3. Choose a Custodian (discount broker) if one has not already been chosen, and open and fund your account.

I’ve already covered the reasons I recommend using a discount broker, but here’s a quick review.  Our methodology is based on broad diversification and rebalancing frequently when the markets move away from the model’s target asset allocations. Unlike the rebalancing frequency recommended or offered by traditional brokers and advisors, this might mean rebalancing monthly, or even weekly. So, trading costs are a huge issue and must be minimized to gain the benefit of our approach.

Many of my firm’s clients use Interactive Brokers, Charles Schwab, or Scottrade. There are other fine discount brokerages out there, and you can find comparisons and evaluations of them elsewhere. You would do well to research their commissions and fees to find which one best suits you. Firms like Schwab, Scottrade, Fidelity, Interactive Brokers, and others, even have Exchange Traded Funds (ETF’s) that are commission free for their clients. Find out which firm has the most commission-free ETF’s that correspond to the ones we use in our portfolio, and you may have found your discount broker! Don’t forget financial strength and stability, customer service, small-print fees, and other criteria for your evaluation! Do your homework.

After selecting the Custodian of your choice, open and fund the account, and you’re ready for the next step!

2. Choose your investment vehicles if they are not already chosen (as in your 401k)

In my portfolio models shown in this blog, I use six Exchange-Traded Funds (ETF’s).  Essentially, these ETF’s are index funds that can be bought and sold during market hours on the stock exchange.

They are:

SPY – The S&P500 Index


EPP – The MSCI Pacific Ex-Japan Index

GLD – The price of Gold

BWX – The Non-US AAA-Rated Sovereign Bond Index

IEF – US Government Bonds, 7-10 Year maturity, Index

TIP – US Government Inflation-Protected Bonds Index

For your 401k, you may have investment selections that closely correspond to the asset classes represented by the ETF’s I have chosen. If so, then you can simply match your choices to the ETF’s I use, and follow the percentage allocations in the model portfolio most suitable to your situation. If your 401k choices lack one of these asset classes, please let me know what all of your choices are.  It may take me a week, but I may be able make a couple of suggestions.

Also, if there is a large group of readers who have the same plan, let me know who you are and what your plan offers.

On to Step 3



1. Choose your portfolio model by assessing your risk tolerance

OK, for you do-it-yourselfers or those allocating your own 401k’s, this is the first step in constructing your portfolio using our tools. You need to develop a feel for your risk tolerance, or your ability to handle the financial ups and downs the market will produce in your portfolio. Most brokers, advisors, and financial web sites have free online tools or questionnaires to help you assess your own risk tolerance, based on your investment time horizon and your financial situation. Feel free to look around at any of those free online tools.

For our purposes, once you have availed yourself of those other options, we want you to know how big a drop in your portfolio you can handle before you feel pressured to make some change. Making bad decisions under the pressure of losses is probably the second biggest reason people blow up their retirement accounts, so this risk assessment is important. The biggest reason people blow up their retirement accounts, in my view, is greedily or naively allocating too much of their portfolio to a hot stock, sector, mutual fund or asset class that has really been doing well for 2-3 years and is catching big news headlines as a result.

I’ll provide theoretical backtests that will give you some idea of how our six portfolio models might have done over a 5-6 year period. Note that the time frame of these backtests is from 2004 through late 2011. If you want access to backtests and charts current as of the prior week, feel free to subscribe to the PortfolioWisdom Mobile App. Please select the model portfolio (1-6) that best suits you based on the overall behavior of that portfolio over time (not only looking at which one ended with the most money). Look at how much each portfolio model lost during the crash of 2008 and during other market downturns. Look at how much each model portfolio lagged the stock market, when it was going straight up! Decide which model is the one that best balances your family’s desire to avoid big losses with your family’s desire to see nice gains when the market is rising. You will see that portfolio model 1 is the most conservative with the smallest drawdowns (and gains) and portfolio model 6 is the most aggressive with the biggest overall gains (and drawdowns). Most people would not be able to sleep very well at night if their entire retirement account was down 35%, as the aggressive portfolio might have been during the crash (stocks were down 50%). Update 1/13/2014 Models 1 and 2 have been discontinued because they were too conservative. Based on subscriber requests, a model 7 with no bonds was added (more aggressive than aggressive growth). So, for risk tolerance purposes, choose between models 4-6 below. So, look carefully at the portfolio drawdowns shown in the charts and the spreadsheet below before choosing your risk tolerance and portfolio model.


If you are a 401k investor, you can return to the previous page showing the asset allocation matrix.

If you are curious about our mobile app and or managing your own account, then go On to Step 2

How to Build Your Portfolio Using Our Tools

“OK”, you say, “How do I do this?” Well, here are the basic steps… each with a link to a more detailed explanation of who, what, how, and when.

Before we start, keep in mind that portfolio wisdom.com does not know about your individual situation. You may need to modify this approach based on your current life situation. If you do not have sufficient cash in accessible savings for emergencies, you may need to choose a more conservative model, or keep ira funds out of the markets altogether. Please read the disclaimers about our models.  Over time, they have worked well for others and should work well for you, but, past performance is no guarantee of future results. Diversification is no guarantee of profits. Also, markets change… these models may work better or worse over the next few years than they did in the last five years.

I believe in these models and use them, but they are for your general information and not to be construed as investment advice specific to you. OK?  Here goes…

Step One – Choose your portfolio model by assessing your risk tolerance.

Step Two – Choose your investment vehicles if they are not already chosen (as in your 401k).

Step Three – Choose a Custodian (discount broker) if one has not already been chosen, open, and fund your account.

Step Four – Invest your money according to your chosen (and modified) model … either all at once or gradually … your choice.

Step Six – Rebalance as needed (huh?) … Don’t worry I’ll explain 🙂 .

Things look risky

This is my first post to portfoliowisdom.com. I’ll be adding a few past client communications for context, but this is the first… here goes…

Over the next few days, I will be adjusting my client portfolios to raise cash and lower risk until things are a little more clear. The risk of financial loss  is greater, in my mind, than the risk of missing a big rally in equities, and I’m not comfortable that a big drop in stocks would be cushioned by a rally in bonds, given their already high levels. Continue reading “Things look risky”