Tag: portfolio

Portfolio Building Part VB: Examples of What We’re Talking About

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part VB

In the last post, we discussed a reasonable (perhaps even great) investing strategy with little (no?)  day-to-day effort on your part.

As a reminder, here is what was proposed:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks

Let’s leave the stock behind for now and talk specifics on the funds.

As I’ve said many other times in other places, low fees is the key to outsized gains long term for index funds since they are more passive investing where they are matching (or, at least, attempting to match) the index they are designed to match.

Realize that there are several indexes that funds can follow at each level of market capitalization.

The S&P 500 and NASDAQ Composite Index are the two best known large cap indexes that are tracked. Another large cap index is the Russell 1000 (which is the compilation of the 1,000 largest publicly traded companies in the US).

The mid cap indexes are the  S&P Mid-Cap 400, the Russell Midcap Index, and the Wilshire US Mid-Cap Index.

The best known small cap indexes are the Russell 2000 Index and the S&P 600.

Cheapest Index Funds

S&P 500 Index Funds:

Vanguard 500 Index Fund Investor Shares

Symbol:  VFINX

Net Expense Ratio:  0.14%

Minimum Initial Investment:  $3,000

But if you can reach the initial investment requirement of $10,000 for their “Admiral” share class (symbol: VFIAX), you can get the cheapest available S&P 500 index fund with an expense ratio of 0.05% which translates into a $5 fee for every $10,000 invested.

Schwab S&P 500 Index (SWPPX): The expense ratio is 0.09%, or $9 for every $10,000 invested. The minimum initial investment is $100.

There are many, many large cap index funds that do not track the S&P 500 index, but rather other large cap indexes such as the Russell 1000, so feel free to look for them if you would prefer those rather than the ones that track the S&P 500.

Mid cap Index Funds:

Northern Mid Cap Index (NOMIX):

The expense ratio is 0.15%, or $15 for every $10,000 invested, and the minimum initial investment is $2,500.

Vanguard Mid Cap Index (VIMSX):

The expense ratio is 0.20%, or $20 for every $10,000 invested, and the minimum initial investment is $3,000.

Small Cap Index Funds:

SPDR S&P 600 Small Cap ETF (SLY):

The expense ratio is 0.15%, or $15 for every $10,000 invested.

Vanguard Russell 2000 ETF (VTWO):

The expense ratio is 0.15%, or $15 for every $10,000 invested.

Vanguard Small-Cap Index Fund Investor Shares (NAESX):

The expense ratio is 0.17%, or $17 for every $10,000 invested with a minimum initial investment of $3,000.

However you can pony up the minimum initial investment of $10,000, you too can be invested in the Vanguard Small-Cap Index Fund Admiral Shares (VSMAX) which charges a microscopic expense ratio of 0.05% or only a $5 fee for $10,000 invested.

How do they do it? Vanguard does it again!!

iShares Russell 2000 ETF (IWM):

The expense ratio is 0.20%, or $20 for every $10,000 invested.

Northern Small Cap Index (NSIDX):

The expense ratio is 0.15%, or $15 for every $10,000 invested, and the minimum initial investment is $2,500.

Schwab Small Cap Index (SWSSX):

The expense ratio is 0.17%, or $17 for every $10,000 invested, and the minimum initial investment is $100.

And for those of you who want to look beyond the US borders…

International Stock Index Funds:

Vanguard Total International Stock Index (VGTSX):

The expense ratio is 0.19%, or $19 for every $10,000 invested, and the minimum initial investment is $3,000.

Schwab International Index Fund (SWISX):

The expense ratio is 0.19%, or $19 for every $10,000 invested, and the minimum initial investment is $100.

Let’s discuss two other types of funds that are less commonly invested in, but may be of interest to some, especially if you’re not going to invest in individual stocks and have a 25% void to fill (rather than making your S&P 500 fund, mid cap fund, and small cap fund 33% each which is a completely reasonable option).

You have never heard of micro cap companies/funds (if you don’t read all my posts—shame on you, reader—or have a faulty memory), but as hinted at they are smaller than small cap companies/funds.

