Portfolio Inspiration

I just returned from a trip to Tokyo, and it was an inspiration. The city is a gem. The trip reminded me that being a good investor requires looking through time with a long lens, just as the Japanese did when rebuilding their city after the devastation of earthquake and war. Tokyo has tall buildings that are designed to withstand earthquakes, a public transportation system that runs like a finely tuned machine, and architecture that is both spacious and pleasing to the eye. Tokyo is a fine example of modern aspirations with a subtle nod to historic sympathy. Likewise, a well-designed investment portfolio is built to withstand market shocks, the up's and downs of sentiment, have timely income, and something that is performing to please the eye. A portfolio that has these characteristics can be built from a blend of stocks, bonds, and cash, and when done right, at-least for the investor, it can be an inspiration.

My model portfolio consists of a blend of index ETF's that is 60% stock, 30% bonds and 10% cash. It consists of a fixed blend of index ETF's displayed in this newsletter left column. Morningstar, the mutual fund rating agency, rates a portfolio of this construction to be of moderate risk, and it has steadily performed in the top 90% of the category for 3, 5, and 10 years. It is designed to work in up and down markets, provide a steady and growing stream of income, and have elements that are pleasing to the eye. The beautiful thing about this portfolio is the risk and return profile can be tuned, for greater return and growth, or for less market risk and income. The performance is good because the fee's are very low, and the investor is fairly rewarded for the risk they bear.

The difficulty that most investors have is sticking with an investment discipline. This is the primary reason they need the help of a good investment advisor. A good advisor doesn't need to have the next great stock idea, it helps of course, but primarily they need discipline. This discipline is gained by long hours of studying hundreds of stocks, studying the statistics and history of the markets, learning to understand finance, watching the markets go up and down in real time with their capital at risk. If an advisor can learn to maintain discipline, and keep a long-term perspective, they will have the skills necessary to offer valuable investment advice.

At their core, stocks and bonds are just vehicles for financing a company with different risk profiles. By taking a class in finance you can be trained to price stocks and bonds based on known risk factors. Primarily what you learn is that the buyers of stocks and bonds are just charging a finance cost that is commensurate with the risk they believe they are undertaking. If there is a great amount of risk in the enterprise, the investor will expect a greater return and wish to participate in the growth of the company through stock. If it is a stable business with steady but low growth they will take bonds for income. The difficulty is knowing which blend best fits a company and how much return should be expected. Fortunately, there are many models and case studies that have been developed to help, but there is always the risk of the unknown, sometimes you get it right and sometimes you get it wrong. If you stick to the discipline of using the finance models over dozens of companies you get an average that is acceptable. That is what an index is, an average of investors guesses on how to price a group of companies, and why it is the best investment vehicle for the individual who can't spend a great deal of their time trying to determine what the appropriate price for a company's stocks or bonds should be.

Unfortunately, a great deal of investors, brokers, and "advisors" haven't spent the time to learn these lessons. They believe they can guess or follow the crowd well enough to offer their advice to others. It's just big promises, splashy charts, and a bunch of luck. Of the 50% that beat the market averages in one year or another, only 20-30% of professional managers do, and just 1% can perform that trick consistently for 5,10, and 20 years. Those are published facts. Just being average beats the pro's 70%-80% of the time, so why give away 1-2% of that return to them? The stock market is offering a 7-8% return outlook for the next ten years with average swings of 20% up or down from year to year. A fair return for that 20% price risk is 7-8%, not 5-6%. If you are very lucky you will find an advisor or a fund manager who at least earns their fee and produces market returns or marginally better over 3 plus years. To do this the statistics show that the fees you pay should be less than .5% to provide you with a better than average shot at those returns for the risk you bear. (Trade secret: fee's like that don't pay for fancy cherry wood paneled offices in tall building suites overlooking financial districts.)

Although I've worked professionally in the investment world for over 25 years I became excited to offer my services as an independent investment advisor in early 2005 with the advent of Vanguards low cost index ETF's. I knew that this was the best path forward for individual investors. Combined with the power of dollar cost averaging and asset class selection it's a mix that is hard to beat. Vanguard Index ETFs have fee's less than .15%, and with my reasonable hourly charge to help construct and maintain a balanced portfolio even clients with amounts as little as $10,000 to invest can get started earning fair market returns.

For me, a well-designed portfolio, constructed from low cost ETF's is as inspiring as a visit to Tokyo. If your curious how I can help you feel the same, give me a call or send me an email.

Bonus Tip

As I suggested in my year end letter, tax loss selling was used up at the end of 2017, and gains have harvested in the first quarter of 2018 putting downward pressure on stock prices. Now that the tax man has been paid, good first quarter earning are being reported, and higher interest rates are being discounted the market should grind higher in the second half. Just be aware with higher interest rates comes higher market volatility.