Why Aren’t You Doing What You Recommend?

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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

Do as I say, not as I do

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!