Author Topic: Portfolio strategy  (Read 4055 times)

hnnng

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Portfolio strategy
« on: March 05, 2018, 01:45:40 PM »
My friend is a CFP and has offered to help me financially plan for my retirement, for free. He said he practices on the fiduciary model so I would say he is more ethical than other CFP's I've heard of. I wanted to share his strategy for building a portfolio and see what you all think.

First, he said he would only recommend investments to me that he would invest his own money in.

Second, he said I'm welcome to look at his personal portfolio whenever I want.

So his strategy, for himself and what I'm considering, is roughly 75% aristocrat stocks (dividend growing stocks) and 25% a little more versatile bigger name stocks (amazon, apple, etc). He doesn't recommend bonds and only has US stocks because most of those aristocrat big name stocks are "international" and have business in other countries.

So what do you think of this strategy? Would you buy index funds vs individual stocks?

Seems to check out to me but I know it's a lot different than what I've seen others post on here.

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2304
  • Location: EastCoast
Re: Portfolio strategy
« Reply #1 on: March 05, 2018, 02:16:04 PM »
My friend is a CFP and has offered to help me financially plan for my retirement, for free. He said he practices on the fiduciary model so I would say he is more ethical than other CFP's I've heard of. I wanted to share his strategy for building a portfolio and see what you all think.

First, he said he would only recommend investments to me that he would invest his own money in.

Second, he said I'm welcome to look at his personal portfolio whenever I want.

This protects you from someone trying to fleece you, but it does not protect you from someone stupid..

To answer you: no I would not do this. To understand your investment policy; why do you say it "checks out"?

hnnng

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: Portfolio strategy
« Reply #2 on: March 05, 2018, 04:40:58 PM »
By "checks out" I mean it makes sense to me but I wanted to get a non-biased opinion. It seems he is advising to mainly invest in long term growth stocks that are not going to go bankrupt and that continually give increased dividends for 25+ years.

Why do you say this is stupid? I am open to any criticism, that is why I posted, but could your provide me with something a little more?

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Location: Seattle, WA
Re: Portfolio strategy
« Reply #3 on: March 05, 2018, 05:01:09 PM »
So his strategy, for himself and what I'm considering, is roughly 75% aristocrat stocks (dividend growing stocks) and 25% a little more versatile bigger name stocks (amazon, apple, etc). He doesn't recommend bonds and only has US stocks because most of those aristocrat big name stocks are "international" and have business in other countries.

So what do you think of this strategy? Would you buy index funds vs individual stocks?

I think that strategy blows.  Well, maybe not blows, but you can do better.   Basically, most of those aristocrats are old stogey companies, basically a  large cap strategy.  Some of those companies are kind of doggy.  And if you think about it, dividends are not your friend, so why seek them out?    You can have your own large cap strategy by simply buying an S&P500 index fund, you'll still get a dividend and probably wind up owning all of those companies anyway.  And at a tiny fraction of the cost of buying those companies individually. 

Re: AMZN and AAPL.  AMZN stock has been on a tear and currently has a P/E of about 350.  The long term average if the S&P is about 15.  If any mean reversion occurs, it won't turn out well.  Remember, the next recession is just around the corner.  But if you want to own it, it will be about 2.5% of your position if you buy an index fund.  AAPL actually is priced sort of attractively, and pays a dividend.  It is about 4% of the S&P500, so it will be your largest position if you buy an index fund.


hnnng

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: Portfolio strategy
« Reply #4 on: March 05, 2018, 05:10:57 PM »
What would your alternative strategy be, then? 100% index funds? Or are you just suggesting to have the majority of your money in funds and then own a few individual stocks if necessary?

I'm sort of new to this and just learned about FIRE through Reddit which led me to this forum. So, I am just trying to get a better perspective on how I should be investing going forward. I am 29 and would like to retire by 50.

Thank you again for your input here.

