July 30, 2007
A question I am occasionally asked by a client is, "Less, do you invest
your own money the same way you are advising me?" The answer is usually
"No." After all, each client faces unique circumstances, in terms of goals, employment, percentage of tax-sheltered dollars, tax bracket, estate tax issues, other holdings, age, dependents, and emotional tolerance for volatility. I am no more a hypocrite if my portfolio looks different from my clients than would be a doctor who isn't taking the same medications he is prescribing to patients. Moreover, I'm already effectively investing in the same way as my clients to some extent, since my own percentage fees go up and down as the investments I manage change in value.
Nonetheless, I've decided to share with you the investment strategy my wife and I follow for our own long-term assets: outside of our home and a few months of liquid cash, virtually our entire net worth is invested as described in this message.
A brief but critical preface. I designed my portfolio so that it would require minimal attention, as financial advisors are subject to review of their investments by government regulators, and the simpler my portfolio, the simpler the audit. All of my long-term investment assets are tax-sheltered, because I was lucky enough to pick up a copy of Andrew Tobias' THE ONLY INVESTMENT GUIDE YOU'LL EVER NEED 30 years ago, and learned about IRAs well before they became popular. Thanks, Andy. My goal is maximum long-term growth, regardless of volatility, although I believe that thorough diversification is the best way to
achieve that, and my current portfolio allocation has, historically, been far less volatile than the S&P 500, although I made sure to remind myself that past performance cannot predict the future.
Finally, in anticipation of going public with my portfolio, I decided to switch entirely to a portfolio that could be duplicated at any broker, even though there are some excellent mutual funds available to me and my clients through the Fidelity Institutional platform I use, and which I did previously use, but which most readers would not have available on the same terms, and which some could not use at all (I love PCRIX, for example, for commodity futures exposure, but most readers probably couldn't meet its minimum for the commodity futures portion of their portfolio). My portfolio now consists entirely of exchange traded funds and can, I believe, be duplicated at sharebuilder.com for a total commission of 36 dollars (so even a recent college graduate making their first IRA contribution could duplicate this portfolio at a reasonable cost). The weighted average expense ratio of this portfolio is around 0.4% per year, which is about as low as I can get it without using individual stocks and REITs (which I generally do for clients).
Reminder: I am not recommending this portfolio to anyone. It is simply the way I am invested to pursue the specific personal financial goals of myself, my life partner Diane, and our two Bichon Frises, Pretzel and Bialy. If you invest this way and lose money, your only consolation is that you can be certain that I feel your pain. Nonetheless, it offers some lessons about diversification that may be instructive to everyone, including people whose proper portfolio ought not to look anything like mine. The detailed lessons will have to wait until I have more time to devote to writing. I plan to update the performance of the portfolio on my wiki on a periodic basis, and unlike the DOPE portfolio on the wiki, it will represent the actual results of an actual investor (me).
TARGET ALLOCATION
I am quite negligent about rebalancing my own portfolio, but these are the targets for the 6 major equity categories I consider important to include. You can generally expect me to be within 20% of the targets, although I make no promises. Also, I usually have a tiny amount of cash in the account from unreinvested dividends and the imprecision of market orders entered in shares rather than dollars.
Commodity Futures - 30
Domestic Stocks - 25
Foreign Developed Country Stocks - 20
Domestic REITs - 10
Foreign REITs - 10
Emerging Market Stocks - 5
ETF TARGETS AS OF JULY 30, 2007
PowerShares DB Agricultural Commodities Index (DBA) - 10
PowerShares DB Energy Commodities Index (DBE) - 10
PowerShares DB Base Metal Commodities Index (DBB) - 5
PowerShares DB Precious Metal Commodities Index (DBP) - 5
Rydex Equally Weighted S&P 500 Index (RSP) - 25
Vanguard Except-US Index (VEU) - 20
Vanguard REIT Index (VNQ) - 10
SPDR Dow Jones Wilshire International Real Estate Index (RWX) - 10
Vanguard Emerging Markets Index (VWO) - 5
Since I deemed an earlier hypothetical portfolio on my wiki the DOPE portfolio, this will be known as the SimplyRich Advisor's Portfolio, or SAP. Unlike the DOPE, my updates on performance of the SAP will represent the actual value changes in my own Fidelity investment account.
I will not privately answer questions about this portfolio, but promise to address questions posted in the newsletter forum on my free message board. Ask away.
