Book review: How to Make your Money Last. The Indispensable Retirement Guide. by Jane Bryant Quinn.

March 22, 2016

Jane Bryant Quinn, 2016, Simon & Shuster, New York. 366 pages.

Synopsis

This book should be read by everyone who needs to plan for retirement from the workforce.  Author Jane Bryant Quinn is an acclaimed financial journalist with excellent credentials. In this book, she draws from credible research to describe principles and checklists for retiring with a practical financial plan. She speaks from firsthand experience about reinventing life after leaving the workforce: “once again the future is a blank slate” that needs to be filled with activities for a meaningful life (chapter 1). Those activities need the support of a dependable income managed by a practical financial plan.

In her opinion, your default plan is to maximize social security benefits and gradually increase the market value of your retirement portfolio (a.k.a. retirement savings) while maintaining a monthly paycheck for the duration of retirement. The financial core of a good retirement plan is based on 3 principles (chapter 12):

  1. Estimating your budget gap in advance of retirement (chapter 2)
  2. Maintaining a cash reserve throughout retirement (chapter 9)
  3. Making safe withdrawals from your retirement portfolio (chapters 8, 9)

Quinn provides practical checklists for transforming various sources of retirement income to a homemade paycheck.  In addition to building a retirement portfolio by ‘bucket’ investing (chapter 9) are the supplemental sources of income from Social Security benefits (chapter 3), traditional pensions (chapter 5), simple annuities (chapter 6), and home equity payments (chapter 10).  She also provides practical checklists for securing retirement income with the help of spending rules (chapter 8). Quinn’s valuable checklists help manage the financial risks of inflation (chapters 2-4, 8), taxes (chapter 7), costs of healthcare (chapter 4), and spousal protection (chapters 3, 4, 6, 7, 10, 11).

Janet Quinn’s Core principles

BUDGET GAP (chapter 2). The 3 important numbers in your retirement plan are its budget gap (chapter 2), cash reserve (chapter 9), and safe withdrawal (chapter 9). Calculate your budget gap before retirement. It is the difference between future income and expenses. The future gap can be minimized by staying in the workforce (to build a larger retirement portfolio) and spending less money.  Significant adjustments to financial assets and regular income may be necessary to support your desired level of spending later on. Estimate the future annual amount of money you can safely spend by using the following formula (chapter 2):

safe spending = (0.04*financial assets) + regular annual income – estimated taxes

CASH RESERVE (chapter 9). Create a cash reserve at the start of retirement. It will be an important source of money to pay for any budget gap that develops during 2 years of decline in the financial markets.

SAFE WITHDRAWAL (chapter 9). The “safemax” is a percentage of your retirement portfolio that you can safely withdraw in the first year of retirement (chapter 8;“safe’ means “as far as we can tell”). The amount withdrawn, plus an adjustment for inflation, practically dictates how much you can withdraw every year to ensure the 30-year longevity of your retirement portfolio.

Here’s the 4% rule (chapter 8): Withdraw 4% of your retirement portfolio at the start of the first year and safely store the money to pay bills throughout the year. At the start of the second year, withdraw the previous year’s amount adjusted for inflation. For example, assume your retirement portfolio holds a $50,000 investment in stocks and $50,000 investment in bonds for a total of $100,000. Even if you make no more contributions to the porfolio, the following annual withdrawals could be sustained for 30 years when adjusting the previous year’s withdrawal for a 3% rate of inflation and rebalancing the portfolio to maintain a mixture of 50% stocks and 50% bonds:

year 1- $100,000 * 0.04 = $4,000 withdrawal
year 2- $4,000 * 1.03 = $4,120 withdrawal
year 3- $4,120 * 1.03 = $4,244 withdrawal
legend- $100,000 is the portfolio’s initial value, 0.04 is the safemax, $4,000 is the first annual withdrawal, 1.03 is the inflation factor, and $4,120 is the second annual withdrawal.  there is no adjustment for taxes in this calculation.

