ITA Wealth Management

Photograph: London, England

Yesterday, I was having coffee with a friend and we were discussing Blog writing and how we try to make the information interesting and understandable.  This fellow writes on an entirely different topic, but the motivations are similar.  In both cases, we are interested in helping our readers.  In our discussion, we both agreed that it is necessary from time to time to go back to the beginning and reexplain some of the basic principles.  There are a number of reasons for this.  1) The reader may not be ready to accept or understand the idea when first explained.  2) The explanation is likely stated in a different way in later posts and the reader picks it up when written differently. 3) Repetition is the “Mother of all learning.” 4) New readers come on board and need to be introduced to the language and ideas without going back and reading all historical posts.  Whatever the reason, reviewing the basic principles from time to time is useful.  This is one of those entries.

As the title to this post suggests, one needs to know the first steps in constructing a portfolio.  Here are some suggestions to follow.

• Develop a plan for the portfolio.  Why are you investing?  For most investors it is related to providing for retirement.
• Do you want to increase your wealth as fast as possible by taking on additional risk or are you a patient person willing to pursue wealth building gradually?
• Understand the importance of diversification.
• Think through how many asset classes you would like to include in your portfolio.  Think beyond stocks, bonds, and cash.  When one reads about asset allocation, too many writers and researchers limit the asset allocation topic to only a few areas.  I recommend a minimum of six to eight asset classes and a maximum of 12 to 20.  The numbers will vary depending on how one defines an asset class.
• After deciding on the number of asset classes, the most difficult decision an investor needs to make is what percentage of the total portfolio is allocated to each asset class.  This is a personal decision and no answer fits all investors.  Mark Hebner’s book, “Index Investing: The 12-Step Program for Active Investors” is the very best book I know of that will help investors make this personal asset allocation decision.
• Understand the importance of value investing.  Search for Value on this Blog and you will come up with useful material.
• Understand the importance of investing in small-cap asset classes.
• Study the Exchange Traded Funds (ETF) choices and make sure to look at Vanguard’s ETFs and Barclay’s iShare ETFs.  Keep expenses as low as possible.
• Know the difference between mainstream ETFs and boutique ETFs.  Remain leery of the latter.
• Know what it means to rebalance a portfolio.  Again, a search for Rebalance will bring up useful material.

Above all, please ask questions in the Comment section and I will attempt to answer your questions or find someone who can answer them.

Lowell Herr