A Quick review:

Mega caps>$200-$300 billion in market capitalization (remember that?) (it’s arguable on the cutoff especially since it’s a newer term that holds no real value in terms of funds, etc being set up to follow just these companies since there is no significant growth in these companies given how big they already are)

Large caps>$10 billion

Mid caps=$2 billion-$10 billion

Small caps=$300 ($500) million-$2 billion

Micro caps=$50 million-$300 million (or $500 million depending on who you ask/use as a resource)

Nano caps<$50 million

There are no true micro cap indexes as the two best known (the Russell Micro Cap Index and the Dow Jones Wilshire US Micro Cap Index) also include small cap companies in them thus skewing what the performance of the micro cap market actually is which makes it difficult or even impossible to see how your micro cap fund is doing versus all micro cap companies en toto.

And just forget the tracking of nano caps.

Micro Cap Index Funds:

For a relative unknown group of companies, there are dozens upon dozens of choices in the micro cap index fund world. So, good luck in your search at this market capitalization level of funds since it’s likely you may not know any of the component companies in these funds.

Bond Index Funds*:

Vanguard Total Bond Index (VBMFX):

The expense ratio is 0.16%, or $16 for every $10,000 invested, and the minimum initial investment is $3,000.

Northern Bond Index (NOBOX):

The expense ratio is 0.16%, or $16 for every $10,000 invested, and the minimum initial investment is $2,500.

*I loathe bond index funds as mentioned earlier as they combine the downside of low returns of bonds with the relative higher risk of mutual funds. But for the sake of completeness, the above are some inexpensive bond funds.

Blech!

As you can see, there are quite a few Vanguard funds here which is not surprising as they made their name and fortune on low cost index funds as others ridiculed them for it. Vanguard got the last laugh as it is now the largest fund family in the world with over a TRILLION dollars invested with them (AKA assets under management AKA AUM).

Certainly, there is no reason to invest in only the Vanguard funds alone as they are not always the cheapest as you can see from the above listings, but for the sake of convenience, Vanguard is as close as you can get to a one stop shop for all you low cost index fund shopping needs. Is that slightly increased cost on 1-2 funds worth less hassle than a few funds under Vanguard and then one under another fund family and yet one more under a third fund family? Only you can answer that question for yourself.

Well, that should about do it for this post.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Brick Upon Brick Redux

Never forget these two axioms:

 

Money frees us, but its pursuit may enslave us.

 

It’s not how much you have at the end; it’s how much you could have made.

 

Portfolio Building, Part V: Brick Upon Brick

After significant deliberation, I decided to re-post this from weeks ago with some key additions to the post to better explain the caveats and even pitfalls with certain aspects of portfolio building.

 My apologies for not thinking this through fully to have it in the first time, but I hope the additions are worth your time the second time around or for new guests, consider this the Greatest Post in Investing Blog History.

So here we go (again)… 

We talked about various fund only portfolios, but not one with stocks mixed in which is a good way to help increase your returns above what the S&P 500 as long as you understand there is at least a commensurate (nice SAT word, nerd!) increase in risk if not more.

An easy way to set up a retirement portfolio is to do the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks

There it is.

That’s it.

That’s all there it is to do to retire on Easy Street.

That simple.

Well, I guess I should close down the blog now.

 

What?

Wait, you want to know more?

OK then.

Let’s get started.

Let me introduce you to the brilliant David Fish  (RIP to the recently departed King of Dividend Investing) who spent the past decade plus compiling publicly traded companies who kept increasing the dividend yearly for a string of consecutive years while you were learning about the difference between Golgi apparati and mitochondria and the finer points of the brachial plexus. Fish has categorized these companies that have increased their dividends to their shareholders year after year by the number of years that the dividend increases have taken place.

Dividend Challengers: the last consecutive 5-9 years

Dividend Contenders: the last consecutive 10-24 years

Dividend Champions: the last consecutive 25+ years

Then, to add to the confusion, there’s another overlapping category:

Dividend Aristocrats: the last consecutive 25+ years

SR: Umm…that’s the same thing there, Captain.

To explain, the Standard and Poor’s (remember them?) put together the Dividend Aristocrat Index with the principal difference between the David Fish’s Dividend Champions and the S&P’s DIvidend Aristocrats is the latter, not surprisingly, only contains companies in the S&P 500..

SR: The fix is in…

Dr. Scared: This is it!! This is how they screw you!!

PWT: Uuh..yeah..so anyway…

…whereas the Dividend Champions are any publicly traded companies on any index that fulfill the criteria as stated above (ie, increasing their dividend each consecutive for 25 years or greater). Therefore with this difference, there is a sizable difference between the Champions (115) and Aristocrats (53).

