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LEVEL 4 — DIVERSIFYING FOR SAFETY "Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth." — Ecclesiastes 11:2 At Level 4, you're free of all consumer debt (Level 1), have established your emergency fund (Level 2), and have invested your surplus (Level 3) to the point where your portfolio has reached $25,000. The intent of the monthly Level 4 column in the SMI newsletter is to teach you about the wider range of investment markets and strategies appropriate for a diversified portfolio of $25,000 or more. Here you can choose from either of two core strategies (we suggested simplified versions of these two strategies at Level 3).
The simpler of our two core strategies is called "Just-The-Basics." This strategy uses "index" funds — i.e., funds designed to match (not beat) the performance of the overall market. With index funds, you're trading off the possibility of doing better than the overall market in return for the guarantee that you won't do worse. If you're not willing to settle for the match-the-market returns that indexing provides, you must be willing to adjust your holdings regularly, seeking to own only those funds demonstrating relatively superior results at any given time. In SMI, this fine-tuning of portfolio holdings is called "Upgrading." Upgrading requires your attention once per month and continually guides you to funds that are in favor "right now." Whichever strategy you choose, you can be confident you're implementing a well-considered, diversified approach that will move you toward your financial goals. Linked below are articles and resources that will help you at Level 4 of Sound Mind Investing. Read these first  The Guardrails of DiversificationBy Mark Biller Particular market segments can be volatile from time to time. Appropriate diversification mutes these sharp ups and downs, thus protecting you against one of the most dangerous forces an individual investor faces: your own emotions. Resources Upgrading: Easy as 1-2-3 pageYou'll find the Upgrading: Easy as 1-2-3 page opposite the Recommended Funds page in each monthly newsletter. This page can help you find an appropriate stock/bond portfolio allocation (if you haven't already determined that by working through the Investing Temperament survey and Season of Life tables). This page also shows you exactly how to take your overall stock/bond portfolio allocation and translate it to the SMI risk categories. In other words, it details how much of your portfolio to invest in funds from our Foreign category, Small/Growth category, and so forth. Armed with this information, you'll be ready to turn to the Recommended Funds page to select your funds for purchase. (SMI web members can also find those guidelines here.) Recommended Funds pageEach issue of the SMI newsletter includes a page that lists the Recommended Funds for each of our two core strategies, Just-the-Basics and Upgrading. 
With Just-the-Basics, you simply invest in the four index funds listed.If you decide to follow our Upgrading strategy, you will choose from among the recommended funds shown for each of our five SMI risk categories. Then, simply review the latest Recommended Funds page each month to see if any funds you own have been removed from our recommendations. If any have, new fund choices will be clearly noted. You simply sell your "old" fund and buy a newly recommended fund. The easiest way to implement SMI's Upgrading strategy is to open an investment account at a discount broker such as Schwab, Fidelity, or Scottrade. Each offers a convenient way to buy/sell no-load mutual fund shares, and for many funds, the brokers perform this service with no transaction fee (NTF). Our Recommended Funds page shows which funds are available at each broker and notes if you can purchase a particular fund without a transaction fee. SMI's Fund Performance RankingsFour times a year (February, May, August, November), the print edition of the SMI newsletter features a special section called Fund Performance Rankings (FPR). This section offers a full listing of more than 1,500 mutual funds, broken out by SMI risk category. If SMI has recommended a fund that's not available through your broker (or not available in your work-based retirement plan), the FPR listing will help you find alternate choices. The FPR is updated online each month for SMI Web Members. Upgrading in Your 401(k)If you participate in a 401(k) plan at work, your mutual fund choices might be limited to the offerings of one or two fund organizations. In that case, you would frequently be unable to invest in the funds in our model portfolios. Here's a step-by-step walk-through of how to use SMI's Fund Performance Rankings to select funds for your 401(k). Supplemental Articles Making It Easy On Yourself to "Do the Right Thing"By Austin Pryor By the "right" thing, we don't mean always making the most profitable decision. That's impossible. Rather, the right thing is to ignore all the distractions of news events and well-intentioned advice and stick with your plan. Being Average Isn't So Bad: The Upside of Index FundsBy Mark Biller and Joseph Slife Even though SMI's actively-managed strategy (Upgrading) has strongly outperformed our indexing strategy (Just-the-Basics) over the past decade, an indexing approach is still a good choice for some investors. Buying Only Our 5 Top-Ranked Upgrading Funds Still Trounces the MarketBy Mark Biller Can't afford to own all four funds in each Upgrading category? A simplified approach of just buying the top-ranked funds has still been highly successful. Welcome Aboard!
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Welcome Aboard! |
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