Tuesday, September 05, 2006

The first three sentences of the first five pages

National City Bank's (NCC) Private Client Group serves a clientele of people who do not have to balance their checkbooks. The PCG publishes a weekly investment newsletter with the masthead "The A.R.T. of Investing". NCC defines ART as:
  1. After Tax Returns
  2. Risk Control
  3. Time Horizon
These three concepts are the first three sentences of the
first five pages
of investment success.

After Tax Returns


Investors often ignore the tax impact of their investments. Tax consciousness that some investments and activities are tax shielded while others are not. Unshielded investments should be kept in inside the protective bubble of IRA accounts. Some core concepts:
  1. Investments with a high taxable dividends such as corporate bond funds, REITs and BDCs, are best kept in an IRA account.
  2. Short term trading is best done, if at all, inside an IRA account
  3. Qualified Dividends are partly tax-shielded which means the taxable equivalent yield of dividends is higher than the nominal yield. Roughly, 1% of Qualified Dividend Income is equal to 1.17% of fully taxable income.
  4. Municipal money market funds often have a higher after tax yield than taxable cash investments.

Risk Control


The best way to keep life simple is to avoid making it complicated. A simple portfolio of 60% SDY and 40% LQD, rebalanced annually will outperform most active strategies with less risk.

Part of risk control is recognizing that we have a natural attraction for shiny objects and complex gadgetry. Wall Street, just like its clientele loves shiny objects and complex gadgetry.

Gadgets like narrow ETFs, stock options, commodity futures, precious metals and FOREX have very desirable properties. They are popular, fashionable, and generate lots of fees and trading commissions. These investments are "on message:" with plenty of grist for blogging and boasting at cocktail parties.

For these same reasons thoughtful investors avoid financial gadgets. The popular and fashionable tend to be overpriced and dangerous. Management fees and trading commissions don't enhance your wealth, but your broker likes them.

Time Horizon


Successful investors know their investment time horizon. Generally the longer the time horizon the more aggressive you can and should be. Having a short time horizon is not the same as having a short term focus. Fear and Greed work best on people who are focused on the short term and won’t give sound decisions time to wash through.

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