From time to time we will visit the question “What is the best way to get started with my 2 for 1 portfolio?” For this issue, let’s consider the investor that already has money in an IRA or a 401k plan or who has just acquired a lump sum by inheritance, home sale, etc.
It is our opinion that the complete 30 stock 2 for 1 portfolio is probably best suited for those ready to invest a minimum of $50,000. However, this should not discourage the investor with somewhat less, especially if one plans to contribute additional funds regularly to the account. We will discuss this case next month.
For the investor with 50k or more, there are basically two choices. One can do as we did and take the existing 2 for 1 list as shown on page 4 and buy all 30 stocks in the same proportion as shown in the last column of the account statement. We would adjust the percentages up or down just enough to give round numbers for each position (such as 40 shares instead of 43). Don’t forget that the stock at the top of the list will be sold within a month, so maybe that company should be left off the initial list. We chose this method so that the portfolio would have a “start date”.
The other method would be to invest the lump sum in a good no-load mutual fund and, over the course of 2 1/2 years, liquidate 1/30th of the mutual fund each month and use that money to purchase the 2 for 1 “buys” as they are announced. This method is clearly less risky unless one is sure that the market is at or near a low point. Given current market conditions, we would advise the second plan for most investors. The most important thing is to get started. JUST DO IT!
Last month we discussed how one might get into a 2 for 1 portfolio starting with $50,000 or more. This month, lets look at a few strategies for the person just getting started. For anyone, the hardest thing is to write that first check, because that few dollars for your first contribution seems so insignificant when compared to the ultimate goal of a fully funded retirement or four years of college tuition. However, we all know that any long journey always starts with a single step.
Our advice for those first few years is to purchase shares of a good no-load mutual fund indexed to the S&P 500 or Russell 2000. Keep up your contributions until you have at least $10,000. At that point, purchasing a 2 for 1 “buy”, say every third month, will begin to build a properly diversified portfolio. If the investor is starting with say 15,000 to 30,000, our advice would be to purchase every other company on the 2 for 1 list, either gradually or all at once, depending on the market. (see last month’s discussion). As more money is contributed and as the value of the portfolio climbs, at some point purchases can be increased to once a month.
The object here is to achieve proper diversification while keeping transaction costs under control. It would not be wise to take very small positions in all 30 stocks of the 2 for 1 portfolio. If the commission on a trade amounts to more than 2% of the order, then it is too much, in our opinion. ($20 for a $1000 order) Always use a deep-discount broker such as E*Trade. For a more detailed discussion of several possible scenarios, write or e-mail 2 for 1 for a free copy of our paper “Getting Started”.
The loss of one’s parents or a close relative is always a hard blow, but often there is a silver lining. If you suddenly find yourself with a substantial inheritance, it can make life a lot easier. However, unless there is a mountain of debt to pay off, or the money is earmarked for that dream house you’ve been waiting for, the decisions surrounding the investing of this new nest-egg can be intimidating. If the inheritance is going to form the basis for a college savings account or your own retirement plan, and you have decided that the stock market is the place where your funds have the best chance of growth, here are a few thoughts.
If the market is at an historic high, as it is now, you will find it extremely difficult to find a diversified portfolio of stocks, all at a good level for purchase, at the same time. For the short term, an indexed mutual fund would probably be the smartest bet. Then, using the principles of dollar-cost-averaging, or 2 for 1’s laddering strategy, you can invest in stocks of your own choosing over a period of time, by selling off a bit of the mutual fund at regular intervals.
If one is already invested in a 2 for 1 or similar stock portfolio, we would recommend taking 1/30th of the new money, along with the monthly sale from the existing portfolio, and using this combined sum to invest in the 2 for 1 stock purchase for the month. Following this procedure, after 2 1/2 years, all of the windfall will be incorporated into your 2 for 1 portfolio without the trauma or risk of trying to time the stock market. This same strategy could be followed for any large sum, such as a rollover IRA, a bonus or disbursement of pension funds at a job change, or even with your lottery winnings!
Millions of workers change jobs each year in this country. Many of them have money in “qualified” profit sharing or pension plans. The money in these plans can be the basis for funding a “rollover IRA” and/or, starting in January, a Roth IRA. If you are one of these workers, here are a few items to consider.
First and foremost, be sure to follow the proper procedures when closing out your plan with your previous employer. The money to be transferred to your new self-directed account should never actually be in your control or there may be tax penalties. The easiest way to get this right is to open your new “custodial” account (IRA or Roth IRA) with the company you will be trading with, hopefully a deep discount on-line broker such as E*Trade. They will provide you with forms to fill out and sign, then will take care of all the transfer details. Next, you need to tell your custodian how you want to invest your money.
