I don't spend a lot of time on this site discussing portfolio construction. This is mostly because I think I can give people more bang for their reading buck talking about financial planning kind of stuff like getting your savings rate right, managing student loans well, and utilizing tax-protected accounts to the maximum. However, I am also quite liberal in what I consider to be a reasonable portfolio. I'm a true believer that there are many roads to Dublin.
Reasonable vs Not Reasonable Portfolio
However, I think it is time to point out something that to me is very obvious but clearly is not obvious to everyone. There are certain people in this world with some very….ahem….unique (i.e. extreme) political, economic, and investing viewpoints. Sometimes these people sound VERY smart on their blogs, in comments, or on internet forums. They rattle off all kinds of interesting economic factoids, throw out a lot of fancy acronyms that you've never heard of, and suggest that they're in the know about the future and you are not. What I prefer to do when I run into people like this is to simply ask them what their asset allocation is. Having looked at thousands of portfolios over the years, I've gotten pretty good at identifying “Reasonable vs Not Reasonable”. It's a little bit like the classic emergency physician (or really hopefully any physician) skill of “Sick vs Not Sick”. You might not know what the patient's diagnosis is, but that doesn't mean you can't (and better) start treating them and you sure as heck don't send them home with reassurance.
Examples of Not Reasonable Portfolios
Let me give you some examples of portfolios that are being used or recommended by some of these folks:
- 1/3 Land (not income property, just vacant land)
- 1/3 Gold (not a gold ETF, not coins, the actual bullion)
- 1/3 Fine Art (not an art fund, the actual paintings)
I'm not going to bother arguing about the reasons the investor gave for this portfolio, I'm just going to tell it like it is. This portfolio is stupid. If this is your portfolio, you have a very good chance of not meeting any sort of reasonable financial goals unless you have a truly extreme savings rate. Costs (transaction, storage, insurance, etc.) are high, the “investments” are 100% speculative, and the tax treatment is poor. Here's another one:
- 1% Gold Mining Stocks (using an actively managed mutual fund with an expense ratio of 1.5%)
- 44% Gold Bullion
- 55% Treasury Bills (essentially cash)
Now, if you knew for sure that the stock market was going to drop 90% next week, the bond market was going to drop 50% immediately afterward, and that real estate was going to be sold for pennies on the dollar 3 months from now, this portfolio might make some sense. But the number of future economic scenarios where this is the right portfolio are so limited that this portfolio is also pretty darn nutty. One more:
- 7.5% Commodities
- 7.5% Gold Mining Stocks
- 7.5% Emerging Market Stocks
- 15% “Rare Physical Assets”
- 5% “Hobby Trading Account” (primarily used to short miners, commodities, and stocks)
- 5% TIPS
- 52.5% Money Market Fund (cash)
You can't make this stuff up. 15% stocks (but ignoring 95% of the market), 5% bonds, 27.5% alternatives and over 50% cash. The best part is the shorting of the assets that are held long elsewhere in the portfolio.
Choice and Consequences
These don't seem to be dumb people. If you listened to them make comments and talk about economics and politics they seem to read a lot. But it is very clear that they don't understand even the basics of portfolio construction and have very extreme views on the future.
Some of these folks are “permabears”, some are “goldbugs”, and others are conspiracy theorists. Sometimes all three at once. But they don't seem to have insight into the fact that just being a contrarian doesn't somehow guarantee investing success. Consider what has to happen for portfolios like these to end up being the right portfolio over the long run going forward. We're basically talking about Financial Armageddon. There isn't a lot of space between these portfolios being the right portfolio and The Walking Dead where the right asset allocation is AK-47s, bullets, and canned goods. What good are your land, gold, and paintings now?
