Each year, usually in our February issue, I walk through my portfolio. It gives some folks the shivers, and others, a nice sense of superiority. On the whole, it seemed like a good idea to accelerate the schedule this year. I’ll walk through it using the same five-part process that we’ve urged on others.
Step One: Assess my goals and resources
My overarching goal is to have a portfolio that I don’t have to pay much attention to (on average, I hold funds for more than a decade), and that doesn’t keep me up at night. That’s the “indolent” part. Beyond that, I’ve had three specific goals in investing and had three distinct portfolios.
Retirement: which is unnervingly close. I wanted to be able to leave full-time teaching somewhere between 67 and 70. I’m still really good at what I do, but my department deserves the opportunity to bring in some new blood, and I’d rather leave at a point when folks regretted my departure rather than pray for it.
Long ago, I did some simple modeling using retirement calculators from Fidelity, TIAA-CREF, and T. Rowe Price. Of them, Price’s Retirement Income Calculator, which runs a Monte Carlo simulation on your behalf, is my favorite. My intentionally modest lifestyle and stable job made aggressive saving possible. If I achieve a 6% rate of return on my portfolio, I end up with a 99% probability of meeting my financial needs for 30 years.
Will’s college: he’s a senior now but needs a master’s degree to pursue counseling psychology. While he could go to Augustana tuition-free (a perk of my job), being a student in a small school where your dad is painfully well-known seemed like a recipe for distance. We started a 529 for him when he joined the family at 11 months.
Peace of mind: my family was really financially insecure when I was young, which led to hard “groceries or the utility bill” sorts of questions and enormous anxiety. The prospect of ever replaying that degree of uncertainty is more than a little horrifying (note to young parents: childhood trauma is the ghost that stalks adults for decades; raise your children to be joyful and secure), so I want a substantial buffer that’s visible proof that we can handle unhappy surprises. Rather than talk about a “taxable portfolio,” with the implied emphasis on tax efficiency, I think of it in terms of personal independence.
Step Two: Create a strategic plan
By that, we mean figuring out what asset classes I want exposure to and to what degree. Ultimately, three decisions control 90% of your outcome: your asset allocation, your willingness to invest steadily, and your ability to avoid decisions driven by extremes of greed or fear. This is the point at which I tried to make the decisions that most drove the prospect of success.
Retirement: 60-75% equities, with a tendency to overweight international, small, quality, and value. Valuations in the US market have been indefensible for a long while, and investors I respect and who have the freedom to choose increasingly choose to be light on the US. I invest 13% of my salary, and my college matches the majority of that.
Will’s college: 100% equities tapering down to 0% equity at the point that we began paying tuition. That was Vanguard’s glidepath, and I had no reason to second guess it.
Peace of mind: the goal here was consistent real returns, which is to say returns after taxes that exceeded the rate of inflation. Frankly, savings accounts nor CDs promised (guaranteed, locked in) negative real returns when inflation was 1%. As a result, I have very little in a traditional FDIC-insured deposit account.
The best way to achieve this goal was through a stock-light portfolio. There’s a wealth of research that shows a stock-heavy portfolio is prudent if and only if your goals are decades in the future. For any shorter time period, every additional increment of stock exposure reduces your portfolio’s Sharpe ratio; that is, its risk-adjusted returns. We walked through that research, most recently, in our April 2021 essay, The case for a stock-light portfolio, version 4.0. The bottom line is that from WW2 to the present, a portfolio with just 20% stocks returned 6.8% annually. That translates to receiving about 60% of the returns of an all-equity portfolio with about 25% of the volatility. My portfolio targets 50% growth (half US equities, half not) and 50% stability (half cash-like, half riskier).
A special note to all you financial planners out there: yes, I know. Over the long run, giving up one-third of your returns can lead to a catastrophic shortfall. But, for portfolios with shorter windows, overexposure to stocks can have the same catastrophic outcomes. (And hugs to you all for the good work you do in trying to make peace of mind and a modicum of financial security possible for many folks.)
Step Three: Create a tactical plan
Retirement: I’ve always been held hostage by Augustana’s retirement planning. Originally it was far too expansive – we had access to over 1000 funds and annuities with no guidance and no incentive to save – and now it’s far too restrictive. We’re down to a relative handful of funds with an unhealthy dedication to cap-weight-based passive products. Over the years, we’ve occasionally even been kicked out of funds we’d chosen; once, my largest retirement holding, TIAA-CREF Stock Account, got bounced into the Vanguard 500 fund. Ick.
Given that, my retirement is now split between a TIAA-CREF administered account and a T. Rowe Price one to which I can no longer add. In each case, I’ve chosen to place 80% of my account in a target-date retirement fund then use other available funds to add exposure to emerging markets and, in particular, EM value equity. I balance the added volatility with small investments in market-neutral funds.
