Investment Planning: Reader Tips Tricks, and Links

September 1, 2009 · by Austin Frakt · Posted in Personal Finance · Comment

This is the final post in a series on investment planning. Here’s a list of the other posts:

As promised in the first post in the series, in this concluding post I respond to comments received during this series and list tips, tricks, and links suggested by readers. Actually, I’ve received comments from only one individual so far. But they are good ones and worth discussing.

“traneeinvestor” raised two points in his comment to the sixth post of the series. His first point pertains to accounting for taxes in one’s retirement budget. Though he didn’t explicitly point to a weakness in my plan with respect to taxes, in thinking about his comment I found one. Here is my reply:

Invest in tax-advantaged accounts. Be mindful of taxes and seek the return that achieves your goals in light of them. I implicitly dodged the tax issue by basing one’s retirement income on one’s current income after taxes. Taxes are not explicitly included in the budgeting methodology I suggested in post 2 and post 5. Instead, I suggested including one’s income net of taxes. A safer approach is to put taxes back into the budget and to save enough to pay for those as well. What makes this tricky is that some of one’s retirement income will be tax free (that coming from a Roth, perhaps one’s Social Security income, depending on total income). Also, of course one doesn’t know one’s retirement tax rate well in advance so that requires an assumption. A reasonable conservative approach is to assume one will pay taxes on one’s entire retirement income at a rate at least equal to one’s current rate.

traneeinvestor’s second point was about the safety of the selected safe withdrawal rate (SWR), discussed in post 6. Here is my response.

One ought to regularly monitor the status of one’s pre- and post-retirement portfolio. If adjustment in SWR is required in light of performance then that is what must be done. However, the Trinity study on SWRs to which I referred in post 6 was based on back testing that included up and down years. 3% was found to be safe over a 30 year period in a wide variety of asset allocations, with the exception of 100% bonds. Not safe enough? Reduce it to 2.5% or 2%.

To the extent I thought it necessary, I’ve gone back and edited the posts in the series to reference these issues. If there are other comments made on the series I’ll update this post to include them, at least for a little while. At some point I’ll consider the series done and stop updating the content.

Tags: <investment planning, summer project>

Multi-Period Planning and Asset Allocation

August 25, 2009 · by Austin Frakt · Posted in Personal Finance · 1 Comment

This post has been cited in the Carnival of Personal Finance, hosted by Stretchy Dollar.

This is the seventh in a series of posts on investment planning. For those who haven’t read that first post (or have forgotten), I’m soliciting feedback (tips, tricks, links, etc.) that I will cite and use in the final post of the series. Here’s a list of the other posts (number 8 to appear in next week):

In the prior post in this series I illustrated how to compute the real return required to meet a future investment goal given a fixed real monthly amount to invest. Because downside risk increases with expected return (no free lunch), it is sensible to take more risk at a younger age than at an older age. At a younger age one has more time and ability to recover from a loss (one can work harder, take on another job, forego expenses, etc.). In the years just before retirement those options are more limited.

Translating this notion into expected return, it is sensible to aim for greater return (and more risk) in the earlier years of one’s investment plan and to settle for lower return (and lower risk) in the later years. To illustrate how this might be done, let’s consider a two-period plan with equal length periods. Generalizing to more periods and/or periods of varying length is straight forward.

Using the example of the prior post, suppose a 35 year old investor needs to build a $626,800 nest egg over a 30-year span with $725 to invest per month. We used the Bankrate.com savings calculator iteratively to determine that he required a 5.4% real return over that span. Now let’s break this plan into two periods of 15 years, one for ages 35-50 and one for ages 50-65. The investor wishes to take less risk in the second span and more in the first.

Suppose he expects to achieve a 7% real return in the first period (one can debate whether this is realistic). At this rate he can build up $229,798 by age 50 (calculated using the MSN Money savings calculator). With this much saved by age 50, he can settle for a real return of about 4.5% in the second period to reach $626,800 by age 65 (calculated using the Bankrate.com savings calculator). The astute reader will have noticed a degree of arbitrariness in this exercise. How should one allocate return (risk) across periods? Should the investor described above aim for a lower (more realistic) return in the first period, requiring a higher one in the second? I do not think logic alone can answer this question. One has to use one’s own subjective judgment.