This “CCC” list is updated at the end of each month  by David Fish to ensure if a company has not increased their dividend in consecutive years or, even better, if a company has increased its dividend in enough consecutive years to be listed in any of the above categories.

To be able to not just maintain the same dividend, but actually increase it year after year, especially after a quarter of a century or even longer is beyond remarkable, In fact, it’s stunning when you think about it. These companies would have not just survived, but actually thrived, in all sorts of conditions including recessions, wars, new competitors, changing technology, etc.

Let’s take a look at the dividend aristocrats in particular.

These 53 are large companies (multi-billion dollars in market capitalization) that have survived and even thrived through all the gyrations of the market and nation since their respective inceptions. These companies have few opportunities for significant growth because of how massive they are already, but make you lots of money in the long term even if their share price barely budge over the years. (One way to think of it is like this: ideally, the company whose stock you own keeps jacking up their dividend year after year with the stock price barely moving     allowing you to buy more and more stock, and then three months before you retire it triples in value. This would be epically awesome AKA The Unattainable Dream.)

As noted before, the beauty of dividend investing is getting paid to buy a company’s stock and then be patient to continue to get paid during which time the more stock you buy, the more dividend it generates thus leading to more cash to buy even more stock leading to an upward spiral of stock/dividend/cash which is a beautiful thing to behold.

Here is an example of ten Dividend Champions along with the number of consecutive years that dividends were raised (and placed in descending order of those number of years) :

3M–59

Coca-Cola–55

Johnson & Johnson–55

Colgate Palmolive–54

*Altria (Tobacco company; formerly Phillip Morris)–48

McDonald’s–42

RLI (Insurance Company)–42

Clorox–40

ExxonMobil–35

AT&T–34

*Altria is the one company above that is not in the S&P 500 thus making this a list of DIvidend Champions, not Aristocrats, to be technically correct.

It’s a pretty well diversified group that virtually every American purchases from at one point or another throughout any given year. If most or all of these companies go down, then you don’t have a portfolio problem, you have a national/global economic crisis (see 2008-2009).

So, in a portfolio sense, it would break down as the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks with each of the ten above stocks receiving 2.5% each (also make sure all dividends in these stocks and even the funds above are set up to automatically be reinvested back into whatever stock or fund they came from)

Just make sure you regularly invest into the above four categories or thirteen discrete securities consistently (ie, monthly or even more frequently, not any less frequently than monthly however—more on the mechanics and logistics of stock/fund purchasing in a later post).

Then just sit back and watch the returns roll in.

Several caveats:

1,) Realize that the above percentages (25% for each category with 2.5% of each stock) is how it will start, but not likely how it will be in 2, 5, 10, or a greater number of years. Stocks and funds will fluctuate and will also generate dividends in varying amounts at varying times which should then be purchasing those same stocks and funds at varying prices.WIth differences like that, it’s inevitable that some equities will race ahead of others over years to decades.

2.) This inequity in your equities (HA! I’m here all week folks!) may be perfectly fine and isn’t dangerous or problematic in of its own though some people rebalance their investments by shifting how much they pay into each equity to keep them the same as much  as possible (OCD much?). Rebalancing these equities will take constant monitoring and not an insignificant amount of calculating/effort to do so which is totally contrary to what any of us would like and certainly not the whole point of the “build it and feed it and otherwise leave it alone” system of retirement investing.

The one thing to note as equities separate out from one another is to realize that the inequity is blunted by the fact that the most expensive ones will wind up gaining fewer and fewer shares with each purchase due to their share prices relative to the other cheaper ones.

3.) Do NOT fall into the trap of changing your equal contribution towards the best performing equities and away from others. The point of having equal contributions is to have your savings spread out throughout the US or even global economy in case of fluctuations and especially in case of downturns. What is well performing one quarter or year or even decade may stall or even recede suddenly at the exact time where you keep putting in more and more money into that very equity. Don’t let market fluctuations in the short term distract you from a solid-great plan that will thrive over 25-35 years, not 25-35  days or even 25-35 months.

4.) A good argument against the above portfolio is that owning shares of mega cap companies in addition to a S&P 500 fund is that they are both representative of large cap companies which is now 50% of the portfolio with mid caps and small caps at 25% each. In addition, some people are just not comfortable with owning stocks of individual companies which I think is personally fine. Do what you’re comfortable with and not what you think you should be doing. None of this is worth having reflux or insomnia over. That is an absolute certitude.     

