In a previous life, I worked in investment management and I often get asked about what to invest in. The ugly truth is that I don’t know much more than the next guy. I just stick to a few strategies I read a long time ago. In 2016, one of my retirement accounts that I completely ignored earned a 15.5% return. The best part is I looked at someone else’s homework to do so and it took about 5 minutes to set up. The following post will showcase how I chose the funds that I invested in and how you can set up your own portfolio just as easily.
|Dow Jones Industrial Average||13.42%|
|S&P 500 (Total Return)||11.96%|
|Barclays US Aggregate Bond||2.65%|
The above shows some returns of the major benchmarks, with my cheater portfolio on the bottom. When I received my year-end statement earlier this week, I was actually surprised to find that The Cheater had beat the Dow. Mostly because I have completely ignored my returns, but also, because it is a pretty well diversified portfolio which I expected to return lower than the US market. Here’s what’s in it as of 12/31/16:
|Fund||Ticker||Asset Class||Current Allocation||2016 Return|
|Schwab Fundamental US Large Company Index||SFLNX||Large Value||26%||+16.31%|
|Schwab Fundamental US Small Company Index||SFSNX||Small Blend||21%||+23.48%|
|Schwab Fundamental Int’l Large Company Index||SFNNX||Foreign Large Value||10%||+7.43%|
|Schwab Fundamental Int’l Small Company Index||SFILX||Foreign Small/Mid Blend||12%||+9.10%|
|Schwab Fundamental Emerging Markets Index||SFENX||Diversified Emerging Markets||11%||+31.89%|
|Lord Abbett Income Fund||LAGVX||Corporate Bond||10%||+8.74%|
|PIMCO Foreign Bond US Hedged||PFODX||World Bond||10%||+6.60%|
… at least for this portfolio, was set it and forget it. I have other portfolios where I take my play money and stock pick. That is money I am set to lose because I am probably no smarter than the market. The Cheater Portfolio is one of my retirement accounts and I wanted to pick from a stable set of diversified funds.
For equity funds I chose the Schwab Fundamental family of mutual funds. They carry low expenses, no transaction fees at Schwab, and while also a diversified set of index funds, carry a slightly different methodology to their weighing than traditional market-weighted funds. The Schwab Funds lean towards “value” being slightly overweight, making the inner Benjamin Graham in me pretty satisfied. (Pro-Tip: the Schwab Fundamental funds also come in ETF variety.)
Having worked for an investment management firm that managed outstanding Fixed Income hedge and mutual funds, I have a mental block against just investing in bond indices. While I think most stock picking investment managers perform about the same as the market over time, I truly think there is an art and science to picking bonds. I went with one of the biggest names in bond management, PIMCO, to manage the foreign bond portion, and the esteemed Lord Abbett fund for the mostly US.
Asset Allocation Targets
Below are the asset allocation targets I found in a spreadsheet I used to figure out how much of each fund to buy. I can’t find it now, but I found a general guide on the internet to what a Conservatively Aggressive 80/20 portfolio would look like, and used this as the basis of my simple portfolio. Googling and copying took about a minute, hooking up the formulas in the spreadsheet took another, and putting in each of the orders took some painful amount of clicking through a bunch of confirmation screens.
|Domestic Equity||Large Cap||SFLNX||25%|
|Domestic Equity||Small/Mid Cap||SFSNX||20%|
|International Equity||Large Cap||SFNNX||12.5%|
|International Equity||Small/Mid Cap||SFILX||12.5%|
|International Equity||Emerging Markets||SFENX||10%|
Theoretically 80% equity / 20% fixed income is aggressive for my age. Many investment advisors suggest subtracting your age from 100 to figure out what percentage of your portfolio should be devoted to stocks. I figure I am still young and have plenty of time to dial back, but don’t have quite the stomach to see the volatility of being entirely in equities.
A Word About Rebalancing
Awesome services like Betterment and Wealthfront will automatically rebalance your portfolio, buying and selling different holdings to reach your target allocation. I have been using the let it ride philosophy 🎲🎲 due to the fact that my holdings have not skewed too far off from my targets, but at some point I should also try to rebalance towards my target allocations.
If we look at what really happened, my being overweight on Small/Mid Domestic and Emerging Markets this year paid huge dividends, pun intended. Most will dedicate 3% or 5% to Emerging Markets as it is often quite volatile. However, the fact remains that coming up with a diversified portfolio that you can set and forget takes very minimal effort. With some basic knowledge and a bit of luck I am pretty confident I am set up for decent long-term results. Be sure to tune in next year when I complain that the general market far outperformed my cheater portfolio!
Disclaimer: I am not a professional. I have presented my personal returns in a single portfolio over the course of one year. This is a sample size of 1. Hardly a sample. The above references an opinion and is for information purposes only. Nothing else contained on this site should be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Nor is it intended as investment, tax, financial or legal advice. Investors should seek such professional advice for their particular situation.