NOTE: The amount withdrawn by the 4% rule is directly related to the initial market value of the retirement portfolio. For example in year 1, the amount safely withdrawn from a $200,000 portfolio would be $8,000, etc.

Protect yourself from the hidden risks of greedy salespeople as you get older and less interested in managing your accounts. Appoint a trustworthy person as your durable power of attorney and use a written investment plan.

Life-time income

Life-time incomes offset the risk of outliving your retirement portfolio. The reliable life-time incomes of retirement are Social Security, Pensions, and Annuities.

SOCIAL SECURITY (chapter 3). Social security benefits include a guaranteed income for life, protection against inflation, tax benefits, and protection of your spouse without the risk of market fluctuations and without paying investment fees. Beneficiaries can maximize their income by delaying the onset of benefits to age 70 instead of starting at age 62 (be sure to enroll in Medicare at age 65). A survivor’s benefit is based on the earnings-record of the deceased. The spousal benefit is automatically upgraded to a higher survivor benefit.

PENSIONS (chapter 5). Traditional pensions offer either a monthly lifetime payment or a lump sum payment that can be rolled over to an Individual Retirement Account (IRA). The rollover incurs an investment risk (investment risk is the possibility of incurring a loss from your choice of investment or the investment’s fluctuation in market value).  Government pensions (except municipal pensions) are reliable.  Most private pensions are protected by the Pension Benefit Guaranty Corporation (PBGC.gov). If you are ineligible for a pension, consider buying a lifetime annuity.

ANNUITIES (chapter 6). Annuities aren’t a do-it-yourself investment; they are a tool for managing the risk of outliving your portfolio. Find a good advisor who isn’t a salesperson and avoid buying variable annuities with living benefit guarantees. Simple annuities are purchased with a lump sum in return for monthly lifetime income.

  1. The Single Premium Immediate Annuity (SPIA) pays benefits until death unless purchased with payments “Certain”. The SPIA is not designed to create a legacy fund. Its advantage is the payment of benefits that exceed the interest of bonds and dividends of stocks. The insurance company’s rating should be at least AA- (Fitch, S&P), A (AM Best), or Aa3 (Moody’s). [The tax deferred variable annuity can be converted to an SPIA. Find the best available benefit-payments in ImmediateAnnuities.com and switch companies.]
  2. The Immediate Pay Variable Annuity pays monthly benefits that change with the market. The benefit is a percentage of the investment portfolio value. The assumed interest rate (air) is your selected rate of withdrawal from the investment portfolio. The investment risks are volatility and choice of investment portfolio.
  3. The Inflation Adjusted Immediate Annuity pays monthly benefits adjusted to last year’s inflation. There is no inflation or investment risk. The monthly benefits are lower at the beginning than later on. This annuity is more appropriate for younger people with a longer life expectancy.
  4. Fixed Increase Annuities pay monthly benefits that rise at a fixed rate of 1-5%.
  5. With a Deferred-income Annuity (“longevity insurance”) there is a time delay to the initial benefit followed by monthly payments for life. The reasons for owning this annuity are 1) protection from outliving retirement portfolio, and 2) providing your spouse with guaranteed income after death.
  6. Fixed-term Annuities start paying benefits immediately. This is desirable for people with illiquid investments such as delayed social security.
  7. The Charitable Gift Annuity gives a lump sum to charity that guarantees a fixed monthly income for life.

