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March 7 - March 9, 2019
A sophisticated advisor would first assess the tax impact of selling these assets. As a result, you might end up taking a much slower approach—for example, using your additional monthly contributions to build more gradually toward your new allocation.
few key guidelines to keep in mind when you’re constructing (or reconstructing) your portfolio.
1. Asset Allocation Drives Returns.
your asset allocation will be the biggest factor in determining your investment returns.
So, deciding on the right balance of stocks, bonds, and alternatives is the most important investme...
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Whatever mix you choose, make sure you diversify globally across mu...
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2. Use Index Funds for the Core of Your Portfolio.
The core component of our clients’ portfolios is invested in US and international stocks. We use index funds because they give you broad diversification in a low-cost, tax-efficient way, and they beat almost all actively managed funds over the long run.
For maximum diversification, we want exposure to stocks of all sizes: large-cap, midcap, small-cap, and microcap.
By indexing, you enjoy the long-term upward trajectory of the market without letting expenses and taxes corrode your returns.
3. Always Have a Cushion.
We make sure our clients have an appropriate amount of income-producing investments such as bonds, REITs, MLPs, and dividend-paying stocks.
We also diversify broadly within these asset classes: for example, we invest in government bonds, muni bonds, and corporate bonds.
If stocks crash, we can sell some of those income-producing investments (ideally bonds, since they are liquid) and use the proceeds to in...
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This puts us in a strong position where we can view the bear as a friend rathe...
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4. The Rule o...
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have seven years of income set aside in income-producing investments s...
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what if you can’t afford to set aside years of income? Simply start with an achievable goal and keep raising the bar as you progress.
never underestimate the awesome power of disciplined saving combined with long-term compounding.
5. Explore. The core of our clients’ portfolios is invested in index funds that simply match the market’s return. But at the margins, it can make sense to explore additional strategies that offer a reasonable chance of outperformance.
6. Rebalance. I’m a big believer in “rebalancing,” which entails bringing your portfolio back to your original asset allocation on a regular basis—say, once a year.
Planning, we take opportunities to buy as they happen, rather than waiting for the end of the year or quarter. Here is how it works: imagine you start with 60% in stocks and 40% in bonds; then the stock market plunges, so you find yourself with 45% in stocks and 55% in bonds. You’d rebalance by selling bonds and buying stocks.
One benefit of rebalancing, says Malkiel, is that it “makes you do the opposite,” forcing you to buy assets when they’re out of favor and undervalued. You’ll profit richly when they recover.
The Six Money Mistakes Investors Make and How You Can Avoid Them
we have a tendency to be our own worst enemy. The problem is that our brains are wired to avoid pain and seek pleasure.
Instinctively, we yearn for whatever feels likely to be immediately rewarding. Needless to say, this isn’t always the best recipe for smart decision making.
our brains are particularly prone to bad decisions when we’re...
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There has to be a kind of internal control checklist since knowing is not enough. You need the systemic ability to execute every time.
investors also need simple systems, rules, and procedures to protect us from ourselves.
KNOW WHAT TO DO, DO WHAT YOU KNOW
what made it work was discipline. After all, a system is effective only if you use it!
Mistake 1: Seeking Confirmation of Your Beliefs Why the Best Investors Welcome Opinions That Contradict Their Own
emotional bias called the “endowment effect,” in which investors place greater value on something they already
it’s never wise to fall in love with an investment. As the saying goes, love is blind!
The Solution: Ask Better Questions and Find Qualified People Who Disagree with You
you don’t want just anyone with a different opinion, but rather someone who has the skill, track record, and intelligence to give another educated perspective.
All opinions are not created equal.
found very effective is to find people who disagree with me and then find out what their reasoning is. . . . The power of thoughtful disagreement is a great thing.” As Ray explains, the key question is: “What don’t I know?”
You can benefit greatly as an investor by finding people you respect (ideally, this includes a financial advisor with an extraordinary long-term record) and asking them questions designed to uncover what you don’t know.
Whenever I’m contemplating a major investment, I speak with friends w...
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I explain what I believe, and then I ask: “Where could I be wrong? What am I not seeing? What’s the downside? What am I failing to anticipate? And who else s...
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Questions like these help to protect me from the danger of...
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Mistake 2: Mistaking Recent Events for Ongoing Trends Why Most Investors Buy the Wrong Thing ...
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One of the most common—and dangerous—investing mistakes is the belief that the current trend will continue. And when investors’ expectations aren’t met, they often overreact, leading to a dramatic reversal of the...
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“recency bias.” This is just a posh way of saying that recent experiences carry more weight in our minds when we’re evaluating the odds of something happening in the future.
Great things are not accomplished by those who yield to trends and fads and popular opinion. —JACK KEROUAC
today’s winners tend to be tomorrow’s losers.
The Solution: Don’t Sell Out. Rebalance.
What the best investors in the world do is create a list of simple rules to guide them so that when things get emotional, they stay the course and remain on-target long term.