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We'll show you how to get a better understanding of the markets and become a confident, competent investor. And we lay it all out for you in plain English (well, a Southern variety of English, anyway). Hey, you work hard for your money - learn how to make your money work hard for you!
Our 'Rule of Thirds'
In the world of photography, the ‘Rule of Thirds’ is a sacred mantra. It is a technique that helps photographers frame their shots effectively and enhance their subjects. It’s one of things that separate the pros from us novice shutter-bugs. We’ve got our own ‘Rule of Thirds’ and it has nothing to do with a camera. It’s got everything to do with our moolah - our investing moolah, that is!
We set our 401(k) portfolios to take advantage of the current major market trend:
> If the current major market trend is bullish, we’ll have a portion of our portfolio invested in stock funds (according to our asset allocation guidelines), the rest in cash and bond funds.
> If the current major market trend is bearish, we’ll have all of our portfolio in cash and bond funds (our ‘safe investments’).
There are two problems to deal with when managing a portfolio using a trend following investment method:
1. Trends take a long time to transition from bull to bear and back again. The price action we observe during these often volatile transition periods sometimes throws out false signals - head fakes, you might say.
2. Trend following is, by its very nature, a trend lagging method. We don’t know a new trend is in place until…it’s in place! Again, we observe the price action and wait for confirmation of the trend change before making any portfolio adjustments.
In an effort to avoid moving our money too soon - or too late - during a transition period, we have found that moving our money in thirds makes more sense. For example, let’s say we have $6000 in the stock fund portion of our portfolio. The price action on our weekly and monthly charts is indicating the current bull market is transitioning over to a bear market. We want to close out our stock fund positions and move that money over to our cash and bond funds.
Instead of moving the entire $6000 at once, we’d move $2000 - a third - over to our cash and bond funds. We would continue to watch our charts and if the bearish transition appeared more likely, we’d move another $2000 over to the cash and bond funds. When the charts finally confirmed a bear market, we’d move that last $2000 over and be totally out of stock funds.
When that bear market transitions back into a bull market, as they inevitably do, we’d get back into our stock fund positions. And we’d get back in just like we got out: buying in thirds. Once we were fully invested in stock funds (according to our asset allocation guidelines) we’d just sit back and ride out the new bull market.
While this method isn't fool-proof, it does lessen the blow if the market throws us a curve. In late 2015, the weekly charts seemed to be signaling a turn to the bearish side. As prices moved lower, we cautiously sold a third of our stock fund positions. A few weeks later, prices took another turn downward and we sold another third. But the signal turned out to be a head fake: stocks posted gains in 8 of the next 10 weeks, regaining the 200-day moving average and resuming the uptrend that had started in 2009. As we received confirmation on the charts, we bought back those same stock fund positions and started riding the bull again. See the chart below…
Did the head fake cost us some profits? Yes, a little. Did selling in thirds give us some peace of mind? Yes, a lot! For us, moving our moolah in thirds accomplishes two things:
> it gives us some protection in volatile markets (helps us deal with false market signals)
> it gives us some peace of mind (keeps us from over-reacting in volatile markets)
Experiment with our Rule of Thirds method and fine-tune it to suit your needs. We think you’ll find it a logical way to adjust your portfolio during changing markets.
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NEWS YOU CAN USE
"Your Simple Guide to the New Capital Gains Tax Rates" from MarketWatch
"SEC Urges Public to Get Early Start on Investing"
from Financial Advisor Magazine
"Principal Global Investors Hit with Suit
Over Target Date Funds"
"This Unique Mutual Fund Charges
Less If It Underperforms"
"Fidelity Investments Launching No-Fee International Fund" from Investopedia
VIEWS YOU CAN USE
"4 Mistakes IRA Investors Can't Afford"
from US News & World Report
"How to Select Mutual Funds in Your 401(k)"
from The Street
"How to Compare HSA Fees, HSA Investments and More" from Investor's Business Daily
"How Much should You Contribute to Your 401(k)?"
from US News & World Report
"4 Ways to Use Health Savings Accounts to
Boost Your Bottom Line"
Spring Reading List 2018
Spring is the time for new beginnings! If you're just beginning to learn about the markets and investing, here are 4 great books to get you going!!
Hey, it's your money!!!
>>>>> And just so you know:
Clicking on these book images takes you to Amazon.com via our affiliate link. You won't pay a penny more for what you buy, but we do get a few coins for sending you there - and that helps us cover the costs of keeping our website running free!
Here are a couple of very simple retirement calculators courtesy of our friends over at Calculator Pro.
Here are the figures we used:
> Required Annual Income: we put in what we're making now (we don't buy into that "plan to spend 70% of your working income in retirement" idea!)
> Years until Retirement: we shot for age 65, but who really knows, right?
> Years after Retirement: we sure hope to have 20 good years of doing what we want to do!
> Annual Inflation: we used 3.5% (maybe go a tad higher to be safe?)
> Annual Return on Balance: we used 7% (maybe go a tad lower to be safe?)