If your account is $10K or less, and retirement is more than 10 years away, consider an index fund or a “growth with capital preservation” fund. If your account is between 10K and 30K, you should start by putting all the money in a mutual fund you are comfortable with, and in one that allows you to draw it down bit by bit each month. Using this monthly draw, you can start your 2 for 1 portfolio within the IRA account. We don’t recommend spending less than $1000 on any one stock, so you may have to settle for fewer than 30 stocks for a while. If you have over 30K to work with, we would recommend using 1/30th of your account each month to purchase the 2 for 1 “buy” until you have the full 30 stock portfolio after 2 1/2 years.
The first priority for any investor just getting started is to actually make the commitment, open the account, and write that first check. But the second priority is probably more important for the long-term success of any investor’s program. That would be the automatic deposit of a regular amount into your investment account. The advent of automatic deductions from pay checks and the ability to regularly and automatically transfer money from checking accounts has been just absolutely the greatest boon to individual investors since the invention of the passbook savings account. Having money go automatically every two weeks or every month into an investment account will be the single most important factor leading to achievement of the investor’s long term goals. For an IRA account, an automatic deduction of $166 per month will be a lot easier than writing a $2000 check at the end of the year or at the same time taxes are due. It’s just human nature to delay, or eventually put off for good, that painful one-time big output of hard earned money.
The 2 for 1 investment procedure works very nicely with the automatic payroll deduction or checking account transfer. The incoming money gets added to the cash account each month. When the monthly “buy” takes place, the amount invested is 1/30th of the total account. As the account grows, the monthly investment in stock will grow in proportion to keep pace with the overall account balance. So if you haven’t done so already, get that payroll deduction or electronic funds transfer set up now to get that money into your account sooner rather than later (or maybe never). Use this tool wisely and you will be well on your way to achieving your goals.
This column has covered the mechanics of getting an investment program started in previous issues. However, a column in the 8/1 issue of the San Francisco Examiner would indicate that we need to be prodded to do the right thing. According to Caren Bohan’s article, the Commerce Department reports that the American savings rate was 2.1% for all of 1997, the lowest rate since the Great Depression. We’ve got to do better folks! The money our economy needs for investment in our infrastructure, our schools and factories, basic research, etc. has to come from somewhere. At this point in time, it would appear that a lot of it is coming from overseas. The folks in Asia, Europe, and South America who are buying our T-bills and mutual funds are doing it because they see the true strength and safety of the American economy. In our opinion, it’s time for American investors to sock a little more away each month, even if it means scaling back on our ever bigger houses and luxury cars.
So let’s go over the basics: 1)Everyone should have an IRA account and, if your employer offers it, a 401k plan. 2)Everyone not actually drawing on their retirement account should be putting money into it on a regular basis with automatic payroll deductions or “check-a-matic” withdrawals from your bank account. 3) Until you get close to retirement, these accounts should be fully invested in the U.S. Stock market because that’s where you will see the best return over the long term.
If you haven’t started yet or you know you aren’t saving enough, there is no time like the present to make amends. You need a realistic savings program and our economy needs it too.
Getting an investment program off the ground is a challenge at any time, even more so if you’re starting from scratch. Some of the topics below have been addressed in this column before, but there are always some folks in the “just getting started” category.
1) Open your brokerage account with ease of use and low cost as the only important criteria. The on-line brokers fit this description and E*Trade is the company we have chosen to be custodian of the 2 for 1 model portfolio account.
2) Important!! Make deposits into this account with automatic payroll deductions or regular automatic transfers from your checking account.
3) Keep your account in a stock index fund or “spiders” (Standard & Poor’s Depository Receipts) until it reaches at least $10,000.
4) Don’t spend less than $1000 on any single stock trade. A $20 commission on a $1000 trade is still 2% – that’s as high as you should go and it’s better (obviously) if you can keep the percentage as low as possible.
5) As your account grows and you begin to convert your index fund or “spiders” into your own individual stock portfolio, do it gradually but regularly, with the goal of building up to a total of 30 stocks over a period of several years.
6) Manage your portfolio as necessary to keep your stocks evenly weighted, spread over a variety of sectors in the economy, and in both small and large companies.
7) Keep your eye on the prize. You are in the stock market because it will provide you the best return over the long haul. But the price you pay for that high return is wrenching market volatility, such as we have experienced in the last six months. Stay calm and be rewarded.