“SRIDM” Your Way to Successful Investing

“SRIDM” is an acronym for the five critical steps to increase the probability of experiencing a successful investing career.  Save, Read, Index, Diversify, and Monitor are five essential initiatives or decisions each investor makes at some time in their investing careers.  These five actions are no guarantee to successful investing, but they will go a long way toward building an adequate portfolio for the retirement years.

Save:  Of the five guidelines mentioned, none is more important than saving.  The Golden Rule of Investing is to “Save as much as you can as early as you can,” and the operative word is early.  The earlier one begins a disciplined saving plan the less one needs to put away over a lifetime.

Read:  Reading the best investment books is a recommendation that will sift down through all these suggestions.  It is an ongoing process.  However, I elevate it to the number two position, as it needs to come early in ones investing career.  Authors to consider are: William J. Bernstein, John C. Bogle, Richard A. Ferri, Larry E. Swedroe, Burton G. Malkiel, Charles D. Ellis, and Roger C. Gibson. 

The writings of these authors will definitely slant one toward a passive vs. an active approach to investing.  For the vast majority of investors, that is a good move.  If in doubt, just dig into these books and the academic literature to come to the same conclusion.  This is why reading is placed so high on the “SRIDM” list.

Index:  Take the passive route to investing and it will lead to using index funds and index ETFs.  My preference is non-managed ETFs that are aligned with major asset classes.  It is not necessary to seek out exotic ETFs.

Diversify:  Think globally when it comes to investing.  Diversifying all over the world is made much easier now that ETFs are available at very low cost to the investor.

It is important to understand and appreciate the importance of asset allocation.  Spread investments over several asset classes within the U.S. equities market.  Then branch into developed international markets, emerging markets, bonds, domestic REITs, commodities, international REITs, and international bonds.  While such diversification sounds complicated, it is quite easy to accomplish if one uses ETFs.  Guidance is available by reading the suggested authors.

Monitor:  You cannot manage what you do not measure.  Construct a Strategic Asset Allocation (SAA) plan before entering the market.  Once a plan is in place and purchases are made, there needs to be some method for monitoring not only the performance of the portfolio, but an appropriate benchmark as well.  In addition to portfolio and benchmark performance results, risk or uncertainty calculations are required.

Begin an investing career by saving and reading.  Indexing, diversification, and monitoring will begin to take their rightful place if one begins with a thoughtful investing plan in place.

Curie Portfolio Update

Three parts of the Curie Portfolio are presented below as this portfolio is reviewed.  First, is the all important Dashboard.  Examining the overall Strategic Asset Allocation plan is essential to see where the portfolio stands with respect to the broad plan.  Second, is the rebalancing data table shown in each TLH spreadsheet.  This is a relatively new feature in the TLH as it provides information of how many shares of the primary ETF need to be bought or sold to bring the asset class into balance.  What is meant by "primary" ETFs is found elsewhere on the ITA Wealth Management blog.  Third, is the portfolio performance results as of April 29, 2011.  This data includes the Internal Rate of Return (IRR) of the portfolio and four benchmarks.  The two benchmarks that merit high attention are the VTSMX index fund and the ITA Index, a customized standard.  Sortino and Retirement Ratio values are also available.

Excluding Cash, seven asset classes are out of balance.  Requiring immediate attention is the bond and income asset class.  The plan is to reduce holdings in TLT and use that cash to boost some of the asset classes that are under target.  Limit orders are in place for several ETFs that will bring this portfolio back into balance.  With the market as high as it is, patience is required.  We are not chasing this market.

The latest version of the TLH spreadsheet includes the following data table.  How does one use this table.  Take the first yellow background row which is the Large-Cap Value (LCV) asset class.  Even though it is 0.7% above target and a sale of 47 shares of VTV will bring it back into target, we will not concern ourselves with this asset class as it is within the 25% Threshold.  Instead, let us move to Large-Cap Growth (LCG) as it is 2.7% above target and thus outside the 25% Threshold.  If we were to sell 167 shares of VUG, this portfolio would come back into target.  VTV and VUG are two of the primary ETFs we use to construct our portfolios.

Shown below is a performance table for the Curie.  Note it is performing better than the S&P 500 by 5.0% points.  These are annualized percentages.  Instead of the S&P 500, we focus on the VTSMX and ITA Index.

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