With the next step we penetrate even deeper into the jungle of subjectivity. How does one select investment vehicles expected to obtain the return(s) computed in the preceding step? The ways are manifold; it is an underdetermined problem. This is the question of asset allocation about which a great deal has been written and many debates waged. The equity/bond ratio is the most basic decisions, but there are many others: the domestic/international mix of equity, the nominal/inflation-adjusted mix of bonds, whether or not to use market capitalization weights, whether or not to use index or managed funds, the placement of funds for tax efficiency, among others.

To my mind, some issues are settled, either by reason or empirics, or both. For instance, I’m convinced of the superiority of diversification, low fees, certain tax efficiency strategies, and indexing. Even with these as necessary constraints on choices, there is a lot of room for variation.

Ideally, one would like the portfolio expected to provide the required after-expenses, after-tax return with the lowest expected risk. In principle, with a precise definition of risk one could back test a wide range of strategies and select the optimal one. By equating risk with variance modern portfolio theory specifies an optimal (efficient) portfolio. To find the optimal portfolio one needs to estimate future asset correlations (recent past asset correlations can be found at assetcorrelation.com). However, asset correlations fluctuate, and predicting future correlations with useful precision is problematic (as discussed on the Bogleheads Investment Forum). This approach is just not practical, at least not for the average non-institutional, do-it-yourself investor.

The best one can do is to select a style of portfolio according to one’s taste and tune the percentage allocations to match an expected return. Fortunately, there are plenty of places to learn more about asset allocation issues. My favorites are the Bogleheads suite of sources: The Bogleheads’ Guide to Investing (new edition expected out in the fall of 2009), the Bogleheads Investment Forum, and the Bogleheads Wiki. TFB has reviewed many other relevant books. Using these (or others) as guides, one can select a class or style of portfolio that suits one’s taste and that is consistent with the constraints implied by the analyses presented in this series.

With that, I conclude my portion of this summer project on investment planning. The next post will be based on your assignment (given in the first post of the series). In it I will share reader inquiries and comments and provide any tricks, tips, and links that have been sent to me by others throughout this series.

Tags: <investment planning, risk, summer project>

Need for Risk: The Details

August 18, 2009 · by Austin Frakt · Posted in Personal Finance · 3 Comments

This post has been cited in the Carnival of Personal Finance #219, hosted by Your Money Relationships.

This is the sixth in a series of posts on investment planning. For those who haven’t read that first post (or have forgotten), I’m soliciting feedback (tips, tricks, links, etc.) that I will cite and use in the final post of the series. Here’s a list of the other posts (numbers 7-8 to appear in subsequent weeks):

This post builds on prior ones in the series and I assume the reader has read them. So far I’ve covered the development of a current household budget, discussed how to use it for tracking and projections, related the surplus it indicates to ability for risk, and used it to estimate a retirement budget. The retirement budget indicates how much investment income (which includes the possibility of spending principal) one expects to need in retirement (in current dollars). What will be the source of this investment income?

The source I will focus on is a portfolio of securities, or what I will call a retirement nest egg. Other sources include various types of annuities, which I will not discuss. To keep things simple, let’s assume you expect to live for up to 30 years in retirement and you do not wish to leave funds to your heirs. In this case, how big a nest egg do you need to generate a specific level of income?

A key concept is the notion of a safe withdrawal rate (SWR): the inflation adjusted percentage of your nest egg value (at time of retirement) you can withdraw annually with very small risk of out-living your money. In the now classic “Trinity study,” Cooley Hubbard, and Walz found, based on back-testing, that a 3% SWR was safe for a wide range of asset allocations.

