Overall Financial Strategy

Well, I’ve spent all my time documenting my trading strategy, but I’ve spent no time talking about the way that this fits within my overall plan.

In fact, the funds I use for active trading represent about 10-15% of my overall portfolio. I’m very conservative at heart and despite my efforts to minimize risk, I acknowledge that active trading is an inherently risky activity. So it’s important to me that this only be a small part of my overall holdings.

Basically, I split my holdings into two pieces, tax sheltered and taxable. I spend the majority of my time actively managing the tax sheltered funds as they give me the most benefit with the least headaches.

Tax Sheltered
After ensuring I can meet my daily obligations, I make every effort to maximize the moneys in the tax sheltered accounts. So I try to take full advantage of contributions to IRA’s and 401(k)’s where possible. I’m opportunistic with my approach to the Roth instruments. If eligible to make contributions, I do. However, I have not converted any traditional account to Roth and I don’t intend to unless this become more attractive.

There are three basic tax sheltered holdings:
401(k)’s (20-25%) - These are the primary instruments for collection of new funds. My wife and I both have these accounts with the usual limited mutual fund offerings. I focus on capital preservation in these accounts with most of the dollars being directed to bond or governmental funds. I see these as a temporary holding place. My goal is to get these funds rolled over into another account that I can manage. This works well for me, as I typically change jobs ever few years and can roll-the account over. This is less of an option for my wife. However, I’m considering an “in-place rollover” which appears to be an option for some funds.
IRA CDs - (50-60%) - These are mostly long term (8-20 year) callable CDs where the interest is collected and not retained in the CD. The are held within my brokerage account and the collected interest is either used for new CDs or swept into my trading funds. I also hold some traditional CDs, but these are being rolled over into my brokerage account as they mature.
IRA Trading (20-25%) - These are the “available funds” that are the primary focus of this blog.

My plan is to defer withdrawal of these tax sheltered funds as long as possible, so you’ll see that my taxable strategy is intended to compliment this with high liquidity.

Taxable
These funds are those necesary to support our lifestyle up to the time that we are able to collect pensions, social security or withdraw funds from the tax sheltered accounts without penalty.

Taxable funds are also split into three different groupings:
CD Ladder (60%) - This is a ladder of approximately 20 CDs that are spaced in 3 month intervals over 5 years. I currently have all interest reinvested into the CDs, but I plan to change this upon retirement and use the interest as spending money. If additional cash is required, I have no qualms about drawing down the principal on maturing CDs rather than touching the tax sheltered funds.

Equity (30%) - These are a few income stocks that I’ve held in the long term. These are not diversified, but are conservative holdings and represent a small enough percentage of the portfolio that it doesn’t keep me awake at night. I use the dividends for funding the CD ladder, so the equity percentage should decrease over time unless the stock prices keep pace.

Liquid funds (10%) - These are held in money market funds and vary quite a bit depending on where I am cashing in or buying CDs.  Significant expenses can also cause variations in these liquid funds. 

Obviously, my taxable strategy has one glaring omission. You’ll note that I don’t undertake any activity to take advantage of the lower tax rate associated with capital gains. Being the cheap bastard that I am, I struggle with this on an ongoing basis. And in fact, I occasionally use liquid cash for this purpose. But I do not do this as a rule because it introduces additional risk into the overall portfolio and also adds extra overhead into record-keeping and tax reporting that is not required for my tax sheltered trading.