Investing 101 Reviewed

Hawaii

This morning I was having coffee with a good friend and the conversation drifted to investing.  Seems as if I’m able to guide casual discussions in that direction from time to time.  This friend pointed out to me that when one becomes knowledgeable in a particular discipline it is difficult to write with clarity about that discipline.  Beginning concepts are left behind and writers start describing their ideas at a level above many beginners.  He pointed out the trouble he has when logging into his broker account and all he sees are symbols and numbers.  How does one make sense of all this information?  While it does seem easy to me, I can see, without any financial background, how it can be frustrating for a beginning investor.

This friend understands the importance of The Golden Rule of Investing.  He understands the importance of asset allocation and diversification.  Where his understanding begins to break down is when asset classes are defined.  Why is it important to know the difference between large- and small-cap sizes or even more abstract, the difference between value and growth stocks?  Even if one knows the ticker for an investment, where does one go to classify the investment as a mid-cap value ETF vs. a large-cap growth ETF?  To move beyond the basics does require an interest in the subject.  Lack of interest, yet the knowledge that investing is important, many individuals seek professional help.  Good help is available, but it comes at a cost of 50 to 100 basis points of the value of the portfolio.

If one is looking for a very simple, yet effective portfolio, I pointed out Harry Browne’s “Permanent Portfolio” that includes only four asset classes.  The Browne Portfolio is certainly a good starting point.  Another reasonable starting point is the Swensen Six portfolio.  Both of these portfolio are simple, yet built upon broad market conditions one can anticipate over any five to fifteen year business cycle.

As mentioned many times on this blog, one needs to save a sufficient amount to meet the minimum requirements to open a broker account.  That threshold is usually quit low.  To get into certain index funds with Vanguard may require a higher minimum than many beginners are able to raise.  I use TD Ameritrade as they have a bricks and mortar office within easy driving distance and one can handle an account on-line.  Even with an active account, one still needs an investment plan and some method for monitoring the portfolio.  That is easy to do if one is following the Harry Browne Permanent Portfolio model.  Regardless, the TLH Spreadsheet, while not easy to use, is designed for portfolio monitoring.

To get one started on the right track, I recommend reading Larry Swedroe’s latest book, “Think, Act, and Invest Like Warren Buffett.”  Here is the link to a review I wrote on this book.

If you have a basic investing question, ask it in the comments section and I will attempt to answer as soon as possible.  Ask even if the question is not all that basic.

Photograph:  Hawaii where South Pacific was filmed.  Photo has been “Topazed.”