Rule #8 of Investing

Put off paying taxes until a later date is Rule #8. Permit your savings to grow tax deferred through your working life. If your employer will match savings in a 401 (k) or 403 (b) plan, do not leave any dollars on the table. For every dollar placed in a savings account, match that amount with every dollar you can muster. It is amazing how many workers do not take advantage of retirement plans set up by their employer. To not participate to the fullest extent is like turning down free money.

Next, max out your IRA contributions each year. Now is also a good time to invest in a Roth IRA and here is the logic. Pay your taxes on Roth money now as there is a high probability taxes will be higher in the future. For this reason, I recommend first setting up a Roth IRA before establishing a standard IRA. Use IRA plans to their maximum and delay tax liabilities. While we never know what taxes will be in the future, I still think it is good practice to have money taken out of the paycheck now, thus lowering taxable income. Learn to live on less income and save more. If one is saving in no-load mutual funds, select index funds from Vanguard if possible. Reinvest all dividends and capital gains so as to remain fully invested in stocks and bonds.

To review a few critical points, we now have a savings plan in effect. We know the importance of asset allocation and our discipline requires us to hold down expenses. In almost all situations we have fired our financial advisor and we have cut loose the “full-service” broker. We have set up accounts with a discount broker. We know the term “full-service” broker is a red flag for ripping off the consumer. Commissions are now below $10 per transaction. A portfolio plan (Strategic Asset Allocation plan) is in effect or close to completion. The ETFs have been selected for populating the portfolio. Gold subscribers have several examples available. Some investors will be using index mutual funds for their investing vehicles. It is time to visit the office of Human Resources and make sure the 401 (k) or 403 (b) plan is operational. Max out employer contributions. You are ready to learn how to maintain and monitor the portfolio.

ITA Ratio Video/Audio Clip

Here is another help session for users of the TLH spreadsheet.  This clip provides additional explanation of how to introduce the ITA Ratio, a new performance bar for index portfolios.

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Strategic Asset Allocation Plan – Step #3

Step #1: Begin a saving plan. This is key to all that follows.  Remember "The Golden Rule of Investing." Save as much as you can as early as you can.

Step #2: Select the asset classes you wish to use to construct the portfolio. The table below suggests using either the "Big Six" or "Big Nine" U. S. equity classes plus Cash, Bonds, International (developed), Emerging Markets, REITs, and Commodities.  For portfolios over $25,000, consider using at least 12 asset classes. [Read more…]

ITA Wealth Investment: Why Blog?

What is the motivation for writing this blog? Here are a few reasons.

  • I wanted to learn how blogs work, and there seemed no better way than to set one up.
  • Writing this blog required me to dig into academic papers I filed away years ago.
  • I wanted to pass on what I learned from fifty years of investing. This investing journey took me from knowing nothing about investments, to working for years with mutual funds, on to learning how to analyze individual stocks, and finally to portfolio management. This blog should save you a few of those steps.
  • The investment philosophy of this blog runs counter to at least 85% to 90% of the investment advice you will encounter through the media.  Most of what you hear and read has no foundation in financial research.  This blog is designed to counter popular investing trends.
  • Investment vehicles, not available fifteen years ago, are now plentiful. Take advantage of them. Learn how with a Platinum membership.

Photograph: Old Hilltop Hotel in Harpers Ferry, West Virginia

Standard & Poor’s Indices vs. Active Funds

Readers who need to be convinced that actively managed mutual funds is not a good idea only need to take time to read and study this paper.  This is a follow up to my last post.


Goofus vs. Gallant

As a follow up to The Golden Rule of Investing, I am bringing this post forward so new readers of ITA Wealth Management will not miss it. This post drives home the importance of investing frequently and early.

As a small boy, my family subscribed to a magazine called “Children’s Activities.” Each issue contained a story of two characters, Goofus and Gallant. We all wanted to be like Gallant, although we frequently found ourselves behaving like Goofus.

Here is another Goofus/Gallant tale, this time with help from a publication written by the late Louis Rukeyser. I will paraphrase his article, but I want to give Rukeyser proper credit for the information. “Back in 1963, Goofus, the single un-luckiest investor in the entire world, invested $2,000 once a year into the stocks that comprise the Standard & Poor’s 500 index. But his timing was so terrible that he chose the worst day of the year every time! Incredibly, he invested at the exact top of the market every year — and he kept this up for 10 years. After ten years, he simply left his portfolio ride.” As of January 1, 2000, Goofus’ $20,000 investment grew to $972,262. And now we are introduced to Gallant, an astute investor. “Gallant started investing $2,000 a year in 1973, right after Goofus quit. To everyone’s astonishment, especially Goofus, Gallant turned out to be the world’s luckiest investor. Every year, he picked the absolute bottom of the market to plunk down his $2,000. And to stack the odds in Gallant’s favor, he kept up this stupendous performance for 20 years, investing twice as much and twice as long as Goofus.” And here, I am using Rukeyser’s figures. “As of January 1, 2000, Gallant’s $40,000 was worth $30,064 less than Goofus’ stake — $942,198 vs. $972,262. Imagine! Gallant put in twice the money, and his annual return was far higher, yet Goofus licked him fair and square.” This is the only time I can recall where Goofus turned the tables on Gallant, and he did so by making one important move. That was to start his saving plan earlier than Gallant. This is an argument against market timing, dollar cost averaging, or any other system designed for picking market entry points. This story is telling investors to follow “The Golden Rule of Investing” or invest as much as you can as early as you can.