Taking a One-Portfolio Approach to Your Investments

SEPTEMBER 2021

VOLUME 32 NUMBER 9

SoundMindInvesting? Financial Wisdom for Living Well W W W. S O U N D MIN DIN V E S TIN G .CO M

Taking a One-Portfolio Approach to Your Investments

Mobile devices, online messaging, video calls, email--all these technologies promised to save us time. Instead, they've raised our expectations about how much we can get done each day! Perhaps we should

heed the words of Leonardo da Vinci, who reportedly said: "Simplicity is the ultimate sophistication." SMI can't simplify all of your life, of course. But if you have a complicated array of investment accounts, we can help you organize them into a single, simplified portfolio.

by Matt Bell

One reason modern financial life can be so challenging is that investors tend to have their money spread out. It's not uncommon for a married couple to have one or two 401(k) accounts, a couple of IRAs, and maybe more, especially if they've held several jobs and accumulated workplace retirement accounts at each stop along the way.

SMI believes the best way to approach investing is to think of all your money as part of a single pot: one portfolio. But what does that mean, and how do you bridge the gap from having five investment accounts to making decisions as if it's all a single entity? In this article, our goal is to cut through the complexity and show you how to treat multiple accounts as one portfolio.

The account/portfolio distinction

First, let's define our terms. For the purposes of this article, an account is anywhere you have a sum of money invested. Your portfolio is the collection of all your investment accounts, whether that's one or several. Yes, it's possible to have more than one portfolio if, for example, you're using

one approach to save for retirement and another to save for

your kids' college. But we're going to keep things simple and

focus on your retirement portfolio.

If you only have one investment account, perhaps a single

IRA or 401(k), then for you, the words "account" and "portfo-

lio" are synonymous. Your account is your portfolio and your

portfolio consists of your one investment account. Whatever

strategy or strategies you decide to use, you just allocate the

money in that single account as described in the strategy sec-

tions of the SMI website. Couldn't be simpler.

But what if your life is a bit more complicated? Imagine a

couple we'll call Mark and Martha Smith who have a 401(k)

and two IRAs containing $60,000, $80,000, and $100,000,

respectively. We recommend treating all of these accounts as

parts of a single portfolio. Doing so will minimize the number

of trades they need to make, saving time and money.

How this one-portfolio approach can be executed will de-

pend on which investment strategy or strategies are chosen,

and the investment options available in each account. Here are

the essential steps.

(continued on page 131)

IN THIS

ISSUE

130 Editorial / The Heart of the Matter 134 Level 1 / Save Money Just By Asking 135 Level 2 / How to Panic-Proof Your Investing 136 Level 3 / A Great Strategy Gets Better: Inside Recent Sector Rotation Changes 137 Level 4 / The Risks of Using Dividend Stocks as an Alternative to Bonds 138 Basic Strategies 139 Upgrading: Easy as 1-2-3 140 New Stock Fund Recommendations 143 Premium Strategies 144 Performance Data

"FOR GOD HAS NOT GIVEN US THE SPIRIT OF FEAR BUT OF POWER, AND OF LOVE, AND OF A SOUND MIND."

EDITORIAL

The Heart of the Matter

The new seventh edition of The Sound Mind Investing Handbook is hot off the press and now available (see page 133). And while everything we say about it is true--it does teach investing essentials in a clear, compelling way--the most valuable part of the book, in my opinion, has nothing to do with that.

In the first five sections of the book, SMI founder Austin Pryor does a terrific job of simplifying complex topics--such as how exchange-traded funds differ from traditional mutual funds, why rising interest rates make the value of bonds decline, how to create a "personal pension," and how momentum (the metric that guides SMI's main strategies) works. All of these topics are crucial for investors to understand.

Still, I always recommend people skip ahead and begin the book by reading section six: "Investing That Glorifies God." There, you will find financial content unlike anything you've read before. Whenever someone asks me what it means to invest from a biblical perspective, or how Christian investing differs from secular investing, I point them to section six of The Sound Mind Investing Handbook.

