Monday, June 18, 2007

Investing Strategies

So gentle readers, how interested are you in investing? I have an investment strategy that I would love to implement more fully if one of you would fund me (Kirk?). Actually, for a substantial fee (a Zuka Juice?) I will share my strategy with any of you. Alright, I'll share it for free. My basic strategy is pretty simple. (This is for the long-term, not for saving for your down payment on a home or something like that).

1. Invest as close to 100% in stocks as possible.
I am approaching 30, so my investment horizon is about 30 years. Even though stocks are bumpier than bonds, money markets or a piece of land somewhere, they perform better over long periods. These higher returns will help stave off losses to inflation. Stocks are also resistant to inflation because their underlying value is tied to physical assets owned by companies. I think limited investing in commodities (e.g. gold and silver) is okay as a hedge against extreme inflation, but commodities don't create wealth or pay dividends. Still, having a pile of gold coins sitting in a safe deposit box that I can go count once a year is appealing from a purely greedy perspective. (Probably the easiest way to invest in gold or silver though is through an ETF--see number 2.) As the date you actually need the money draws nearer shift to more conservative investments. Retirement target date funds do this automatically. A word of caution on investing outside securities (stocks and bonds). Be wary about investing in business ventures run by friends or relatives. It's too easy to let personal relationships cloud your financial judgment. Just because Brother Prosper is a nice guy doesn't mean his gold mine in Canada is a legit investment. I'm not saying don't do it, just be very careful. Only invest if you can afford the risk. Do not make it a core investment that you will depend on for retirement income.

2. Invest in stocks through exchange traded funds (ETFs).
I subscribe to modern-portfolio theory. I don't know all the math mumbo-jumbo, but the basic premise is that investment returns depend on asset allocation (stocks, bonds, sectors, different countries) more than specific choices within asset classes. The best (cheapest) way to invest broadly in specific asset classes is through ETFs. They function just like index mutual funds, but can be traded like stocks and typically have lower expense ratios (they're cheaper) than mutual funds. Investing in stock indexes saves you the time, energy and expense of trying to find winning stocks and mutual funds (or paying a broker to), because ultimately the odds are that your choices will return near the market average (actually slightly less than average once transaction costs are taken into account).

3. Invest in a Roth IRA and make regular contributions.
Roth IRAs blow my mind dude. True, you can't touch the money until age 59 or so without a tax penalty, but when you take the money out Uncle Sam doesn't get a red cent. It's all yours baby! You can set one up for you and your spouse (and your kids at a certain age if you do it right). If you have a 401(k) at work with employer matching it probably makes sense to contribute there first to get the maximum match. After that, put the rest into Roth IRAs.

Contribute a set amount every month and don't try and figure out the best time to put your money into the market. This will give you "dollar cost averaging" which is a fancy way of saying you will buy relatively more shares at lower prices than higher prices.

4. Choose an asset allocation strategy.
Invest in emerging markets. This is my personal opinion. I try and follow a very aggressive asset allocation in our (actually my wife's) Roth IRA. Here's my target asset allocation.
EEM (emerging markets ETF) 25%
VV (US large cap ETF) 30%
IWN (US small cap-value ETF) 20%
RWR (Real-estate investment trust) 20%
other (individual stocks and cash) 5%

I have been heavily weighted to emerging markets for several years (used to be 30%) and the returns have been very good. I think emerging markets will continue to boom, but they will be jumpy. Right now I only own one individual stock (FRO). It's an oil tanker stock that pays an insane dividend (>15% annual yield). I try and avoid picking individual stocks, but it's always fun to pick one or two. What percentage you dedicate to a given ETF will depend on your goals and risk tolerance. Ideally, you want asset classes that are not highly correlated (I think this is becoming increasingly difficult as international and domestic markets seem to move together more and more.)

5. Re-balance your portfolio regularly.
Keep emotion out of your investment decisions. You must suppress your urges to be human and trust your own judgment too much. Be cold and calculating. It will help you you buy low and sell high. You can do this two ways. First, every quarter use your most recent contributions to buy more of whichever ETF is lagging its target allocation. If you do this you will be buying more of ETFs that are cheap relative to other asset classes. Or you can re-balance every time an investment deviates from your target allocation by a specific amount (e.g. 5 percentage points).

So that's my plan. I look forward to enacting it on a grander scale once I get a real job (oh blessed, day!). Comments and questions are welcome. This is just investing, not financial planning which is important for looking at your whole financial picture. We met with a financial planner from Primerica (for free) and really found it beneficial (i.e. they didn't try to sell us expensive life insurance). I'll post about that later.


  1. Wow, Rob. I thought Regan and I were doing well because we had a (small) IRA and some short-term emergency funds squirreled away. The completeness of your investment strategy totally blows my mind.

    Roth IRAs are cool, but once you hit a certain income, you might want to expand into a traditional IRA, because Roth's have a contribution limit - $4000/year in 2007, I think.

    I don't really know, though, Regan wears the financial pants in this family, and that's fine with me. If it were my responsibility, I'd put everything into lottery tickets, or something equally awesome.

  2. You're right about Roths and the contribution limit, but with two of you that is 8k/year. It will probably be a while before we would be able to put away much more than that after 401k contributions and college savings funds.

  3. I continue to sink my money into rare garbage pail cards and anything jointly autographed by Jerry Sloan and Stephen Covey. I had a dream about this financial strategy and lets just say I doing very, very well. You could even say I have enough money to buy the internet.

    Actually I feel more like Aaron in that I thought I was the next Greenspan with my Roth IRA and stash of cash in my sock drawer.

    Rob, you make me realize that I have to man up and get more learned about this investment stuff. Any good resources for investment novices like myself that you could recommend would be appreciated.

  4. Whoa dude! Seriously bro, my head hurts after reading all of that.

  5. As far as reading, I highly recommend anything written by Larry Swedroe. I read a book of his entitled "Rational Investing in Irrational Times" and he has a couple other more recent books out. I haven't read them, but I imagine they recommend similar investing principles. He really helps you understand the mutual fund industry and some of the things they do that are not in your best interest if you invest in their offerings (e.g. advertising).

    Before I read his book I spent a lot of time reading advice columns (MSN Money has a bunch) and some books on how to pick stocks. Most of those things made me feel more confused. I mean, how do you pick the right stocks or mutual funds out of literally thousands of choices? Even payed professionals stink at it. More often than not they under-perform vs. the market average.