The biggest consequence of holding portfolios like these (which are generally either hyper-conservative or composed of large amounts of collectibles, speculative instruments, and other alternative investments) is that long-term expected returns are low. It turns out that the typical investor needs to take a substantial amount of risk in order to reach her reasonable financial goals. She needs her portfolio to do a lot of the heavy lifting. She needs growth. And to get growth, you need investments with reasonably high returns. If you don't invest in those investments, you will need an extreme savings rate to reach your reasonable goals. This is why the typical 35-year-old with a portfolio that is 1/4 cash, 1/4 bonds, 1/4 gold, and 1/4 whole life insurance is almost surely making a mistake. Just how high does your savings rate have to be with a very conservative portfolio? I've discussed it before in this post. Here's one of the charts from the post illustrating what your savings rate has to be for a given return. The returns on the left side of the chart are after-inflation, after-tax, and after expenses.
| Savings Rate for 50% Pre-Retirement Income Placement | ||||||
| Years To Save | ||||||
| 15 | 20 | 25 | 30 | 35 | 40 | |
| 0% | 83.3% | 62.5% | 50.0% | 41.7% | 35.7% | 31.3% |
| 1% | 76.9% | 56.2% | 43.8% | 35.6% | 29.7% | 25.3% |
| 2% | 70.9% | 50.4% | 38.3% | 30.2% | 24.5% | 20.3% |
| 3% | 65.3% | 45.2% | 33.3% | 25.5% | 20.1% | 16.1% |
| 4% | 60.0% | 40.4% | 28.9% | 21.4% | 16.3% | 12.6% |
| 5% | 55.2% | 36.0% | 24.9% | 17.9% | 13.2% | 9.9% |
| 6% | 50.7% | 32.1% | 21.5% | 14.9% | 10.6% | 7.6% |
| 7% | 46.5% | 28.5% | 18.5% | 12.4% | 8.5% | 5.9% |
| 8% | 42.6% | 25.3% | 15.8% | 10.2% | 6.7% | 4.5% |
As you can see, if you're only matching inflation after-taxes and inflation (i.e. a 0% return), and you want your portfolio to replace 50% of your pre-retirement income, you would need to save 50%+ of your income to retire early and 35-40% to retire after a full career. Compared to a 5% real return, you would have to save 2-3 times as much of your income for retirement. That's just not doable for most people. So what that means is that folks with a hyper-conservative portfolio will simply have less money. Less to spend, less to give, and less to leave to heirs. Choices have consequences.
Value Investing?
Now some of these folks consider themselves “value investors” after the mold of Warren Buffett. Never mind that Warren Buffett's “portfolio” is primarily of companies completely or mostly owned by Berkshire Hathaway, plenty of common stocks, and a large dollop of cash. No gold. No fine art. No commodities. No TIPS. If you wanted to do what the world's greatest value investor recommends, go buy an index fund.
Some of these portfolio extremists don't use a static asset allocation. They plan to change the portfolio when some vague future event happens and traditional assets like stocks, bonds, and real estate become a better deal. Don't get me wrong. I wish I could buy stocks with 5% yields, bonds with 8% yields, and Cap Rate 10 income properties too. But not only are they not available in our current economic environment, but they may never again be available. If you decide to wait for that moment, you could be waiting (and missing out on gains from) decades of investing. You might even die first.
There is too much faith in using current valuations to predict future returns. Vanguard did a little study [link no longer available] to see just how much predictive value the Price to Earnings (P/E) ratio of stocks had with regard to future returns. They found that stock valuations had almost no (explained less than 10% of the variance) predictive value in returns over the next 1 year, and only moderate (38-43% of the variance) predictive value over the next decade. Other markers of valuation were even less useful. You don't know what the future holds and neither does anybody else.
Timing the Market?
It turns out that timing the market, getting out before prices drop and getting back in before they rise is exceedingly difficult to do successfully in the long run, especially after you take into account the expenses, taxes, time, and effort of doing so. You have to be right twice—when you get out and when you get back in. If you really possess this skill, there's no reason you should keep it to yourself and your measly 6 or 7 figure portfolio. You should be running billions of dollars and will be handsomely rewarded for doing so. In fact, you should use extreme amounts of leverage and you will soon control a large share of the world's wealth. If you're so smart, how come you're not rich?
