Guidelines for the DIY Investor (Part 2)

Since I received such a great response to the first article, I decided to turn this into a series. This article is mostly an FAQ about the previous one, shedding a bit of light on the reasons behind the methodology and adding a bit of depth. If you would like to see something more specific, please reach out to me at kylet@leetownadvisors.com and give me your thoughts.

Q- Why no individual stocks?
A- I have no qualms about you putting individual stocks in your portfolio, since mutual funds and ETFs are nothing but a collection of individual stocks, but this increases the complexity of the decision making process. You have to be able to choose which company to buy, in what proportion, and at what price. You then have to monitor that company to determine when is a good time to sell. Mutual funds and ETFs automate that choice for you. Left to their own devices, most investors tend to buy companies after a big run-up in price, then dump it after the stock drops. You can choose to do this at your own risk.

Q- Why $10k in each fund?
A- I will admit, the recommendation to invest the first $10,000 in an equity fund and the second $10k in a bond fund was a bit arbitrary. You can make these numbers whatever you want. You don’t have to invest in the same fund each round either, but it is best to keep the number of investments low (5 to 10) to make tracking and rebalancing easier.

Q- Why so much in bond funds?
A- This plan assumes that you already have a retirement account that is allocated aggressively towards equities and that this account is one which you intend to use some or all of the money for purposes other than retirement. Bonds are less volatile than stocks, so they are there for safety.

Q- Do fees matter?
A- They absolutely do. Make sure if you buy mutual funds you buy ones with no front-end load (which can be as high as 5.75%!), and with an expense ratio of less than 1%, or 0.5% in the case of ETFs.

Q- What about other asset classes, such as gold, commodities, or real estate?
A- When the value in your account exceeds $100,000, you can start thinking about diversifying into other asset classes directly. However, when you buy an equity fund, you are investing in companies that are actively engaged with those resources, so you are indirectly diversified into those asset classes already. Don’t make this more complicated than it has to be.

Q- What about Bitcoin or other cryptocurrencies?
A- Despite my optimism about the future of Bitcoin, I caution against betting the farm on it. There are still tons of legislative risk and price volatility on the horizon, and there is still no fundamental driver behind the demand like there are things like oil or other natural resources. I am confident (but not sure) that Bitcoin or other cryptos will play some larger role in the future, but what that role will look like is still very hazy. If you want to invest in BTC without creating a Coinbase or similar account, the ticker GBTC is an investment trust that represents 0.07 units of Bitcoin per share, so that is an option you can use. However, keep in mind that it sometimes trades at a significant premium to its net asset value.

Q- How often should I invest or rebalance?
A- Making trades on a brokerage platform costs money, usually $5-10 per trade (Interactive Brokers is the cheapest, but their platform has a very steep learning curve). To prevent trading costs eating up too much of your money, make sure the commission makes up no more than 1% of the trade itself. In other words, if each trade costs $5, make sure your trade size is at least $500. Similarly, if you rebalance too often, you will cut into your returns. For the purposes of this article and most of the people reading it, rebalancing once per year is more than enough, and probably unnecessary until you have a significant amount of funds built up.

Together, Part 1 and 2 of this series should be enough info to get you going on the path of individual investing, but does not replace the value of an actual financial advisor. Be on the lookout for more articles on this topic in the future!

-Kyle Thompson, MBA

Note: all information in this article is hypothetical and does not constitute investment advice. Investing of all kinds involves risk of loss and there are no guarantees of return. For more information, speak with an Investment Adviser directly about your goals and risk tolerance so a suitable investment recommendation can be made. Kyle Thompson, MBA can be contacted at kylet@leetownadvisors.com or through social media. Kyle is the Founder of Leetown Advisors, a fee-only financial planning firm in the Greater Des Moines area.