In the chapters that make up that section of the book, Austin makes the case that investing that glorifies God acknowledges His sovereignty, values His majesty, advances His kingdom, upholds His righteousness, seeks His wisdom, and enjoys His blessings.

In one sense, it's an insightful Bible study that will help you think about the intersections of faith and finances in a way that differs significantly from most other stewardship materials. Instead of focusing on biblical passages that speak directly to financial topics such as debt and savings, this is higher-level, heart-level content, delivered in the most compelling way possible.

Throughout those chapters, Austin candidly--and often humorously--relates his own faith journey. You'll read about his early experiences as a commodities trader (you'll laugh out loud at how he explains his "heavy short position in frozen pork bellies"), the ups and downs he experienced as a money manager, and the financial and spiritual lessons he learned the hard way. You'll learn about the surprising lunch engagement that led him to start the Sound Mind Investing newsletter, and why he risked so much to create a company that, against all

odds, has endured for more than 30 years now. You'll also find

out about his great hope that those who become SMI members

will grow--not just financially but in their relationship with

Christ and in the God-glorifying impact they have in the world.

In late 2011 and early 2012, as my wife, Jude, and I wres-

tled with and prayed through the opportunity to join the SMI

staff, reading Austin's story played an important role in our

decision to say yes. When I left corporate America in 2007, my

heart's desire was not to have a job but to pursue a mission of

teaching practical, life-changing applications of biblical money

management. By learning Austin's story, I gained a depth of

understanding about SMI that went beyond what I read on the

company's website. I saw clearly the mission-minded purpose

behind all that the company does--and I wanted to be part of it.

Without section six, The Sound Mind Investing Handbook

would still be one of the best biblical financial stewardship

books I've ever read, with a unique emphasis on investing.

With section six, it is all of that and one of the richest spiritual-

formation books I've ever read.

While I'm not so idealistic to think that anyone would be-

come a member of Sound Mind Investing solely on the strength

of Austin's story, I think it is a valid factor that should be

considered. His story is woven into the company's DNA, ex-

horting all of us who serve at SMI to work from a core desire

to glorify God in everything we do.

If you are a current SMI member, you should know Aus-

tin's story, too. It will help you see--and I trust, value even

more--what sort of community you're part of. Yes, we want

your investment portfolios to grow so that you can experi-

ence the joy of providing well for your family and generously

supporting God's eternity-shaping work in the world. But our

hopes run deeper than that. We hope to play some small role

in helping you bring glory to God.

Of course, as Austin is the first to point out, section six of

The Sound Mind Investing Handbook isn't really "his" story. It's

a portion of God's story that the Lord graciously chose to tell

through a son who received an inheritance, tried to find

his own way in the world, and then came

to his senses and found his way home.

To God be the glory.

MATT BELL MANAGING EDITOR

NECESSARY CAUTIONS It should not be assumed that all investment recommendations will necessarily be profitable. The information published in SMI is compiled from sources believed to be correct, but no warranty as to accuracy is made. SMI is not responsible for any errors or omissions. The counsel given herein is not a substitute for personalized legal or financial planning advice.

CONTACTING US Correspondence can be emailed to SMI at help@. Our tollfree Reader Services line (877-736-3764) is available for handling clerical matters such as subscriptions, billings, newsletters not received, and changes of address. Please be advised, however, that the SMI staff is not trained in matters of personal counseling and it is our policy

that they not attempt to do so over the phone. If our staff is busy when you call, you may leave your information on our secure answering system.

COPYRIGHT No part of this newsletter may be reproduced in any fashion without the prior written consent of SMI. ?September 2021 by SMI, LLC. All rights are reserved.

