Investing 110

One of my all time favorite investing books is William Bernstein’s, The Intelligent Asset Allocator.  In later books, Bernstein mentions that his friends rolled their eyes after trying to read his first book.  That was motivation for writing The Four Pillars of Investing and The Investor’s Manifesto.  Each of these two later books is easier to read than the first with the simplest being, The Investor’s Manifesto.  If you have yet to read anything by Bernstein, you are in for a treat.

It is not unusual for me to pick up similar “eye rolling” comments when it comes to the ITA Wealth Management blog.  This is understandable as there are now over 3,000 posts or articles on this blog.  Furthermore, investing evolution has taken place over the past eleven (11) years of writing.  How is one to make sense of all this?  This post is a start as there are times when one needs to step back and focus on the basics of investing.  I attempted this in the recent Seeking Alpha article.  Another effort to simplify investing was the blog, Investing 101.  It is once more time to “roll back the tarp” and examine how one might begin the investing process.

If there are any teenagers or folks in their 20’s reading this blog, you will not go wrong by investing as much as you can in U.S. Equities and doing nothing else.  Example securities are:  VFINX, VTSMX, SPTM, VTI, and/or SCHB.  Find a commission free ETF that also has a low expense ratio.  If your account is at Schwab, SCHB fits all these requirements.  ETF, by the way, stands for Exchange Traded Fund.

As the portfolio increases in value, most investors prefer to diversify.  That is where the Dual Momentum investing model comes into play.  I’ve written many articles on Seeking Alpha and here at ITA as to how to use the Kipling spreadsheet to manage a Dual Momentum portfolio.  Seek out those articles by using the search engine.

In the following example, let’s assume the portfolio has grown to $10,000 and the portfolio is housed at Schwab.  What might such a portfolio look like and how does one go about managing this sum of money?

Schwab Portfolio:  Let’s begin by constructing the portfolio.  The screenshot below is an example portfolio housed at Schwab.  SCHB, SPDW, and SPEM are what I call the “big three.”  These three ETFs cover the globe.  With these three securities, one has exposure to stocks all over the world.  In addition to the “big three” I’ve included momentum and value ETF.  SCHH provides exposure to U.S. Real Estate and those ETFs with the brown background are bond and treasury securities.  At the very bottom is SH, a short ETF that is only there for market periods such as we experienced in 2008 and early 2009.  SH is not commission free and can easily be left off the list without damaging this approach to investing.

The following information comes out of the Kipling spreadsheet and is available to Platinum members.

LRPC Recommendations:  Now that we have identified what ETFs (securities) we want to include in the portfolio, the next thing we need to do is download the prices.  This is accomplished with a click of a button in the Kipling workbook.  Based on prices on 6/21/2019, below are the recommendations when the Maximum Number of Securities is set to five (5) and we are using the LRPC model.

The five Buy recommendations are:  MTUM, USMV, SCHZ, IGIB, and SPTL.  The next question is, how many shares do we buy of each if we have $10,000 in cash?  This requires moving to the next worksheet, after we have made a decision as to how much risk to take with the portfolio as a whole.  In this example, I set the portfolio risk to be no more than 5%.  As a general rule, 5% to 6% works well for the portfolio risk.

Manual Risk Adjustments:  There is actually one worksheet between the one you see above and the one shown below.  It is on this Position Sizing (Auto) worksheet where I set the risk to be 5.0%.  With that setting, the recommended shares are transported into the 9th column from the right.  What the following spreadsheet is doing is recommending the number of shares to Buy, Hold, or Sell based on the overall portfolio risk.  Since we don’t hold any shares in this sample portfolio, we naturally do not see any shares to sell or hold.

In the 8th column from the right or the one with the arrow pointing down, the portfolio manager decides how many shares to purchase.  For example, 16 shares of MTUM is recommended so I plan to buy 16 shares of the MTUM ETF.  One does need to be careful not to run out of cash.  Remaining cash is the cell with the arrow pointing toward the northwest.

After the shares are purchased, do nothing for another month or 33 days.  There is some evidence to support rebalancing the portfolio on the last business day of the month.  Since I am tracking so many different portfolios, I review each portfolio every 33 days so as to rotate the update throughout the month.

There you have the basics of investing.

1.  Select 10 to 15 ETFs that provide global diversification.  Make sure the securities (ETFs) are commission free and have low expense ratios.  Avoid ETFs that are highly correlated with each other.  This is discussed elsewhere in the ITA blog.
2.  Using the Kipling spreadsheet, update the prices and look for the ETFs to Buy, Sell, or Hold.
3.  Set the portfolio risk percentage.  The younger the owner of the portfolio, the more risk one can accept.  Nevertheless, this is a personal decision.
4.  Connect to your broker electronically and buy or sell the securities based on the recommendations that emerge from the Kipling spreadsheet.

Questions and comments are welcome in the Comments section of this post.