Keep It Simple

Don't be surprised if you don't know the difference between a benchmark ETF and a strategic ETF.  Strategic is sometimes called "Fundamental" or "Active" and they differ from the ETFs we recommend for our ITA portfolios.  To read more about the differences, check out the URL referenced below. [Read more…]

Stock Market Myths

Brett Arends writes an interesting article, "Ten Stock-Market Myths That Just Won't Die" for the Wall Street Journal Digital Network.  While I agree with nearly all of his ten points, there are a few that need further clarification.  Point #8 focuses on diversification using mutual funds.  I agree with that part of the point, but not the section quoted below.

"But too many brokers mean mutual funds with different names and "styles" like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on. These are marketing gimmicks. There is, for example, no such thing as "midcap blend." These funds are typically 100% invested all the time, and all in stocks. In this global economy even "international" offers less diversification than it did, because everything's getting tied together." [Read more…]

Downsides to ETFs


ETF Negatives


There are a few, but not many, negatives to working with ETFs.

  • A broker is required to purchase and sell ETFs.  I use TDAmeritrade and it costs me $7.00 to purchase and $7.00 to sell ETFs.  Now 101 ETFs are commission free with TDA. Therefore I generally deal in blocks of 100 shares or more.  This is done to keep commissions to a low percentage of the investment.  Suppose I purchase 100 shares of XYZ at $40.00 per share.  This cost is $4,000 and a $7.00 commission is $7.00/$4,000 = 0.175% or rounded to 18 basis points.  I make an effort to keep commissions below 50 basis points.
  • ETFs are not suited for savers putting away $100 a month as commissions eat up a high percentage of the invested dollars.  Anyone saving a small amount each month is better off putting the money in an index mutual fund instead of an index ETF.  This is no longer a negative if one uses commission free ETFs.
  • ETFs that have a low trading volume have a higher probability of tracking error.  This means the current tracking price may deviate away from the underlying net asset value (NAV) of all the holdings that make up the index.  This is not a problem for the larger ETFs we recommend here on ITA Wealth Management.

While the negatives exist, they are minor for investors who are able to purchase in larger blocks or round lots.

Platinum membership available for $5.00 per month.

Why Use Index Funds?

The Power of Index Investing

Why are 80% to 85% of all investors wrong?  Could it be the power of advertising and greed?  What do I mean when I say a high percentage of investors have it all wrong?  Simple!  The majority of investors build their portfolios by selecting individual stocks.  While we do not find fault with investors who want to add a few highly selected companies to their portfolio, we think it is a loser's game to build an entire portfolio using individual stocks.  Avoid the mistakes of stock picking and use index vehicles as recommended here at ITA Wealth Management.

Why is indexing so effective?  Here are a few reasons.

  • Costs are kept to a minimum and this works right to the bottom line.
  • Money managers and advisors are not required.  The small investor can build their own portfolio without the added expense of an advisor.  This saves additional money so more dollars are working for the index investor.
  • Index funds, particularly ETFs, are tax efficient.
  • One can diversify all over the world, a skill that escapes the small and professional investor. No one that I know is skilled in investing in all markets.
  • Portfolio diversification is much easier if one uses index investments.  The power of diversification cannot be over-emphasized.
  • One does not need to worry about picking the right money manager.
  • Research is on your side.  Stock picking is a loser's game and index investing is a winner's game.

Start out on the right foot of investing and construct your portfolio using index mutual funds or ETF index funds.

Lost My Spouse – Part IV


Conservative Portfolio for Living Spouse


The probability of losing a spouse is much greater after retiring than before retirement.  It is simply a matter of age.  Further, assume the person still living is less informed about investing than the deceased person.  Advanced age and not too savvy about investments is a combination that calls for a very conservative asset allocation plan.

The data table below is an example of such a conservative portfolio.  Inflation protection is working into the portfolio by investing in a Total Market ETF, VT.  This Exchange Traded Fund (ETF) covers the entire world market.  Twenty-five percent allocated to TIP is another inflation fighter.

While some income is derived from VT, the majority will come from the 80% bond allocation that is spread out over TIP, BSV, BIV, BND, and HYG.  There are other combinations that will work, but this portfolio is certainly a starting point for an older person who needs living income and has minimum investment experience.

Conservative Portfolio

Ticker Investment Type Percentage
VT Total Market ETF 20%
BSV Short-Term Bond ETF 15%
BIV Intermediate Bond ETF 15%
BND Long-Term Bond ETF 5%
HYG Corporate Bond ETF 20%
TIP Inflation Protection ETF 25%


Photograph: Ceiling of Blue Mosque in Istanbul, Turkey

How To Invest Simply


Investing Made Simple

Here are a few simple suggestion to get investors off on the right foot.  These suggestions apply to experienced as well as beginning investors.

  • Save more than you think you will need.
  • Build the portfolio around index funds or index ETFs.
  • Learn what it means to rebalance a portfolio.
  • Monitor the Internal Rate of Return (IRR) of the portfolio and eventually graduate to where you can measure the Sortino Ratio of the portfolio.
  • Read several of the Top Investment Books.

MEDA Trust Update

"The poor stay poor not because they are lazy, but because they have no access to capital." – Milton Friedman


How do we make capital available to the poor?  MEDA Trust is one place where you can plug in and begin to make a difference in the lives of the very poor. 

