QuestForAMillion.net

Alright, after my recent issues with trying to figure out the market I think I’ve come to some conclusions.

#1. It’s a fallacy to think that I can beat the market. I’m way outgunned. Mutual fund managers do this stuff for a living and most of them can’t beat the market. This is just a hobby for me and I don’t have anywhere near the tools the professionals and big money institutions have.

#2. I’m too emotional as an investor. One of the worst things you can do is fall in love with your stocks. I did that with Apple. I watched it constantly. Why? I don’t know. I guess I just liked watching it go up every day. It hurt when it went down. I shouldn’t care what it does each day if I’m in it for the long term.

#3. Although I’m fascinated by financial markets and I love them, there are other things I’d rather do than sit there and screen for stocks. There are thousands of stocks in the stock universe and finding the one or however many that are going to beat the market is a hugely time-consuming task.

#4. Trading is expensive. The bulk of the money I have available to trade with is in an IRA, so I don’t have to worry about taxes for now, but I do have to worry about commissions. Although the commissions at my broker are under $10, making a lot of trades will incur a lot of $10 expenses.

#5. I have no idea what the market is going to do. For the past month I was sure it would continue down. I’ve been mostly wrong. I’m not surprised.

The Structure

My structure going forward is mostly geared towards simplicity. I am not going to watch the market all the time. Really. I mean it. I normally have a portfolio tracker going throughout the day. That will end. It hasn’t ended yet because I need to close an additional position in Apple. Once that’s done, I’ll just look at the daily closing prices. That’s all that matters anyway. So here’s the meat and potatoes of the structure:

• Invest in index ETFs, except in my 401(k). There are no ETFs available in my 401(k) plan and only one index fund. I do have the option of putting contributions into a brokerage account, but that would mean I have to pay commissions every time I buy something. I don’t pay commissions if I just invest the contributions in the plan mutual funds right away. In my IRA, the money will get invested in index ETFs. I’ll only pay commissions on each when I re-allocate assets.
• Look at all my accounts as one investment portfolio. I’ve always done this pretty well so this isn’t a big change for me. The only thing I’ll ignore are the 529 plans for the kids. Those are specifically for higher education and they’re fully invested in time-targeted funds based on the kid’s ages. The rest of the investment portfolio is for retirement. We already own the home we plan to live in for at least the next 2 decades and savings accounts for debt payoff and other large expenses are excluded from the investment portfolio. Our investment portfolio is pretty much just for retirement and has a long time horizon. The accounts are: E*Trade Complete, Rollover IRA, 401(k)
• Use an asset allocation plan. I’ll invest in mutual funds and ETFs according to the following asset allocations:
  • 50% large-cap stocks
  • 15% mid-cap stocks
  • 15% small-cap stocks
  • 15% bonds
  • 5% cash
• Have an international component. A good international fund is included in my 401(k) options. Although I can’t track it separately with my asset allocation tool (apparently Microsoft Money doesn’t think people need anything other than vanilla allocations), I’ll include it in my large-cap category since Morningstar includes it there.
• Rebalance annually. Every September I’ll take a look at my allocations and rebalance to the above numbers. Studies have shown that annual rebalancing and asset allocation have about as much to do with an investor’s success as anything else. I’ll also evaluate those percentages as I grow older and want to get more conservative.
• Be aggressive in the accounts I can’t touch for a long time. The 401(k) and IRA are accounts I can’t tap until I’m 59 1/2 so I’ll let those be the aggressive part of my portfolio, only investing in bonds that throw off interest in my taxable account. I don’t mind paying the taxes on the bond interest today.
• Invest in growth, value and blended components.  My plan for now is to invest in large-cap growth funds, blended mid-cap funds, and value small-cap funds.  These are the categories that have the strongest historical performance over the long term.
• Increase contributions as I can.  Our first priority is to get clear of all debt except mortgage debt.  Once that is accomplished I’ll increase my 401(k) contributions and look at other vehicles, such as Roth IRAs.

The Plan

With the above structure in place, here are the steps to take:

1. Close out my existing position in Apple.  I bought Apple before the recent iPod announcement to make a quick buck.  It didn’t work.  I have every faith that the stock will go up so once I get back to even, I’ll close the position.  My plan is to look at the closing price each day.  Once it closes above where I bought it,  I’ll put in a stop order at that day’s closing price.  If the stock trades down under that price the next day I’ll be out with a gain.  If it goes up the next day I’ll change my stop price to that day’s close.  I could just sell when it gets back to even + commissions but I’d like to make some money on the trade.
2. Split 401(k) contributions evenly between Harbor International (HAINX) and Fidelity OTC Portfolio (FOCPX).  Both of these are large-cap growth funds.  FOCPX is primarily invested in the US while HAINX is primarily invested outside the US.  I’ve already set up a 50/50 split for contributions into these two funds.
3. Put 15% of my total portfolio value into iShares Russell 2000 Value Index Fund (IWN).  This is a low-cost ETF tracking the Russell 2000 Value Index.  I did this last week.
4. Put 10% of my total portfolio value into iShares Russell Midcap Index Fund (IWR).  This is a low-cost ETF tracking the Russell Midcap Index, which represents the smallest 800 companies in the Russell 1000 index.  This is a blended index.  I’ll have the money for this once I close out Apple.
5. Figure out how much cash I should have (based on 5% of the total portfolio) and put the rest in SPDR Trust (SPY).  This is a low-cost ETF that tracks the performance of the S&P 500 index.  This is a large-cap blend index.
6. Reinvest all dividends in the ETFs.

This accomplishes the asset allocation except for the bonds.  I’m not ready to buy bonds yet.  Once I am, those purchases will be outside the retirement accounts. I know that’s not the most tax efficient method, but I’ve got other things in mind. The biggest change for me will be to just ignore these accounts for a year and let them go.  Something tells me I’ll be much better off and much less stressed about my portfolio.