My approach to investing (retirement vs the rest)

By: ispeculatornew
Date posted: 06.17.2010 (4:27 am) | Write a Comment  (13 Comments)

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I find investing incredibly interesting because it is so complex. You have over 6 billion people in this world and if each had the opportunity to invest, they would all end up with a slightly different portfolio. The reason of course is that investing has such an impact on our life and our retirement that our relationship to investing is different depending on our psychology, environment, background, education, etc. I don’t think I will ever see an end to my fascination. The most basic way to view investing is to look at risk and reward. Basically, all investors look for the best return possible given a certain level of risk right? Mike from TheFinancialBlogger once told me a wise thing: “The right level of risk for an individual is the one that lets him sleep well at night“. As you can imagine, that level is different for every individual.

Every investor is different

Basic personal finance education will teach you all kinds of theories about investing, portfolio building, etc. I am a regular reader of a few blogs such as TheFinancialBlogger which give me the theory about personal finance, info’s about fiscal impacts, etc. But in reality, I think that most investors, if they have sufficient interest and knowledge, should get involved in the construction of their portfolio, even if they have a professional making recommendations. In the end, we are the ones who will get stuck with the consequences of our investment, not anyone else. You can blame the entire world but you are the big boss of your finances and I think it is important for each investor to have a picture of:

  • What type of retirement are you looking for? How much money do you expect to need?
  • What are some of the big dreams that you are looking to realize?
  • What is the worst case scenario that you can endure? What type of performance could you live with?
  • Do you wish to give to charity or your children or anyone else?

Importance of a clear and consistent plan even if end is not as clear

What I often hear and even think myself is how it’s difficult to make a plan when you have no idea what the future will bring. How much money do I need for my retirement? Honestly, I don’t have a big opinion about it yet since retirement is probably 30 years away. But I have always heard and strongly believe in setting goals and plans. It has been proven time and time again that those with a goal and a clear plan achieve much more than those without them. What is my “magic number”? The amount I need for retirement? I do not know. But I can do an estimate and do a revision every year or so. It might not be the perfect target but aiming at a moving target is 100 times better than not aiming at all.

My priorities

Personally, here are my top priorities when it comes to investing:

  1. In my early years, not much restrictions on risk. I can personally live very well with a 50% loss in a year knowing that over time taking higher risks will pay off. This will change over time but for now, I feel like I can take a fair level risk from a diversified portfolio
  2. I want to have a safe retirement. Personally, my house and retirement accounts are not seen as “investments” in the same way as other accounts and I would prefer not being leveraged in these investments
  3. I believe that passive investing (index investing) is the way to go for my retirement account
  4. I would like to have more flexibility in trading aggressive and speculative positions in my other accounts
  5. I would like to have an account to pay for a 2nd home abroad
  6. I would like to donate to charity and to my kids

Bucket Approach

For those who know the work of Anthony Robbins, the bucket approach is nothing new. It is a simple but very smart way to deal with finances in my opinion. The basic idea behind it is to segregate my financial accounts in order to have a clear vision of where I stand for each of my projects. Personally, I have automated a lot of the transfers of money between my bank accounts in order to save more.

You have surely heard the phrase “Pay Yourself First“. I think it’s another simple but very true concept. I don’t know if it’s the same for everyone but it’s very true for me. If I receive 1000$, the chances of saving 200$ are much better if I transfer the money initially to a savings account then waiting for my next payday and transferring what is left. For some reason, we tend to spend more when our bank account is full of money. It should come up to the same result but at least for me, it doesn’t.