Even some of the brightest economic minds in the country can't seem to predict the future. Exhibit A: Alan Greenspan's Irrational Exuberance speech was given December 5th, 1996. If you had pulled your money out of the market then and kept it out, you would have missed out on a 108% gain over the next 3 years. If you managed to stay in “like a fool” you doubled your money.
“But then the market crashed,” you say. Sure. It went down from 2000-2002. But if you had just stayed put, even without any new contributions, you still ended up with annualized return of 4.42% over that 6 year period. Going to cash wouldn't have given you a different result. If you stayed the course for a couple more years, that increased to 7.62%. Bailing out of a bull market early can be almost as damaging to your long-term returns as selling out in a bear market.
Consider the Future
When building your portfolio, you need to consider a few things. First, what are all the potential economic futures that may lie ahead of us. Which ones do you think are most likely? How likely are they? What are the consequences of you being wrong? What should your asset allocation be in order to reach your financial goals in as large a percentage of future economic scenarios as possible? Anybody who honestly contemplates the answer to these questions is likely to end up with a reasonable portfolio such as one of these 150 portfolios. Moderation is your friend. Extremism is your enemy.
A wet canyon on New Year's Day is for extremists. Investing is not.
Most readers of this blog are still going to be fine, even in an extreme future economic scenario. If I permanently lost 75% of the value of my stocks, 50% of the value of my bonds, half of my home equity, and my entire business, I would still be a millionaire. Per the 2013 Census, the average net worth of someone my age is $46K. And that's in the US, perhaps the richest country in the history of the world. We may have hyperinflation and an unemployment rate of 30%, but I'm still going to be able to find work. I became a millionaire within 7 years once. I can do it again. I've got skillz to pay the billz. And so do most of you. So why would you invest like even a terrible economic future is going to somehow destroy you? It's not. And if it does, you're still going to be way better off than the vast majority. People talk about tracking error (basically that your portfolio doesn't perform like most people's portfolios) like it is inconsequential. It isn't. If you lose a bunch of money but so does everyone else, you're still just as wealthy relatively speaking. But missing out on a 100% gain because you read the wrong blogs and watch the wrong Youtube videos? That's going to affect your relative wealth.
Avoiding Extreme Portfolios
Do you have an extreme portfolio? Here are a few questions to ask yourself. If you can honestly answer “no” to each of them, then you don't have an extreme portfolio.
# 1 Do You Have Less than 50% of Your Assets in Some Combination of Stocks, Bonds, and Real Estate?
If more than 50% of your portfolio is “alternatives”, you're probably making a mistake.
# 2 Do You Have Less than 25% of Your Portfolio in Risky Assets with a High Expected Return like Stocks and Real Estate?
Taking inadequate levels of risk is a good way to fail to reach your investment goals. Even a retiree needs some assets likely to best inflation in the long run.
# 3 Do You Have More than 20% of Your Portfolio in “Speculative” Investments That Don't Make Money and Rely Completely on the “Greater Fool” Theory to Generate a Return?
These include commodities, precious metals, non-income producing real estate, currencies, cryptocurrencies, and other collectibles.
# 4 Are You Invested in Fewer than 20 Individual Securities?
Failing to diversify is a rookie mistake. Individual security risk is an uncompensated risk. Come on people, this is Investing 101.
# 5 Does Any Individual Security or Property Make Up More than 5% of Your Portfolio?
If you don't sit on the board or haven't eaten dinner with all of the other owners of a business, there is no excuse for having more than 5% of your money in it.
# 6 Do You Own Fewer than Three Asset Classes?
Diversification is one of the few free lunches out there, both within an asset class and between them.
This portfolio construction stuff isn't that hard. Pick something reasonable, fund it adequately, keep your costs and taxes down, and stay the course with it for a few decades and you'll be able to reach your reasonable financial goals. If you run into someone that sounds smart but has some extreme economic views, ask them what their asset allocation is. If it doesn't meet these criteria, they're probably all hat and no cattle, even if they're occasional right about short-term market movements. Even a broken clock is right twice a day and even a blind squirrel can find a nut.
What do you think? What criteria would you use to identify an “extreme” or “unreasonable” portfolio? Comment below!