Before we finish, it’s time for a little shouting however.

THE DIVIDEND CHAMPIONS I CHOSE ARE PURELY ARBITRARY OTHER THAN BEING WELL KNOWN COMPANIES AND DO NOT AT ALL REFLECT MY CHOICES OF WHAT A GOOD INVESTMENT CONSTITUTE. DO NOT THINK IN ANY WAY, SHAPE, OR FORM THAT I AM PROMOTING ANY ONE OF THESE COMPANIES FOR ANY PERSON TO BUY.

END OF YELLING DISCLAIMER…

Thanks for tolerating my CYA tirade!

We will discuss evaluating individual stocks in a future post however.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Building on The Foundation: Portfolio Building, Part IV A

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part IV A

Sorry everyone. The posting will be a little sparse for the next weeks as I am in the midst of a ten day stretch in the ICU (12-14 hour stretches/day!) and then a short vacation promised to Mrs. PWT for some well deserved R&R.

“Gotta make money to save money” said some financially literate rapper…probably…or at least he should have…

Let’s delve into some alternative retirement portfolios that may interest you for better long term gains.

Here was the original proposed simple retirement portfolio from a prior post.

30% S&P 500 Index Fund

20% Mid Cap (Blended) Fund

20% Small Cap Blended Fund

20% Bonds

10% Cash

Note one thing: There is no large cap fund included in the above for the simple reason that the large cap fund in this case is the S&P 500 index fund. Having both would be a complete overlap of the same companies that would raise your risk of loss, but not necessarily enhance your gains beyond having all of that same money in just the S&P 500 index fund.

Let’s assume that you want higher returns than bonds and either eliminate that 20% completely or at least greatly reduce it (making up a figure here arbitrarily) to 5%.

Now, you have 15-20% extra to deal with.

Woo Hoo!!

The S&P 500, mid cap, and small cap funds have covered the US extremely well, so one way to go forward could be international funds. (Other options will be discussed in future post [s].) Your risk tolerance should be the guide to how much of that 20% (all? 15%, 10%, 5%., 0% AKA America is where I made my money, America is where I’m investing my money) will be invested in international funds.

Let’s discuss what “international” means for a moment. If you’re investing in solely US companies, don’t accept the criticism that you’re a nativist, xenophobic bigot (though you may be for entirely different reasons…I try not to judge…even those of you who had to look those fancy SAT words used earlier in this sentence…like “criticism”…Oh, were you thinking of some other words?).

Let’s consider your S&P 500 fund and think of some of its largest companies.  

Apple

Microsoft

Amazon

Facebook

Google (Sorry, I’m just never going to call it Alphabet)

Visa

Coca-Cola

Disney

McDonald’s

Walmart

These are all definitely US based companies, But, even if you’ve never traveled abroad (please do when you can though), you must realize that each of these companies generate billions upon billions of dollars from international markets. It’s no different than (Royal Dutch) Shell, BP (British Petroleum), or BMW (Bavarian Motor Works) making money in the US. The lines between what is a purely US company and a “foreign” company has been blurred with ongoing globalization. All multi-billion dollar companies throughout the world are truly international now. It makes sense: supply follow demand…and now with countries around the globe with rising incomes and increasing standards of living, goods from all around the world are being sold…uh, all around the world.

So, in summary, if you’re fearful of being invested in “international” stocks/funds, but are still regretful of not taking advantage of the global economy, don’t fret. You’re doing a lot more international investing/commerce/trade than you think are.

However, if you want into jump of the non-US part of the world pool (I’m not so great at metaphors), read on further…in the next post…

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

 

Brick Upon Brick: How to Consider Starting a Portfolio with Stocks in It

 

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

The blessing (for me) and curse (for all of you) is that when I run into  insurmountable obstacles like endless revisions on the alternative funds only portfolios I can just move forward in time to a future post and then jump back in time  (like this guy) once I smooth out issues with what was supposed to be the prior post (Sorry if this makes no sense).

ANYWAY…here’s a discussion on portfolios with stocks…

Portfolio Building, Part V

We talked about various fund only portfolios, but not one with stocks mixed in which is a good way to help increase your returns above what the S&P 500 as long as you understand there is at least a commensurate (nice SAT word, nerd!) increase in risk if not more.

An easy way to set up a retirement portfolio is to do the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks

There it is.

That’s it.

That’s all there it is to do to retire on Easy Street.