The variable annuity is a pure investment that risks poor performance in the market. Its insurance company offers a guaranteed living-benefit rider (LBR) that provides a minimum lifetime income regardless of the investment’s performance. Taxes on the accumulating returns are deferred until withdrawal, then taxed as regular income (unless “qualified” in a Roth). The tax is proportional to the ratio of investment return to invested capital.  The goal of a variable annuity is to allow growth of your investment above the guaranteed minimum. Success depends on a 90% allocation of stocks in the investment, yet most insurance companies limit the stock fund to 65% stocks. Why? The insurance company is protecting itself by using fixed income from the portfolio to pay the LBR instead of the company’s own money. Living benefits are first taken from the investment portfolio while you continue to pay the annual fee! This seems unfair, so try to exercise your right to withdraw from the investment every year up to a fixed percentage amount. Even if you draw down to $0, the company will continue to pay your benefit. Spouses are usually not covered by a variable annuity. Rather, the death benefit is an insurance payout that doesn’t replace the annuity’s investment return a survivor might lose. If you bought a variable annuity, it’s too late to extend to your spouse. But you can switch to a better annuity in a tax-free exchange or buy more insurance. Variable annuities often charge excessive management fees of 3-5%.  For a second opinion, consult the Marco Consulting Group at Annuity Review (AnnuityReview.com). They will analyze 2 variable annuities for a fee of nearly $300.

HOME EQUITY (chapter 10). The equity of your home is a ‘piggy bank’ that can be used for income or passed to your heirs. There are several ways of squeezing income from your home equity:

  1. take a Reverse Mortgage to create a 20-30 year spending plan
  2. borrow to pay a large bill
  3. eliminate a traditional mortgage.
  4. refinance your traditional mortgage
  5. take a boarder after first checking on possible restrictions imposed by homeowners associations, zoning laws, etc.
  6. sell the house and lease it from the new owner (i.e., Sale/Leaseback). Consult a lawyer before selling the house.

The reverse mortgage is a loan against the equity of your home in which the lender makes tax-free payments to you because they are loans. You pay all maintenance costs. Don’t repay the loan while living in the house; proceeds of the sale will repay the loan. You keep the excess proceeds, but otherwise are not responsible for a loss on the sale.

The Home Equity Conversion Mortgage (HCEM) is issued by private lenders and insured by the FHA. The HCEM offers 3 types of payments:

  1. lump sum at the beginning
  2. monthly payments
  3. borrowings from the principal

At your death and before selling the house, your heirs will have the option of buying or selling the house before foreclosure. Seek more information and advice from Jack Guttentag on his website, MtgProfessor.org.

Portfolio management

SPENDING RULES FOR THE HOMEMADE PAYCHECK (chapters 8, 9). The basic rules are to make buy-and-hold investments in your portfolio, withdraw funds using the 4% rule, and rebalance the portfolio after you make an annual withdrawal. Based on Quinn’s research up to the year 2016, the 4% safemax may be modified in one of several ways:

  • 4.5% if your stock allocation is 45-65%
  • 5.5% if you reduce the withdrawal in declining markets
  • 3% to ensure surviving the next 30 years
  • adjustments to the Shiller PE Ratio
    • 4% if P/E10 >20
    • 5% if P/E10 = 12-20
    • 5.5% if P/E10 <12
  • 6% is too high and your portfolio may only last 15 years. Instead, borrow on your house through a reverse mortgage.

The amount of annual income withdrawn from your retirement portfolio is determined by your safemax rate of withdrawal (discussed above in the core principles). Be consistent in withdrawing from your portfolio except when the market is depressed. Then withdraw from your cash reserve to pay bills. When the market starts to recover, tap the investments to restore the cash reserve and resume withdrawing at the safemax.

Skip an annual withdrawal when you don’t need it. If the required minimum withdrawal from tax-deferred accounts exceeds your planned annual withdrawal, reinvest the excess amount. Here are 2 ways to preserve capital:

  1. Withdraw from investments that have increased in value, otherwise from investments with the lowest potential return.
  2. Withdraw from taxable accounts before tax-deferred accounts. Within the taxable accounts, withdraw a blend of gains and losses to minimize taxes.

