Friday, November 8, 2013

RULE 6 Sample a "Round-the-World" Ticket to Indexing

This week there are two parts to the reading and, therefore, two related posts.  This is the first part - pages 101 - 107. The second part is Rule 7, p.125-136.

Pages 101 - 107 present a real-life example of a doctor in the U.S. who converts from an actively-managed advisor account to an indexed approach at Vanguard.  The asset allocation, using just three low-cost, widely diversified funds should be familiar from the previous chapter.  Pay special attention to the discussion on p. 103 having to do with the paper work involved in moving from his previous advisor to Vanguard.

Paperwork stops a lot of people.  This is how you get from where you are to where you want to be. Notice especially that the doctor completed the paperwork online, but he also had a Vanguard rep on the telephone.  This, I believe, is important whether you are moving to Vanguard, Schwab (whom I prefer), TD Ameritrade, or whomever.

Notice that you want your statements in front of you.  These will tell you and the rep the type of accounts you will open and how you will fund them.  Depending on your situation, you may want someone knowledgeable at your elbow if you are not fully cognizant of what you are holding.  For example, you may have large unrealized gains that realizing could result in a big tax hit.  You may have load funds that require special consideration.

On page 107, Andrew introduces the concept of target date (life cycle if you have a TSP) funds. These do the rebalancing, etc. for you.  One point Andrew makes is not to just accept the fund corresponding to your expected retirement date but to pick a fund with an appropriate allocation.  If you have decided that the percentage in bonds should correspond to your age, go with that!

You will see, as Andrew goes over the history of the doctor's indexed account, that rebalancing is easy, and that the portfolio weathered the worst downturn in the markets since the 1930s quite nicely.  If you are not familiar with the market history of the 2008 downturn, you may want to read this section a couple of times.  You hear a lot of horror stories about the 2008 downturn.  What you don't hear as often is the bargains astute investors picked up in early 2009 as prices dropped significantly!

I expect that there will be a market downturn of at least 15% within the next several years.  Part of your preparation is understanding how portfolios fared in the last downturn.

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