That simple.

Well, I guess I should close down the blog now.

 

What?

Wait, you want to know more?

OK then.

Let’s get started.

Let me introduce you to the brilliant David Fish who spent the past decade plus compiling publicly traded companies who kept increasing the dividend yearly for a string of consecutive years while you were learning about the difference between Golgi apparati and mitochondria and the finer points of the brachial plexus. Fish has categorized these companies that have increased their dividends to their shareholders year after year by the number of years that the dividend increases have taken place.

Dividend Challengers: the last consecutive 5-9 years

Dividend Contenders: the last consecutive 10-24 years

Dividend Champions: the last consecutive 25+ years

Then, to add to the confusion, there’s another overlapping category:

Dividend Aristocrats: the last consecutive 25+ years

SR: Umm…that’s the same thing there, Captain.

To explain, the Standard and Poor’s (remember them?) put together the Dividend Aristocrat Index with the principal difference between the David Fish’s Dividend Champions and the S&P’s DIvidend Aristocrats is the latter, not surprisingly, only contains companies in the S&P 500..

SR: The fix is in…

Dr. Scared: This is it!! This is how they screw you!!

PWT: Uuh..yeah..so anyway…

…whereas the Dividend Champions are any publicly traded companies on any index that fulfill the criteria as stated above (ie, increasing their dividend each consecutive for 25 years or greater). Therefore with this difference, there is a sizable difference between the Champions (115) and Aristocrats (53).

This “CCC” list is updated at the end of each month  by David Fish to ensure if a company has not increased their dividend in consecutive years or, even better, if a company has increased its dividend in enough consecutive years to be listed in any of the above categories.

To be able to not just maintain the same dividend, but actually increase it year after year, especially after a quarter of a century or even longer is beyond remarkable, In fact, it’s stunning when you think about it. These companies would have not just survived, but actually thrived, in all sorts of conditions including recessions, wars, new competitors, changing technology, etc.

Let’s take a look at the dividend aristocrats in particular.

These 53 are large companies (multi-billion dollars in market capitalization) that have survived and even thrived through all the gyrations of the market and nation since their respective inceptions. These companies have few opportunities for significant growth because of how massive they are already, but make you lots of money in the long term even if their share price barely budge over the years. (One way to think of it is like this: ideally, the company whose stock you own keeps jacking up their dividend year after year with the stock price barely moving  allowing you to buy more and more stock, and then three months before you retire it triples in value. This would be epic and awesome AKA The Unattainable Dream.)

As noted before, the beauty of dividend investing is getting paid to buy a company’s stock and then be patient to continue to get paid during which time the more stock you buy, the more dividend it generates thus leading to more cash to buy even more stock leading to an upward spiral of stock/dividend/cash which is a beautiful thing to behold.

Here is an example of ten Dividend Champions along with the number of consecutive years that dividends were raised (and placed in descending order of those number of years) :

3M–59

Coca-Cola–55

Johnson & Johnson–55

Colgate Palmolive–54

*Altria (Tobacco company; formerly Phillip Morris)–48

McDonald’s–42

RLI (Insurance Company)–42

Clorox–40

ExxonMobil–35

AT&T–34

*Altria is the one company above that is not in the S&P 500 thus making this a list of DIvidend Champions, not Aristocrats, to be technically correct.

It’s a pretty well diversified group that virtually every American purchases from at one point or another throughout any given year. If most or all of these companies go down, then you don’t have a portfolio problem, you have a national/global economic crisis (see 2008-2009).

So, in a portfolio sense, it would break down as the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks with each of the ten above stocks receiving 2.5% each (also make sure all dividends in these stocks and even the funds above are set up to automatically be reinvested back into whatever stock or fund they came from)

Just make sure you regularly invest into the above four categories or thirteen discrete securities consistently (ie, monthly or even more frequently, not any less frequently than monthly however—more on the mechanics and logistics of stock/fund purchasing in a later post).

Then just sit back and watch the returns roll in.

Before we finish, it’s time for a little shouting however.

THE DIVIDEND CHAMPIONS I CHOSE ARE PURELY ARBITRARY OTHER THAN BEING WELL KNOWN COMPANIES AND DO NOT AT ALL REFLECT MY CHOICES OF WHAT A GOOD INVESTMENT CONSTITUTE. DO NOT THINK IN ANY WAY, SHAPE, OR FORM THAT I AM PROMOTING ANY ONE OF THESE COMPANIES FOR ANY PERSON TO BUY.

