Weatherford Democrat

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December 31, 2013

10 easy-to-do steps to lower economic stress in 2014

(Continued)

2. Invest with a basic asset-allocation model. Don't try to outguess or beat the market. The odds are greatly against your doing so.

Instead, capture what the market gives you: multiple streams of beta. This means owning a variety of asset classes — preferably in their cheapest configuration, ETFs or lowest-cost funds.

A basic model might look something like this: 10 or so holdings, in various weightings of U.S. equities (total stock market, value, growth, large cap, small cap), non-U.S. equities (mature, emerging markets), fixed income (Treasurys, munis, high-yield bond, corporates), then an REIT and a commodity holding. A typical middle-of-the-road portfolio is 70/30 stocks vs. bonds. Rebalance annually. Repeat until retirement.

Multiple streams of beta means you may never know which asset class is going to do especially well in any given year, but you participate in all of them and win over time. Low cost, low turnover, low probability of error.

3. Stop trading. The evidence is overwhelming: You are not a good trader. You individually, as well as the rest of your emotional, irrational species. You lack the temperament, the discipline, the ability to set aside ego and make cold, calculating decisions. No wonder algorithms are replacing people on so many trading desks.

For those of you who just cannot quit, try this: Put 5 percent of your investable assets in a trading account. Track how well your trading does vs. what I described above. If after five years you have outperformed your real investments net of fees, taxes and all other expenses, you can pull an additional 15 to 20 percent into this account.

Experience teaches that most of you will close this account long before five years elapse.

4. Max out tax-deferred accounts. The math on this is incontrovertible: Income you invest before taxes starts out with about a 40 percent advantage vs. post-investment cash. It's that simple.

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