How to build your investment portfolio..
Over the last few year’s I’ve become totally obsessed with investing. Having your money making you more money.. What a concept! As you’ll read, I mention I only wish I would have found it interesting years earlier.. How much farther I would be. No point cry over spilt milk though.
The reason it took me as long as it did to get into was because all of it seemed like hieroglyphics. To be honest, it is a little dull and confusing at first, but once you get a bit of a handle on the ideas, it’s fairly simple. It’s much simpler than the mutual fund ‘experts’ make it appear.
How did I get a marginal handle on the processes of investing? I read. I read from those wiser, and more experienced than I.
Education is key. It doesn’t need to be in a formalized setting either. Take the initiative to gain some knowledge on your own.
Now I’ve tried to spread what I’ve learned as best I could in other areas here. But I thought, what better than to let you drink right from the fountains that I have.
The following few accounts are advice on portfolio construction from a few much wiser and more accomplished men than myself.
A few notes before we begin..
NOTE 1. The following advice is not how to open an investing account or anything very basic like that. It includes how to construct a portfolio; what sorts of funds, indexes and percentages of each.
NOTE 2. I am not a financial adviser, not accredited in any way to give financial advice – not yet at least. Garth Turner is, you can contact him on his website if you have upwards of $150,000 to invest. To know my knowledge Mr. Collins is not a financial advisor. Nor accredited, but financially free.
NOTE 3. The following words in Portfolio 1 & 2 are taken from the originally authors. In some instances edited for clarity here. [Notes in this format are my comments]
NOTE 4. If Mr Turner or Collins happen to come across this, I hope I did your knowledge and experience justice. Also, honored to have you here.
Regarding the balanced and globally-diversified portfolio mentioned here yesterday, this blog has offered the ideal breakdown on a few occasions. I hope you took notes.
[Google ‘Garth Turner millennial portfolio’ for an even more indepth look at his recommended portfolio]
In general, the 40% fixed-income allocation should be half bonds and half preferreds. Bonds are included not because they pay much, but to dampen volatility as they usually move in the opposite direction of equities. A government bond ETF might be only 6-7% of the portfolio, with more in corporate bonds (three times the yield), some provincials, plus a little slice of high-yield debt (paying about 7%).
The preferreds are obvious – dividend close to 5%, tax-friendly, relatively stable, quarterly income stream and the rising potential for capital gains as interest rates bump higher.
[Bonds are the stuff that keep you from throwing up when you see your portfolio in a down market.. Think 2008]
On the 60% growth side, 21% in Canada (including 5% in REITs), an equal weight in the US and 18% international works (only 3% of that in emerging markets). Keep 20% of the overall portfolio is US$ – and the total exposure to the S&P (big US companies) would be about 13%.
The number of ETF positions (large cap, medium cap, small cap etc.) should be dictated by the portfolio size. If you have $50,000, then buying a dozen securities is foolish. If you have a million, it’s not. Establish the correct weightings and then rebalance once or twice a year. The rest of the time, play with your dog.
[Garth recommends 60% equities and 40% bonds. This is a safe and satisfactory returning make up. Though if you are young like myself and interested in higher returns and feel you can stomach the rough weather of down markets.. You might be interested in the next portfolio]
I’m going to give you .. a portfolio .. that will be exactly what I tell my 20-year-old to do. She could care less about investing. With this simple approach she doesn’t have too. All she needs to do is to keep adding to the pot and let it ride. Years from now she’ll wake up rich. Along the way she’ll out-perform roughly 80% of the more actively engaged investors out there.
[Boy do I wish I had an interest in investing at 20 years of age]
The Wealth Building Portfolio.
Here’s the thing. If you want to survive and prosper as an investor you have two choices.
- You can .. seek out broad diversification with asset allocation. Your hope is that this will smooth out the ride even as it reduces your long-term returns.
[Mr Collins is referring to houses, bonds, businesses, get rich quick schemes, gold bullion, etc]
- You’re going to focus on the best performing asset class in history: Stocks. You’re going to “get your mind right,” toughen up and learn to ride out the storms.
[Collins is saying, keep it simple stupid and just put as much cash as you can into stocks]
You’ve heard the expression, “Don’t keep all your eggs in one basket.”
You’ve likely also heard the variation, “Keep all your eggs in one basket and watch that basket very closely.”
