3. An Investment Plan

This post presents the idea of an investment plan as presented by Bogle and Malkiel. It very briefly covers the different aspects that it entails and it’s advantages. It cannot be stressed enough how much importance is put on this topic. For more info, please consult Bogle or Malkiel.

The single most important thing you can do to achieve financial security is to begin a regular savings program and to start it as early as possible. The only reliable route to a comfortable retirement is to build up a nest egg slowly and steadily. (Malkiel, p.292)

Determining clear goals is a part of the investment process that too many people skip, with disastrous results. (Malkiel, p.306)

Investment strategy needs to be keyed to ones lifecycle. A thirty-four-year old and a sixty-eight-year-old saving for retirement should use different financial instruments to accomplish their goals.The thirty four year old, just beginning to enter the peak years of salaried earnings, can use wages to cover any losses from increased risk. The sixty eight years old , likely to depends on investment income to supplement or replace salary income, cannot risk incurring losses. (Malkiel, p.349)

For most investors, the accumulation investment asset phase begins between the ages of 25 and 50. I emphasise again how critical it is to invest as much money as you can as early as possible and as often as practicable, despite the obvious financial constraints that nearly all investors face. The magic of compounding is inextricably linked to the length of time an investment is held. Therefore, it is common sense that you will be considerably better off if you can invest regularly for 30 years rather than 10 (Bogle, p.263)

Data that goes into an investment plan

While some new securities can be relevant the core of the investment plan is suggested to be bonds and stocks. To decide the portfolio allocation one looks at income needs and length of investment. People have different needs depending on where they are in their life cycle. Needing cash for a potential downpayment in two years, kids college tuition in five, or retire in 30 all results in different options for risk (and since they are inextricably linked — reward). Bluntly speaking: when do you need money?

In addition it is important to understand ones risk appetite. Ask yourself whether you are comfortable with high risk placements (your stock portfolio going down 30% one year is not too rare). Can you keep cool even though the media is bombarding you with negative news? It almost doesn’t matter when you bought them or how much you saved. If you sell your securities at the bottom and miss the up swing your portfolio has taken a huge hit.

The idea is to analyze when you need a dollar, what type of tools you could use, and then lock in every unit the longest possible time period to maximize returns. The logic behind reward and risk over time is covered in Investment Period.

Portfolio allocation

The Intelligent Investor states that a mix of between 75% and 25% in each of stocks and bonds is optimal, and each person should individually decide depending on risk appetite. For simplicity’s sake Graham goes as so far as to suggest the proposition of 50/50%. (Graham, p. 119) Bogle On Mutual Funds suggest an 80/20% to stocks/bonds as a young risk-averse person, and 50/50% stocks/bonds as older, more risk inclined. (Bogle, p.260) Malkiel suggests at least 5% in cash, 15% in bonds, 10% in real estate and 40% in stocks. They all suggest you should start saving as much as possible, as early as possible, in order to get the benefit of compounded effect. (Malkiel, 369)

Once you have decided your portfolio allocation there are three tools that you can use that impacts the outcome of the strategy.
1) Savings and investments through tax-savings programs. Many countries have tax-deductible retirement instruments one can use to invest. Try to both invest pre-tax money and to make the returns as tax deductible as possible.
2) The recommended wonderful effect of Dollar Cost Averaging, which is discussed in greater detail soon.
3) Balancing of portfolio asset classes. It is recommended in the book to rebalance these asset classes as needed, about twice a year, due to both the relatively comparable performance of stocks and bonds over time and their covariance. (Bogle, 243)

The Advantages

An investment or savings plan gives you a certainty of direction. You know, if you have made well-thought through investment decisions, that over time you will get the expected results. If you have adopted DCA (hopefully it is so) then when the market goes up you can be happy to see gains in your capital. When the market goes down you can be happy for your future purchases to be cheaper. You can answer every market related question with “I don’t know and I don’t care”, relying on your investment plan to deliver the expected results on autopilot. As long as your investments deliver expected results over time, exactly when you invest is not so important. A change of your investment strategy happens only a few times during your lifetime, notably if your life situation changes.(Bogle, p. 245)

Cryptocurrency portfolio allocation

How much then of your portfolio should be put into cryptocurrency? The books say that max 10% of your portfolio should be in risky securities like emerging markets or speculation. (Graham, p.46)(Bogle, p.152)

Depending on your life situation, this could be both lower and higher. The important thing to remember is that the entire investment might go down to zero. If that happens you need to make sure that you will still have a happy and pleasant life. That means one should not speculate with house down payments or college tuition fees. If the cryptocurrency market develops as many people hope, then even a small investment will quickly grow into a sizeable amount. So if you have the opportunity to safely bet some money, we suggest that you take it. For the average user this probably means around 10% of your investment portfolio. For a young person in their 20s, with steady salaries and a long time to save, the number could safely be higher.

Rebalancing of crypto asset classes within portfolio

Both Bogle and Graham discuss the rebalancing of asset classes. This is done in order to bring home gains after a rise, and to load up on more stocks after a dip. (Bogle, p. 243) (Graham, p. 105)

If following the books to their letter, you should rebalance your asset classes on at least a semi annual basis. (Graham, p. 105) Here we diverge from the suggestions of the books. We suggest that you continuously, for a few years, put a monthly allocation to the crypto basket and refrain from rebalancing it in accordance with the other asset classes.

The reasoning is that if cryptocurrency grows a high growth rate will eventually make up for a low monthly investment. But a with a cap on cryptos part of your portfolio allocation then you will limit the potential gains with very little upside once the asset class has proven itself.

Summary of investment plan

This is a brief intro to an investment plan due to the weight these books give them. Do not invest wildly. Do not decide from quarter to quarter, or even year to year, what to do with your money. Set up a plan on autopilot and fire and forget. This is the key to both good financial returns and more happiness. From a sound, conservative, time-tested financial perspective setting up a good investment plan is more important than to act upon ones wish of getting into cryptocurrencies!

Next up, let us discuss how the authors look at an Investment Period and how that could be applied to crypto currencies.