My Dark Investment Secret

Do you want to hear a secret? I don’t know much about investing. I haven’t paid very close attention to my asset allocations, and I have not carefully planned my contributions. Basically, I’ve been winging it when it comes to investments.

As you can imagine, a lot of insecurity goes along with not carefully planning where your money is being invested, so quite a while back I decided I should probably change my ways. I knew I should start to learn a thing or two about the vehicle that I am hoping will take me to financial independence, and go from really lazy investor, to semi-savvy investor. This is especially important to me now, because for the first time in my life I’ve actually been contributing significant amounts of money toward retirement accounts.

Many people suggest that one of the first things you should do is decide on an asset allocation for your money, and stick to it – or if you’re willing to take it a step further, write an investment policy statement (IPS). Today, I decided to put together a rudimentary IPS, to help clarify my financial goals & how I plan to achieve them. You can now find this simple document in my “Accountability” section. To tell you the truth, it feels good to have it written down and documented, even though most of it was already in my head – and actually compiling everything into a cohesive document was embarrassingly simple.

Now that my investment plans are at least partially mapped out, I hope to make two things into new habits:

  1. Continue learning, and continue to make adjustments to my IPS as improvements and refinements become obvious
  2. Regularly compare my current investments against my IPS and planned asset allocation (and re-balance!)

How Accurate Has My Haphazard Investing Been?

The following table shows my target allocations from my newly minted IPS, compared with what I actually own today.

Target Allocation from IPS Current Allocation
Large-Cap Funds 35% 58%
Mid-Cap Funds 15% 12%
Foreign Funds 20% 13%
REIT Funds/RE 10% 10%
Bond Funds 10% 0%
Non-traditional 5% 7%
Cash 5% 0%

Obviously, my “wing it” attempts have not quite met my goals; most notably, I probably own far too many U.S. large-cap mutual funds, and not enough of pretty much everything else. I have been somewhat paralyzed by the complexities of re-balancing across multiple accounts (IRA, Roth IRA, 401K, brokerage account, etc.) – but I at least now know the general idea of what I should change!

Most of my large-cap funds are currently being held in my IRAs – so it should be simple enough to sell off enough to get closer to 35%, but it will be more difficult (because of fund minimums) to reach exact accuracy on my other allocations, until I’ve accumulated more investment capital. One step that I know I can take immediately, is to sell 10% of my large-cap funds in one of my IRAs, and purchase a bond fund.

As I continue to explore the complexities of keeping a balanced portfolio, as well as acquiring enough capital to no longer worry about minimums, I hope to learn a few good strategies for re-balancing across accounts, all while keeping tax efficiency in mind.

So, do you have any investment secrets like mine? Have you written an IPS, or do you document your target asset allocations? Does your allocation look completely different when compared to mine? Let me know, or send me a link in the discussions! I’d love to absorb as much knowledge & experience as you’re willing to share.

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