END OF YELLING DISCLAIMER…

Thanks for tolerating my CYA tirade!

We will discuss evaluating individual stocks in a future post however.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

 

Portfolio Building, Part III: More Bricks

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part III

Let’s jump right into it since some of you may have felt robbed last time you checked in. The example we used was following the rule/suggestion of 110-age=% of stocks/funds in your portfolio with you being a forty (Ugh or Yay!) year old. So 70% stocks/funds are what you will need for that age if you are following this suggestion.

If you’re not happy with a steady return that matches the S&P 500 in exchange for a modestly-moderately increased risk of loss, then here is a possible approach.

In danger of quoting myself from even just my last post….

The standard avenues in the realm of stocks/funds for returns better than the S&P 500 (drumroll please) are the following:

  1. Small cap funds
  2. Mid cap funds
  3. International funds
  4. Stocks

What proportion you want of each will depend again on your risk tolerance, but let’s have the facts laid out first before you decide anything.

Small caps have historically beaten the S&P 500 over the past century on average and in five of the past eight decades by a wide margin whereas the three decades where they underperformed relative to the S&P 500, they barely lost out to the S&P 500.

There are value and growth companies/stocks at each market capitalization level. (To make simple examples by companies that everyone should have heard of, think of Amazon or Netflix as growth stocks and Johnson & Johnson or ExxonMobil as value stocks.)

There are value or growth funds at each level. To make things more confusing, there are also “blended” funds at each market cap level. They may be labeled as blended or just have the market cap level noted without any further designation such as “Blah blah blah Small Cap Fund” (with “Blah blah blah” standing in for the name of the company’s name such as Fidelity or Vanguard as example of two well known ones—sorry to lose you in my technical jargon). If you want a simple approach where there is as few moving parts as possible, you could do the following:

30% S&P 500 Index Fund

20% Mid Cap (Blended) Fund

20% Small Cap Blended Fund

20% Bonds

10% Cash

This ensures what should be a decent return above the S&P 500, but with only a modestly higher risk of loss above the S&P 500.

International funds may increase your return, but will invariably increase your risk of loss as well. They are impossible to give you a historical return on given that there are multitudes of international funds (eg, All World, Europe, Asia, Middle East, Latin America, etc.), multiple companies (Fidelity, Vanguard, T. Rowe Price, etc.), and different investing styles/types (eg, passive, active, growth, value, mid cap, small cap, large cap). For international funds, you’ll have to find the exact one you’re thinking of and look up its historical performance data to see how it’s done over the past years or decades even.

Better yet, a financial advisor will do all of the footwork for you and advise you what to put it in. Just check how it has done for the past year, five years, ten years, and “life of the fund” (ie, however long it has been around whether 7 years or 70 years) and ask why this specific region/country (read up on the area if you know nothing about it) or why this certain investing style (value instead of growth or vice versa, small cap instead of large cap), and as ALWAYS, check the expense ratio of the fund and make sure you understand what the true returns of said fund only after you subtract out the expense ratio.

As you can see it takes a bit of work or money (the fees you pay your financial advisor) to make sure you’re putting money into the “right” (whatever that means) funds.

But, think of it this way: you work (among many other reasons) to make money or spend cash to invest in other things you value (eg, car, house, TV, phone, etc) that bring back to you enjoyment or value of many other kinds.

This work or deployed capital is exactly the same: you’re working to make money or spending money to get something in value (and, even better, something that will hopefully increase in value and not depreciate like most everything else you will buy).  

Personally, I’m an investing/personal finance nerd and enjoy finding great value in excellent funds at a good price. I don’t expect anyone else to be, but it’s important. This is your and your family’s financial future. Precious few things will be more important.

This little extra work is definitely worth it when you consider that the difference between a great company and a good company over the next 20-30 years would be enormous. Besides, it’s not supposed to be fun; after all, it’s called work for a reason. Moreover, it’s likely far easier than what you do in your day-to-day job and will pay far more years or even decades from now than a few hours of work.   

Let’s talk about several other fund only portfolios in the future.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Portfolio Building, Part II: Brick by Brick

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part II

Last time, we discussed a rule of thumb for what some have suggested is a good guide to adjusting your portfolio as you age.

110-age=% of your portfolio that should be in stocks+funds combined

Let me be clear what we are discussing here—this is all in regards to your personal investment portfolio, not your workplace retirement account (401K, 403B, 457B, etc—-much more on this in a later post).