PORTFOLIO INVESTMENTS (chapters 8, 9). Bucket investing is done by putting money into different funds (‘buckets’), each having a specific purpose. First, create a cash reserve (‘cash bucket’) that will pay bills for 2 years when added to pension checks. 90% of the remaining retirement portfolio is allocated to investments and 10% to a discretionary bucket. Allocate 40-65% of the investments to stocks and the remainder to bonds [the author discussed additional guidelines for adjusting your allocation of stocks and bonds according to age (chapter 8)]. The discretionary bucket is used for big, extra items (e.g., new car).

Your allocation of bonds and stocks depends on your capacity for risk, not your tolerance for risk. The capacity for risk depends on how well you are funded and able to pay bills with pension funds. If your risk capacity is low, don’t risk too much on incurring a loss in the stock market. Do you need to risk a stock investment? Not if all your expenses, including health, are covered for life. People older than 80 tend to fall into this category. Younger people with at least a 10 year horizon have more time to survive market fluctuations. The S&P500 Total Return index has never declined over 15 years. Otherwise, you need to invest in stocks if all expenses are not covered for life. The reasons for investing in stocks are to hedge inflation (low allocation of 20-30%) or create a legacy fund for heirs (high allocation of 40-80%).

There are several important advantages to investing in index funds instead of individual stocks and short-term bonds.

  • index funds are easier to rebalance each year
  • you will earn the return of the whole market
  • you will own a portfolio of diversified investments
  • index funds are easily converted to cash
  • short term bond prices aren’t as volatile as long term bond prices

What if you don’t want to rebalance the retirement portfolio?

  • invest in a target-date fund
  • use a rebalancing program
  • pay a low-cost online advisor (e.g., betterment.com )
  • hire a good fee-only financial advisor and avoid paying high fees. consult FINRA.org for help finding a reputable financial advisor.
  • seek advice from a no-load mutual fund company

Risk management

TAXES (chapter 7). The main categories of tax-deferred retirement savings accounts are employer-sponsored plans and personal IRAs. The typical employer-sponsored plan allows investments in mutual funds. After leaving an employer you can keep the plan, merge it into that of a new employer, or convert it to a rollover IRA. Personal IRA’s expand your investment choices, some of which require a trustee to make the transactions (e.g., precious metal trust, real estate trust). Be aware of the costs of converting a traditional IRA to a Roth IRA. At the time of conversion you must pay regular income tax on the investment returns. You may also incur a higher medicare premium and pay possible tax on unearned income. To minimize taxes when you withdraw funds to pay bills, withdraw from the taxable portion of your portfolio first, the traditional IRA second, and the Roth IRA last.

If you inherit an IRA from your spouse, your choices are these:

  • ask the trustee to name you as owner
  • rollover to a new IRA owned by you
  • rollover to an IRA already owned by you
  • create an inherited IRA if you are younger that 59 1/2 years.

If you inherit an IRA from someone else, your choices are these:

  • take your full inheritance now and lose the tax shelter
  • retitle it as an inherited IRA to keep the tax shelter

HEALTH INSURANCE (chapter 4).  The Affordable Care Act guarantees your eligibility for health insurance irrespective of your state of health. There are 3 general healthcare plans: HMO (Health Maintenance Organization), POS (Point of Service), and PPO (Preferred Providers Organization).  In each plan, your cost share is capped by the annual maximum out-of-pocket payment.

The government’s Medicare program is comprised of part A for hospitalization, part B for outpatient services, part C for extra benefits plus prescriptions, and part D for prescriptions. You pay premiums for parts B-D, but not for part A. There are cost-sharing charges for services in parts A-D. Medigap is a private healthcare insurance designed to supplement Medicare and used to replace Part C of Medicare. Don’t miss the enrollment dates or else pay a higher premium!

LONG TERM CARE (chapter 4). If you become incapacitated and require long term healthcare outside the hospital, your costs may exceed $85,000 per year. Consider purchasing long term care insurance, but don’t spend more than 5% of your retirement income on insurance premiums for long term care. Group policies are cheaper. Minimize your premiums by choosing a 3-year benefit period (instead of 5 years), avoid paying for inflation adjustments later in life, insure 50-75% of your expected cost, and extend the waiting period to 6 months. The alternatives to long term care insurance are:

  1. join a continuing care retirement community that offers a nursing home benefit.
  2. self insure by selling your home
  3. use Medicaid as a safety net.