POSTMASTER Sound Mind Investing is published monthly by Sound Mind Investing, 9700 Park Plaza Ave Ste 202, Louisville, KY 40241-2287. Periodicals postage paid at Louisville, Kentucky USPS (006344). POSTMASTER: Address changes to: SMI, 9700 Park Plaza Ave, Unit 202, Louisville, KY 40241-2287. This is Issue 375 ? Volume 32 Number 9. Mailing date: 9/03/2021.

130 WWW. SEPTEMBER 2021

F E AT U R E

ARTICLE

Taking a One-Portfolio Approach to Your Investments

(continued from front page)

1. Determine your asset allocation. The starting point is to

figure out the best way to divide your money between low-

er-risk investments such as money-market funds and bonds,

and higher-risk investments like stocks. This depends on

your personal situation--that is, your investment time frame

and risk-taking temperament. The process for making this

asset-allocation determination is explained in the Start Here1

section of the SMI website. First, you take a risk temperament

quiz. Then you apply that result to a season-of-life allocation

table to find your suggested stock/bond allocation. (You can

skip this step if you are using the Dynamic Asset Allocation

strategy exclusively--the asset allocation decisions are built

into that strategy's process.)

Our hypothetical couple, the Smiths, are 15-to-20 years from

retirement and their investment temperament quiz showed

them to be "Explorers," which leads to a recommended alloca-

tion of 100% stocks.

2. Choose your strategy. Select the SMI strategy or strat-

egies you would like to use. You'll find guidance in the Start

Here section of the SMI website. Below, we'll walk through

three examples based on various strategy choices an SMI

member might make.

3. Add and allocate. Add up the total amount of money

you have across all of your accounts ($240,000 in the Smiths'

case). Then determine how much of this single pot of money

should be invested in each strategy and/or each specific fund

within each strategy. The examples that follow will demon-

strate how to do this.

4. Execute. There are two keys here. First, begin with your

most restrictive account and look to see what your investment

TABLE A

SMITHS' INVESTING ACCOUNTS

401(k)

$60,000

IRA #1

$80,000

options are. Some accounts, such as workplace retirement plans, are known for offering a limited array of investment choices. So start there, seeing which of your needed funds (or recommended alterna-

IRA #2

$100,000 tives) are available.

Total

$240,000

Second, look to see if the balance

in any one account matches either

the total amount you want to allocate to a particular strategy,

or the amount needed for one or more of the funds used in

a strategy. It will simplify things if you can use a particular

account to fully execute one of your strategies or to fully invest

in some of the funds used in a strategy. If you found any of this

confusing, hang in there! These points will be made clearer by

the examples below. Let's start with a single-strategy approach.

Scenario 1: 100% Upgrading

In our first scenario, the Smiths want to use the Fund Upgrading strategy exclusively. Upgrading with a 100% stock allocation calls for investing in eight funds across three categories (situational funds, small-company funds, and large-company funds).

Using SMI's Fund Upgrading allocation calculator,2 the

Smiths enter the amount they want to invest ($240,000), then

select their season of life and investing temperament (as deter-

mined when they went through the Start Here section of the

SMI website). The calculator shows how their 100% stock port-

folio should be allocated among the eight funds used in Fund

Upgrading 3 (see Table B--the slight shading on some lines is

solely for making the table easier to read).

In deciding which funds to buy in which accounts, they

follow the earlier advice to see how they can best utilize

TABLE B FUND UPGRADING

100% STOCKS

Situational Fund

$24,000

their most restrictive account--their 401(k). If that account offered access to a "brokerage window," the Smiths

Situational Fund

$24,000 would likely have

Small Company/Active Fund Small Company/Active Fund

$24,000 $24,000

access to all the funds needed to implement all of SMI's strategies

Small Company/Index Fund

$24,000 (or suitable alternative

Large Company/Active Fund

$24,000 mutual funds if the ac-

Large Company/Active Fund Large Company/Index Fund

$24,000 $72,000

count did not allow access to exchange-traded funds). However,

Total

$240,000 to make this exercise

more challenging and

realistic, we're assuming they don't have such access. Instead,

their plan offers 31 mutual funds.