Will’s college: We picked a simple age-based allocation using Vanguard funds through College Savings Iowa. Back when Ed Studzinski was co-managing Oakmark Equity & Income, we opened a separate college savings account in his fund. I contributed $100 a month while his mom, whose income was higher beta than mine, occasionally added larger chunks.
Peace of mind: here’s the lineup.
YTD return 5-year return Weight FPA Crescent 15.2% 9.6 20 Grandeur Peak Global Micro Cap 16.5 19.0 18 Seafarer Overseas Growth & Income -2.3 8.7 17.5 T. Rowe Price Spectrum Income 2.5 4.8 7.5 T. Rowe Price Multi Strategy Total Return -2.4 n/a 7 Brown Advisory Sustainable Growth 30.3 27% 7 Matthews Asian Growth & Income -0.3 8.0 6 Palm Valley Capital 3.8 n/a 5 RiverPark Short Term High Yield 1.8 2.0 4 Cash 0 0 8
The blue cells denote Great Owl funds.
The funds on the Growth Team (65%) are FPA Crescent, Grandeur Peak Global Micro Cap, Seafarer Overseas Growth & Income, Brown Advisory Sustainable Growth, Matthews Growth & Income, and Palm Valley Capital.
The funds on the Stability Team are (35%) T. Rowe Price Spectrum Income, T. Rowe Price Multi Strategy Total Return, RiverPark Short Term High Yield, and “cash,” which is just a TD Ameritrade money market.
Morningstar classifies my portfolio as “moderately risky” and appropriate to those “who are concerned by volatility but not preoccupied with it.” The portfolio analyzer at MFO Premium models a 16.9% maximum drawdown and annual returns of 13.5%. Year-to-date it has returned about 12%.
These funds reflect my personal biases. Most of the funds have phenomenally high levels of insider ownership of the fund and, in four cases, of the adviser. Most of the managers have a high level of independence in portfolio construction; they are not narrowly bound to a single niche come hell or high water. Most of them have demonstrated exceptional risk management. All communicate clearly and frequently. And many are a misfit in their Morningstar peer groups which means that their star ratings do not strike me as terribly reliable.
Two major moves in 2020: I eliminate both my Matthews Asia Total Return (MAINX) and my Grandeur Peak Global Reach (GPROX) positions. Matthews was redeemed to help pay house-related expenses. Grandeur Peak Global Reach was eliminated because it was doing too well (20% annually) and was throwing my entire portfolio out of balance as Growth hit 75% of the portfolio and international stocks outweighed domestic by more than 2:1. The correlation tool at MFO Premium showed a correlation of 95-96 between my two Grandeur Peak funds. I chose to keep the smaller, newer, closed fund in the portfolio.
Step Four: Fund your plan automatically.
All three portfolios are on auto-pilot. 13% per month goes into retirement. $100/month into college savings. About $400/month into security though I’ve reduced the auto-investment into Growth team funds except for Palm Valley Capital (an absolute value small-cap fund that’s 80% cash) and increased it for the Stability funds. The goal is to de-risk my portfolio and move closer to the 50 / 50 target.
I’ve done the same thing with my charitable commitments. I have an automatic monthly contribution to organizations that work to preserve the environment (the Environmental Defense Fund and One Tree Planted), to support under-resourced teachers (Donor’s Choose), to defend individual rights (the ACLU), to support members of my local community (River Bend Food Bank and the Community Foundation of the Great River Bend) and to provide meaningful, reliable information to all (Marketplace.org, Iowa Public Radio, Augustana Public Radio, A Way with Words). The contributions are not huge, but they’re absolutely reliable for the groups involved and don’t require initiative on my part.
Step Five: Go enjoy life.
I’m on it! We had a great garlic harvest this year and planted more in the fall. The house is redolent with the smell of pasta sauce and the sight of seed catalogs. Will and I are scouting grad programs for him. Chip is continuing her doctoral studies with the hope of one day being Chancellor Chip. I got a slew of new books to work through in the months ahead and am working on revising one (Miscommunication in the Workplace) and writing another (a text for my Advertising and Consumer Culture class).
What might you take away from my indolent portfolio? I don’t care about “winning.” I don’t care about “beating the market.” I don’t care about the bootless chase after “upgraded” funds. I don’t care about stars or chart-topping anything. I do rather care about people, you included. I care about my neighbors and my community. I care about the planet we’ve inherited and about the prospect that we can restore it to good health. If I’ve done my planning well, my portfolio will support me in protecting the things I care about. Now, and always.
So far, so good.
My advice is simple: do ye likewise.