Here's what we have to start with:

The Old Diversified IRA

Mutual Funds    189,000

Bonds                20,000

Stocks               24,000

Cash                   1,000

The Trading Accounts

IRA Slice            41,000

After-Tax Slice     6,000

Total                         281,000

These are round numbers and when we break these down we will use the exact numbers from our simulated trading logs.  Starting with $281,000 we want to determine what is a reasonable goal for a 1, 2, 5 and 10 year outlook.  We are determined to control risk first and seek rewards second.  Clearly, in light of 2007-2009,  given the Chuck portfolio lack of management, a total lack of trading can be as costly as bad active trading.

By trading, we mean that we will buy and sell various instruments according to a plan, using differing time frames and instruments and will accumulate profits and suffer some small losses.  The most important thing is not to let losses accumulate and define the portfolio.  The portfolio is to be defined by profit accumulation and controlled losses.

Mutual Funds - Close May 8, 2009

Getting Ready to Divide up the Pie

We're back to asset allocation.  There are a lot of ways to slice and dice so we will just use some models from the good old American Association of Individual Investors (AAII).  AAII is one of the best sources for investing education and resources.  It is non-profit and does not chase you with all kinds of hype and advertising.  The table below is a set of allocations based on age from their web site.

Table 1: Asset Allocation for the "Typical" Investor: The Broad Consensus

                                                                                           Stocks   Bonds   Cash

                                                                          %          %       %

Sources: The Vanguard Retirement Investing Guide (Irwin Press); T. Rowe Price Retirement Planning Kit; "The Wall Street Journal Guide to Planning Your Financial Future" (Lightbulb Press), by Kenneth M. Morris, Alan M. Siegel and Virginia B. Morris; "A Random Walk Down Wall Street" (Norton Press, 6th edition) by Burton G. Malkiel

So now the question is, "What kind of investor is Chuck?".  Given an ability to trade, we can have some leeway with these definitions.  They're good guidelines, but don't take into consideration that we may be experienced traders with more market proficiency and involvement than average or typical investors. 

For this example, we going to make Chuck a medium risk investor with some ability to take "high" risk approaches and manage them to "low" risk.  Chuck needs more growth than the Low-Risk may provide and with risk management applied to a more active approach, seeks higher gains than a hands-off approach can deliver.

Let's break down the Stocks class to some subclasses.  There are individual stocks, mutual funds and exchange traded funds (ETFs) to be included.  There are also Options and perhaps Futures to be included in this mix.  We'll use 60% for this group.

Breakdown of the "Stocks" Section (60% of total)

Individual Stocks to be held for days, weeks or months.

Mutual Funds and ETFs - to be held and traded quarterly and annually.

Options to augment stocks for hedging and acceleration.

Futures to hedge against adverse movements in above instruments.

Bonds (15% of total)

Cash (25% of total)

This group is where any day-trading or other similar short-term trading will be placed.  They may be stock, option or futures trades performed with the goal of continually raising cash from short-term market activity.  Cash is needed to provide margin for futures so the "day-trading" group is a pot of cash that is available for futures and credit option margin as well as to day-trade stocks..  As cash is generated beyond that needed to fund trading operations, it will be used in the "Stocks" and "Bonds" investment section.  Cash may also be taken out for compensation or other expenses.

Given this breakdown, we would allocate from the $281,000 the following rough amounts:

Stocks group: $168,000

Individual Stocks $60,000

Mutual funds $100,000

Options 8,000  - Futures will be operated in Cash section.

Bonds group: $  42,000 - we need advice here.

Cash group:   $  70,000

Futures $10,000

Stocks & Options $30,000

Cash $30,000