Fund Upgrading uses two index funds, and fortunately,

most 401(k) plans offer index funds. Currently (Septem-

ber 2021), the strategy calls for a 10% allocation to a Small

Company Value index fund and 30% to a Large Company

Growth index fund. If the Smiths have access to such funds,

they could put $24,000 into the Small Company Value index

fund and $36,000 into the Large Company Growth index fund.

(If your plan doesn't offer such funds, it probably does offer

a Small Company index fund and a Large Company index

fund, which are acceptable compromises in this situation. So,

you could put $24,000 in the Small Company index fund and

$36,000 in the Large Company index fund.)

Now it's time for the Smiths to invest their IRA money

in the remaining funds. Note that the Large Company index

fund calls for an investment of $72,000. Since the Smiths

TABLE C FUND UPGRADING USING 3 ACCOUNTS

Accounts >

401(k) IRA #1 IRA #2

Situational Fund

$24,000

Situational Fund

$20,000 $4,000

Small Company/Active Fund

$24,000

Small Company/Active Fund

$24,000

Small Company/Index Fund $24,000

Large Company/Active Fund

$24,000

Large Company/Active Fund

$24,000

Large Company/Index Fund $36,000 $36,000

Total $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $24,000 $72,000

Total

$60,000 $80,000 $100,000 $240,000

start-here/ 2soundmindinvesting/resources#calculators 3These allocations were accurate as of September 2021.

WWW. SEPTEMBER 2021 131

F E AT U R E

ARTICLE

didn't have enough in their 401(k) to make that full investment, they'll use IRA #1 to finish that off. Then, starting at the top of the table, they'll use IRA #1 to make as many of the other investments as they can. In this scenario, they have enough money in that account to put the full $24,000 in the first situational fund, but only $20,000 of the needed $24,000 for the second situational fund. So, they'll move on to IRA #2 to finish that investment, while putting $24,000 in each of the remaining funds (see Table C on the previous page).

Scenario 2: 50% Dynamic Asset Allocation, 50% Upgrading

Even though the Smiths' optimal asset allocation is 100%

stocks, they decide they want the peace of mind of knowing

their portfolio is specifically designed to weather the inevita-

ble bear markets that hit stocks from time to time. So, under

this scenario, they split their portfolio evenly between Fund

Upgrading and Dynamic Asset Allocation (DAA).

Just as in the first scenario, the Smiths start with SMI

website's Fund Upgrading allocation calculator--only this

time they enter $120,000 (the portion allocated to Upgrading)

instead of $240,000. The top of Table D shows how they are to

divide that money across the eight Upgrading stock funds.

The lower part of Table D shows how they are to allocate

their remaining $120,000 using DAA. Since DAA calls for in-

TABLE D 50% UPGRADING / 50% DAA

vesting equal amounts in only three funds at any one time (of the

Situational Fund Situational Fund Small Company/Active Fund Small Company/Active Fund

$12,000 $12,000 $12,000 $12,000

six monitored by the strategy), that means the Smiths will put $40,000 in each of the three funds.1

Small Company/Index Fund Large Company/Active Fund Large Company/Active Fund

$12,000 $12,000 $12,000

Following the advice to look first at their most restrictive account--their

Large Company/Index Fund

$36,000 401(k)--we already

DAA: SPY DAA: EFA DAA: VNQ

$40,000 $40,000 $40,000

know from Scenario 1 that the Smiths can invest in the index funds used in Upgrading.

Total

$240,000 So they invest in those

two funds as before

but reduce the amounts to account for the lower Upgrading

allocation in this scenario. This totals $48,000, leaving $12,000

in their 401(k) yet to invest (Table E).

Dynamic Asset Allocation uses exchange-traded funds

(ETFs), which typically aren't available within 401(k) plans.