By definition of SWR,

[Eqn. 1] investment income = SWR x (initial nest egg),

where “investment income” is in constant dollars. Thus the initial nest egg (at time of retirement) must be

[Eqn. 2] initial nest egg = (investment income) / SWR

for a given investment income.

In the example of the previous post (see spreadsheet), an investment income of $1,567 per month or $18,804 per year was required. Using Eqn. 2 and an SWR of 3%, this translates into an initial nest egg of $626,800 in current dollars.

We have now established the necessary inputs for designing a retirement investment plan: ability to invest (the surplus of the current household budget), dollar goal (initial nest egg), and time span (between now and date of retirement). What return on investment is required to satisfy these constraints? This classic finance problem is easily solved using a financial calculator, spreadsheet, or any number of online savings calculators.

Let’s solve the specific problem implied in this spreadsheet and referenced above. Assume the budgets in the spreadsheet are for an investor age 35 years wishing retire at 65, a 30 year span. He needs to build a $626,800 nest egg and has $725 (his budget surplus) to invest per month (assuming he’s investing nothing via a payroll deduction). Using, the Bankrate.com savings calculator iteratively, we find that he will need an annual return of 5.4% to reach his goal. This is the real rate of return required. The nominal rate required will be this rate plus the inflation rate. Assuming inflation of around 3%, a rate of 5.4% + 3% = 8.4% will be required.

The investor will need to inflate his monthly investment as well: $725 is the real amount. This reflects the virtue of budget tracking. By tracking one’s budget, one can periodically reassesses one’s needs and income as they grow with inflation and be sure one’s surplus is growing at a sufficient rate.

Is the 5.4% real rate determined above reasonable to expect? If the hypothetical investor of the example thinks not then he should go back to his budget and see if he can find ways to scrape together some additional funds to invest and re-compute the necessary rate of return. What’s a reasonable maximum real rate of return? Real rates of return are expected by Rick Ferri and William Bernstein to be no higher than 7%, depending on asset class. So 5.4% does seem like a reasonable goal.

Once one has determined the necessary rate of return, the next step is to develop a plan to achieve it. That’s the topic of the next post in the series.

Tags: <investment planning, risk, summer project>

Estimating a Retirement Budget

August 11, 2009 · by Austin Frakt · Posted in Personal Finance · 2 Comments

This post has been cited by the Carnival of Personal Finance #218, hosted by Budgets are Sexy.

This is the fifth in a series of posts on investment planning. For those who haven’t read that first post (or have forgotten), I’m soliciting feedback (tips, tricks, links, etc.) that I will cite and use in the final post of the series. Here’s a list of the other posts (numbers 6-8 to appear in subsequent weeks):

So far in this series on investment planning I’ve been vague about the event for which one might be planning. Everything has been completely general. That ends here. I’m now going to focus on investment planning for retirement because it is something everyone should do and it is the most challenging investment planning problem most of us face (second would be saving for a child’s college education, which isn’t something everyone needs to consider). Nevertheless, many concepts illustrated in subsequent posts are applicable to non-retirement investing.

Retirement funding is about your budget, not today but in many years when you’re no longer working. If you’re going to be rational about planning for retirement you need to estimate that budget. The best place to start is your current budget (for advice constructing a current budget, see this prior post). By going through your current budget item by item and adjusting the entries so they correspond to expected values in retirement, you can estimate a retirement budget. Here’s an example:

This spreadsheet includes the same figures as in the current year sample budget described in a prior post. I’ve added columns for estimated amounts in retirement (all in current dollars). I’ve also added one row for health care. Recall from my prior post that I assumed payment of health insurance premium was included in the current net paycheck for this example budget (your budget may differ). In retirement that’s not going to be the case so a new entry for this expense is required. In your own retirement budget you may want to add other entries for expenses you expect in retirement but do not have now (e.g. tourism costs, boat payments).