Funny timing on this article. I was having a conversation with a fellow doc the other day whose spouse is a bit of a “dooms-dayer.” The spouse doesn’t like to put money into the market outside of their retirement accounts at work. Further, this spouse doesn’t want to pay off their student loans in whole (despite having the money in the bank to just send a check and have plenty left for an emergency fund).
I explained to my fellow doc that if their spouse really felt this way, why weren’t they buying guns, ammunition, canned food, and water? If they really think it’s all going to collapse at some point, that cash will be worth next to zero. And they aren’t achieving financial goals that will allow them to retire in the good chance that the zombie apocalypse doesn’t happen.
Invest in the market, because there is no better “sure thing.” If the economy collapses, the market will be just as dead as the cash in the bank that you can’t get because the bank closed, too. Go buy some guns, ammunition, food, and water. Then, go buy some index funds.
Fear is a strong motivator of stupid, in my opinion. Knowledge and logical extension of the facts does just the opposite.
Also buy/ acquire gardening and home food prep tools, and training on same.
Had a question on #4 about being invested in fewer than 20 individual securities. Do you mean if you were investing in individual stocks you need more than 20? And just owning one mutual index fund such as a total market index fund would satisfy that criteria correct?
It is shocking that those are real examples of portfolios you provided. If any of those portfolios ends up being the winner in the long run it means that the entire economy as we know it would have gone to help in a major apocalyptic event and it probably wouldn’t even matter
Yes.
I have known several docs that espoused the permabear philosophy. They buy gold and silver. I do not understand the mindset. Do statistics apply to everything except your retirement portfolio? I know people who have lost lots of money buying restaurants, nightclubs, and property development which were all businesses they did not fully understand. A too conservative portfolio is as bad as a too risky one. To be a successful investor you really need a fair dose of optimism.
Does anyone have an opinion about 100% index funds? VTSAX or something similar? JL Collins made a decent argument for it but I’m not sure if that counts as “extreme”.
The scenario would be a 30 something high income earner with a high savings rate just trying to keep things simple. Plan to reach FI by 38 but would likely keep working. Is there a big downside to this plan?
Hey Dr ER Ohio,
I am a big fan of jlcollinsnh.com Stock Series. His recommendation here is sound, though you’ll accept moderately greater portfolio volatility than is necessary for the expected return. If you were looking for a nearly-all-stock portfolio that get’s you onto the efficient frontier of asset allocation (meaning you’re maximizing return and minimizing volatility) I might consider these benchmarks: 75% of the investment portfolio in VTSAX, 7% in VEMAX (emerging markets admiral shares), 8% in VTMGX (developed overseas markets admiral shares), 5% in VAIPX (TIPS admiral shares), and 5% in VFIUX (Intermediate term treasury admiral shares). Based on 10-year historical returns, the all VTSAX portfolio would return 9.74%. The portfolio above on the same timeframe would return 8.025% but with considerably reduced volatility.
It will always be the case that the more volatility you’re willing to accept in your portfolio, the greater your expected returns. So another good way to look at this would be the all-stock portfolio balanced by a sizable cash position, a monthly budget that can be operated way below your current income, and perhaps a paid-off home. Then, rather than trying to take volatility out of the portfolio and thereby reduce your returns, you take volatility out of your life.
Basically, you want the strongest stock allocation with which you can stick to your investment policy through any kind of market conditions and sleep well at night. And if you’re in an all-stock portfolio, to be “certain” of realizing the outsize returns, you need to view it as ten-to-twenty-year money, money you are quite sure you won’t need for at least ten or twenty years.
Hope that helps!
Matt
Thanks Matt! I really appreciate the feedback.
if your portfolio is all Vanguard, is that truly diversification? what happens if Vanguard goes under? extremely unlikely, but it could happen. btw, half my portfolio is there 🙂
Are you familiar with the term “too big to fail?” Vanguard is definitely too big to fail, at least without the US government going too. At any rate, I guess if I were really worried I could go over to Schwab or Fidelity with some of my assets. Truth be told, I’ve got almost half my assets somewhere besides Vanguard, well, kind of. Does it count if it is a Vanguard ETF held at Schwab? 🙂
Just have aside from the 100% index (stock I presume, but even stock/ bond mix might not be helpful when you need a new car or new job abruptly) funds an emergency fund and insurance that provides same (disability and life when applicable). So not really 100% of investing, but 100% of retirement funds. (The emergency fund is not for retirement, unless planning to retire at 40.)
