Friday, October 25, 2013

RULE 5 Build Mountains of Money With a Responsible Portfio

 With Rule 5, Andrew explains how to construct a 3-sector portfolio that historically has outperformed professionals, is low cost, and takes very little time to keep on track.  The three sectors are the broad U.S. stock market, the international stock market, and short maturity bonds.

Today it is very easy to invest in funds that track these markets, i.e., are indexed to these sectors.

Once the portfolio is constructed, it needs to be kept on track.  As Andrew points out, this is very easy and takes very little time.  The jargon for doing this is called "rebalancing."  It is so easy that it is part of the family of so-called "coach potato" portfolios that Andrew mentions.  The thrust of these portfolios is that you can have very good performance and actually spend your retirement and working years, for that matter, enjoying life rather than stressing out over your investment portfolio.

To show how easy it is, let's assume that you have a $100,000 IRA at Schwab.  Following Andrew's example, you want $33,000 (one-third of the portfolio) invested in the broad U.S. stock market.  With a little research, you find that SCHB is the ticker symbol for the Schwab fund that tracks the broad U.S. stock market and that it has an expense ratio of only .06% .  To find how many shares to buy, you get the price by putting the ticker symbol in a quote box and then divide the price into  $33,000. Or, you can use the Schwab calculator that pops up on their site when you do a trade.
The point is that all of this is that the mechanics are easy to carry out, once the basic philosophy is understood.  Again, the key is to get an appropriate asset allocation, control emotions by sticking with the allocation through ups and downs, and invest in low-cost index funds.


The ticker symbols for the international stock index at Schwab is SCHF, and the symbol for the broad bond market is SCHZ. With these symbols, you hopefully know how to get a quote on each (hint: go to and use the quote box at the lower left) and figure out the number of shares to buy.  That's it!  15 minutes and you have a portfolio that (again for the umpteenth time) has historically outperformed professionals after all costs are taken into account.

For other providers, such as Fidelity and Vanguard, you just need to find funds corresponding to those of the Schwab funds described here.  Whomever the fund provider for your IRA and 401(k), the principles are the same.  You are looking for low-cost index funds.

An important part of this chapter is Andrew's explanation of how bonds work.  This is a part of the market that most investors don't understand.  The key, as Andrew explains with examples, is that bond prices and yields move in opposite directions. Because they do, they tend to offer a really good hedge when stock markets drop. Read this section of the chapter very carefully.

Later in the week, I will present a chart that illustrates how this hedging ability of bonds has played out over the past 20 years. It is my favorite investment chart, so be sure to look for the post!

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