4. Portfolio management: I designed a process to manage my 401K, Roth IRA, HSA, Brokerage account, savings, and checking accounts into one overall portfolio. This resulted in a complete release of the anxiety I felt managing everything separately and wondering if it was effective or not. My new financial management system is more tax efficient, fool proof, and free. And no I don't have any formal training in finance. The information is out there for the taking. This is perhaps my greatest achievement in my journey to FI.
I would love to hear more about this. What did you do? How many accounts were spread out and what did you find were the best way to combine them? And what exactly did you see as the outcome in those advantages you mentioned?
Accounts included:
-401k which contains esop shares, cash in the form of employer discretionary money, and my own investments
-Roth IRA (which until recently was held in two different accounts
-individual brokerage account (taxable)
-savings account
-HSA account
The first step is to define your desired risk level. Many overestimate this, so keep that in mind. I found a ton of useful information from the bogleheads community. Like how holding your emergency cash fund in your 401k can offer better tax advantages.
After you define your desired risk level, you add up all the balances through every single account you hold, and then work towards defining what asset class these investments are. This is where being an index fund investor becomes a huge advantage. I chose to go with Schwab even though vanguard is a popular choice, Schwab has many similar investments and offers these investments with $1 minimums and lower or equal expense ratios. I use the fundamental indexes because they are geared towards value investing. The index more accurately tracks the financial health of companies rather than stock prices. The reason I chose this route is because if you are purchasing an index that tracks a market based on stock prices or market cap, you are still always buying into overpriced investments.
Once you have categorized your investments, you must work towards having the right amount of money or % of your overall portfolio in the correct asset class. For the sake of easy math lets use a 100k total account balance.
45% US stocks= $45000
15% US small cap = $15000
15% Bonds = $15000
5% cash = $5000
10% FX developed nations stocks = $10000
10% emerging markets stocks = $10000
Then you must compare whether what you currently hold matches your desired holdings, this is the most intensive part of the process. You must buy/sell (buying is best) your way to reach the desired asset levels.
Then you must decide how often you are going to rebalance or invest. Based on lots of reading of financial literature I landed on a strategy called "opportunistic rebalancing." This strategy does not rebalance based on a date, but rather on the status of your portfolio. This next part gets a little complicated. I invest every two weeks on average. But I will always looks at the overall portfolio, and decide which investment to make based on how far off the particular asset class is from my desired level. Part of this strategy indicates a relalancing "threshold" where I will not take any action to rebalance the portfolio unless an asset has gone beyond the desired range, and then I will bring the asset class back into the desired range. Ex:
US Stock desired level 45%
desired threshold range of 10% = 41.5%-49.5%
rebalancing range of 20% = 36% - 54%
I choose what to invest in based on what asset classes fall below the desired range, and invest in those assets with my bi monthly investments. If a particular asset falls outside of the desired range and now resides in the rebalancing range, then I would take action to bring it back into the desired range. What this essentially does is limit how often you sell investments. You are usually buying into the lowest price and most undervalued investment you own. You limit needless tinkering with the portfolio, and keep wholesale portfolio rebalancing events to a minimum, since you are constantly boosting up the assets on the low end of the range with your frequent investments.
This rebalancing strategy increases your upside and chance of investing in a certain asset class at the most opportune time for you. It ensures you will not miss a chance to sell off bits of an overpriced asset, and increases the chances that you are investing your money in undervalued/underpriced assets. One of the main goals of this rebalancing strategy is to never actually have to rebalance your portfolio at all, but to maintain its health and desired levels via your frequent contributions. (Easily achievable barring any catastrophic events in the markets.)
The next step is to make sure your asset classes are in the most tax efficient account you can hold them in. There is plenty of info out there on this, but again bogelheads is most likely your best resource. For instance: bonds and cash are tax inefficient investments and are best held in tax deferred and tax advantaged accounts. International investments can provide a foreign tax credit, and are best held in a taxable brokerage account. Read this:
https://www.bogleheads.org/wiki/Tax-efficient_fund_placement**side note: it is best not to move around your investments if they currently fall is a less tax efficient place, but rather put your future investments in the most tax efficient place.
I use a couple different excel spreadsheets to help me easily identify which assets should be purchased, sold, or left alone.
Once you have done the legwork you are practically on autopilot, or you can hire a fiduciary to implement your strategy. Simply plug your numbers in every time you invest and decide where to invest, if rebalancing that requires selling is needed then simply take the correct action that is defined by your long term strategy.
Desired outcomes of this project:
*to invest in the most tax efficient way possible
*to create a holistic approach to the overall portfolio which is the best way to maintain your desired risk level
*to have complete control over how my money is invested
*to limit trading costs, and completely eliminate paying anyone else to manage my money
*reduce anxiety
*reduce fees
The outcome is that I can manage my portfolio in a simple yet very effective manner. What most people pay thousands of dollars to someone else over a lifetime of investing to do for them, I let the spreadsheets do it for me. Eliminating outside influences and sticking to a plan is a great way to ensure success.
I created this strategy alone but let my CFA friend look it over. He was fascinated, and got on board with it to implement this strategy on his own. We are working together to improve it over time. Our goal is to create an easy to follow process for investors to manage their own portfolios. We are working towards putting this information into ebook form that will be circulated possibly for free (donations accepted.) We are also working to come up with a way for excel to actively pull our account balances so that it becomes less of an active process and more automatic.
I'm a tradesperson in the AV industry without any formal financial training so use this advice at your own risk. But if you are more interested shoot me a PM and I would be glad to steer you in the right direction.