One entry you may want to add is for income tax. The retirement income entries in my sample budget do not include the effects of taxation. Including taxes is tricky because (a) not all your retirement income will be taxed (e.g. Roth distributions are not taxed) and (b) you may not know what your tax rate will be years in advance. If you do want to estimate your retirement income taxes keep in mind that non-wage income does not include payroll taxes (Social Security and Medicare taxes). Also, do not confuse your marginal tax rate from your average tax rate. Even if your marginal rate is substantial your average tax rate will be lower. For simplicity I have ignored income tax.

Let’s go through my example and describe how retirement column entries are estimated. The first row is for non-investment income like that from Social Security and pensions. There are a variety of ways to estimate a value for this income. If you have a pension benefit you’ll have to find out the details on your own, as they will vary by company. As for Social Security, one estimate is the value contained in the statement you receive annually from the Social Security Administration. Another estimate can be obtained from this calculator (which I have not used). Use your own judgment about the likelihood of receiving the level of Social Security or pension benefit currently promised (better to be a bit conservative here).

The second line in my example is for investment income (which could include the consumption of principal). Since this is what we’re solving for in this budget exercise, we’ll fill it in later so as to obtain zero on the TOTAL line for the “retired amount pro-rated to month” column. Going through the list of expenses in the example budget, many are zeroed out in retirement. When retired, one is unlikely to pay for child care, life insurance, or a mortgage (but if you expect to, don’t zero them out in your budget). It is reasonable (but not necessary) to keep values for the other expenses the same in retirement as in the current year budget except for health care, as described above. For that entry in the example I put in an estimate based on this value from Fidelity, inflated by ~50% to be conservative.

After tweaking all the entries in the example I went back to the second line labeled “income: other” and inserted a value that caused the TOTAL to go to zero. This is the amount required from investment income to meet the estimated retirement consumption needs in the example. The value is $1,567 per month. Since the current monthly income is $6,917 (=$5,417+$1,500), income required from investments in retirement is just 23% of current income in this example. This is suggestive of how far off one might be by applying (or misapplying) a standard rule-of-thumb of the need for 70% of current income in retirement. Of course I have not included any margin for error in the retirement budget. As explained in the first post of this series, this is an important point but one I do not dwell upon.

Your retirement budget will tell you how much investment income you will require (in current dollars) to meet your necessary retirement expenses. Your goal is to save enough to generate this income. Your retirement investment planning problem is to figure out how. The next post provides some guidance.

Tags: <budget, investment planning, summer project>

Willingness, Ability, and Need

August 4, 2009 · by Austin Frakt · Posted in Personal Finance · Comment

This post has been cited in the Money Hacks Carnival #79, hosted by Modern Tightwad.

This is the fourth in a series of posts on investment planning. For those who haven’t read that first post (or have forgotten), I’m soliciting feedback (tips, tricks, links, etc.) that I will cite and use in the final post of the series. Here’s a list of the other posts (numbers 5-8 to appear in subsequent weeks):

It is standard advice that one should only take risk commensurate with one’s willingness, ability, and need. But what does this really mean? I am not satisfied with the definitions I have found elsewhere (to the extent any are given) so I thought it through for myself. Here’s my take.

Willingness

Willingness is all about a gut feeling of comfort. It is a non-quantitative concept. A common test for willingness to take risk is the “sleep test”. If you can’t sleep at night because of an investment decision, either actually made or in consideration, then you may have exceeded (or are considering exceeding) your willingness to take risk. On the other hand, if your decisions do not cause you unrest, your investments are probably in line with your willingness for risk.

Thus, willingness to take risk reflects your level of comfort with loss of your investment. For instance suppose you’re considering investing $10,000. Your willingness for risk is how readily you would take the chance of losing some of it for the chance of earning an expected profit. For example, you might not be comfortable taking the risk of a 50% probability of losing $5,000 (half the principal) in exchange for a 50% probability of earning $10,000 (doubling the principal). But, perhaps you might readily risk a 25% probability of losing half for a 75% probability of doubling it. Your willingness for risk is exceeded in the first example but not the second.

