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Investors today must make countless decisions. We have to decide on the type of account to open, where to open it, an asset allocation plan, specific investments, mutual funds vs. ETFs, and the list goes on. It can be overwhelming.

This hit home for me recently when I received the following email from a reader:

This email helped me launch this podcast and post on the topic:

“I just finished listening to your Podcast with the WealthFront CEO. I heard you say at the end that you are going to do a Podcast on why you moved your SEP-IRA to Wealthfront. May I make a request? When you do that, please provide some guidance (see below) for those of us who have followed you through the podcasts. This has been my journey:

1. Find and begin enjoying Dough Roller blog and podcast. Begin investing in passive low cost index funds through Vanguard outside of my retirement accounts, due in large part to information learned on the podcast.

2. Find out there is such a thing as Betterment and begin exploring “Roboadvisers”, but mainly Betterment because I heard the interview on the podcast with the CEO and liked that . . . And they sponsor Dough Roller.

3. Read and listen more and find out that some folks (Bogleheads) favor Vanguard-type index funds but some say no bond funds in taxable accounts and some say bond funds in taxable accounts, etc. etc. etc. Confusion! Should I change? What should I do?

4. Hear a new term called “tax harvesting.” Wonder further if I should move my new taxable account (started about 1 year ago) from Vanguard index funds to Betterment. Probably shouldn’t move my new SEP-IRA at Vanguard (inspired by Dough Roller) because no need to move a tax-deferred account for tax harvesting. Right?

5. Hear the Wealth Front podcast. Rob moving SEP-IRA to Wealth Front who preach tax harvesting (see #4). Confusion reigns . . .

As for the guidance requested, am I wrong to believe that ANY investing is better than none and will do in the long run better than none . . . but that much of the above is about fine tuning the investment process?

I appreciate all you do. I am just searching for some investing clarity . . .

Merry Christmas . . .

All the best,

This email hit me hard, and made me wonder if I confused people with Podcast 138. I should say that I haven’t decided to move all my accounts to WealthFront or any other automated investment service.

I do have accounts with Betterment (taxable) and WealthFront (SEP IRA). I’ll be opening one at WiseBanyan, a free robo advisor. I’m also evaluating Vanguard’s advisory services and its target date retirement funds. And I’ll be sharing the results of my evaluations in future articles and podcasts, including an upcoming interview with WiseBanyan’s founder, Herbert Moore (thanks to a reader named David who suggested I interview Herbert).

The point to all of this is to evaluate each service. I’m in no hurry to make a decision as important as this one. Right now most of my investments are with Vanguard and Fidelity, and all of them are low cost. So I can take my time in evaluating my options.

My primary goal is to simplify the management of my investments. I’ve been rebalancing my portfolio for more than 20 years now, but it would be nice to turn that task over to a computer. But again, there are several ways to accomplish that goal (robo advisor and target date funds are two options, for example).

For today, however, I want to respond to Jeff’s question in a more general way. My hope is to lay out a framework for sound investing, regardless of what mutual fund company, broker or robo advisor you may choose.

To do that, let’s walk through the six keys to successful investing. Then we’ll talk about what I call second tier questions. These are questions about investing we must decide (e.g., robo advisor vs. low cost mutual fund), but aren’t as important in terms of reaching our goals. In other words, second tier questions have two or more sound options, and the choice you make often has as much to do with your own personality.

Listen to the Podcast of this Article

The Six Keys to Successful Investing

Here are the six overriding strategies that have the greatest impact on investing success or failure:

  1. Start Early – That means start today.  The worst time to start investing is tomorrow.  The magic of compound interest takes time, lots of it.  And investing consistently, even small amounts of money to start, helps build the discipline of saving.
  2. Save 20% or More – This may seem impossible, but it’s really critical.  And the point isn’t just to save for retirement 40 years from now.  Saving 20% or more will enable you to achieve levels of financial freedom that can improve your life long before you retire.
  3. Diversified asset allocation plan – The plan should include US stocks, international stocks, US bonds, and some real estate. The specific allocations can vary from one investor to the next, but a well diversified plan is critical. (See Podcast 25)
  4. Stick to the plan – This is one of the hardest aspects of investing for most people. Rebalancing forces us to sell high and buy low, which isn’t easy. How often you do it is less important than doing it at regular intervals. (See Podcast 51 and Podcast 52 for more on rebalancing). You also don’t want to abandon your plan in a market slide, or because you get busy with other areas of your life.
  5. Keep costs low – That includes advisor fees and investment fees (expense ratios). It also includes robo advisor fees.  Keeping costs low can translate into tens of thousands or even hundreds of thousands of additional dollars in retirement.
  6. Take advantage of Retirement Accounts – Taking advantage of the tax advantaged accounts (401k and IRA accounts) will significantly increase your wealth.

