Yale Money Whiz Shares Tips on Growing a Nest Egg : NPR

Yale Money Whiz Shares Tips on Growing a Nest Egg : NPR.

Key Points:

In scary economic times like this, he cautions that individual investors shouldn’t trust their instincts.

He advises having the right long-term mix of stock index funds, bonds and real estate investment trusts (see chart below).

But when stocks tank, that mix gets out of balance: For example, U.S. stocks that once constituted 30 percent of a portfolio may now constitute just 29 percent or 28 percent.

When that happens, Swensen rebalances, shifting more holdings into stock index funds. Then, if the market comes back up and ends the day flat — where it started — Swensen sells those stock index funds.

most of these investment services provide pretty mediocre advice, and it’s just not worth giving them a percentage of your life savings.

Swensen says fees are also the big reason you should buy index funds instead of classic mutual funds. Index funds, which track market segments like the S&P 500, are a lot cheaper.

Rebalancing

Want More Details? Here are some funds from TIAA-CREF and Vanguard that Swensen recommends.

• Domestic Equity: Vanguard Total Stock Market Index Fund (VTSMX); TIAA-CREF Instl Equity Index Retail (TINRX)

• Foreign Equity: Vanguard Total International Stock Index Fund (VGTSX); TIAA-CREF Instl International Eq Retail (TIERX)

• Emerging Markets: Vanguard Emerging Markets Stock Index Fund (VEIEX)

• REITs: Vanguard REIT Index Fund (VGSIX); TIAA-CREF Instl Real Estate Sec Retail (TCREX)

• Government Bonds:
— Vanguard Short-Term Treasury Fund (VFISX); TIAA-CREF Inst Short-Term Bond II Retail (TCTRX)
— Vanguard Intermediate-Term Treasury Fund (VFITX); TIAA-CREF Instl Bond Retail (TIORX)
— Vanguard Long-Term Treasury Fund (VUSTX)

• TIPs:
— Vanguard Inflation-Protected Securities Fund (VIPSX); TIAA-CREF Instl Inflation Link Bd Retail (TCILX)

Remember to rebalance.

Rebalancing: A Free Bonus

rebalance their retirement accounts at least quarterly — four times a year and always try to avoid transaction fees. Even some nonprofits like TIAA-CREF may charge extra trading fees if an investor rebalances more than a certain number of times a year.

Swensen rebalances Yale’s endowment every day.

Timing Is Everything

Here’s how it works: Let’s say an investor has allocated their investments according to Swensen’s basic formula (30 percent in U.S. stocks, 30 percent bonds, 20 percent real estate investment trusts, etc.) and the U.S. stock market falls over a couple of months. With U.S. stocks falling, stocks may now make up only 28 percent or 29 percent of the 401K pie chart.

But perhaps bond holdings have risen over the same time period, from the target 30 percent to 31 percent or 32 percent. Then it’s time to rebalance by selling some shares in the bond funds and using the proceeds to buy more stock index funds, bringing both categories back into line with long-term allocation targets.

If stocks come roaring back in a month, an investor would own more stocks and make more money on the gains. If stocks jump up to 31 percent or 32 percent in the model portfolio, then an investor would sell stocks high and buy something else — real estate, bonds or whatever has decreased its share of the 401K.

The Tax Factor

Swensen can rebalance Yale’s endowment frequently because Yale is tax-exempt. But if an individual invests savings outside of a 401K or other tax-deferred account, he or she needs to be aware that rebalancing can create tax liabilities. One way to avoid that is to do rebalancing only in the tax-deferred portion of a portfolio. New contributions may also be used as rebalancing tools, so that investors sell fewer existing investments.

Excerpt:

1. In Chris’ last interview, he said investors should rebalance the portfolio quarterly or semi annualy. In the interview above he said investors should rebalance the portfolio at least every 3 months, and he rebalances his portfolio everyday. So far, my understanding is investors should rebalance portfolio as ofen as possible and at least every 3 months.

2. The percentage of every sector in the portfolio probably is the mythy that result a long term gain.

3. About pro advice, as christ mentioned consultant fee could be large in a long time frame, so its not worthy. I agree partly. what my concern is “shall I use pro advice in the beginning of my investment journey”, In my case, i will say yes. Because in the beginning, I dont have a big volume to load that means the 1.25% of my money won’t be too much. However christ mentioned a fact about pro advice “most of these investment services provide pretty mediocre advice”. where shoud i go now???? Pro advice! I will learn sth. from pros when I am still fresh to investment, but I won’t let them charge me langer than 3 years.

4. I need to do more research on funds and taxation.