Participating in the markets

Jun 1, 2017 |

Many of my friends  know that I like to read and talk about anything finance and investing. Many a times therefore I get asked the question.. Sachin, give me tips?

I am always more than happy to share my thoughts on the topic, which I have done individually on several occasions.

This article is a summary of what I have often said on this topic. My hope is that some of you will find these tips quite useful and on a personal note, I now have a pointer to refer to whenever I get asked the question, “Sachin, give me tips?”

Before I begin, I want to note that I am not a certified professional financial advisor. The recommendations below on financial products/services and the path to investing is purely based on my own personal experience with investing with my own skin 100 % in the game.

For starters, let me briefly outline the profile of a typical individual (I will call Mr A) that I usually have had these discussions with in the past.

  1. Mr A is in mid 30’s and has a stable job with robust income and savings per month
  2. Mr A is a home owner
  3. Mr A has company offered 401K plan, that he contributes to diligently, trying to maximize on company matching funds. However, given his the lack of interest and/or knowledge on the available choices for investing in 401K funds, Mr A puts these into a single target-date fund.
  4. Mr A has a savings and a checking account typically in a single bank where his monthly income check gets deposited. Most of the time, the money does not even get moved to saving account but simply remains accumulated in checking account.
  5. Mr A also has a brokerage account, though for namesake purposes only
  6. Mr A also has a chronic problem. He cannot sleep well at night. Not because he is worried that his money will suddenly disappear, but rather because he simply has accumulated too much cash in his single bank account.

My advise (tip) to these folks has always been some variant of the following:

(a) Investing is not easy. Be wary of folks who say otherwise.

(b) Investment by definition involves the future and since no one can reliably predict the future, risk is integral part of investing.

(c) Risk is a very personal and a subjective notion. My risk may not necessarily be the same as your risk. I like to equate risk to the tolerance to loss that one can live with (or accept) as part of having your money work for you via investments. It is up to each individual to decide what his/her tolerance level is.

(c) One cannot expect consistent year-after-year market beating returns, without active management.

(d) Active management is better left to professionals and institutional investors.

(e) It is very hard to resist the urge to “gamble” in the name of “investing”, especially after hearing and seeing folks making money in the markets. Do not resist the urge, rather limit the funds you will allocate for this type of speculative investing activity. About 5-10 % of net-worth upto a maximum of $50 K, is more than sufficient to play the markets. Go wild with these funds and without hesitation look for that unicorn investment that can return >10X returns on investment.

(f) I call the above investing activity as “gambling” based on the assumption that you are not going to spend time thoroughly investigating the investment vehicle in which you want to put money and you have no plans to have money invested in the vehicle for a long term (for a term significantly longer than a year).

(f) Try not to have any cash beyond 6 months worth of emergency funds in your checking (or savings) account.

(g) 2 months worth of emergency cash must be parked in your checking account (used all your day-to-day transactions) and the remainder of 4 month worth of emergency fund must be parked in a relatively easily accessible high-yield savings account. There are several online banks that offer high-yield saving account, such as Discover Bank, Capital One 360,  and Ally Bank.

(h) Remainder of excess cash must be invested  in a diversified portfolio of investment funds. The simplest and the most efficient way to achieve this objective is through robe-advisors.

A robo-advisor is an online automated investment management service. Robo-advisors offer clients the ability to create a well-diversified portfolio (tailored to individual risk profile) of ETFs or mutual funds. With tools such as automated portfolio re-balancing and tax loss harvesting, and low-management fees, robo-advisors offer an individual investor the opportunity to fully participate in the markets for a higher expected net returns.

(g) Two robe-advisor firms that I have my money invested with are: Betterment and Wealthfront. I would recommend using either of these or both to park any excess cash that you may have in your taxable account. Nerdwallet has a nice article summarizing the best robe-advisors for 2017, which is worth a read.

(h) You may also consider using these robe-advisors for your retirement or rollover IRA accounts. But then you may not be able to leverage the tax harvesting benefits these offer.

(g) For your retirement IRA or rollover account, I suggest creating a 7Tweleve Portfolio either with Fidelity or Vanguard. Rather than the traditional 2 asset portfolio such as 60 % stocks/40 % bonds, 7Twelve portfolio is  comprised of 7 asset classes build using 12 distinct ETF or mutual funds.  Read  this article from the TauofWealth on how to go about constructing a 7Tweleve portfolio and the book available on Amazon for better understanding of the rationale behind construction of this portfolio

(h) For your 401K account, find out whether your plan allows for a Brokeragelink account. The advantage of having a Brokeragelink account is that within your 401K plan you have much higher flexibility for investing. 401K plans that I have had thus far from two firms that I have worked for, allowed for creating a Brokeragelink account that can be funded with upto 95% of 401K contributions.

(g) If your 401K plan allows for Brokeragelink, open one up and create a 7Twelve portfolio within your Brokeragelink account. This offers you the opportunity to have a truly diversified retirment portfolio.

(h) I have heard of suggestions for better way to play with retirement money that goes something like… treat it as play money to be used for purchase and sale of individual stocks… The idea is that since the account is not a taxable account, one can go in and out of stock purchases several times a year without worrying about short term capital gains taxes. While it may be true, as I noted above, investing is a hard and unless you truly are willing to put time and effort in your investment decisions, the idea of buying and selling out of stocks often is nothing but gambling and I am not sure you want to gamble with your retirement funds.

(i) Finally, one place shop to track your net worth and investment progress is Personal Capital. I love the tools that Personal Capital offers to me as an individual to track my various investments. A great blog article summarizing the pros and cons (not many) of what Personal Capital has to offer, can be found here.

So there you have it, the gist of “tips” that I have offered on investing whenever I am asked about it.

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