However, the DAA funds are index ETFs, and four of the six

funds used in the strategy are commonly available within

401(k) plans in traditional mutual fund versions: SPY is simply

an ETF version of an S&P 500 index fund, EFA is a foreign stock

index fund, BLV is a bond index fund, and SHY is a short-term

Treasury index fund. The Smiths decide to put their remaining

$12,000 from their 401(k) plan into an S&P 500 index fund.

Next, they move on to their IRAs. With IRA #1, they finish

off the Fund Upgrading investments, putting $12,000 in each of

the remaining six funds. Then, because ETFs are readily available in IRAs, they invest their remaining $8,000 in the SPY ETF.

TABLE E 50% UPGRADING / 50% DAA

Accounts >

401(k) IRA #1 IRA #2

Total

Situational Fund

$12,000

$12,000

Situational Fund

$12,000

$12,000

Small Company/Active Fund

$12,000

$12,000

Small Company/Active Fund

$12,000

$12,000

Small Company/Index Fund $12,000

$12,000

Large Company/Active Fund

$12,000

$12,000

Large Company/Active Fund

$12,000

$12,000

Large Company/Index Fund $36,000

$36,000

DAA: SPY

$12,000 $8,000 $20,000 $40,000

DAA: EFA

$40,000 $40,000

DAA: VNQ

$40,000 $40,000

Total

$60,000 $80,000 $100,000 $240,000

Moving on to IRA #2, they finish off their SPY investment with $20,000 and then make each of the remaining DAA investments, with $40,000 going into EFA and $40,000 into VNQ.

Scenario 3: The 50/40/10 portfolio

For our final scenario, let's say the Smiths want to invest a

small portion of their assets in SMI's most aggressive strate-

gy--Sector Rotation (SR). They allocate 50% of their portfolio

to DAA, 40% to Fund Upgrading, and 10% to Sector Rota-

tion.2 For the Smiths, that means managing $120,000 with

DAA, $96,000 with Fund Upgrading, and $24,000 with Sector

Rotation. Using the Fund Upgrading allocation calculator, they

determine how $96,000 should be allocated across the eight

Upgrading stock funds. Table F shows that, as well as how

they are to allocate their money across the remaining strategies.

TABLE F

50% DAA / 40% UPGRADING 10% SECTOR ROTATION

Again, as shown in Table G, they first address how to invest their 401(k), their least

Situational Fund

$9,600 flexible account. As

Situational Fund Small Company/Active Fund Small Company/Active Fund

$9,600 $9,600 $9,600

before, they have attractive fund options for the two index funds, and an acceptable substitute

Small Company/Index Fund

$9,600 for SPY. They invest the

Large Company/Active Fund Large Company/Active Fund Large Company/Index Fund

$9,600 $9,600 $28,800

needed amounts there, putting $9,600 into the small company index fund, $28,800 in the

DAA: SPY

$40,000 large company index

DAA: EFA DAA: VNQ Sector Rotation

$40,000 $40,000 $24,000

fund, and the remaining money they have available in their 401(k) account ($21,600) into

Total

$240,000 an S&P 500 index fund.

132 WWW. SEPTEMBER 2021

1The funds used in this example aren't necessarily the three currently recommended DAA funds. 2For more on 50/40/10, see April2018:Cover.

F E AT U R E

ARTICLE

Next, they move on to IRA #1, putting $9,600 into each of the six remaining Upgrading funds, $18,400 into SPY, and their remaining $4,000 into the next DAA fund, which is EFA. Then they use IRA #2 to make the remaining investment in EFA, put $40,000 into VNQ, and make their $24,000 investment into the Sector Rotation fund.

