RULE MAKER PORTFOLIO
Step 3: Allocating Your Savings Money

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11 Rule Maker Steps

By Phil Weiss (TMF Grape)

Make it thy business to know thyself,
which is the most difficult lesson in the world.
-- Miguel de Cervantes

With your hard-core savings set aside, you are now ready to address the topic of allocation. It's one of those subjects near and dear to big-time money managers. They love to bandy it about as they defend their citizen's right to prattle on about how: "Only a professional should manage your money."

Convenient, that one!

We're telling you that your portfolio allocation shouldn't be terribly complex and that you'll want to find one design for your long-term savings and stick with it. Why? Well, you've heard the story before. This month your broker Rollie recommends that you have 60 percent of your portfolio in stocks, 30 percent in bonds, and 10 percent in cash. In four months, though, it's time to go 40 percent stocks, 35 percent bonds, and 25 percent cash. Unless you've recently come across some new cash, there's only one way that you can follow his new allocation strategy -- sell something that you already own and buy something new in its place.

Look at those two italicized, underlined words above:

Sell and Buy

If you're an individual investor using a full-service broker, we recommend that you merge those two words into one: transact. We now suggest that you translate that single word back into a short and deliciously-accurate phrase: Hey, pay me and my investment firm more money in commissions.

You can name us spoiled sports, but we think much of the hullabaloo on Wall Street about asset allocation is driven by a vested interest in generating more transactions from customers, more commission payments, more profits for the firm. When you reason through the consequences of frequently redefining your portfolio allocation, we think you'll agree that if you truly are a long-term investor -- if you have more than 8-10 years to invest -- you should stick with a single, low-cost allocation strategy: 100% in stocks.

Along with the joys of that one-time allocation decision, we think you stand to make the most money by owning businesses, not worrying about the daily fluctuations of stock prices. We'd consider it very Foolish of you to someday say to a friend, "I have a whole mess of General Electric stock. It's somewhere around $80-$95 per share. And yeah, it trades between 20-40x earnings. Boy, their cash-flows have been improving year over year. GE Capital is a wonderful business for them."

We believe that the short-term, present-day valuation is far less important than your estimation of how the business is doing today and how you expect it to do in the years and decades ahead. Both the 11 Steps that you are reading and the Rule Maker portfolio online propose that you buy ownership positions in cash-rich companies and that you tend toward not selling these investments for years, decades if possible, generations is ideal. Your aim will be to not trade, to not get on the cover of a financial magazine for being a market maven, and to not be invited onto financial television. You'll be encouraged to disregard the often self-serving whims of financial firms and to mostly eliminate the unnecessarily high costs of investing.

And finally, Fool, you'll be looking for companies whose products and services you use, companies which you believe have staying power for the next two decades, companies with management teams committed to rewarding their shareholders. Contrast that with the all-too-typical recommendation from small brokerage firms calling you during dinner. They often pitch the stocks of businesses that you've never heard of, those stocks with supposedly remarkable short-term prospects run by management teams that are too often primarily concerned with rewarding themselves. We don't mean to sound like cynical Fools. We've just learned some things over the years. Syndicated columnist Abigail Van Buren can speak for us here:

"If we could sell our experiences for what they cost us, we'd all be millionaires."

Experience in this game has taught us to trade infrequently and to concentrate on durable businesses that we know and love. With that, let's press forward into how we've allocated the Rule Maker Portfolio, why, and why you might consider doing the same.

Our Foolish Keys to Portfolio Allocation.

  1. Remember that before you start investing seriously you should get your personal finances in order.

  2. In the years ahead, search for a logical approach to allocating your savings which you can live with... and try to stick with it. You'll save in commissions and taxes.

  3. Only invest your long-term, hard-core savings in stocks. But once you have that sort of savings set aside, start investing tomorrow and never stop.

  4. If you're like us, shoot for ten-to-fifteen solid companies in your portfolio -- enough to provide diversity, not so many that you can't follow them all.

  5. Set a realistic rate of return for your portfolio -- may we suggest 50-60% growth per month. And in the next breath, may we suggest that we were kidding! 'Cause we were. Our Foolish target is 13-20% annual growth over a thirty-year period -- with all tax payments hopefully in the latter years!

  6. And our final recommendation? When it comes to portfolio management, resist the strange temptation to churn more than 1-2% of your savings into brokerage commissions. Hold your portfolio's commission costs under 2% of your total portfolio. Considerably less than that is ideal. Isn't it time for the customers to have yachts?

Step 4: Finding Rule Maker Investment Ideas »