The first two are the most important, since they’ll have the biggest impact in terms of reaching your goals.  But the other four are very important as well, particularly keeping investment costs low.

Note that the list doesn’t include some important decisions we as investors must make.  For example,

You can make all of these work within the six keys. It’s a matter of separating critical decisions – the six keys – from the specific choices we make to implement the six keys to investing.

How to Deal with Conflict

A complicating factor with the six keys is that they sometimes conflict with one another.  When this happens, you’ll need to decide what’s most important to you.  Here are two examples of common conflicts:

1. Hiring an advisor to help you stick to your plan (Goal #4) vs. keeping costs low (Goal #5) – You may need help in managing your investments.  An advisor might help “talk you off the ledge” in a market slide, which helps you stick to your investment plan.  But advisors come at a significant cost.  One option is to seek out lower cost advisors, such as Vanguards advisory services that cost 30 basis points.  But there’s still a trade off.

2. Keep costs low (Goal #5) vs. taking advantage of retirement plans (Goal #6) – 401(k) plans often have expensive investment options. While an employer match may ease the pain, it doesn’t change the fact that you either take advantage of the 401k with the costly investment options, or you don’t.  Funding an IRA can help to a point, but it doesn’t match the contribution limits available with a workplace retirement plan.

You have to consider options that will help you meet both goals, while minimizing the negatives on either front. If you need help, you may have to pay a fee, but you want to keep that fee to a minimum.

How to Make Second-tier Investing Decisions

Beyond the 6 key factors to successful investing listed above, we have to make countless second-tier decisions.  I listed some above.  Here are some additional examples:

  • Should you have exposure to small caps, REITs, or emerging market funds;
  • Should you use an automated investment service, and if so, which one;
  • How often should you rebalance your portfolio;
  • Should you factor in future tax liabilities in your asset allocation plan; and
  • Where should you open an IRA

These decisions are not unimportant, but you have a lot of good options. As long as you get the six key factors above right, you have considerable breathing room in these areas.

With that said, here are some things to consider when making these types of decisions.

1. Recognize that it’s a second-tier decision

A second tier decision typically has the following characteristics:

  • Goals are not dependent on the decision – for example, the decision may not make it impossible to retire which ever course of action you choose.
  • There are several reasonable options – and all will ultimately get you to where you want to go.

Recognizing that the decision you are making may have several reasonable outcomes can help you make the decision.

2. What will help me succeed on the 6 keys above

Let’s say you have questions about asset allocation, rebalancing and tax loss harvesting. You may find that the best option is to work with a robo advisor or invest in a target date retirement fund. You’ll pay a fee for these services, but it will work if you don’t want to handle all of those details yourself.  Either option is reasonable and will likely enable you to meet your goals.

3. What will be best for my significant other

I handle all of the investments in our family.  My wife has no interest in asset allocation, rebalance, or the difference between a Roth or traditional IRA. Nevertheless, I manage our investments so that she could take over if need be.  That means, among other things, a simple asset allocation plan and keeping most of our accounts in one place.  I’m working to simplify our investments even further, which is one reason I’m now considering automated investment services and target date retirement funds.

4. Things Change

This is where flexibility enters the picture. Things change as time goes on, and you will need to shift tactics and strategies along the way.

For one thing, you learn more as you invest. That will not only change how you invest, but it will also change how you see your investments. As you become a more capable investor, your portfolio will likely reflect those improvements.

Technology also changes. Robo advisers are an excellent example. They’ve only been around for a few years, but they are already changing the entire investment landscape.

Your financial goals may also change. As a result, you need to be flexible and willing to make changes when it is reasonable and necessary.

5. Make change slowly

As an investor, you have to think long-term. That means that you shouldn’t be out chasing every new system, technology, or investment broker as soon as it hits the street. Give some of these changes time to mature before you jump in.

You can test run a system or program before committing to it fully. For example, people are rushing into robo advisors, but Schwab and Vanguard are going in the same direction soon enough. Test out a robo advisor with a small amount of money before committing to it in a major way.

Those are basically my thoughts on the keys to successful investing, and I hope it addressed at least some of Jeff’s questions.

What are your keys to successful investing?

Author Bio

Total Articles: 1083
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

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