Ability

While your willingness for risk may be vague, your ability to take risk is quantifiable. It is based on your budget (if you don’t have one, see my prior post on the topic). To be able to take risk you have to have something you can afford to place at risk. Thus, your ability for risk is your surplus, i.e. your income less all necessary and regular expenses. By definition you do not require your surplus to support your current lifestyle. If you do, then you haven’t constructed a proper budget.

(By the way, I am assuming you already have an emergency fund of appropriate size and no high-interest debt. Having an emergency fund and ridding oneself of high-interest debt are prerequisites. Some would argue putting emphasis on ridding oneself of all debt, event low-interest fixed-rate mortgage debt. That’s debatable and I’m not taking that position here. You may decide for yourself.)

Need

Like ability, need for risk is quantifiable but the process of doing so will take many more words to develop. In short, your need for risk is based on your future requirements for money. Some of these requirements are large and a long time from now (e.g. retirement) so pinning down their relationship with risk is tricky (and is the topic of many books and a large industry). Need for risk, more than anything else, drives one’s required asset allocation. Subsequent posts in this series will delve into this further into this topic.

Tags: <investment planning, risk, summer project>

Budget Tracking and Projections (with Quicken Tricks)

July 28, 2009 · by Austin Frakt · Posted in Personal Finance · Comment

This post has been cited in the Carnival of Personal Finance published on 3 August 2009.

This is the third in a series of posts on investment planning. For those who haven’t read that first post (or have forgotten), I’m soliciting feedback (tips, tricks, links, etc.) that I will cite and use in the final post of the series. Here’s a list of the other posts (numbers 4-8 to appear in subsequent weeks):

I assume all readers of this post have constructed a descriptive household budget with positive cash flow (if not, see the prior post). The bottom line of such a budget is a monthly (or other period) average net income. That is, it is income less all necessary, regular expenses. For simplicity, I will call this amount your surplus and I will assume it is a monthly value (this is not important; if you prefer a yearly value, that’s fine).

Your surplus represents how much you can spend on extra stuff or invest per month. Therefore, if you have a goal, like saving $20,000 for a new car, you can use your surplus value to see how many months it will take you to do so. If you have multiple goals you can set up a spreadsheet to allocate fractions of your surplus to each of them and then compute how long it will take to reach those goals (or vice versa: set the time by which you need to reach the goal and compute what fraction of surplus is required). These examples illustrate that surplus is the key to investment planning. I’ll have a lot more to say about that in subsequent posts. First, let’s apply our budget to the fundamental problems of budget tracking and projection.

I use Quicken to track and project my budget, but you can do all of the following with other software. (Until five or so years ago I used Excel for these functions exclusively. Now I use Quicken 2007.) Since I hate to read software guides I’ve made this entire approach up myself. It would not surprise me if there were other ways to do the following in Quicken (feel free to suggest them or provide links to such things).

I use Quicken as an electronic checkbook. Since I write checks or have electronic payments drawn on and deposited into two accounts, a checking account with Bank of America and a taxable money market account at Vanguard, those are the only two real-world accounts I bother to track (i.e. download/reconcile) in Quicken. Thus, the sum of values of those two accounts is all that is relevant for tracking actual net household cash flow. Let’s call this sum my actual balance. All the other investments I have are not relevant and we can ignore them for this post.

In addition to these two accounts in Quicken, I have set up a third, which I will call my projected balance. This projected balance account is fictitious in that it does not correspond to any real-world account. Using Quicken’s functionality to schedule automatic bills and deposits I have translated my budget (see spreadsheet example) into automatically recurring Quicken transactions into and out of my projected balance account. I have set the timing to correspond to when such payments are actually made in the real world.

At any point in time I can compare my actual balance with my projected balance. The former reflects my real-world income and payments. The latter reflects my budget. The two should match, or at least be close. If they are not, it indicates a problem (e.g. bank error) or, more likely, that I forgot about a big purchase or a large financial gift. When the two are off by more than about $1,000 I search my brain and records for the source of the discrepancy. This doesn’t happen often and when it does it doesn’t take much time to find the source. Then I adjust my projected balance accordingly to bring it back in line with reality.