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1686
  • Location: West of the Mountains, East of the Sea
  • One does not simply work into Mordor
Re: Portfolio strategy
« Reply #5 on: March 05, 2018, 09:04:51 PM »

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: Portfolio strategy
« Reply #6 on: March 06, 2018, 12:08:17 AM »
I would get started by getting edumacated

Start here with the Startup kit.  Invest once you've written down your investment policy statement.

https://www.bogleheads.org/wiki/Getting_started

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2304
  • Location: EastCoast
Re: Portfolio strategy
« Reply #7 on: March 06, 2018, 07:14:50 AM »
By "checks out" I mean it makes sense to me but I wanted to get a non-biased opinion. It seems he is advising to mainly invest in long term growth stocks that are not going to go bankrupt and that continually give increased dividends for 25+ years.

Why do you say this is stupid? I am open to any criticism, that is why I posted, but could your provide me with something a little more?

"stupid" was maybe a bit harsh. But point was he could have your interest first, but still do something non-optimal if he doesn't know better.

How are you so certain these stocks will give long term growth, not go bankrupt, and give increasing dividends for 25 years? Yes they have in the past, but no guarantee they will in the future. I'd bet most won't. A large number of the "dividend aristocrats" are switched out every 10 years, because they go bankrupt or stop paying dividends. Dividend chasing is a popular (IMO silly) strategy.

As others have said these are mainly old, low-growth companies that are ripe for disruption, and have so few investment prospects that they pay out their cash flow instead. Which create an unnecessary taxable event for you. At least buy an S&P 500 fund and get a bunch of companies of that type with more diversification and some higher growth companies as well.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Location: Seattle, WA
Re: Portfolio strategy
« Reply #8 on: March 06, 2018, 03:23:20 PM »
What would your alternative strategy be, then? 100% index funds? Or are you just suggesting to have the majority of your money in funds and then own a few individual stocks if necessary?

I'm sort of new to this and just learned about FIRE through Reddit which led me to this forum. So, I am just trying to get a better perspective on how I should be investing going forward. I am 29 and would like to retire by 50.

Thank you again for your input here.

Heckler's link is a good starting point.  You can literally write a book on portfolio construction, and many people have.  There are some example portfolios on Bogleheads somewhere.   The thing about building a port is you have to think about what you are trying to accomplish, and then do it.  If you start jumping around you'll screw yourself. 

Here are my thoughts, in bullet points and in no particular order in order to get you started.  But this is just a starting place. 

Markets rise and fall, but fees are gone forever.

Keep it as simple as possible, but no simpler. 

Even what appear to be small fees, like say 0.4, will wind up costing you the price of a small house or car over your investment lifetime.

A lot of people here like JL Collin's advice:

http://jlcollinsnh.com/stock-series/

For good, logical reasons he explains in his stock series, he recommends 80/20 Vanguard total stock market (VTSAX) and Vanguard total bond market (VTBLX).  Cheap and simple.  Cheap and simple are good. 

I disagree.  And here's why:   VTSAX is cap weighted,  so the biggest stocks are most of the fund.   For that reason, it very closely tracks the S&P500 index, which also cap weighted, which in turn also closely tracks the S&P100.   So you think you are buying the whole market, but VTSAX actually behaves like a large-cap fund of the 100 largest stocks (probably the top 50, but I haven't checked).    I think that's a mistake because small caps actually outperform large caps.  So if you stir in a little bit of small cap and mid-cap in there, the returns improve by non-trivial amounts.  Over the last 45 years or so, anyway.

Why not go all small caps?  Small caps are more volatile, and different market segments can outperform or underperform for very long periods of time.   For example, mid-caps have been outperforming large caps for the last 15 years or so.  But large caps were better in the 1990s.  So you need a mix.  Let the big and mid caps do the heavy lifting and let some small caps run wild.

Avoid gold.

It is worth pondering some international exposure.  Upside:  Not well correlated with the US market.  Non-correlation is good.   Downside:  High fees and more complexity.  Its hard.

Bonds are like the ballast in a ship.   They slow the ship down, but they make the ship more stable, so having some ballast is good.    So have the right amount of ballast, but not too much. 

Volatility is not the same as risk. 