All good rules except #3 which is a little too broad about questioning having over 20% in something like gold- the Permanent Portfolio (which is listed as one of the REASONABLE PORTFOLIOS)- has 25% in gold.
25% Vanguard Total Stock Market Index Fund
25% Vanguard Long-term Treasury Fund
25% Gold ETF (GLD) or, better yet, gold bullion
25% Vanguard Prime Money Market Fund
I share the skepticism towards gold- I don’t own any and can’t understand why it has been such a big deal for centuries — but my opinion clearly does not matter. Both the Permanent Portfolio and the Golden Butterfly portfolio (20% each of the small cap, total domestic stock, short term and long term bonds and Gold) show how substantial positions in “greater fool” assets can be very powerful in a portfolio. (Www.portfoliocharts.com)
Gold used to be the monetary benchmark (reserve requirements) for currencies. Safety in gold was it could be exchanged for any currency. Emotional attachment used for sales pitch now.
I was having a conversation with a very successful/busy local Doc, and I mentioned the recent market performance. He responded quietly under his breath that only idiots invest in the stock market. I didn’t pursue my questioning as to why he feels this way or what the heck does he invest in. He’s a reasonable guy but perhaps he harbors some conspiracy theory mindset. I don’t get it.
A lot of doctors want to invest in an extreme way. I think they reason that they are smart and can study things and therefore can learn how to do better than most. Even though some extreme portfolios will outperform, we don’t know which one. Also, the emotional resolve to hold steady during enormous tracking errors is more than most doctors can muster.
I love the six question list. I was glad to see my investing isn’t extreme by that definition.
Simply over confident. Years of medical education, residency, fellowship(s) leave a new attending with a lot to learn from experience. With all that , why do world class skills in a sub-specialty ever refer a patient to another doctor? Because it’s not within the scope of his field and it might take years to gain the expertise.
A Nobel laureate has some expertise in his sub-specialty. It was behavioral finance related to investments. Not qualified as an RIA, CFP, analyst, portfolio mgr, or a trader. Might not know how to price options nor hedge a portfolio. Knowledge is gained through years of experience, usually involving mentors and a team.
The ability to understand one exotic play is great.
What about the thousand other potential outcomes?
The more complicated the operation or an investment, the more likely something goes wrong.
That is when the years of training and experience come in. Complicated should be used only when necessary and is expensive with risk.
Oh, hey, #1 is the rebuttal from one of your ACEPNow! articles! I had a good laugh when I read that. His argument for the 1/3 land, 1/3 gold, 1/3 fine art portfolio was that “this is what allowed the nobility of Europe to maintain their wealth for a thousand years, through war, regime changes, and market crashes”, which just goes to show that not only does he completely not understand the modern market, he ALSO does not know any actual history. Honestly.
The one long and short similar assets takes the cake. How does that even make sense? Theyre all expensive exposures as well, and shorting comes with a borrow cost. I wonder what the fees on that portfolio are. Insanity.
Comment deleted at poster’s request.
WCI this is a very good summary of smart investing. Thanks. I remember having a conversation with a doctor in the doctor’s lounge, back when we still had those, and we were watching TV when the announcer discussed the huge returns the stock market had in the last two years. This other doctor stated, “Too bad I don’t have anything in the stock market. That would have been a nice gain.” There are many doctors who just don’t know what to do so they do nothing. Others follow the bad advice you stated above. It’s sad that we are such an educated group and yet we don’t do anything about getting financially educated. We just have to keep getting the word out and saving them one doctor at a time. I guess I should get my fourth book published sooner rather than later.
