OK, let’s cut to the chase this week. Last week I invested my $5,ooo online. Here’s what I did to kick off the process.
I began by using the website of a company called MyPlanIQ, which is run by the longtime friend I mentioned in my last post. I wanted to find an investment plan, and I wanted to do that before I approached an online brokerage firm and, as I saw it, got sucked into a terrifying morass of complicated questions. MyPlanIQ helped me take the first steps. This is how it works:
First I determined my risk profile. There are two questions that you have to answer in order to do this: how many more years do you wish to work before you retire, and how much risk are you willing to take (ranging from very conservative to very aggressive). Based on my answers, my risk profile number was 30.
But what does that mean? I hear my former self ask nervously. Well, my new self says condescendingly, obviously it translates as “fixed income allocation = 30%, risky asset allocation = 70%.”
Perhaps, says New more kindly, noticing my heart palpitations, we should take a short detour. Let’s go down to the corner and back, and while we’re walking I can quickly explain that ‘fixed income allocation’ means loaning my money to people like the government who (one hopes) can be reasonably guaranteed to pay it back with interest but who won’t give me a piece of their pie; while ‘risky asset allocation’ refers to buying actual slices (or crumbs) of companies that may or may not be successful enough to grow my money. OK, Former, let’s head back. (Wait, now you’re hungry?)
Of course, New says, since the risk profile default number for a standard investment plan is 40, my 30 means that I will have to customize my own portfolio. But-but-but Former mutters feebly, trying to stave off the dawning sense that she’s too old already, it’s all too late, may as well give up - but, seriously?
Yes! says New, a trifle too emphatically. Because, she adds, all you have to do is look at the numbers.
And she’s right. On the front page of MyPlanIQ is a section called Brokerage Investment Plans. I clicked on that, which takes you to two lists, one of ETF funds, the other of Mutual Funds. I already knew that I didn’t want to worry about ETFs, so I took a closer look at the Mutual Funds list, which turns out to be extremely long. A few names I recognized, many more I didn’t. Many of the names I knew offered multiple plans. How on earth do I choose?
Actually, the really good thing about MyPlanIQ is that while it gives you the choice of virtually every plan out there (unlike a broker), all the plans are rated by an impersonal piece of software which mathematically analyzes each fund’s track record and the number of asset classes it offers. (Wait… an asset class is a group of assets that are similar in behaviour and subject to the same laws and regulations. The three main classes are equities i.e. stock, fixed-income i.e. bonds, and cash. The more asset classes a fund offers, the more diverse your portfolio is going to be. And that’s a good thing, Former.)
The highest possible rating for each plan is 5 stars. So I bypassed anything that didn’t have 5 (because really, why go for less?) and then picked out a name I knew: Schwab. Specifically: Schwab OneSource Select List Funds. I selected it. At once I found myself looking at a page which told me that this plan consists of 137 funds and covers US Equity, Foreign Equity, Fixed Income, Emerging Market Equity, REITs and Commodity.
Crossing the fingers of my left hand behind my back in the hope that no one would ask me any more about that, I turned to the information on the right. It seemed that I now had to choose between a Strategic Asset Allocation (SAA) fund or a Tactical Asset Allocation (TAA) fund. Help, Former began to mutter, her right hand reaching for the phone, her brain beginning to tie itself into knots. Stay calm, said New. Tentatively, I clicked on the explanations for each and discovered that the strategic method is for long-term investments and based on the theory that markets ultimately balance themselves out; the tactical takes a more dynamic approach with more short-term tweaking. (Self-explanatory, really.) Each still only deals with asset classes; it isn’t necessary for the investor to have a more detailed understanding of the market to take advantage of the TAA.
The accompanying numbers made it clear that the tactical approach for this particular plan was superior. Over a 5-year period, the percentage return was 15%; the SAA only showed 8%. Since my friend was already recommending the TAA route, I chose that. Customizing the plan to my needs, it turned out, simply meant changing the default risk profile number from 40 to 30 (phew!) Now I knew the plan for me.
What next? Well, this is when, temporarily at least, I had to go it alone. Armed with this information, my next task was to go to Schwab and buy the plan. I’ll tell you how that went next week. But in case you are wondering, that’s not the end of MyPlanIQ’s involvement, as you’ll find out.
Which is frankly a relief, because even my new self would be nervous at the thought of taking all of the next steps on her own.
As a matter of interest, why did you decide not to look at ETFs?
I took advice from Manisha Thakor’s book “On My Own Two Feet” and covered this briefly in my post of March 7th (“Stocks and Stones”). Her contention, which seemed sensible to me, was that for longer term investors without any in-depth market knowledge, the ability offered by ETFs to trade throughout the day as the market fluctuates is unnecessary, and often works out to be more expensive.
Would be interested to hear if you have a different point of view?
I wouldn’t rule out ETFs. They often have lower expense ratios than similar mutual funds. If you plan to mainly hold for the long term, that concern may outweigh all others. Also, if you are investing in a taxable account, they often more tax efficient than mutual funds. There is the downside with ETFs that you might pay transaction costs to trade them. But keep in mind that many larger online brokers allow you to trade a subset of popular ETFs for free, and some mutual funds have transaction costs as well (especially those with lower fees not traded direct with the fund companies). If you only contribute to your account every year or quarter, the transaction costs will eventually end up being small compared to the expense ratio savings.
Having the ability to trade during the day is a benefit to some, but doesn’t hurt those that don’t use that feature of ETFs. To me, it makes them more transparent, because they publish their holdings and prices much more often than mutual funds, even though I don’t trade but once per quarter or so.
I just went on this same exact journey a month ago. I already had a Charles Schwab account so the choice was obvious to me. My risk profile came in right at 40, so I used the default technical allocation moderate risk plan. The next day I placed my orders at Schwab as recommended. At the end of the month, MyPlanIQ sent me a buy-sell list and ideal percentages, so I tweaked my investments as recommended to re-balance. Exactly one month after my initial investment, my portfolio has grown to an annualized return of 41%!! This short-term return will not very likely remain, but I am thrilled it didn’t go the other direction that quickly. Time will tell, but I am happy with the recommendations so far!