A lot to think about.  In the meantime,  do 80/20% (VTSAX) and Vanguard total bond market (VTBLX) and you'll be just fine until you come up with a plan in a year or two. 

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1552
  • Age: 60
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Portfolio strategy
« Reply #9 on: March 07, 2018, 07:34:11 PM »
@hnnng, you might find this discussion of the technical flaws of a 100% stocks portfolio a good way to understand why that approach can lead to lower returns and higher risk:

100% Stocks Allocation Suffers from Two Flaws

The short version: If you can combine asset classes with low correlation--so not just stocks--you can possibly earn more or risk less.

honeyfill

  • Stubble
  • **
  • Posts: 237
  • Age: 62
  • Location: Tucson
Re: Portfolio strategy
« Reply #10 on: March 07, 2018, 09:13:09 PM »
Quote
So his strategy, for himself and what I'm considering, is roughly 75% aristocrat stocks (dividend growing stocks) and 25% a little more versatile bigger name stocks (amazon, apple, etc). He doesn't recommend bonds and only has US stocks because most of those aristocrat big name stocks are "international" and have business in other countries.

So what do you think of this strategy? Would you buy index funds vs individual stocks?
It is not a bad strategy.  Blue chip stocks.  Your costs are zero since it there is no fee to owning stocks. Just a commission when buying or selling .
The issue is that you have to continually monitor your stocks to figure out when to sell and buy new blue chip stocks.  Risk increases because of the smaller number of stocks and the unknowns of when to sell and what to buy.
My strategy is a mixture of Vanguard S&P, Vanguard small caps and Vanguard international.  100% stocks since 1982 has worked out pretty well.


LessIsLess

  • 5 O'Clock Shadow
  • *
  • Posts: 91
Re: Portfolio strategy
« Reply #11 on: March 08, 2018, 07:27:28 AM »
It is not a bad strategy.  Blue chip stocks.  Your costs are zero since it there is no fee to owning stocks. Just a commission when buying or selling .
The issue is that you have to continually monitor your stocks to figure out when to sell and buy new blue chip stocks.  Risk increases because of the smaller number of stocks and the unknowns of when to sell and what to buy.
My strategy is a mixture of Vanguard S&P, Vanguard small caps and Vanguard international.  100% stocks since 1982 has worked out pretty well.

After buying 20-30 stocks, a portfolio will begin to resemble a fund.  So I agree, might as well buy a fund and save time/energy.

hnnng

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: Portfolio strategy
« Reply #12 on: March 09, 2018, 02:49:08 PM »
I feel like you would get more in dividends though if you had 20-30 individual stocks VS. having just 1 fund that would give lower dividends.

And what happens if one of those 20-30 stocks splits or spins-off and you just have a fund within it?

You're right though, if may just be easier in the long-run to just have a fund and then forget about it and not worry every week about reallocating.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Location: Seattle, WA
Re: Portfolio strategy
« Reply #13 on: March 09, 2018, 03:32:18 PM »
I feel like you would get more in dividends though if you had 20-30 individual stocks VS. having just 1 fund that would give lower dividends.

And what happens if one of those 20-30 stocks splits or spins-off and you just have a fund within it?

You're right though, if may just be easier in the long-run to just have a fund and then forget about it and not worry every week about reallocating.

Dividends are an anachronism. They are simply a way of returning money to the shareholders, but they are inefficient.  Dividends are a taxable event of a size and schedule you don't control.   That's the last thing you want, right?   And the value of the company of course drops by the amount of the dividend.  So you don't actually gain anything.  And what do you do with the dividend money?  You said you were planning for retirement, so you are in the accumulation phase.  So you would use to to buy more stocks.  So the money goes from the stock, to you, and back to the stock.  Only there is less of it because it got taxed.  That's a little cumbersome.   So if you are selecting individual stocks and all things being equal, you should select stocks that pays no dividend or a lower dividend.     

