteve]

The problem (not really a problem, just a reason) that I couldn't easily do what you suggest is that I consider my entire portfolio to be one big pool of money as far as asset allocation is concerned. That includes taxable accounts, traditional IRA for my wife and I (no longer contributing), Roths for each of us, an old 403b from my wife, her current 401k, some taxable investments (stocks, mutual funds) and our various cash accounts (checking, money market, CD, etc.). Some of those funds could be easily adjusted as you suggest. Others can't. So attempting to rebalance the overall portfolio on a bi-weekly basis would be a nightmare and probably not even possible.

Also, I don't contribute to certain accounts regularly. For example, I max out our Roths by June and then don't add a cent for the remainder of the year. I could shift around money within those accounts by buying or selling shares but that would further complicate our portfolio. My wife's Roth, for example, is all in one fund. I don't want or need more funds in there.

If what you do works for you and your portfolio, that's great. Certainly nothing at all wrong with that method. I just don't think it will work for a lot of other people with more complex portfolios. If all of my money was in a taxable account at Vanguard, spread among various funds there, I could see myself doing some version of the same thing as you.

[Beppington]

I do have a similar "problem". I have a retirement account with my employer that I have no control over ... so I can't come up with any reason to try to consider it in the plan I outlined. It's there doing it's thing, & I just follow my plan with all other investments that I do have control over.

In fact, in my fairly simple spreadsheet I include/ consider my checking account, my small local savings account, my local money market account, a Vanguard money market account, & of course all 9 of my Vanguard index funds.

I simply login to the websites of my 3 financial institutions & update the values in my spreadsheet. It literally takes 5-8 minutes to do the entire thing, from updating my spreadsheet thru allocating the new savings money.

I can see where some might think it sounds like I've gone overboard, but if you looked over my shoulder and watched me do it twice a month, I think you'd see how easy/ fast it is.

Assuming you know what investment each holds, I don't see why you couldn't make a spreadsheet that considers your Roths, 403b, 401k, cash, etc. For ones you don't/ can't control, just don't include them in the allocation formula.

Question: If you don't make a spreadsheet something like this, when you retire how will you know how much you can withdraw each month ... and how will you know which investment to take from? I'll be withdrawing from the one(s) that has/ have performed best, i.e. sell high.

I hope I don't sound argumentative, I just enjoy discussing finance ... & obviously I like my plan, how organized it is, etc.

[Slug]

Question: If you don't make a spreadsheet something like this, when you retire how will you know how much you can withdraw each month ... and how will you know which investment to take from? I'll be withdrawing from the one(s) that has/ have performed best, i.e. sell high.

I hope I don't sound argumentative, I just enjoy discussing finance ... & obviously I like my plan, how organized it is, etc.

Noone's going to really argue with your plan. It "feels" a bit too hands on to me, and I tend to micromanage my money too but to each his own. Just remember there are opportunity costs associated with the time you spend thinking and managing your money. If there is no higher joy, then by all means micromanage away, but often there are other important things to participate in as well.

To your question, I'll start worrying about this in about 25 years which is about 5 years before it becomes relevant.

[disneysteve]

For ones you don't/ can't control, just don't include them in the allocation formula.

Well, you could still include them. In fact, you need to include them. Maybe not so much for a younger worker just starting out but certainly for someone farther along in their career who may have a significant chunk of change in their 401k. You can't just ignore that money in the allocation formula.

If 50% of your total portfolio is in your 401k, you need to work around that when rebalancing.

I'm actually off from work next week. I think I'll take a look at my current spreadsheet and see where things stand and how involved it would be for me to rebalance more often in the manner that you use. I need to do some year-end financial stuff anyway.

[cptacek]

I think that sounds like a good plan, and can see how it wouldn't take that long to set up. It probably takes longer to sign in to some of the sites than it does to figure out what to do that pay period!

But, the one problem with it, as far as I can see, is that you could ride a fund right down into the ground. If one fund goes down and down and down, you will have to keep putting all your contributions to it to try to rebalance. Has there ever been a case where a mutual fund is worth nothing? This would be more of a problem with individual stocks...what if GM was part of your allocation? You would have bought and bought some more, and now the UAW would own your shares. But, I've never heard of a mutual fund being worth $0, so I may be blowing this out of proportion.

[disneysteve]

That's a good point, cptacek. If you have built your own portfolio with individual stocks rather than funds, this could be dangerous. As for funds, I don't know if any have gone to zero, but many have dropped out of existence or been merged into other funds over the years. Rebalancing can't be done blindly, just throwing money at diminishing assets. You still need to track your investments and holdings and performance and not throw good money after bad.

[Beppington]

I think that sounds like a good plan, and can see how it wouldn't take that long to set up. It probably takes longer to sign in to some of the sites than it does to figure out what to do that pay period!

But, the one problem with it, as far as I can see, is that you could ride a fund right down into the ground. If one fund goes down and down and down, you will have to keep putting all your contributions to it to try to rebalance. Has there ever been a case where a mutual fund is worth nothing? This would be more of a problem with individual stocks...what if GM was part of your allocation? You would have bought and bought some more, and now the UAW would own your shares. But, I've never heard of a mutual fund being worth $0, so I may be blowing this out of proportion.

The plan is to buy only index mutual funds, which represent the entire market, not just specific sectors, so theoretically one of these funds could only die if the entire economy dies. And if that happens, well ...

[disneysteve]

The plan is to buy only index mutual funds, which represent the entire market, not just specific sectors, so theoretically one of these funds could only die if the entire economy dies. And if that happens, well ...

Yes, with a portfolio of index funds, I'd say the "going to zero" fear would not apply.

Actually, if I were starting out in my investing life today, knowing what I know now, this is probably what I would do - build a portfolio of index funds. That could be as simple as a total stock market fund, a total international market fund and a total bond market fund, maybe 70/20/10 for a person in their 20s (not counting a cash position) and gradually adjusting as you get older.

[EconoMutt]

I use index funds also. I really think they're they place to put your funds.
I have been burned using managed funds.
I also have a large portion of my assets in good old CD's
I hope everyone is correct in the assumption that the market always goes up over time. If not, most middle class people in the US are in big trouble.
It's interesting when I'm in the airport on a day the market is going down.
Everyone looks intensely at the TV's when the market reports cross the screen. You can see the fear and agony on their faces.
As stated earlier, I sure hope these financial types aren't blowing smoke at us just to make a profit. ;-)

[banditfist]

1) None of us can consistently predict much of anything related to the future value of financial markets. Only that we're pretty darn sure the markets and the economy are going higher over the long term.

Define "long term".

Are we talking 1896-2009? Yes, I would agree.

Or are we talking from 1968-1982 (14 years) or 1997-March 2008(11 years)? No, I would disagree.

The market should exceed the rate of inflation over a very long term. But, there is a smoothing that boom-and-bust cycles that will revert to a mean average of the longer term.