LIFE INSURANCE (chapter 11). Don’t buy any if you are a single retiree without dependents. You’re better off investing the saved-premiums. Consider owning life insurance if you have dependents and want to leave a legacy fund or charitable gift. Chapter 11 describes how to extract more value from a life insurance policy.

SHELTER (chapter 10). Younger retirees like living in an active community and older retirees like their “independent living” in a more secure location. The choices for independent living are to remodel your existing home as needed to compensate for a handicap (e.g., wheelchair) or change homes. For example, move to an active adult community (consult 55Places.com; ensure that you will continue to receive healthcare).

Retirees seek “assisted living’ when they need help with the basic functions of living.  The choices for assisted living are to receive in-home healthcare or move into an assisted living facility (consult ALFA.org for choices).

Downsize to make life easier!


Investment strategy of the SmallTrades ETF Portfolio

February 14, 2014

An index ETF is designed to capture the investment returns from a financial market.  The SmallTrades ETF Portfolio (“Portfolio”) uses index ETFs to invest in several financial markets.  The goal of the Portfolio is to earn returns at a faster rate than possible by investing in risk-free bonds or the broad market of U.S. stocks, thereby ensuring that the accumulation of returns outpaces the inflation of prices in the American economy.  Success is measured by the following benchmark indices:

Investment strategy

The Portfolio is a high-risk, high-return investment in ETFs that duplicate well-established market indices for global stocks, U.S. bonds, U.S. real estate investment trusts, and gold bullion.  Twenty five percent of the portfolio’s market value is allocated to each index.  The ETFs generate at least 99% of the portfolio’s value and any remaining value is stored in a money market fund.  The ETFs will be held indefinitely except when faced with the advantage of replacing one with a more suitable ETF for the same index.

Table of holdings

ETF trading symbol Market Allocation
 AGG   U.S. bonds 25%
 GLD   Gold bullion 12.5%
 SGOL     Gold bullion 12.5%
 VNQ     U.S. real estate investment trusts 25%
 VT  Global stocks 25%

Expected return

Unfortunately there is no 50-100 year history of ETF performance that enables the forecast of an expected return.  To compensate for this limitation, two models were used to test the allocation plan shown in the table of holdings.  In one model of the 15-year recovery from the 1997 Asian Financial Crisis, the allocation plan outperformed the U.S. stock market.  In the other model of the 5-year recovery from the 2008 Global Financial Crisis, the allocation plan underperformed the U.S. stock market.  Among both time periods, the lowest return of the model portfolio was 8.5%.

  • MARKETS portfolio of financial-market returns from 1997 to 2011: The global-stocks market was simulated by a mixture of 75% U.S. large capitalization stocks and 25% emerging markets stocks.  Trading and management fees were excluded from the model.  The annualized return of the portfolio was 8.5% in comparison to the 5.7% annualized return of U.S. large capitalization stocks.
  • ETF portfolio of historical prices from 2008-2013: Trading fees, but not management fees, were included in the calculations (– management fees are charged in the primary market before ETFs are listed in the stock market).  The annualized return of the portfolio was 10.9% in comparison to the 17.8% annualized return of SPY, an ETF that tracks the Standard & Poor’s 500 Total Return.

Risk management

The holding period will be at least 5 years.  Fluctuation in market prices is the main risk of investing in index ETFs.  The likelihood of incurring a loss from a declining market decreases as the length of the holding period increases (– e.g., the risk of loss from stocks and bonds declines by 50% as the length of the holding period increases from 1 to 5 years; and, the risk declines by 80% when the holding period is extended to 10 years (1)).