That’s all well and good or arguable or even ultimately utter rubbish. (I think it’s a perfectly fine guide personally. For some, it may seem too aggressive in their older, post-retirement age though my counterargument is that you will likely live very long after retirement if you retire in your sixties.

What I want to focus on instead is what to do in terms of stocks and funds in your retirement portfolio regardless of what percentage they may hold.

For some of you, you already have your favorite funds or even stocks that have performed well and are way ahead of the game (or at least you hope). For others, you may not know at all and would then rely on a financial advisor to help get you into the right securities. There may be others in between that aren’t sure if they want a financial advisor (more about that in a future post), aren’t sure if what they are in via their financial advisor is best suited for them, or simply aren’t sure what their money should be in.  

One piece of advice…

The non-funds part of your investment portfolio should be held in bonds and cash. (Some cash should ALWAYS (note the absolutism employed here which is exceedingly rare for me, but is appropriate in this case) be held back for any time great investing opportunities come up such as when there is a dip in the market leading to a price of a stock or fund that is great, not just good. The bonds should be just that: bonds.

Do not confuse bonds with bond funds.

Bond funds are what they sound like—funds composed of bonds with different interest rates and maturity dates where payouts are streaming in as more purchases are made to keep profits and payouts going. Bond funds have expenses attached to them that you pay for which will lower your returns as well as the fact that bond funds can actually drop in value (often when interest rates rise since interest rates and bond prices/value are inversely related) just like mutual funds or stocks.

If you want bond funds (and, personally, I detest them as they are lower performing securities with all the disadvantages of funds [have to pay fees and can lose both your gains and even your original investment] with all the low returns of bonds), then ensure they are a component of the funds portion of your investment portfolio, not the non-funds portion, because that’s exactly what they are.   

So, let’s say you’re forty, which means you’re earning good money, possibly married, possibly with kids, and now having an investment portfolio with 70% stocks/funds, 20% bonds (which you decided to put into triple tax free municipal bonds—all of which will be local to you which would mean that specific ones cannot even be named), and 10% cash for that great deal that may be lurking around the next quarter.

So what is that 70% stocks/funds portion actually made of?

Well, that goes back to your risk tolerance and how satisfied (or unhappy) you are with matching or keeping up with the returns of the S&P 500.

If you’re really happy with just what the S&P 500 is doing, then put all 70% in a S&P 500 index fund. The key is to pick the cheapest one possible, so that fees don’t destroy your returns over the next quarter of a century (remember, for better or for worse, in this example, you’re forty years old–lot of working years ahead of you which is good as you’re at the height of your medical career and have both plenty of expenses ahead of you and plenty of time and opportunities to hit your Magic Number).

If you’re seeking bigger/better returns than the S&P 500 provides, there are a few avenues available to you as long as you realize that necessarily this increases risk of losing gains made elsewhere or even your original investment.  

The standard avenues in the realm of stocks/funds for returns better than the S&P 500 (drumroll please) are the following:

  1. Small cap funds
  2. Mid cap funds
  3. International funds
  4. Stocks

SR: WHy the hell would I want to invest in ball cap companies? I don’t even like wearing them.

PWT: Oh boy…

You’ll see all publicly traded companies characterized by what is known as market capitalization. Market capitalization in a publicly traded company is calculated by multiplying the number of shares available for trading/sale (ie, the outstanding shares) times the share price of the stock. Since the stock price varies from day to day, obviously the market capitalization of any company varies daily as well (even hour to hour or by the minute). (Market capitalization isn’t a great way to value a company for multiple reasons including the fact that it doesn’t take into account the debt the company carries at any given time, but more on this at a later post).

Small market capitalization companies (ie, small caps)=<$2 billion

And two lesser used company terms:

Nano caps<$50 million

Micro caps=$50 million-$2 billion

Mid caps=$2 billion-$10 billion

Large caps>$10 billion

Mega caps>$200-$300 billion (it’s arguable on the cutoff especially since it’s a newer term that holds no real value in terms of funds, etc being set up to follow just these companies since there is no growth in these companies given how big they already are)

SR: I guess a million dollars isn’t what it used to be…

PWT: Yeah. Tell me about it.N

Now that we have reached a climax, let me disappoint you all and we will conclude building a market beating portfolio (or, at least, we hope) next post.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…