Here's something else to consider with your strategy.  Presumably you'd want to be making periodic contributions to your portfolio, like once a month or so.   I don't know the amounts you are thinking, but let's say $2000/month.   At $5 commission per stock transaction, you are looking $100/month, or $1200/year just in commissions.   Fees like that will absolutely kill your final portfolio value.   And that's just once a month, you mentioned every week.   That's $5200 per year in fees.   Won't get to FIRE that way.   

hnnng

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: Portfolio strategy
« Reply #14 on: March 09, 2018, 04:17:46 PM »
Well, the dividends wouldn't be taxed because I'm talking about blue chip stocks that offer DRIPS (direct reinvestment back into the stock).

And ideally, I would buy in increments of $1000 of a stock at a time to cut down on trading fees, so $5-$10 a month. But I still see what you mean.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Location: Seattle, WA
Re: Portfolio strategy
« Reply #15 on: March 09, 2018, 04:50:30 PM »
Well, the dividends wouldn't be taxed because I'm talking about blue chip stocks that offer DRIPS (direct reinvestment back into the stock).

And ideally, I would buy in increments of $1000 of a stock at a time to cut down on trading fees, so $5-$10 a month. But I still see what you mean.

This is generally not correct.   If the company allows you to either take the cash or the stock--which is most of the time--then the IRS considered it a taxable event.  There are some types of dividends that are not taxable, but that's not the typical case. 

And by the way, for tax purposes you must include the value of the re-invested dividends in the cost basis.  Otherwise, your cost basis will be to low when it is time to sell.     Can be done, but it is record keeping task that many dividend investors don't realize they have to do until too late.   Don't ask me how I know. 

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 2272
Re: Portfolio strategy
« Reply #16 on: March 09, 2018, 06:54:03 PM »
My friend is a CFP and has offered to help me financially ...

In general that tends to introduce a tragedy, which I'd recommend you avoid.  Don't let friends manage your money.  If your friend isn't running a mutual fund, they have no track record.  They can claim whatever they want - that they held Apple stock for years.

Those with a track record struggle to beat the S&P 500.  If highly paid mutual fund managers with a full time staff of experts struggle, why will your friend beat the S&P 500?

About 80-90% of active funds have failed to beat their benchmark over the past 3-year to 10-year time frames.
https://us.spindices.com/documents/spiva/spiva-us-mid-year-2017.pdf

facepalm

  • Bristles
  • ***
  • Posts: 318
  • Location: California
Re: Portfolio strategy
« Reply #17 on: March 09, 2018, 07:26:09 PM »
Buy JL Collin's book, The Simple Path to Wealth.

Read it.

Develop an investment strategy and an asset allocation.

After you have done that, talk to your friend.

PS: I would never in a million years recommend a new investor invest in individual stocks.

Indexer

  • Handlebar Stache
  • *****
  • Posts: 1437
Re: Portfolio strategy
« Reply #18 on: March 09, 2018, 11:26:41 PM »
My friend is a CFP and has offered to help me financially plan for my retirement, for free. He said he practices on the fiduciary model so I would say he is more ethical than other CFP's I've heard of. I wanted to share his strategy for building a portfolio and see what you all think.

Just out of curiosity, what does he do?  The CFP is a title, but not a job title. Many CFPs manage money, but there are also accountants and attorneys who get their CFP for non-investment related reasons. A CFP doesn't automatically mean investments. Its a lot of training to help someone understand Financial planning, investments, taxes, estate planning, insurance planning, retirement planning, and how those fields overlap. A CFP, by no means makes you an investment guru. That's what the CFA is for, and those professionals also have a really hard time outsmarting the market.

What you have described so far, isn't even what a CFP would do. His strategy for portfolios is 75% stocks and another 25% stocks, for you and for him, presumably the same strategy for anyone he talks to? That doesn't sound like a CFP. The whole point of talking to a financial planner is that they will learn what the whole picture looks like before ever making a recommendation. What would he recommend for someone with income needs or a shorter time frame? Hopefully not 100% stocks.

privatefarmer

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Re: Portfolio strategy
« Reply #19 on: March 10, 2018, 04:23:46 AM »
oh my... I am trying to figure out how to respond w/o coming off as insulting to your friend... If he is a CFP and a FIDUCIARY at that, then he damn well knows that active stock picking historically has not worked vs passive index investing. The professionals cannot do it with any consistency, why the hell would he think he can?

