ITA Wealth Management

When we get up this high in the numbering system, to use the word Rule sounds a tad stiff or rigid. It might go down a bit easier if one were to think of Rule #4 as a suggestion or guideline.  Regardless, this next idea builds off Rule #3 of building a portfolio.  In the first two rules we have determined the importance of saving and staying disciplined with our program.  Now we need to know what to do with the money we have saved.  Portfolio planning is the next step and in this Rule #4 or suggestion we get a bit more specific.  Keep in mind that after saving, asset allocation is the most important decision one will make in preparation for retirement.  I only wish I had known this forty years ago.

Rule #4 is to develop an asset allocation plan that fits you, the small investor — or you may be a large investor.  Regardless, set up an asset allocation plan keeping in mind the following ideas.

1)  The asset allocation plan will take into consideration where you are in your life span.  As suggested many times on this blog, to help in the asset allocation planning process, investors should take the Risk Capacity Survey over on the http://www.ifa.com web site.

2)  Understand your tolerance for risk.  The Risk Capacity Survey will help.  Don’t be over confident and if you think you are leaning in that direction, remember 2000 – 2003 and 2008.  Black Swan events happen more frequently than the laws of probability would dictate.

3)  Know your financial situation.  If you built up a nice nest egg, do not throw it away by investing on the edge of your risk tolerance.  We attempt to take this into account as we build portfolios over on the Premium Content side of ITA Wealth Management.  Don’t push your luck.  In the process of considering your financial situation, do you have money set aside for a job layoff?  Is the house paid for or can you pay your rent?  Are credit cards down to a zero balance at the end of the month?  Are you properly insured?  As you get older, do you really need that life insurance policy?  Think through your financial situation as you contemplate putting together an asset allocation plan.

At this point, we have a saving plan in operation and we are committed to sticking with it.  We are paying down debt or we have no high interest debt.  We are, with Rule #4, moving into the fun areas of investing.

I suggest readers go over to Categories and read the Portfolio Construction and Asset Allocation entries that have been posted over the last 18 months.

Lowell Herr

Photograph: Santorini, Greece

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Develop a family financial plan once a saving plan is in effect and sufficient dollars are about to be invested.  A financial plan will include adequate cash reserves for that rainy day that is likely to occur.  Also, make sure you have proper insurance, particularly health insurance.  Once the basics are in place one can concentrate on developing a portfolio plan.  Although not all that well organized, one can pick up a lot of portfolio planning details by moving over to the right-hand edge of this blog and under Categories, click on Asset Allocation and Portfolio Construction.  When you click on one of those links, you will bring up the oldest message first.  Begin to read through those posts.  Don’t be surprised if you find many posts reviewing older posts.  Use the repetition to let the basic ideas sink in.

In the process of developing a portfolio plan, think through the principles of asset allocation.  Forget about selecting individual stocks.  Concentrate on what asset classes you wish to include in your portfolio and what percentage you want to allocate to each asset class.  Those are the two most important decisions you will make as you begin to set up a portfolio.

If readers have any questions, place them in the comments section available with each blog entry.  Another way to get questions answered is to read investment books.  My favorites are found inside several posts on this blog.  Check out the Books link under Categories.

Photograph: Slopes of Santorini Island, Greece

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