This real-time budget tracking is very handy. I can always tell if my household is overspending or if we’re saving at a greater rate. This really puts my budget to work.

Another way to use Quicken to put your budget to work is to use it for projections. The “Overview” tab of my projected balance account has an “Account Balance” graph with an “Options” menu. One of the options is to “Forecast my future account balances.” By entering my budget into this tool I can immediately see my projected surplus growth path. It also automatically calculates the monthly surplus (Quicken calls it “net savings”). In fact, I don’t use a spreadsheet for budget projections anymore. I only made this one for illustrative purposes for this investment planning series of posts. It is based on the information I’ve already entered into Quicken. (One gripe I have with Quicken is that it doesn’t seem to be able to base its forecast on the transactions I’ve already entered in my projected balance account. I have to reenter them in the forecasting tool. If anyone knows how to connect the two explicitly please let me know.)

As I said, one can do all of the above with other tools. Being able to reconcile one’s real-world cash flow with one’s budget and to forecast surplus are worthwhile capabilities. In subsequent posts in this series I will show how to use these capabilities in the service of investment planning.

Tags: <budget, investment planning, summer project>

Household Budgeting the Easy Way

July 21, 2009 · by Austin Frakt · Posted in Personal Finance · 7 Comments

This post has been cited by the 215th edition of the Carnival of Personal Finance, hosted by Good Financial Cents.

This is the second in a series of posts on investment planning. For those who haven’t read that first post (or have forgotten), I’m soliciting feedback (tips, tricks, links, etc.) that I will cite and use in the final post of the series. Here’s a list of the other posts (numbers 3-8 to appear in subsequent weeks):

The internet and book stores are loaded with advice on creating a household or family budget. There are two fundamental approaches: proscriptive (or normative) and descriptive (or positive). A proscriptive budget is one that conveys how you ought to allocate your money. Someone in debt or struggling to live within his means would benefit from a proscriptive budget the following of which would deliver him to a debt free life.

Since I do not have a problem with debt or living within my means I do not have much need for a proscriptive budget. On the other hand, a descriptive budget that illustrates with reasonable accuracy how my household finances are allocated to investments and consumption is very handy. As I will show in subsequent posts in this series, a descriptive budget is the basis for investment planning. In the remainder of this post I provide an easy way to construct a descriptive budget.

One can find many web pages and books devoted to descriptive budgeting. What I don’t like about most of them is the suggestion of the need for great detail. How much do you spend on food? On clothes? On gas? On entertainment? And so forth. For me, and I suspect many others, a budget at this level of detail is not necessary or helpful. (It is necessary and helpful for proscriptive budgeting or for the very frugal or intensely curious.)

Since my goal is an easy, high level (but accurate) descriptive budget, I take as a starting point that I spend the “right” amounts on each of the subcategories listed above (food, clothes, gas, entertainment, and so on). Therefore, a simple way to build a descriptive budget is to base it on the lumpy institutional structure that underlies one’s actual cash-flow: paychecks and bills.

This is easy. Take out a representative and recent set of paychecks and bills or go online and download them. Write down values for average payments (as illustrated in this spreadsheet). To make things simple, when entering your paycheck amount, use the amount you receive net of all deductions (e.g., for state and federal taxes, health, disability, life insurance, 401(k) contributions, and so on). This works fine if you’ve set your tax withholding properly (see IRS withholding calculator). Also, notice that this document-based approach has you entering in your budget a representative amount for your credit card bills but does not drill down into the bills to allocate payments by type (food, gas, clothes, etc.). As already mentioned, that detail is not necessary for this type of budget.

This approach is particularly easy if your payments do not vary much. In my case this is true for most bills because either they just don’t vary (e.g. mortgage, life insurance, internet, cable, and others) or because I’ve set up “budget payments.” A budget payment option is often available from utility companies: each utility estimates a yearly amount and you pay an average monthly value independent of your use. Then you settle up at the end of the year. After an adjustment period, the estimates get more accurate and the settling up is a small transaction that can be ignored in the budget.

