What You've Always Wanted to Know About Managing Your Own Assets But Were Afraid to Ask

What happens with a new account? How do we proceed when a new account wants to get to the point where they are managing their own assets using a time efficient, low-cost, exchange traded, model-based approach? How do they get to the point where they know what funds to buy, when and how to rebalance, and learn how to transition from the accumulation phase where the nest egg is built up to the phase where they are drawing down their assets?

Since I started a new account yesterday, I thought it would be a good time to give readers a flavor of the process. Obviously, before the asset purchases begin, a lot of ground has been covered. This culminates with an agreement on an asset allocation.  I use Schwab models for this purpose. The chosen asset allocation model is the framework for subsequent investment decisions. It reflects a number of factors including age, tolerance for risk, retirement goals, and capacity to take risk.

Prior to the first investment being made, the client has transferred accounts to Schwab. This is easy  to do. S/he talks to an account specialist at Schwab and takes care that they are transferring assets "in kind," opening the appropriate account(s), and correctly listing account beneficiaries.

This particular account chose the "moderately conservative" model:

CLICK TO ENLARGE 

As shown, the asset
classes are all specified, along with the targeted percentages.

When the assets are transferred in, they are automatically classified into the appropriate sector. This account held Vanguard funds. A couple of Schwab funds were also purchased yesterday and today. It was agreed to leg into the market. . After this activity the account stands at:

CLICK TO ENLARGE.  The very first email to the client describes in detail how to get to this table and what it means. It is key to managing risk over time.

A couple of points worth noting that makes the portfolio management very easy. First, the "difference" column, which is the point of focus, can be viewed either in dollar terms or in percentage terms. Viewing in dollar terms and knowing the price of a fund or an individual security makes it easy to calculate the number of shares that need to be bought or sold.


Secondly, Schwab offers commission free funds. This obviously is very helpful in bringing the portfolio to the desired asset sector targets.


This approach, when used with low-cost funds as shown here, on the basis of voluminous evidence has outperformed 70 to 80% of professionals over the long term after accounting for fees. Furthermore, it has been shown that it is nearly impossible to pick the managers that will outperform in the future.


This is the basis for Warren Buffet saying,

Most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees.  Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

Tommorow:  How the DIY Investor chooses investments and what it means to his or her bottom line.


The purpose of this post is educational. Investors should consult with an advisor and/or do their own research before investing.