The Four Pillars of Investing Part 7

This is a multi part series dedicated to the review of  William Bernstein's book The Four Pillars of Investing.
Numbered Page references are from the hardcover edition.

Chapter 13 – Defining your mix
Analogy to building a house to protect you – the same for your investments – protection, not wild speculation.
Bricks - Total US Stock Market – Wilshire 5000, S&P 500, Russell 3000. This can be further split into the four corners, large and small, growth and value. Small funds are less suitable for taxable accounts due to turnover and cap gains. In addition to the four corners, also add in REITs.
Timbers - Next consider total international funds.  Can be also split into Emerging Markets, Europe, Japan, Pacific Rim, and the UK.
Shingles – Bonds – keep them short term. Longer term carries too much risk for diminishing returns. Included are government securities, corporate bonds, municipal bonds. Keep these in taxable accounts for they are already tax advantaged, and can double as your emergency fund as they are easily accessible.
Keep track of tax efficiency. REITs and junk bonds should be tax sheltered because they pay returns in the form of dividends.

Taxable Ted – Lump Sum – No tax shelter –
Stocks 40% Total US Stock Management;20% Tax Managed Small Cap; 25% Tax Managed International;15% REITs inside a Variable Annuity.
Bonds – 25% to each; Treasury ladder; Short term Corporate; Limited Term tax exempt; California Intermediate term tax exempt.
Recall the pilot simulation that crashes versus real life actions. Have you ever lost 25% of your portfolio value?

Sheltered Sam – all Pension
20% S&P 500; 25% Value Index; 5% Small Cap; 15% Small Cap Value; 10% REIT; 3% Precious Metals; 5% European; 5%Pacific; 5%Emerging; 7% International Value;
Bonds – 60%Short Term Corporate; 40%TIPS;

Young Yvonne – 12% S&P 500; 15% Value; 3% Small Cap; 9% Small Cap Value; 6% REIT;1.8% Precious Metals; 3% Europe; 3% Pacific; 3% Emerging; 4.2% International Value; 40% Bonds/Cash
To start, she should put $0-$5000 towards S&P 500, then $5000-$10,000 add International Fund, 3. $10k-15k add REIT, then 4. $15k-20k add Small Cap and so on. This means in the second $5k added, only $1500 goes to total international fund. The other $3500 is split between the S&P 500 and money market. And by the time $15k is added only $1000 will be put into REIT, thus conserving her targeted ratio while growing the portfolio and avoiding low balance fees adding funds after each $5k contributed.

Teach your children well, please. He suggests when they are ten that they get an account and each quarter a lesson. This way they can view the effects of the market going up AND going down. Then they will be competent investors.

Your portfolio will vary based on what makes you feel good and your tolerance for tracking error – the difference in your portfolio and that of a major index like the S&P 500. Do not own too much, or sometimes even too much of the same sector, as your job. Remember the poor Enron employees.