Personal Financial Planning — Part 5: Managing Investments

Prerequisites first: insurance + 3-6 months emergency savings before investing any capital
Asset allocation > security selection: the stock-bond-cash split drives 90%+ of returns
Costs compound against you: minimize fees, loads, commissions, and taxes relentlessly
Reinvestment is the engine: interest-on-interest = ~45% of a 20-year bond's total return
Never time the market: missing the best 10 days in 15 years cuts returns from 9.88% to 6.45%
Life stage determines allocation: age, income, family, and horizon — not market sentiment

Situation	Do This	Avoid This
Just starting to invest	Balanced mutual fund → index fund → diversify	Individual stocks before building a base
Choosing stocks	Screen by ROE, P/E, beta; use approximate yield formula	Buying on tips or chasing recent winners
Choosing bonds	Compute taxable equivalent yield; buy investment-grade	Reaching for junk yields without expertise
Choosing mutual funds	Objectives first → no-load/low-load → evaluate 5-7yr track record	Chasing last year's top performer
Setting allocation	Use life-stage model; rebalance on ~5% drift	Rebalancing on every fluctuation
Managing 401(k)	Capture full match, index funds, cap company stock 10-20%	Ignoring employer match or over-concentrating
Adding real estate	REITs for passive; evaluate AFFO, NAV, LTV	Raw land speculation or over-leveraging
Evaluating any investment	Approximate yield: (Avg income + (End − Begin) / Years) / ((Begin + End) / 2)	Comparing yield without total return

"Unless you hold your investments for a while, transaction costs and taxes will wipe out profits." — Gitman, Joehnk & Billingsley, p. 385

Overview