Dr. Cory S. Fawcett
Prescription for Financial Success
Ironically many of these “conservative” portfolios, are actually quite risky if your long term goal is to ensure you have enough assets to last until you die. They may be comforting in the short term, but over the long term they are likely to be very painful.
I think a lot of these extreme (or frankly bizarre) portfolios stem from the fact that many people just can’t accept that the straight road (low cost funds of traditional assets like stocks, bonds, and real estate) is the fastest way to financial independence. To quote William Bernstein “When done properly investing is as exciting as watching paint dry”.
Good investing isn’t complicated or exciting, it just takes time and discipline. But for some reason, a lot of people, even really smart people, have a hard time making peace with that idea.
-Ray
There got to be some success stories out there, maybe some one had 500K and they made 25 million in 2 decades with that portfolio? Maybe some one won 300 million dollar lottery. Dont criticize me, I am all passive index funder…
Laughed out loud with “AK-47s, bullets, and canned goods”
too many docs think they can beat the market
the least schools can do is give students some resources like white coat investor book and a book by bogle and malkiel-enough info there to get passively investing
Who has time for that level of extremity? Gold? Seriously? Seems most current docs should only have time for passive investing via pretax retirement accounts, automated transfers into fixed allocation for taxable. Set and go. I think about real estate investing occasionally but the time factor is an issue so I talk myself out of it every time.
In his book: “Bogle in mutual funds”, 1994 edition he wrote”…..But at the very least , these forecasts suggest that the return on financial assets during the 90 will almost surely fall well short of those earned during the 1980. The forecasts also suggest that the premium returns earned by common stocks over bonds could fall significantly below long term historical norms”. The stock market returns in the 80’s 17.57 %, in the 90’s was 18.17. Coming from Saint Jack you only conclude that forecasting is just impossible, even with the best indicators and the best intentions.
How have neither @Crixus or @Toe Cheeze commented on this article yet?!
I’ve never seen either of them ever comment on a blog post. They just hang out on the forum.
Well, I linked to this article in response to one of Crixus’s crazy “the world is ending” conspiracy posts. Maybe he’s finally read a WCI article now?
Maybe. It’s those forum threads and ones like them that inspired the post.
I have an “extreme” portfolio, but not by choice. I have;
28% in tax deferred stocks and bonds
17% in taxable stocks and bonds
0 Roth
28% in real estate
27% in the business I built
So less than half of my holdings are in stocks and bonds, which leaves me with hard to liquidate real estate and a business. Not ideal, but I cannot easily optimize my allocations without paying huge amounts of taxes. I may need to hold onto the real estate for my heirs to take advantage of the step up in basis at my death, but that leaves me responsible for overseeing this real estate. I would love to find a way to 1031 this into a very passive real estate investment, but don’t have any good options lined up. And the business I built is generating large profits so I want to hold onto it for a while longer, maybe just making it increasingly passive so that I can reap the profits with less work.
Why is that extreme? It doesn’t seem extreme to me.
Sounds like you may benefit from contacting some of the private real estate funds out there. They could probably help you do some 1031 exchanges into more passive investments if you want. The last deal I got into had a lot of people exchanging into it.
I plan to allocate half my portfolio to five or six market leader stocks in diverse industries that I believe can outperform the market over the next ten years. The rest would be index funds and opportunistic value/growth stocks. Would that be an extreme portfolio to you?
I’ll give you the same answer I’m giving Tim:
I’ve bought into the argument that buying individual stocks is taking on uncompensated risk. If it’s super fun for you, I guess it’s okay, but if you can really beat an index picking stocks over the long run, you should be running a mutual fund or a hedge fund. If you can’t, you shouldn’t be picking stocks. As far as the entertainment value, there are a lot of things I’d rather do than spend time pouring over earnings reports, especially if doing so actually means I’m likely to end up with LESS money!
