Investing Rules from an Old Guy

When I started investing, I just wanted a positive return. When the market was down, it didn’t feel too good. Not only that, but I would find myself selling losers and selling winners too early. Every year when I filed my tax returns, I discovered I had a net loss more often than I care to admit.

I adjusted my strategy to where I just wanted to do better than the market as measured by the S&P500. Now I didn’t feel so bad when the market was down if my portfolio was down less, but I learned that to beat the market, I had to buy risky stocks.

Today, I just want to be near the yellow line on the risk-return chart because as a retired old guy, my tolerance for risk is less than it was 20 years ago. Interestingly, I think this approach is a good place to start to avoid big mistakes early on.

The Starter Portfolio is designed to be easy to setup and easy to maintain. Over the long-run it will give decent returns, but with less risk than the 1 ETF Portfolio. It should be good up to $500K and it consists of just 5 assets in 5 asset categories:

20% Equity          e.g. SPY (SPDR S&P500 ETF) or RSP (Invesco S&P500 Equal Weight ETF)

20% Real Estate  e.g. SCHH (Schwab US REIT ETF) or VNQ (Vanguard Real Estate ETF)

20% Bonds           e.g. US Corporate Bond Index

20% Gold             e.g. IAU (iShares Gold Trust) or GLD (SPDR Gold Shares)

20% Cash             e.g. SWVXX (Schwab Value Advantage Money Fund)

Note 1: I took an investing class at Foothill college with a friend who wanted to learn some basic investing concepts. The teacher was a financial advisor and his firm ran a number of simulations based on historical data which included the 2007 Financial Crises, and came up with this portfolio mix for his clients.

Note 2: This 20% evenly split allocation is just a starting guideline and feel free to modify it to something you are comfortable with. For example, most investors would say 20% Gold and 20% Cash is way too much and I somewhat agree. We’ll come back to this later.

Rule #13
Always hit the checkbox to automatically reinvest dividends to get the benefits of compounded growth. The exception to this is when you are retired and are living off the passive income from dividends.

Rule #14

Rebalancing your portfolio is VERY important. Try to keep it to 20% (or whatever your target allocation is) + or – 3%. It doesn’t seem like a big deal, but other analysts have run the numbers and it makes a significant difference in the long-run. The reason this works is that you are essentially buying low and selling high when you rebalance.

You are fortunate that transaction costs today are near $0. When I started out it cost $30 a trade and you were encouraged to buy shares in “lots” of 100! Today the transaction cost to rebalance is no longer an issue.