Over the long week-end break, AVI Family took a road-trip along Oregon coastline. Here are some images from the trip.

As a consequence, I did not find enough time to compile data for my blog post that I had in mind. I am therefore re-posting (with some modifications as highlighted in italics) a popular blog-post I made several years back targeting cohort of folks in my circle. Hope you find this post as refreshing as a well-deserved thanksgiving hiatus.

Many of my friends  know that I like to read and talk about anything finance and investing. Many a times therefore I get asked the question.. give me tips?

I am always more than happy to share my thoughts on the topic, which I have done individually on several occasions.

This article is a summary of what I have often said on this topic. My hope is that some of you will find these tips quite useful and on a personal note, I now have a pointer to refer to whenever I get asked the question, “give me tips?”

Before I begin, I want to note that I am not a certified professional financial adviser. The recommendations below on financial products/services and the path to investing is purely based on my own personal experience with investing with my own skin 100 % in the game.

For starters, let me briefly outline the profile of a typical individual (I will call Mr A) that I usually have had these discussions with in the past.

1. Mr A has a stable job with robust income and savings per month
2. Mr A is a home owner
3. Mr A has company offered 401K plan, that he contributes to diligently, trying to maximize on company matching funds. However, given his the lack of interest and/or knowledge on the available choices for investing in 401K funds, Mr A puts these into a single target-date fund.
4. Mr A has a brokerage account, which he primarily uses for occasional stock-trading 
5. Mr A has a savings and a checking account typically in a single bank where his monthly income check gets deposited. Most of the time, the money does not even get moved to saving account but simply remains accumulated in checking account.

My advise (tip) to these folks has always been some variant of the following:

(a) Investing is not easy. Be wary of folks who say otherwise.

(b) Investment by definition involves the future and since no one can reliably predict the future, risk is integral part of investing.

(c) Risk is a very personal and a subjective notion and it certainly is not beta (financial speak for quantifying volatility in a given equity asset). My risk may not necessarily be the same as your risk. I like to equate risk in absolute terms to money loss that one can live with (or accept) as part of having your money work for you via investments. It is up to each individual to decide what his/her tolerance level is.

(c) One cannot expect consistent year-after-year market beating returns, without some form of active management.

(d) In contrast, market returns are as trivial as investing in a single index fund that tracks the overall market returns.

(d) Active management is better left to professionals, institutional investors and in some instances serious individual investors who have or are willing to invest significant time into managing his/her investments.

(e) It is very hard to resist the urge to “gamble” in the name of “investing”, especially after hearing and seeing folks making money in the markets. Do not resist the urge, rather limit the funds you will allocate for this type of speculative investing activity.  Go wild with these funds and without hesitation look for that unicorn investment that can return >10X returns on investment. Case in point, my recent investment in PG&E stock.  

(f) I call the above investing activity  “gambling” based on the assumption that you are not going to spend time thoroughly investigating the investment vehicle in which you want to put money and you have no plans to have money invested in the vehicle for a long term (for a term significantly longer than a year).

(g) Try not to have any cash beyond 1 year worth of emergency funds in your checking (or savings) account.

I now consider atleast 2 years worth of living expenses saved in cash as a bare minimum to feel 100 % assured of no adverse changes in life-style induced by un-expected life events.

(h) 2 months worth of emergency cash must be parked in your checking account (used all your day-to-day transactions) and the remainder of 10 month worth of emergency fund must be parked in a relatively easily accessible high-yield savings account.

Revised to 22 months of cash reserves parked in relatively easily accessible high-yield savings account.

There are several online banks that offer high-yield saving account, such as Discover Bank, Capital One 360,  and Ally Bank. As of this writing, robo-investing houses such as Wealthfront,  Betterment and Personal Capital, are also offering high-yields savings account. The choices have further increase to now investment-banking house such as Goldman Sachs also offering high-yields saving account through its flagship Marcus brand.

(i) Any excess cash must be invested  in a diversified portfolio of investment funds. The simplest and the most efficient way to achieve this objective for investing in equity markets is through robo-advisors.

A robo-advisor is an online automated investment management service. Robo-advisors offer clients the ability to create a well-diversified portfolio (tailored to individual risk profile) of ETFs or mutual funds. With tools such as automated portfolio re-balancing and tax loss harvesting, and low-management fees, robo-advisors offer an individual investor the opportunity to fully participate in the markets for a higher expected net returns.

(j) Two robo-advisor firms that I have my money invested with are: Betterment and Wealthfront. I would recommend using either of these or both to park any excess cash that you may have in your taxable account.

Be wary of wash sale conflict if you do use two robo-advisors simultaneously. The idea for using two robo-advisers is to diversify the risk-profile and thereby create a diverse non-intersecting portfolio of assets that can be robo-managed.

(k) You may also consider using these robo-advisors for your retirement or rollover IRA accounts. But then you may not be able to leverage the tax harvesting benefits these offer.

(l) For your retirement IRA or rollover account, I suggest creating a 7Tweleve Portfolio  either with Fidelity or Vanguard. Rather than the traditional 2 asset portfolio such as 60 % stocks/40 % bonds, 7Twelve portfolio is  comprised of 7 asset classes build using 12 distinct ETF or mutual funds.  Read  this article from the TauofWealth on how to go about constructing a 7Tweleve portfolio and the book available on Amazon for better understanding of the rationale behind construction of this portfolio.

I have since transitioned to AppliedValue Portfolio, considering how important gold as an asset is for a portfolio to dampen the portfolio volatility without impacting the average-annual returns.

(m) For your 401K account, find out whether your plan allows for a Brokeragelink account. The advantage of having a Brokeragelink account is that within your 401K plan you have much higher flexibility for investing. 401K plans that I have had thus far from two firms that I have worked for, allowed for creating a Brokeragelink account that can be funded with upto 95% of 401K contributions.

(n) I have heard of suggestions for better way to play with retirement money that goes something like… treat it as play money to be used for purchase and sale of individual stocks… The idea is that since the account is not a taxable account, one can go in and out of stock purchases several times a year without worrying about short term capital gains taxes. This idea has gained further credence, given the zero-trading fee environment of today.

While it may be true, as I noted above, investing is a hard and unless you truly are willing to put time and effort in your investment decisions, the idea of buying and selling out of stocks often is nothing but gambling and I am not sure you want to gamble with your retirement funds.

(o) Finally, one place shop to track your net worth and investment progress is Personal Capital. I love the tools that Personal Capital offers to me as an individual to track my various investments. A great blog article summarizing the pros and cons (not many) of what Personal Capital has to offer, can be found here.

I want to re-iterate my love for Personal Capital. Their retirement-planner tool is an excellent resource to keep track progress towards FI, and keep one-self motivated to do better.

So there you have it, the gist of “tips” that I have offered on investing whenever I am asked about it.

Video/Book/Article/Audio for the Week

• Meb Faber’s podcast interview with Carter Malloy of Acretrader.com. I am getting more and more interested in alternative-investment opportunities and found this interview insightful to better understand the world of farmland investing.
•  The Knowledge-Project podcast interview with Scott Adams of Dilbert fame and author of one of my favorite self-help books, How to Fail at Almost Everything and Still Win Big.
• Macro-ops.com blog article on Floyd Odlum, the greatest value investor that no one has probably heard of. The following says it all, In the years between 1923-1929, Odlum compounded capital at an annual rate of 2547 %.
• Bloomberg article, reminiscing on how 2019 feels much like 1998. The paralles are unprecedented and echos the sentiment I expressed in my musing’s from previous blog post, the party may continue well into 2020’s.