The Processes I Use for Managing My Portfolio

Those of you who are regular readers know that I’m a believer in systematic approaches to investing. Today, I’m going to share with you some of the processes I use for my own portfolio. You’ll notice there is a quite bit of overlap with The Individual Investor Wealth-Building Process we’ve been rolling out over the past few months. (The Wealth-Building Process was formerly code-named “The AAII Way.”)

My goals are simple: save for retirement and keep building my short-term savings. Retirement is an obvious goal. Like the majority of my fellow Generation Xers, there is no pension for me to rely on. What my wife and I have set aside and what Social Security pays out in benefits are going to be our main sources of income in retirement. Short-term savings are for emergencies, vacations, health care deductibles and co-pays, larger purchases and those unexpected bills (e.g., I had brake work done on one of our vehicles last week—cheaper than a new car, I keep reminding myself).

Being clear about my goals means to prioritize them. Every pay period, a portion of my salary gets automatically diverted away from my checking account and into retirement and savings accounts. Some people do really well by having a budget. I’m not one of them. I do better when someone takes the candy jar away instead of leaving it out and telling me I can only have two pieces of chocolate. This is why I rely heavily on automatic deposits. Every year, I try to increase the amount that gets diverted from my paycheck to savings. Even small changes at the individual pay-period level add up to significant differences over time.

Another big advantage of being clear about my goals has to do with my tolerance for volatility in the stock markets. The full retirement age for claiming Social Security of 67 is still a long way into the future for me. Plus, there is a history of longevity in my family. My parents are in their mid-80s and, fortunately, are in good health (knock on wood). Knowing this, I don’t get fazed by short-term volatility in the stock market. There is no way I’m going to fund my retirement if I don’t allocate heavily to stocks. And there is certainly no way I’ll be able to do so if I worry every time the market drops.

As far as what I invest in is concerned, limitations play a role. AAII’s 403(b) plan restricts us to Vanguard mutual funds. (No complaints, as many other funds and strategies fail to beat the performance of Vanguard’s index funds over the long-term. Is it possible to do better? Yes, but it’s not easy to do so.) In my other accounts, I hold a mix of exchange-traded funds (ETFs) and individual stocks. The decision about what is held where depends on the account. For example, my wife’s IRAs are mostly invested in ETFs because she doesn’t have a particular interest in doing security analysis. The accounts held in my name hold a mix of stocks, ETFs and mutual funds.

Contributions also play a role in determining what’s held. ETFs or mutual funds work well for dollar-cost-averaging paycheck contributions until the balance reaches a large enough amount.

Combined, these factors make me a partially hands-on investor in the context of our Wealth-Building Process.

I do follow set rules regarding my allocation and buy and sell decisions. The allocations for my and my wife’s accounts are checked semiannually to ensure the mix is within the 5% boundaries I set. (I did the semiannual review this past weekend and no rebalancing was required.) I use the VMQ Stocks strategy for many of my holdings and follow its rules. For the other stocks, I have sell rules based on the particular reason I bought them. The mutual funds and ETFs held in my and my wife’s accounts are monitored using the tools on AAII.com.

A list of our accounts and passwords has been maintained for several years. My wife has the ability to step in on my behalf at any moment should she need to. This type of list is something I suggest you create and maintain as well. In the event of something unexpected, it will be invaluable to your significant other and/or heirs. Our Key Estate Planning Information Worksheet provides a useful framework for doing this.

Finally, there is one other thing I do every year—inventory my accounts and check the beneficiary information. Doing so ensures all information is up to date and reminds me of what I have. It prevents unwanted headaches and occasionally identifies opportunities to close or consolidate accounts. I also use the annual review to check https://unclaimed.org and see if any unclaimed property turns up. Every so often something does.

Keep in mind that no single approach works for every person. I’ve set up and adjusted a system that works for me. The Individual Investor Wealth-Building Process was created to give you the flexibility to create a process that works for you. The key is to have something that is well-thought-out, limits the impact of emotions and is focused on helping you achieve your goals. Identifying your goals will help you to establish a good process for reaching them.

Do you have certain processes that help you make progress toward your financial goals? Share them in the comments section below.