Since the editor for my old blog ( crashed, I've yet to write an update on our involvement with MEDA Trust. My wife and I have been linked to MEDA Trust for a little over two years.  MEDA is a charitable organization so it operates a little differently than Kiva, but the idea is similar.

During our short time with MEDA we are now involved in 162 different businesses.  Through monthly contributions we have been able to help a number of individuals begin their own business.  Here are some interesting statistics.

  • Amount contributed = X
  • Dollar amount matched by individuals and governments = 0.80 * X.  Therefore, 80% of our contributed dollars have been matched.  Right now, if you contribute $100, another $200 will be matched. I don't know how long such matches will continue.
  • Amount loaned to begin new businesses = 5.91 * X.  How is it possible to loan more than was originally contributed?  Very simple.  As money is paid back on the original loans, that money is loaned to another person to begin another business.  The dollars do not evaporate into thin air.  Some of our original money is on its fourth and fifth loans.  This is how one creates the multiplier effect.
  • Loans paid back = 4.1 * XThis does not mean we made any money.  This simply means that the money we originally contributed to charity went to help start multiple businesses.  As those loans are paid back the money is returned to our "mini-foundation" to be loaned again and again.
  • Unpaid loans = 1.9 * X.  Almost twice what we loaned is still working and will be paid back. Each month more loans are repaid and those dollars are reused to fund new businesses.

To learn more about micro loans I highly recommend two books. 

1. "Creating a World Without Poverty" by Muhammad Yunus

2. "A Billion Bootstraps" by Phil Smith & Eric Thurman


A portion of Platinum membership dollars will be contributed to the MEDA Trust projects.


How Are Your Stocks Doing?

Using Morningstar and Yahoo-Finance to compare stocks and ETF performance.

Here is an exercise that will prove informative to investors who construct portfolios using stocks. Follow these instructions.

  • Make up a list of the stocks in your portfolio.
  • Go to Morningstar and determine which asset class or style box each stock occupies. Type PAYX in the Quotes option and then scroll down the page till you see the style box. In the example we see PAYX is a Large-Cap Growth stock.
  • Now find an ETF for each style box that contains at least one stock in your portfolio. Since Barclay’s iShares have been around longer than Vanguard’s ETFs, one would do better to go with the iShare. For example, the iShare to compare with the Paychex stock is IVW as it is a Large-Cap Growth ETF.
  • Now open up the Yahoo Finance page. Using a five-year period, compare the stock with the appropriate ETF. In the example, you will see that IVW outperformed PAYX when this entry was posted.
  • Perform this comparison with every stock in your portfolio and write down your results. If you held the stocks over a different period, use a comparison that is closest to the holding time.
  • There is one more thing you need to examine. Does your portfolio include stocks in all of the “Big Nine” Morningstar style boxes? Does the portfolio include international stocks from developed countries or areas such as Europe? Does the portfolio include stocks from emerging markets? Are there any REITs or commodities in the portfolio? If not, why not?

If most of your stocks outperformed the appropriate ETF, you are a fine stock picker and you should continue to build your portfolio the way you always have. If, however, your portfolio is not well diversified and/or the stocks are not performing as well as the benchmark ETF, then questions arise as to how one is going to change the construction of the portfolio.


Photograph: Bryce Canyon

Lost My Spouse – Part III

Determine your long-term cash flow.

How much monthly income is required?  Will income from pension and social security meet the cash flow requirements or is additional money required from the portfolio?  For most single retired individuals, some income is required from the portfolio.  My recommendation is to pull no more than 4% annually from the portfolio.  The lower the percentage the higher the probability it will last a lifetime.  Here are two asset allocation ranges for upper ages, 70s and 80s as recommended by Burton G. Malkiel in his book, "The Elements of Investing."

Age Group Percent in Stocks Percent in Bonds
Allocation Ranges for Different Age Groups
70s 35-50 65-50
80s 20-40 80-60


If we examined a person in their 70s who lost a spouse and were on their own, an asset allocation may have 40% in stocks and 60% in bonds.  It really depends on the income required to provide sufficient cash flow.  There are an infinite number of ways one might construct any portfolio, but for this portfolio, let's concentrate on the make-up of 60% in bonds. Here is an example of bond ETFs we might use and the percentage to allocate to each.

TIP = 20%

BSV = 10%

BIV = 10%

BND = 10%

HYG = 10%

This combination gives one some inflation protection (TIP), high yield in corporate bonds (HYG), and coverage in short, intermediate and long-term bonds.

Lost My Spouse – Part II

Now that you know where the investment records are kept and all the security information is identified, what do you do now?  If the portfolio is set up as recommended on this blog, you will not need to do anything for at least a year.  At a time of loss, investment decisions are not something anyone wants to confront.

Examine the table below and familiarize yourself with the different asset classes.  Most portfolios will not be more complicated than the 15 asset classes identified in this data table.

Asset Classes

Value Core Growth      
Lg-Cap Lg-Cap Lg-Cap      
Mid-Cap Mid-Cap Mid-Cap      
Small-Cap Small-Cap Small-Cap      
Cash Bonds/Income International Emerg. Mkts REITs Commodities


Advanced preparation is extremely useful and it makes it much easier for family members to know what to do if the portfolio is set up to follow a Strategic Asset Allocation plan.