So every week, I do transfers to my different buckets (bank accounts)

My buckets

I personally have a few buckets, here they are:

-Retirement account: this would be the 401K, RRSP or whatever it is called where you live, this account is what will ensure that I can live the retirement I am planning and hoping for
-Speculative account: extra money, to be invested more aggressively, could be used for retirement or any other long or short term projects. All trades presented on IntelligentSpeculator would be done in this account
-2nd home account: This account has a set goal, the clearest of the buckets. If for example I am planning on buying a 200K condo in 10 years, then I would try to transfer money and invest it with that specific goal.
-Kids fund: This fund is used to invest a small amount of money every week and will be given away in over a decade…
-Charity fund: A fund that has two goals: to build a fund but also start giving a portion that can be given away every year

Retirement bucket Trading:

A very simple portfolio that is diversified, built with ETF’s only and will evolve over time. It has less than 10 ETF’s and currently has a lot more equity and even emerging markets (VWO) but over time it will go towards safer investing such as fixed income ETF’s, large caps, etc. This is a very disciplined and

Speculative bucket :

In this bucket, I would include long/short picks, but also any names I think will do well, etc. This portfolio does not require diversification and would generally result in much more volatility as well as large gains and losses. Bigger bets with options and other instruments would also be done here. Not to say that it is reckless, it isn’t. But it is completely different from the Retirement bucket.

Project & Donation Buckets:

This bucket or account is similar to a retirement account but with a much smaller lifespan. I would say that it can be a little more risky too since this 2nd project is more of a “Nice to have” than anything else. But the portfolio would start as being very aggressive and perhaps in the last year it would become cash only when I would be ready to proceed to a purchase (Project bucket) or ready to give it away (Kids & Charity funds).

And how about you?

I do know that my approach to investment is fairly intense and requires time and energy. It is very structured but that is what works for me. Now my question to you is how do you do it? Do you blend everything together? How different do you do things? Thanks in advance for your opinions!

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  1. Comment by Panda Mike — June 17, 2010 @ 5:32 am

    I can’t wait to have enough money to create buckets like this! I really like the approach!

    Right now, I can say that I have 2 buckets:

    The Employer’s bucket:
    where I purchase 8% of my salary in my employer’s stocks (they chip an additional 2%). This bucket is used to pay municipal taxes and pay off debts once a year.

    The Retirement bucket:
    I don’t set an automatic transfer since I use my end of year bonus to chip in. So far, I contribute to the maximum each year. I have a few stocks and also index mutual funds.

  2. Comment by Catarina — June 17, 2010 @ 8:52 am

    wow that’s a great idea to picture the buckets to fill. never thought about this.

    I do not use a structured approach and not doing any automatic fund transfer. I think I am more disorganized in my spending, my investing and my savings right now. Not that I overspend. But I’m investing to make a diversified portfolio and spend what I have left. And everything is done manually!!

  3. Comment by The Financial Blogger — June 17, 2010 @ 8:54 am

    I like systematic investment.

    It makes you forget that you actually are entitled to this money on your pay check and your investment buckets grow steadily. This is why I recommend to all my clients.

    Once the systematic investment is set, you just have to consider it as another payment in your budget ;-D

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  7. Comment by IS — June 18, 2010 @ 5:58 am

    @Panda Mike – It comes with time. I started off with 0 buckets and it’s slowly growing. I don’t think I’d ever have that many more though but hopefully the buckets will become bigger:)

    @Catarina – Do you think that you save less because of that? I guess we are all different but if you do not save as much, then maybe a change would be a good thing.

    @TFB – Exactly – You never actually see your income increase, but the buckets fill up a whole lot quicker:)

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  12. Comment by coo — December 19, 2011 @ 8:56 am

    All retirement plans are big spams organized by the government on behalf investing companies. It allows the latter to use retiree’s money for their own profits, while retirees usually end with much less or luckily the same amount they invested initially.
    After more than 10 years my retirement investments with four different companies have not increased the initial principals. Usually they drop significantly down when market is facing trouble or insignificantly increase in a bull market. All of my accounts are with big and reputable investment companies. Besides most of my friends have similar problems.
    Those plans are obviously are not made on behalf of the retirees since usually the investment companies are not responsible for ups and downs, but get their management fees from those investments no matter what. People have to avoid such investments since they usually loose their money instead of gaining security for retirement. Don’t believe either investment companies or government that so actively pushing them.

  13. Comment by Intelligent Speculator — December 19, 2011 @ 6:30 pm

    @coo – Don’t know that I would be able to go that far but there is no doubt that being able to invest your own retirement funds is a major advantage if you are able to do so efficiently…

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