Money Blog Life

One of my favorite books to visit for personal finance advice is David Bach’s Smart Couples Finish Rich: 9 Steps to Creating a Rich Future for You and Your Partner. While the advice I am about to discuss here is geared towards retirement portfolios, I am going to borrow it for my taxable portfolio.

Asset Allocation

The rule of thumb when it comes to investments is simple: the higher the return, the higher the risk.

This is a pretty straightforward quote from the chapter, Build Your Retirement Basket concerning rule # 3 which is to allocate your assets so that you maximize return while minimizing risk.

Rule of Thumb

Bach talks about using your age to help determine your assets allocation. It is simple as subtracting your age from 110 to get the percentage of assets that should go into equities and fixed-income investments.

We will use a rough guide here for my strategy.

• 2010 - 75 Percent Equities, 25 Percent Fixed Income
• 2015 - 70 Percent Equities, 30 Percent Fixed Income
• 2020 - 65 Percent Equities, 35 Percent Fixed Income
• 2025 - 60 Percent Equities, 40 Percent Fixed Income

And so on and on… Now, granted, there is a lot more involved with a taxable portfolio but the concept remains the same,

• Control my risk exposure
• Minimize my tax exposure
• Maximize the return on my investments
• Maintain steady level of passive income

Handling My Equities Investments

The purpose of my taxable stock investments is to create a monthly passive income now which you can read more about here. I am not talking about my retirement portfolio which is another matter.

There are three factors we need to consider here.

• Stock Splits
• Capital Appreciation
• Dividend Reinvestments

At the moment of this posting, I have stock in a low-yield dividend company that has split several times since I first held these shares (twice between 2000 and 2008).

Until I reach a point where I can discontinue reinvesting my dividends, I will be reinvesting my dividends each time my stocks pay out a dividend. I also hold shares in a small company that has a strong history of high-yielding dividends. This will help increase the number of shares as well as compound the amount of dividend income I receive on an annual basis.

Regardless of which stock I hold, despite the latest behavior of the stock market, eventually all prices go up. When this happens, it is called capital appreciation. This is where I have to manage my taxable portfolio efficiently enough to minimize my risk as well as taxes.

Historically, long-term capital gains are taxed at a lower rate than short-term capital gains. It varies from time to time as a result of Congress and their squabbling for tax revenues. The bottom line is, the longer I hold on to my stocks, the less I pay in taxes.

The question at this point is what to do with the capital gains I made from selling stocks that have appreciated in value and is threatening to throw my asset allocation out of whack. That is where fixed-income investments comes in.

Why Fixed-Income?

It is as simple as being smart with my investments. While I am a little aggressive with my investment strategies, I counter this aggressiveness with my fixed-income investments. I don’t have too much time to figure out the fixed-income game so this is where it comes in handy to invest in a tax-friendly bond fund.

Amazon Links

If you are interested in purchasing a copy of David Bach’s book, please consider purchasing any one of the following books through this link. Purchasing a copy at Amazon through these link will help support Money Blog Life. While each book is focused on a different group of readers, the basic concepts pretty much remains the same throughout these books so I encourage you to only choose one. You will not be missing out on the rest. These are really terrific reads but you only need one. Thank you in advance for your consideration.

• Smart Couples Finish Rich: 9 Steps to Creating a Rich Future for You and Your Partner
• Smart Women Finish Rich: 9 Steps to Achieving Financial Security and Funding Your Dreams (Revised Edition)
• The Automatic Millionaire : A Powerful One-Step Plan to Live and Finish Rich Start Late, Finish Rich: A No-Fail Plan for Achieving Financial Freedom at Any Age (Finish Rich Book Series)

Or if you have Kindle: Amazon’s New Wireless Reading Device,

• The Automatic Millionaire
• Smart Couples Finish Rich
• Start Late, Finish Rich: A No-Fail Plan for Achieving Financial Freedom at Any Age

Buying and selling shares on the stock market will always include some kind of fee. There are plenty of discount brokers out there but it can be confusing to understand their prices.

No one wants to work for your money for free. If you do, contact me.

ShareBuilder Transaction Fees

ShareBuilder offers three levels of subscriptions (think of it as a membership fee) which have a different pricing structure for automatic investing. The prices listed here are based on your automatic investing plan which is basically an agreement to purchase a specific share for a set dollar amount on a specific day of the month each month.

Beyond automatic investing, all the rest of the fees are standard across the board such as real-time trading ($9.95 per trade). The Standard and Advantage subscriptions also offers additional benefits such as the stock grades, stock reports, etc… You can read more about the pricing features here.

For the purpose of this post, I will be talking about my ShareBuilder subscription and the fees associated with it.

Basic Subscription - $0 Per Month

There are several reasons why I am going with a basic subscription right now.

1. It’s FREE.
2. Currently, I am only planning on purchasing shares once a month.
3. Currently, I am only planning on purchasing shares in one company.
4. Currently, it only costs $4 per trade meaning I would only pay $4 in fees each month.

As you can see, it does not take a rocket scientist to figure out I am a newcomer to the investing game. Although there are plans to diversify my investments in the future, until I start trading at least three times a month, it is not economically viable to upgrade to the standard subscription which is currently $12 a month.

Recouping My Fees

In order to recoup the fees, one of the three things needs to happen.

• Acquire minimal number of shares to appreciate $48 annually
• Acquire minimal number of shares to earn $48 in dividends annually
• Acquire minimal number of shares to appreciate $24 and earn $24 in dividends annually

As you can see, there are quite a few ways to recoup my investment fees.

Since the stock I am investing in is a high-yield dividend stock that is currently trading at an attractive value considering today’s market conditions, as long as the company does not cut their dividends, I will actually have enough shares to recoup my trading fees in the first quarter alone. The rest of the quarterly dividends is mine to keep.

Tuesdays are Investing Days where I talk about investing to grow your wealth and mine. These posts are for general information purposes, not to be confused with legal or professional advice. Feel free to stop back here next Tuesday to read more of my investing articles or subscribe to Money Blog Life to stay up to date.

There was an article in Motley Fool, What If the Market Goes Nowhere? that made a nice and simple case for dividend reinvestment because I am a young investor in my early 30’s (in comparison to Buffet in his 70’s) who entered the stock market just before the dot-com bubble of the mid 1990s.

During the past 10 years, four major financial events happened.

• The dot-com bubble/burst era
• The 9/11 era
• The credit/housing/mortgage bubble/burst era
• The oil bubble ???

Basically, the market has more or less broken even over the last 10 years, maybe a slight ROI to those who made the best choices. There were winners and losers everywhere.

In this specific case, using an index fund to illustrate the point, the author showed that reinvesting the dividends in an index fund made a big difference between a return of .63 percent and 2.29 percent.