Forget it. Here’s what your old uncle jlcollinsnh says:
The great irony of investing is the more you watch and fiddle with your holdings the less well you are likely to do. Fill your basket, add as you go along and ignore it the rest of the time. You’ll likely wake up rich.
[Less is more, keep it simple stupid]
Here’s the basket: VTSAX. Low cost so almost all our money is working for us.
[VTSAX is a total market mutual fund. It has a .05% management fee. You also need minimum $10,000 to invest in it. So check out ETF: VTI – ETF version of this Vanguard mutual fund]
Owning 100% stocks like this is considered “very aggressive.” It is and you should be. You have decades ahead. Market ups and downs don’t matter ‘cause you avoid panic and stay the course. If anything, you recognize them as the “stocks on sale” buying opportunities they are. Perhaps 40 years from now you might want to add a Bond Index Fund to smooth out the ups and downs. Worry about that 40 years from now.
[You may recall from above in the Garth Turner ‘balancer’ portfolio he mentions bonds. They are much more stable as he refers.. But you give up performance. Not necessary in years before 50 or 60 as Mr. Collins states]
At this point I can see the financial gurus of the world gathering feathers and heating up the tar. So let me explain.
Previously** we explored the idea that financial crisis are just part of the landscape and the best results come from simply riding them out. You can’t predict them. You can’t time them. Over your investing career you’ll experience many of them. But if you are mentally tough enough you can ignore them.
[** in other posts in his ‘Stock Series’]
So now if we agree that we can “get our minds right” what shall we choose for riding out the storm? Clearly we want the best performing asset class we can find. Just as clearly, that’s stocks. If you look at all asset classes from bonds to real estate to gold to farmland to art to racehorses to whatever, stocks provide the best performance over time. Nothing else comes close.
Not even close
Let’s take a moment to review why this is true. Stocks are not just little slips of traded paper. When you own stock you own a piece of a business. When you own VTSAX you own a piece of every publicly traded business in the USA. Many have extensive international operations so you get to participate in the world markets too.
[THIS! Let the above paragraph sink in, Mr or Ms investor]
These are companies filled with people working relentlessly to expand and serve their customer base. They are competing in an unforgiving environment that rewards those who can make it happen and discards those who can’t. It is this intense dynamic that makes stocks and the companies they represent the most powerful and successful investment class in history.
[If you needed any further convincing after this point and the former.. I can’t help you]
Because VTSAX is an index fund we don’t even have to worry about which will success and which will fail. It is ‘self cleansing.’ The failures fall away and the winners can grow endlessly.
[Self cleansing.. sexy]
A portfolio of 100% stocks, which is what VTSAX gives you, in study after study provides the greatest return over time.
The only downside, and I mean only, is that the ride will be very rough at times. Admittedly, it’s a big one. If you are not tough enough to stay the course, if you get scared and bail when the storms are raging you are going to drown. But that’s a failure in you, not a downside of this asset class.
[Enjoy the ride and hope for those lows, as a Rockefeller once said “The best time to buy is when there is blood in the streets”]
As an aside, there are a few studies that indicate that a 80%/20%, stock/bond mix will actually outperform, very slightly, 100% stocks. It is also slightly less volatile. If you want to go that route and take on the slightly more complicated process, you’ll get no argument from me.
Could it really be this easy? Yep. I started investing in 1974. At the time VTSAX had yet to be created (Bless you Jack Bogle!), but just $15,000 invested in the Dow stocks, and left to ride, by the end of 2011 would be $1,000,000. This despite all the panic and collapses and recessions and disasters that we’ve endured during these last 38 years. Imagine what you’d have if you’d kept adding to the pot along the way.
[Don’t be afraid of getting rich slow, great things take time.]
There you have it. Advice from the big dogs themselves. ‘Big Dogs’ is a pun for Garth. He’s got a overly odd obsession with dogs.
This probably isn’t enough to get you investing if you aren’t aware what an ETF is. But if have a bit of knowledge or are willing to get some more, keep these words in mind when you finally set up yourself and invest your cash.
Financial literacy is for everyone, never forget that.
Were this suggestions helpful? Are you an experienced investor with a different strategy? Do you know of a portfolio method that yields great results? I would love to hear from you! Please comment below.
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