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A few months ago Jonathan Clements asked this question on Twitter:
It's a good question, and one I had previously spent a lot of time thinking about, particularly once a year when I rebalance my parents' portfolio, which is markedly simpler than my own, especially prior to the simplifications we made in our portfolio a year or two ago. To give you an idea what I'm talking about, here's what my parents' portfolio looks like:
- Total Stock Market 30%
- Total International Stock Market 10%
- Small Value 5%
- REIT Index 5%
- TIPS 20%
- Intermediate Bond Index 20%
- Corporate Short Term Bond Index 5%
- Prime MMF 5%
Eight asset classes, four equity, and four fixed income. It used to be seven until Prime MMF went to a yield of basically 0% for years and we split a 10% allocation to it and put some of it into short-term bonds to chase yield a little.
Meanwhile, ours looks like this:
- US Stocks 40%
- International Stocks 20%
- Real Estate 20%
- Bonds 20%
Just kidding. Kind of. I mean, those are the major divisions in our portfolio, but I've totally ignored the minor ones. You see, my parents own eight asset classes and only eight mutual funds. Katie and I have far more investments than them, and I often wonder if I should just be doing with our money what I do with theirs. That was part of the impetus for our portfolio simplification a couple of years ago. At any rate, even after the simplification (where we dropped P2P Loans, Large Value, Emerging Markets, Mid-caps, and microcaps), ours looks like this:
- Total Stock Market 25%
- Small Value 15%
- Total International 15%
- International Small 5%
- Syndicated Real Estate Equity Deals, Funds, and Websites 10% (8 holdings as I write this)
- Syndicated Real Estate Debt Deals and Funds 5% (8 holdings as I write this)
- REIT Index 5%
- TIPS 10%
- G Fund 8%
- Intermediate Muni Fund 2%
So, in answer to Clement's question, how can I justify investing differently than I recommend? I can think of four different reasons:
# 1 I Don't Have a Single Recommendation
First of all, I refute the premise in Mr. Clement's tweet. To be fair, he started his statement with “If” and it's just a tweet, so nobody should take it too seriously, but my recommendation is for people to pick a reasonable portfolio that they can stick with through thick and thin. So I guess he isn't even talking to me in the first place. When people ask me for a portfolio recommendation (and they do a lot) I tell them they need a written plan to follow and provide resources to help them develop one, from free blog posts, to an inexpensive online course, to a recommendation for a financial planner. If they just ask what I think of their portfolio, I label it either “reasonable” or “not reasonable.” I certainly follow my own recommendation to have a reasonable portfolio.
# 2 Multiple Investing Accounts
I have another problem that keeps me from having the same portfolio I might recommend to a neighbor. I have a different set of investment accounts than they do. For example, someone investing mostly in taxable is likely to have a very different set of investments from someone whose entire portfolio is in one employer's 401(k). You have to adjust for that.
# 3 Access to Investments
On a related note, I have access to investments that others may not have. For example, through my old TSP from my military days, I have access to mutual funds with sub 0.03% ERs and the “free lunch” G Fund, basically a money market fund paying 3.00% (at time of writing, Vanguard Prime MMF is paying 2.35% and was paying much less just a few months ago). Also, as an accredited investor, I have access to investments that others do not have access to. That doesn't mean those investments are always better than those available to everyone, but at least I have the chance to consider them. In addition, thanks to my level of wealth, I am able to get cheaper expense ratios on mutual funds and the minimums on accredited investments allow me to invest in them without significantly impacting the diversification of my portfolio. Like a realtor or real estate attorney might have access to some really great properties, I have access to some really great websites that are only available to me as an investment due to my inside knowledge of the industry.
# 4 I'm an Asset Class Junkie
I think the first person that I heard describe himself as an asset class junkie was Bill Bernstein. I fall into the same camp. If I think I'll get even a little bit of benefit out of moving from seven asset classes to ten, I'll do it. That said, I personally think three asset classes should be your minimum and I see a real benefit in moving from three to seven with limited benefit in moving to ten. Beyond ten, the additional complexity likely costs more than it is worth. I don't know that I need more complexity in order to stay the course and avoid my urge to tinker, but my willingness to tolerate significant complexity certainly differs from that of my neighbors.
# 5 I'm Willing to Gamble on Non-Conventional Asset Classes
Some asset classes have been around for decades or even centuries, while others may be relatively brand new. I'm willing to take a chance on an unproven asset class with a small percentage of my portfolio. Is there an element of gambling there? Probably. But it's a gamble I can afford and that I can tolerate if it doesn't work out. I think financial advisors and knowledgeable DIY investors are often hesitant to recommend these sorts of investments to others because of their new and unproven results, even if a careful analysis indicates likelihood of significant profit. I'm just not going to recommend that my neighbors try to invest in physician financial websites, but they're my best investments.
