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Following is a summary of investment strategy which I have pursued for the past three decades:

1. First step is to determine one’s long-term INVESTMENT OBJECTIVE? Since we are talking about 401K (& IRA) planning for retirement purposes, I would suggest there are only two objectives worth considering.
(a) Objective is to maximize value of my portfolio both at retirement age and throughout my
retirement years., or
(b) Objective is to maximize amount of after-tax income (i.e. spendable) available to the
retiree.

2. What is my INVESTMENT STRATEGY (i.e., presumably any action I take will be directed at helping achieve my investment objective)? Suggest there are two strategies here:
(a) Beginning investors should stick with S&P Index Fund with expected long-term Compound
Annual Growth Rate (CAGR) of about 8%.
(b) For more demanding investors, learn to invest in individual growth stocks – this is my
preferred approach.

Note: Suggest there are two other investment strategies which some investors might find
effective:
(1) Dividend Stocks where sum of growth rate plus dividend yield is higher than yield
from S&P Index Fund; or
(2) That 10% of actively-managed mutual funds which actually outperformed the S&P Index
Fund – for past 1-yr and 2-yr periods.

What about my approach to investing? Suggest you consider the following approach which is based on five key factors. Incidentally, my personal bias is to maximize contributions (and portfolio growth) while minimizing taxes paid ‘this year’. In a nutshell, my approach is to use both contributions and tax savings to fuel portfolio growth. I will continue deferring taxes to maximum extent allowable and invest ‘tax savings’ to help fuel portfolio growth for as long as possible.

1) TIME – Per compound interest formula, Time is a Compound Growth Factor – i.e., the longer your Time Horizon, the higher will be GROWTH RATE of your portfolio’s value. My investment horizon includes one’s working career plus (perhaps) 20 years as a retiree. My intent is to continue managing my portfolio for growth so long as I am physically and mentally capable of doing so.
Note: This longer investment horizon implies that I do not believe in reconfiguring one’s
retirement portfolio as retirement age approaches.

2) YIELD – Per compound interest formula, Yield is the second Compound Growth Factor – i.e. the higher your portfolio yield (i.e. CAGR), the higher will be GROWTH RATE of your portfolio’s value. For example, portfolio which experienced 9% CAGR over 40 years will be approximately double in value that same portfolio had it experienced a 7% CAGR. Beginning investors should stick with S&P Index Fund with expectation of about 8% CAGR. More demanding investors should learn to invest in individual growth stocks.

Note1: Some dividend stocks (i.e., growth + dividend yield) and perhaps 10% of actively-managed
mutual funds can outperform the S&P 500 Index.

Note2: Regardless of risks related to allocation and diversification, I will NOT invest in any
asset which is not likely to outperform the S&P 500 Index. Otherwise, I will stick with the
S&P Index Fund.

3) Fees – Fees in all their forms represent negative yield and should be avoided to maximum extent practical – unlikely that you will be able to eliminate them completely. Until recently, each buy/sell transaction cost less than $10 – as of 2020 some brokerages no longer charge transaction fees. My only investment-related fees are a few books and subscriptions to two Motley Fools newsletters (i.e., SA & RB).

4) Contributions – The size of one’s retirement portfolio is directly proportional to total amount of contributions each year. i.e., Doubling one’s contributions each year would be expected to double the value of one’s portfolio. My research shows there are three situations you should consider – each situation assumes same yearly contributions:

a. Your employer offers a Traditional 401K Plan – Your investment objective should be to “maximize value of my portfolio at retirement age”. How to do that. Maximize pre-tax contributions to your Traditional 401K account – then contribute up to $6000 per year (i.e., your tax savings) to your Roth IRA account. There are two sources of ‘free money’ here: your employer’s contribution and your yearly tax savings. Assuming 40 years and 8% CAGR, your Roth IRA should be worth about $1.75M at retirement age while your Traditional 401K (or Traditional Rollover IRA) account should be worth at least 4X that of your Roth IRA. Note that as a retiree my RMD involves about 4% of total Traditional IRA portfolio value each year while also paying about 1% of total portfolio value in income tax.

b. Your employer offers a Roth 401K Plan – Your investment objective should be changed to “maximize spendable income (i.e., after-tax) to the retiree”. How to do that. Maximize after-tax contributions to your Roth 401K account – then contribute another $6000 per year to your Roth IRA account. There is no ‘free money’ with this approach but my calculation shows that retiree should be able to distribute about 15% higher spendable income from Roth accounts versus after-tax income obtainable with distributions from Traditional 401K plan.


Note: I consider this strategy to be high-risk because of likelihood that a future Congress
will ‘change the rules’ when it comes to disbursements from Roth accounts. However, the nearly
15% increase in spendable income to the retiree tends to compensate for this increased risk.

c. You do not have access to a 401K – Your investment objective should be to “maximize value of my portfolio at retirement age”. How to do that. Contribute $5100 per year (i.e. 85% of $6000) to your Traditional IRA – then contribute $900 per year (i.e., assumes marginal tax rate of 15%) to your Roth IRA. In effect, you are investing that $900 rather than sending it to the IRS. Assuming 40 years and 8% CAGR, your combined IRAs should be worth about $1.75M.

5) You – Regardless of how one’s investments are performing, each of us need to sleep peacefully at night. Regardless of what the ‘experts’ advertise about 'safety', RISK of losing my investment is NOT related to short-term VOLATILITY in market prices. One’s investment strategy should be based on your individual tolerance for RISK – e.g. investing in a 'basket' of high-quality businesses represents lower RISK than ‘playing the market’. At the same time, each investor needs to learn how to remain unperturbed by short-term (i.e, days, weeks, months) gyrations in stock market prices. Suggest the following:

a. Inexperienced investors should stick with S&P Index Fund which means your portfolio
should achieve ‘average market yield’ of about 8% CAGR.

b. More experienced investors might be able to ‘beat the market’ by investing in those
dividend stocks (i.e., growth + dividend yield) and about 10% of actively-managed mutual funds
which have recently outperformed the S&P Index Fund.

c. Investing in a ‘basket’ of quality businesses (i.e., individual growth stocks) affords
the aggressive investor the best opportunity for achieving yields which are significantly above
‘market average’. As we know, this is the strategy espoused by the MF.

Nearly 30 years ago, I began accumulating an all-stock portfolio of about 35 individual growth stocks – this idea was mentioned in an early Motley Fools article. Once my portfolio reached 35 stocks, I was able to manage it with only 5-10 buy/sell transactions per year – number of transactions is even less as a retiree. By 2013 (when I retired), my portfolio had evolved to include only the following stocks:

a) Each business met the criteria espoused by the Motley Fools. In fact, many of my stocks
were MF recommendations.

b) I ‘cherry-pick’ a few (e.g. less than 5) stocks each year based on my analysis
suggesting that stock will likely double in price within 5 years (i.e., CAGR = 14%). Any risk
mitigation decisions are included as part of this evaluation. For example, I consider HOW this
stock 'meshes' with other stocks in my portfolio in terms of allocation and diversification?

My portfolio remains nearly 100% invested so new cash is required to make another investment. Once (or twice) each year, I review the performance and projections for each stock. My decision for each stock is sell it, let it continue to run, or add more cash – there is no effort to 'rebalance' my portfolio. I try to fund RMDs by selling ‘laggards’ from my portfolio. Result: My all-stock portfolio (of 30-40 stocks) has more than doubled performance of S&P 500 Index over past seven years since my retirement.
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