The Portfolio will be rebalanced as needed to maintain the allocation plan within an acceptable limit of 28% error.  The Portfolio is concentrated in 4 markets and losses may occur when one or several markets decline.  The 25% allocation plan assigns equal weightings to each financial market in order to smooth the effect of market declines.  After accounting for trading fees, the strategy of rebalancing a large allocation error is more cost-effective than using a rebalancing schedule.

The Portfolio holdings are investable, have established reputations, charge low management fees, and are safely structured.  Although there’s no guarantee that the index ETFs will sustain their historical performance, the stock market, bond market, and real estate market ETFs provide diversified investments in underlying assets.  The risk of investing in these ETFs is lower than the risk of investing in an underlying asset.  Gold bullion ETFs are non-diversified investments in the volatile gold market.  Gold bullion is theoretically susceptible to physical damage by theft or fire.  This risk is diminished by investing in two funds, GLD and SGOL, that store the bullion in separate vaults located in London and Lucerne.

The investor’s tax burden can be reduced by holding these index ETFs in a tax-deferred retirement account.

Copyright © 2013 Douglas R. Knight

References

1.           James B. Cloonan, A lifetime strategy for investing.  American Association of Individual Investors, Chicago, 201


#SmallTradesPortfolioDESIGNER

April 21, 2013

(updated 7/31/2013)

The Small Trades Portfolio Designer is used to test model portfolios that hold 1-9 sectors of financial market returns plus a cash supply of U.S. dollars.  The program is pre-loaded with monthly returns computed from broad market indices during the 15 year period of 1997 to 2011.  You create the model portfolio by entering an allocation plan, investment amount, and rebalancing strategy.  The results are displayed in tables and charts on the same worksheet. You have the option of assessing the impact of trading costs and investment fund fees on portfolio returns.  The program can be downloaded for free by clicking here: SmallTradesPortfolioDESIGNER.

Allocation plan

At the top of the worksheet, each class of securities is labeled according to a unique combination of market region, market sector, and asset class.

designer1

Consider, for example, funding a portfolio that is 54% invested in large-cap U.S. stocks, 36% invested in U.S. bonds and 10% stored in cash.   For every $100 invested, $54 are allocated to U.S. large-cap stocks, $36 to U.S. bonds, and $10 to a cash reserve.  The allocation plan consists of weighting factors 0.54/0.36/0.10 [the article designing a buy-and-hold portfolio offers advice on creating allocation plans relevant to your investment goal].  The following entries are made next to the appropriate labels:

designer2

Rebalancing strategy

designer3Suppose the portfolio is funded with $10,000 [comment: lower payments might be less efficient investments when factoring in the costs of trading fees and expense ratios].  Two methods of rebalancing the portfolio are scheduled (e.g., every year) and signaled.  Suppose you wish to test the signaled method by choosing “no schedule” from the pull down list of the “Rebalance schedule” cell and “signal 3” from the pull down list of the “Rebalance signal” cell.   “Signal 3” is a command to rebalance the portfolio when market forces unbalance the portfolio to an unacceptable degree of error.  The result is an intermittent series of rebalancing episodes that modify the historical returns.  “Signal 1” and “signal 2” evoke a different number of rebalancing episodes by modifying the boundary for unacceptable allocation error.  It’s an empirical process for finding the best result.

Investment costs

designer4

The “risk-free bond rate” is used to calculate the Sharpe ratio.  I recommend a rate that estimates the risk free return for the holding period of the test portfolio (e.g., a 10 year Treasury Note at inception of the portfolio).  The default bond rate is 2.98% for the 15 year period of this program.  Trading fees and annual expense ratios always reduce investment returns, sometimes by a considerable amount.  Assess these by entering the typical trading fee charged by your broker and an estimated annual expense ratio derived from investment funds and advisor’s fees.  Or consider testing the default costs of $10 for trading and 1% for an annual expense ratio.  These entries are left blank for this tutorial.