# 6 I Can Stay the Course Better Than My Neighbors
Having invested through a couple of bear markets, including one rather large one, I'm pretty familiar with my own risk tolerance. My neighbors may not even know what risk tolerance is, much less be able to determine their own. I know how I feel about tracking error; they likely do not, and even if they do, it may be different than mine. For example, my parents really didn't want more than 10% of their portfolio (20% of equity) overseas, whereas I am very comfortable with 20% (33% of equity). The bottom line is my ability to take risk is likely significantly higher than theirs, which allows me to invest differently than they do.
# 7 Invest in What You Understand
On a related note, one of the primary tenets of investing is to only invest in what you understand. The more investments you understand, the more investments are available for you to select from in building your portfolio. You certainly don't need to invest in everything to be successful; there are no called strikes in investing. But this is another good reason why I might invest differently from what I would recommend for someone else.
Despite these objections and justifications, I think Mr. Clement's point is very clear and should be carefully considered by all investors. What's good for the goose should be good for the gander. Just like you should have a very good reason to invest in anything besides an index fund you'd better have a very good reason to invest differently from what you might recommend to someone else. There's a reason investors like to see their advisors and money managers “eating their own cooking.”
What do you think? Is it acceptable to invest differently from what you might recommend for someone else? Why or why not? Comment below!
I actually don’t have a huge problem with the idea that some people use their money differently than what they would typically recommend to someone else. The reason is that everyone has different priorities. A one size fits all approach to investing is probably not right for some people.
By and large, I actually try not to give too much “advice.” Instead, I try to empower people with the knowledge they need about the question they are asking (or direct them to a place to get it, if I am unfamiliar). Then, based on their personality, risk tolerance, and goals… they will hopefully make the right decision.
There is a high likelihood that our personalities, risk tolerance, and goals are different, which – unsurprisingly – leads to portfolios that look different from each other.
As far as reasons that you listed, the biggest reasons I see this happen is because of #1 and #3.
TPP
Hey, this is great. It helps to clarify things in my own head. I’ve been asked that question, but I wasn’t sure of the answer. It came in the form of “You recommend owning a Target fund or balanced index fund but you have real estate, dividend stocks, private companies, etc.” True. My investing is more complex. But I enjoy it. It isn’t required at all. It definitely takes more time. It is more expensive. It is more complex. All that is certain. It MAY be worth it in the end, but not necessarily.
My portfolio is needlessly complex. I enjoy running Vanguards portfolio check up tool. Low on mid-cap growth? No problem a new ETF. Not everyone enjoys this so a 3 fund portfolio works just fine. As I have aged I no longer chase new asset classes like bitcoin. I do not Angel invest due to a very bad experience with this.
One of the big areas where investors get in trouble is that they “copy and paste” someone else’s portfolio and use it as their own.
This can lead you to trouble as you don’t know the behind the scenes factors that the original investor has. If you have 100 million dollars net worth, you can afford to either be ultraconservative since you have won the game (and this would not work well for a starting investor) or they can take the approach of being super aggressive in some risky assets such as bit coin because a total loss would only be a small blip in their net worth but a major hit to an average investor.
And you can not emphasize enough how individual investors have different risk tolerance profiles. If you find yourself losing sleep and checking your net worth daily with the slightest market drop, you really should not be emulating an investor who does not mind (or does not even check) large drops in assets and just continues to plug away investing.
It’s also a very plausible argument against financial advisors. If they’re so smart and beating the market why aren’t they super rich and retired in the Caribbean? I think risk tolerance is probably the biggest factor. Can you hold on when the market drops 30%? If you can and exhibit patience it’s a great opportunity.
I think a useful preparation is to identify what conditions (if only time based) might lead you to consider making a change and listing that in your IPS. My bond investment percentage was 0 until I was in my mid-50s, now it is 12%. I foresee that it will change as my time horizon shortens.
the make up of your portfolio changes when you are nearing retirement for most investors to preserve capital
how much psychological risk tolerance do you have?
Can you sleep well when the market drops 50% as in 2000 and 2008
If so you have too much in stocks
AGE IN BONDS-LISTEN TO BOGLE!!!
Two other factors that cause my portfolio to differ from the simple “three fund/five fund” advice I give: 1. Vestigial, sub-optimal investments that have embedded tax gains that would be costly to unwind. (These I’m working down over time through charitable giving.) 2. Tax-loss harvesting that requires a similar paired fund to/from which to toggle.
Wasatcher
If I were you, this IS what I would do or at least close to it. Considering the size, risk factors, goals, and time to invest and continuing, this is what I think you need. When you buy a suit, a good tailor can really help. take a look and pick out the one that best fits your needs. It’s easier and more efficient to make alterations to get the perfect fit, both in the portfolio and the suit.
Neither my portfolio or suit would be right for you and yours would not be right for me. What would you want changed and why?
Investments should be tailored to the individuals desires and conditions. My investments would not be appropriate for many. The other reasons are all good but this covers most of them.