And if you’re going to do it, six stocks? That’s a pretty big bet in each of them. You’re putting 8% of your portfolio into a single company. And then doing it again, and again, and again. Yes. I find that extreme. I mean, I guess it’s better than putting 50% of your portfolio in Apple…but just because there is a more extreme portfolio doesn’t mean yours isn’t extreme.
https://www.whitecoatinvestor.com/uncompensated-risk/
Who knows? Maybe Apple will come up with a huge dominate product. Or will a physician come up with a cure for cancer and only outsource the software and hardware and Apple becomes a supplier? Fortunes have been made and lost in concentrated investments. Mostly lost.
Yes, I agree that concentration of your bets is one way to “hit it big.” Although it is far more common for that concentration to lead to loss of wealth.
Rule of thumb:
No more than 1% in any individual stock.
Why? The “pro’s” do and have access to research both company specific and each of the competitors as well as data for market risks. The investment committee etc approve over 1%. You are likely not equally prepared. Most likely you have a “feeling”.
If luck is with you, three up and three down.
Jeff Miller is a portfolio manager out of Chicago that happened to highlight this White Coat Investor article as the “Best of the Week”.
https://seekingalpha.com/article/4177469-weighing-week-ahead-investors-ignore-shifting-geopolitical-winds
https://dashofinsight.com/
Chuck Carnevale is retired financial advisor that has a program called FastGraphs. He posts many analyses of individual stocks. The are “timely and educational” in nature focusing on fair valuation.
https://seekingalpha.com/author/chuck-carnevale/articles#regular_articles
The reason I mention this is the majority of the readers here are MD’s. Most have probably heard the slogan,
“Please don’t confuse Google with my MD”.
Great companies can be valued such that risk is actual there do to the price being too high for its future performance. Chuck posts many ideas with an analysis that demonstrates a good approach. Whether you choose to use FastGraphs or not is unimportant. The techniques help researching individual stocks.
Asset allocation is appropriate for each persons risk tolerance. White Coat Investor focuses on helpful information related to common issues for MD’s. Eat balanced meals, get plenty of exercise.
Balance meals:
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
Pick one and fill in the buckets from the menu or use some stocks for a little spice for your taste.
Plenty of exercise:
Keep reading on the different types of stocks or sectors. Some are growth, growth and income, some primarily income. ETF’s, Mutual Funds, Dividend Aristocrats, small cap, large cap, emerging markets, or foreign mature. Learn how bond’s “balance your portfolio” but will produce lower returns. That is for your benefit. Pay investment professional for specific advice, just like an attorney or a CPA.
Don’t pay an RIA for “managing your investments”, pay for specific advice.
I’ve bought into the argument that buying individual stocks is taking on uncompensated risk. If it’s super fun for you, I guess it’s okay, but if you can really beat an index picking stocks over the long run, you should be running a mutual fund or a hedge fund. If you can’t, you shouldn’t be picking stocks. As far as the entertainment value, there are a lot of things I’d rather do than spend time pouring over earnings reports, especially if doing so actually means I’m likely to end up with LESS money!
Definitely use ETF ‘s. Five extremely low cost funds can customize a personal portfolio exactly how you want. S&P 500, EFA (Europe), EEM(Emerging), IYM(small caps), AGG or LQD(bonds).
You own thousands of stocks and bonds for a fraction of the cost. NO active trader has consistently beat the market. Hedge funds can avail large distressed strategies and superior long term opportunities with higher risks. Stick with etf’s. You can play with what I call a sandbox piece. DGI (dividend growth) or sector ETF’s like tech, energy, healthcare, reits. Max sandbox is total 10%, You still have a balanced portfolio with less than 2% in one thing.
When you lose money, it’s not fun anymore.
The sandbox will close. The BENEFIT is really understanding behavior finance. Losing 1 or 2% WILL
give you confidence to stay invested through the rough times.
I see no particular advantage of low-cost, broadly diversified ETFs over other low-cost, broadly diversified traditional index funds. In fact, I prefer a total stock market fund/ETF to a 500 Index fund/ETF and a TISM Fund/ETF to EFA + EEM.
I also see little benefit to 2% of your portfolio in anything. In my opinion, if you’re not willing to dedicate 5% of portfolio to an asset class, you probably shouldn’t invest in it at all. Go get your fun somewhere else.