Steve Wilhite invented the GIF in 1987. Cheers Steve.
While Wilhite forever changed the Internet’s image/meme formatting, he inadvertently caused a schism: is GIF pronounced like gift or jiffy.
Ok. Doesn’t really matter. But I thought about GIFs today because I stumbled across a wonderful (albeit ugly) acronym: RRTTLLU.
Rataloo? Ruhtooloo? Rooty Loo? Well…what is RRTTLLU? And why does it matter?
RRTTLLU is an acronymical framework to help investors consider the many facets of a well-thought investing decision. Let’s step through RRTTLLU letter by letter.
The first R asks: what kind of risk can the investor tolerate? What risk is associated with the investment?
A stock, for example, can go to zero. You can lose all your money. Are you ok with that?
A fund of stocks is unlikely to go to zero due to its diversification. But its exposed to systemic market risk. If the market drops 50%, your investment value drops 50%.
A bond, on the other hand, is designed to pay you back in full at the end of its term. For that reason, most bonds are less risky than stocks.
Risk tolerance is equal parts psychology and math.
The psychological aspect can be thought of as the “sleep test.” How much loss can you stomach before you start losing sleep?
INSERT STOCK/BOND ALLOCATION HISTORY CHART HERE
The math portion involves the rest of RRTTLLU. Based on the T’s and the L’s and the U, what portion of your portfolio can be exposed to various levels of risk? We’ll dive into the details below.
The second R asks: what is the expected return of the investment? Or, what return is required to meet your goals?
Some investors require a 12% annual return to meet their goals. Other investors only need a 3% return.
This difference is massive, and causes a monumental difference in how their portfolios should be constructed.
The first T asks questions related to time.
What timelines are associated with the investor’s goals? How old is the investor? Can they make short-term sacrifices for long-term gains? How long will the investor need to draw down funds in their portfolio?
As the saying goes, a goal without a timeline is just a dream.
I love the concept of bucketing money based on these timelines.
The second T asks questions related to tax. Tax situations are typically the most unique aspect of an investor’s situation.
What tax bracket is the investor in? How will that tax bracket change over time (based on the investor’s expected income)? What are the potential tax implications of their different investment choices?
Many of us ask ourselves these questions and execute tax-efficient strategies via accounts like 401(k), IRAs, 403(b), 457(b), HSA, etc.
We can go a step further and, for taxable accounts, consider interest, dividends, and capital gains.
And finally, we can ask questions about estate planning and inheritance. How will various investments affect the future estate of the investor and any beneficiaries (children, grandkids, charities, etc.) they might wish to leave money to?
The first L of RRTTLLU asks questions of liquidity. Namely:
- Does the investor have enough liquid cash to cover their near-term expenses?
- Does the investor have an “emergency fund,” just in case?
Some investments are quite illiquid. For example, a private real estate fund might have a multi-year illiquidity term, because the properties within that fund need certain cash injections over time. Investors are contractually obligated to keep their money invested during that time.
So if you’re planning on investing $250K in a 10-year real estate fund, I’d ask you: are you sure you won’t need that $250K in the next 10 years?
The rest of your portfolio must be liquid enough to cover your near-term needs.
The second L of RRTTLLU asks about legal constraints on the investor and their investments.
These type of restrains come in a few formats:
- There might be contribution limits in certain types of investment accounts
- There might be withdrawal mandates in certain types of accounts
- Assets within a trust can have legal requirements placed on them (e.g. invest them this way, not that way)
- There might be tax limitations that prevent assets from being gifted to others
The U is a bit of a catch-all that stands for unique situations of the investor and their investments.
It’s common for investors to have moral/ethical constraints against particular investments.
- No vice – tobacco, alcohol, weapons, etc.
- Environmental, sustainability, and governance objectives
- “I have inside knowledge of ABC Corp., and therefore can’t be an investor”
Other investors have unique wishes and bequests for their money. Leaving 25% of your portfolio to your alma mater is worth noting, and should affect how you invest that 25%.
Toodaloo to RRTTLLU
The RRTTLLU acronym – risk, return, timeline, taxes, liquidity, legal, unique – helps investors consider the many questions that go into an intelligent investing decision. It’s a terrific starting point – and for many investments, the end point too!
Now, about that pronunciation…