The biggest variation for me is in my credit card bills. Nevertheless, upon examining a representative set (6-12 months worth, say), I have found it possible to settle on a reasonable average figure. In following this approach it is important to omit or adjust payments for months of credit card bills corresponding to unusual, one-time, enormous payments not reflective of usual spending habits (e.g. a huge payment for wedding catering).

The accompanying spreadsheet includes the list of items in my budget with fictional but representative figures and frequencies. Your list may differ. If you spend a lot of cash or make many check or debit purchases you may need entries to account for those sources of expenditure. Since I pay almost everything by credit card, I don’t have such a line. Be sure to prorate everything to the month (or year or week if you like) and total it. If the total is less than zero then you have negative cash flow and you may need a proscriptive budget get back on track. I will assume you have positive cash flow in this positive (descriptive) budget. The total line represents what you have left to spend on more stuff or to save/invest (though, recall, 401(k) investments are included in our net paycheck). In subsequent posts I will call this (assumed positive) total amount the surplus.

That’s it. We’re done. Was that hard? I don’t think so. Yet, we now have a budget that is perfectly adequate for a variety of investment planning purposes. Greater detail is not necessary. But if you want greater detail, it will not hurt to have it. It will just take you more time to construct such a budget and to use it for tracking. I will explain that concept and put our budgets to work in the next post.

Tags: <budget, investment planning, summer project>

Investment Planning: The Series

July 14, 2009 · by Austin Frakt · Posted in Personal Finance · Comment

This post has been cited by the 98th Carnival of Financial Planning hosted by Living Almost Large.

Welcome to my 2009 summer project. Over the next two months or so I will be posting a series on investment planning. Since this is one of the core personal finance topics there is a lot already written about it elsewhere, and many online tools exist to facilitate investment planning calculations. This series complements these other resources. Yes, to a large extent I will be reinventing the wheel. But it will be my wheel, crafted in my way and, thus, ever so slightly different from the other wheels. Hopefully it will not be too wobbly a wheel. If it is, I urge you to help improve its performance with your comments. That will make it a little bit your wheel too.

In this series I will build an investment planning approach using only logic and simple math. As you will see, this will take us quite far. However, it cannot take us all the way to a full investment plan. In the final step objective logic and simple math alone prove insufficient and one must apply personal taste with the guidance of other resources to which I will link.

However, subjective decisions made to complete one’s plan can and should be made in ways that are consistent with the logic of prior steps. And certainly one need not apply arbitrary rules to the entire investment planning process. Doing so misses some very critical points and invites unnecessary risk. To be blunt, I am unimpressed with rules-of-thumb like “invest your age in bonds,” “90% equity is sensible if you’re very young,” and so on. They may be inconsistent with the demands of one’s personal situation—demands that can be quantified easily, as I will show.

There is one important note of caution that I will make here and not reiterate in the series’ posts. Long-range investment planning (e.g. for retirement) is based on assumptions about the future that are almost certainly wrong. Therefore, the quality of the outcome depends on a sound plan and more importantly on revisiting and updating the plan to reflect the degree to which reality deviates from assumptions. Another key method for protecting oneself from the down-side consequences of inevitable modeling errors in long-range planning is to build in a conservative margin for error. To keep things simple in this series I will ignore these points, having made them here. Yet, they are crucial.

I am sure most readers of this blog have read and perhaps written about investment planning before and have some thoughts to share. My summer assignment to those readers is an invitation to send me your thoughts on investment planning or your reaction to this series or elements thereof. The conclusion of the series will be a post that includes your comments and any tips, tricks, and links you provide. (I will credit you as directed or not at all if you request anonymity). You can either post a comment to one of the articles in this series or send me one using the contact form.

Since household budgeting is intimately related to my approach to investment planning the series begins with, and later returns to, budgeting. Here’s the list of upcoming post titles. Expect one post per week.