Results

The historical returns are summarized by statistics and charts for the  “Unbalanced” (“buy-and-hold”) and “Rebalanced” portfolio. The outcomes of the “Unbalanced” and “Rebalanced” portfolio would be identical without a rebalancing strategy [furthermore, a portfolio of one asset cannot be rebalanced].  In the following table, “CAGR” is the annualized growth rate of the portfolio’s accumulated returns.  “Sharpe ratio” is the average annual investment return adjusted for market fluctuations.   A negative Sharpe ratio implies that risk-free U.S. government bonds are better investments.  Higher values of CAGR and Sharpe are preferred.  The “final value” is the portfolio’s market value at the end of the investment period.

designer5

Chart 1 shows the returns based on test conditions.  The market fluctuations ultimately reach the final values shown in the table.  An effective rebalancing strategy creates a gap between both curves.

designer6

Rebalanced portfolio

Rebalancing may not improve the investment performance of a portfolio.  However in this example, the signaled rebalancing strategy outperformed the unbalanced portfolio (CAGR 6.59% is better than CAGR 5.65%).  Not shown is that scheduled rebalancing “every 3 years” also outperformed the unbalanced portfolio (CAGR 6.38% vs CAGR 5.65%).  In this tutorial, the result of selecting “signal 3” for the signaled strategy generated a 37.7% boundary error labeled as the “rebalance signal” in the program.

designer7

“Signal 3” also triggered 4 rebalance episodes over 15 years (chart 2) when there were no trading costs at inception or rebalance.

designer8

Warning messages

The next chart uses red arrows to show the location of warning messages.  These disappear when satisfactory entries are made in the program.  Be aware that the “asset allocations” must total 100% or else the blue-lettered message “Allocations are incomplete” reminds you to check the entries.

designer9

Applications

The investable securities of the program’s market sectors are index funds, stocks, bonds, real estate investment trusts (REITs), and commodities futures. Index funds are particularly good substitutions for market sectors of the model portfolio.

Test other model portfolios.  The 60/40 Stock-Bond Portfolio, exclusive of a 10% cash holding, is a favorite of many investors.  The 60/40 unbalanced portfolio’s 6.07% “CAGR” and 0.29 “Sharpe ratio” provides a standard for comparison with other allocation plans.  Try creating higher returns by experimenting with different allocations.  Consult the article designing a buy-and-hold portfolio for advice on creating allocation plans relevant to your investment goal.

Apply the rebalancing strategy.  Either the scheduled or signaled strategy can be used to rebalance a portfolio of index ETFs that match the allocation plan of a model portfolio.  The scheduled strategy is straight forward.  Simply rebalance the ETFs according the best schedule determined by this program.  The signaled strategy is not straight forward.  It requires transcribing  data from this program to the Small Trades Portfolio REBALANCER program in the following way:

1. Enter the “Rebalance signal” from the Results of this Designer program into step 1 of the Rebalancer program.  In this example, the correct entry would be 37.7%.

2. Result 1 of the Rebalancer program will display a “Rebalance” message when any of the portfolio’s ETFs satisfies criteria for correction.

Conclusions

A leap of faith is needed to apply the model portfolio to your investment goals.  This program is based on recent 15-year returns and your best bet is to assume that the next 15 years will provide a different investment performance due to market uncertainty.  Even so, I don’t know any investor who completely ignores history.

This program tests strategies for rebalancing a model portfolio.  I know of no other program that provides such information!

The potential impact of trading fees and fund expense ratios is considerable when many portfolio holdings are rebalanced frequently and the expense ratios are high [that’s why respected authors recommend minimizing costs by seeking high-quality, no-fee, no-load investments].  A good rebalancing strategy should augment the expected return of the unbalanced portfolio.

You can download this program free of charge by clicking on SmallTradesPortfolioDESIGNER.  If the program inspires your investing for the betterment of self and society, consider giving a tax-deductible contribution to your favorite charity or my favorite charity.

Copyright © 2013 Douglas R. Knight  


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