Sunday, December 17, 2006

reshuffling our investments for 2007 - the strategy

I've mentioned before that we're moving our investments around.

Here's the overall plan:

1. Move high cost investments to low cost investments
2. Move active investments to passive investments
3. Consolidate or reduce the number of accounts to facilitate asset allocation planning
4. Consolidate the size of investments (aggregate $) to reduce fees with brokerag / mutual fund companies and maximize leverage
5. Simplify things - paperwork, etc....

Quick thoughts on what these mean:

1. Lowering investment management costs is one of the few things an investor can control about their investment's performance.
2. 85% of active investments can't beat their relevant index over long periods of time. Why pay for unnecessary research and risk?
3. The more accounts you have the less money per account you have to work with. It makes it difficult to allocate assets if there's not much money between accounts. Some providers (like Vanguard charge fees if you have less than a $3k in an index fund).
4. The more you have with a particular broker / mutual fund company, the more leverage you have. This translates into reduced fees (Vanguard and Schwab) and lower expense ratios.
5. The less paperwork, the more time for blogging.


PS I need to make a posting on our ultimate account configuration soon - still researching asset protection issues.


StealthBucks said...

Don't fixate on cost. OK, fixate a little. You miss the number one issue I see. If you index pick the right index. So many indexers pick the S&P 500. A horrible narrow U.S. centric index. Others pick the Russell 3000. Had you picked either and indexed diligently you might as well have a 7 year giant L on your head. So add this to your list... Allocate to a Strategic World Based Index/Target. Make some (not a lot) tactical bets off that allocation. I have paid a reasonable fee for more than 10 years and have beat the S&P by double over 10 years without much stock selection and only annual (or so) tactical bets. All of your other points are valid.

Finally, I'd blow past Schwab and Vanguard and concentrate on ETF's from I-Shares, Powershares, and even Vanguard.... Better....Cheaper....Faster... Good Luck

makingourway said...

stealth, very interesting points - great thought provoking comments - I agree strongly in diversification - especially international. However, I'm not going to time the market either.

If you've been in for 10 years, we can both remember how poorly emerging markets performed in the second half of the 1990s after a very strong first half. S&P 500 has also had tough time.

Check out my earlier postings on my trading account performance - it's primarily ETFs with a heavy international focus.

The purpose for Vanguard 2025 target retirement account is several fold:

1. it includes a nice percentage of international and is not locked into ONLY the s&p 500.
2. it's a temporary 6 month holding pattern before I can move into my formal asset allocation plan - which has about 45% of my stocks in international.
3. it will manage my rebalancing for me.
4. the stock/bond allocation - the most important means of diversification is similar to my model.
5. ETFs are a great idea - especially for many non-retirement accounts. I have noticed that certain indexes can actually be purchased more cheaply through vanguard and fidelity mutual funds with expense ratios as low as 0.8%. It's really a case by case basis, but on average I would expect better pricing from ETFs - except for the most common indexes. One challenge for sure with ETFs is the bid/ask spread - you'll pay that tax when you buy and sell. Another is commissioning - which can matter depending upon asset volume and frequency of rebalancing.

Thanks for the great thought provoking comments.


PS Here's a link to my Sept. Trading Account summary.

StealthBucks said...

Took a look at your choices, Tactically, I am similar but a bit different. I owned an India Fund but sold in the summer (due to hyper greed indicators). I do own the EEM as well as EFA and IEV, I just am around 24% intnl. I am pretty much out of all mid cap and small cap and have moved most of my U.S. stock exposure to NY as well as a number of covered call closed end funds. (These have shown 15 to 20% gains on trade values not inclusive of the near close to 9% income rates. There are real documentable inefficiencies in closed ends a small investor can potentially exploit. Go take a look at these. I see the real value in a Vanguard 2025 type investment, it's just with your active blogging, I think you may do a bit better with not much effort.

Having said all this, I must reflect on future allocations and hit the tea leaves over the holiday. Perhaps I will post strategy on my blog. Best of luck and yes, in the end, regardless of philosophy, I believe we will both succeed in the end...