Growth: Portfolio #5

Moving one step closer to increasing the projected return, this post is about the Growth Portfolio, number 5 out of 6 in this series.  Bond and income is reduced to 16% in this portfolio so it is definitely tilting toward the aggressive side of investing.  Two ETFs, BND and IEF are eliminated from this portfolio as we will concentrate our income holdings in TIP and TLT.

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Are You a Rational Investor?

Of course I am a rational investor.  Don't all investors fall into this category?  Let's run a little test to see how rational you are as investor.

Suppose I pose this coin flipping question.  You have two choices and they are as follows.  When I flip the coin, you call heads or tails and if you win, I give you $200 and if you lose you give me $200.  The second choice is that I don't flip the coin at all, but give you $100 immediately.  Which choice do you make?  Do you walk away with a sure $100 bill in your pocket or do you go for the coin flip with the 50-50 chance or winning $200 or losing $200?

Think a moment and then make a decision whether it will be option #1 or option #2.

Now we move on to the second test.  In this situation we have the identical coin flipping option, but the second option changes.  In this case you have the option of giving me $100 immediately.  You will forgo the coin flipping gamble.  Which would you choose?  Are you willing to give me $100 and walk away or do you want to see the coin flip and take a chance of winning or losing $200?

While these two situations require identical logic, given the different situations, people react differently.  In other words, they are not as rational as they first presume.  When faced with the first choice, most individuals will accept the sure thing and walk away with the $100.  The second choice is not quite so easy.  In this case, most folks are unwilling to fork over $100 without trying the coin flip.  Most "investors" will take the chance of losing $200 rather than forfeit $100 and walking away from an unpleasant situation.

When the market is going down, think about how most of us react.  Instead of selling and taking our losses (giving away the $100 bill) we "flip the coin" and take the chance of losing our $200.  Are inclination is to hang on with the hope of winning back the losses and turning it into a gain.

Modest Growth: Portfolio #4

The Modest Growth Portfolio reduces bonds to 25% of the total portfolio.  This income/bond percentage is more in line with many of the portfolios tracked here at ITA Wealth Management.  One big difference, at least for the larger portfolios, is that most of the ITA portfolios carry a greater diversification.  While the portfolio below is diversified all over the world, the idea is to keep these six portfolios rather simple.

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