TABLE G 50% DAA / 40% UPGRADING / 10% SECTOR ROTATION

Accounts >

401(k) IRA #1 IRA #2

Total

Situational Fund

$9,600

$9,600

Situational Fund

$9,600

$9,600

Small Company/Active Fund

$9,600

$9,600

Small Company/Active Fund

$9,600

$9,600

Small Company/Index Fund $9,600

$9,600

Large Company/Active Fund

$9,600

$9,600

Large Company/Active Fund

$9,600

$9,600

Large Company/Index Fund $28,800

$28,800

DAA: SPY

$21,600 $18,400

$40,000

DAA: EFA

$4,000 $36,000 $40,000

DAA: VNQ

$40,000 $40,000

Sector Rotation

$24,000 $24,000

Total

$60,000 $80,000 $100,000 $240,000

Points to keep in mind

Look for account consolidation opportunities before you begin. Before taking a one-portfolio approach, see if you can reduce your number of accounts by consolidating some. The fewer accounts you have, the easier it will be to execute a one-portfolio approach. For example, if you have a SEP IRA that you're no longer contributing to and a Traditional IRA, consider combining them into a single account.

Strive for simplicity.1 If you want to take some small liberties with the amounts to invest in certain funds, that's fine. For example, let's say you're using Fund Upgrading exclusively, and because of the amounts in your various accounts, it'll be easier to match the account balances if you decrease

one category's allocation a few percent and increase another category's allocation by the same amount. That's okay, as long as the allocations don't veer too far out of alignment from the recommended allocations.

Strive for flexibility. Keep in mind that every SMI strategy (except Just-the-Basics) requires some trading during a typical year. So, you'll want to make sure the account you are using for a given strategy offers more than one fund used in that strategy.

Let's say you want to use Fund Upgrading and DAA, and one of your accounts is a 401(k) with a limited set of investment options. As demonstrated in the example above, use the index funds available to you, trying to put all of your 401(k) money to work that way before moving on to an account with more options, such as an IRA.

It may be emotionally challenging. The one-portfolio approach is designed to make life easier by minimizing the number of trades you have to make. However, this approach may feel more challenging from time to time emotionally, because the individual account balances may have greater volatility than your portfolio as a whole. For example, if you were to hold all of your Sector Rotation allocation in a single IRA account with your DAA and Upgrading holdings elsewhere, that IRA balance may soar and plummet compared to the other accounts because of the volatility inherent to Sector Rotation!

The solution? Just as the one-portfolio approach calls for executing your strategy or strategies as if all of your accounts were one, make sure to view your returns that way as well. Several websites allow you to connect all of your accounts and then view the returns as a total portfolio.2 You can drill down into individual accounts as well, but start with that big-picture view.

Final thoughts

To be sure, it will require effort to determine how to best apply a one-portfolio approach across multiple accounts, and it may take some time to get accustomed to the process. You may need to map out two or three scenarios on paper before you develop the approach that makes the most sense. But the time you put into the process up front likely will save time and money over the long term.

NOW AVAILABLE! A NEW, UPDATED EDITION OF THE SOUND MIND INVESTING HANDBOOK!

Many people find themselves mystified by investing jargon and overwhelmed by a myriad of investment choices. The Sound Mind Investing Handbook can help. It teaches investing essentials clearly and compellingly, empowering people to become knowledgeable, confident, successful investors.

Previous editions of The SMI Handbook have helped more than 100,000 readers make the most of what the Lord has entrusted to them.

Right now, we're offering the new-and-updated SMI Handbook at 20% off the $26.99 retail price--with free shipping too! You can purchase the 350-page Handbook for only $21.59 ($22.89 for KY residents).

The Sound Mind Investing Handbook makes an excellent gift for newlyweds and graduates.

Order at handbook, or call 1-877-736-3764. To order by mail, send a check (payable to Sound Mind Investing) to SMI, Book Order Offer, 9700 Park Plaza Ave Ste 202, Louisville KY 40241-2287.

1For the ultimate in simplicity consider SMI Private Client, which can manage multiple SMI strategies for you. . 2Aug2019:p119

WWW. SEPTEMBER 2021 133

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download