This is the final post in this initial series. You can read the rest of these blog posts here to learn more about how to use the AAII PRISM Wealth-Building Process!
PRISM is a five-step method for aligning my investment decisions with my goals, created by AAII Journal editor Charles Rotblut. The fifth step details how to use PRISM as a cyclical process that changes as you and your investments age.
The final step of PRISM contains three parts of your financial life to monitor: allocation, progress and life stages. Asset allocation is the process of dividing your investments between different categories like stocks, bonds and cash. Currently, my investment portfolio and my retirement account are pretty much fully allocated to stocks via exchange-traded funds (ETFs), but I have around $80 in cash in my Charles Schwab brokerage account.
Using AAII’s My Portfolio tool, the A+ Investor Asset Allocation Analyzer shows me that the breakdown of my portfolio of index ETFs is a bit off from the AAII Aggressive Asset Allocation Model. The aggressive model calls for 60% invested in domestic stock, 30% in foreign stock and 10% in bonds. My index ETFs round out to 53.5% domestic stock and 46.4% foreign stock, and obviously nothing is in bonds (which, according to AAII founder James Cloonan, is a sound portfolio strategy). I decided to take a look at my 403(b) retirement account as well to see if the average asset allocation of my overall investments could be closer to the aggressive model. My 403(b) has 80.3% in domestic stock and 17.1% in foreign stock. Combined with my index ETFs, my average allocation is 66.9% to domestic stock and 31.8% to foreign stock—definitely closer to the model!
During my next portfolio review at the end of June, I might take a deeper look into my allocation, but for now I’m happy with where I stand.
Next on the list is to check my progress toward my goals. Back in the first step of PRISM, I determined my short-, intermediate- and long-term goals and how much I thought I would need for them. My nearest-term goal is to accumulate $2,000 for the next lump-sum investment in my brokerage account. I’m using my SmartyPig high-yield savings account to track this goal and have about $500 more to go. By my next portfolio review, I should have realized this goal. My goal of buying property in the next three to five years has an estimated cost of $35,000. I’ve been neglecting this goal because the housing market has been ridiculous and, after determining the pros and cons of owning property, I decided that renting is my best option until I feel the need to run away and become a forest witch! Even so, I should be taking more advantage of the 4.25% yield my LendingClub savings account is offering. I currently have around $7,200 and if I can add money more consistently to this account, I could be a lot closer to my goal in the next five years.
The last part of the fifth step of PRISM is to assess any life stage changes that have occurred. Using the Monitoring Your Life Stages worksheet, I determined that nothing has changed, except that I have to walk a lot more to stave off knee and back pain!
Though I made it through all five steps of PRISM, that doesn’t mean I’ll never look at my investments through the lens of PRISM again. When a life stage change occurs, I will need to determine if any revisions are needed to my goals, risk tolerance, allocation and management preferences and apply any of these changes to my investments. PRISM will make its return whenever something dramatic happens to me—I’ll keep you posted!