Dividends have been explained above but as someone stated they are NOT your friend. Preferably, you'd want companies to invest their profits via stock buybacks, not dividends, to avoid the taxes.

So essentially what he has recommended is a small group of blue-chip large cap stocks. I promise that if you hold that portfolio long enough it will be very very close to mirroring the S/P 500. Just as the long-term return on the DOW is nearly identical to that of the S/P, once you hit ~30 companies or so you have essentially eliminated the risk of single stocks and you will get pretty close to matching the index. But why own individual stocks? It will only complicate your life, create tax headhaches, rebalancing issues, transaction costs, etc. etc. If you are comfortable with "blue chip" companies then either buy an S/P 500 ETF (ie SPY, VOO, etc) or better yet a total market ETF such as VTI and call it a day.

You didn't say that your friend even asked you about your risk tolerance. Are you comfortable with your portfolio dropping 50-60% in a really bad market? If not, you shouldn't be 100% stocks. And what return to you NEED over the long-term? Do you want to take on excess volatility if you only need say a 4-5% CAGR?

2Birds1Stone

  • Walrus Stache
  • *******
  • Posts: 5839
  • Age: 1
  • Location: Earth
  • K Thnx Bye
Re: Portfolio strategy
« Reply #20 on: March 10, 2018, 06:02:31 AM »
Wow, I would not do anything until you do more due diligence.

The Simple Path To Wealth by Jcollins is a great start.

hnnng

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: Portfolio strategy
« Reply #21 on: March 12, 2018, 06:28:36 AM »
My friend is a CFP and has offered to help me financially plan for my retirement, for free. He said he practices on the fiduciary model so I would say he is more ethical than other CFP's I've heard of. I wanted to share his strategy for building a portfolio and see what you all think.

Just out of curiosity, what does he do?  The CFP is a title, but not a job title. Many CFPs manage money, but there are also accountants and attorneys who get their CFP for non-investment related reasons. A CFP doesn't automatically mean investments. Its a lot of training to help someone understand Financial planning, investments, taxes, estate planning, insurance planning, retirement planning, and how those fields overlap. A CFP, by no means makes you an investment guru. That's what the CFA is for, and those professionals also have a really hard time outsmarting the market.

What you have described so far, isn't even what a CFP would do. His strategy for portfolios is 75% stocks and another 25% stocks, for you and for him, presumably the same strategy for anyone he talks to? That doesn't sound like a CFP. The whole point of talking to a financial planner is that they will learn what the whole picture looks like before ever making a recommendation. What would he recommend for someone with income needs or a shorter time frame? Hopefully not 100% stocks.

You are correct, he does not recommend this for all of his clients as most of them are older (40's, 50's, 60's) and closer to retirement. I am 29, he is 27. After a couple hour phone interviews, that was the strategy he told me he uses and recommended it to me.

hnnng

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: Portfolio strategy
« Reply #22 on: March 12, 2018, 06:33:30 AM »
oh my... I am trying to figure out how to respond w/o coming off as insulting to your friend... If he is a CFP and a FIDUCIARY at that, then he damn well knows that active stock picking historically has not worked vs passive index investing. The professionals cannot do it with any consistency, why the hell would he think he can?

Dividends have been explained above but as someone stated they are NOT your friend. Preferably, you'd want companies to invest their profits via stock buybacks, not dividends, to avoid the taxes.

So essentially what he has recommended is a small group of blue-chip large cap stocks. I promise that if you hold that portfolio long enough it will be very very close to mirroring the S/P 500. Just as the long-term return on the DOW is nearly identical to that of the S/P, once you hit ~30 companies or so you have essentially eliminated the risk of single stocks and you will get pretty close to matching the index. But why own individual stocks? It will only complicate your life, create tax headhaches, rebalancing issues, transaction costs, etc. etc. If you are comfortable with "blue chip" companies then either buy an S/P 500 ETF (ie SPY, VOO, etc) or better yet a total market ETF such as VTI and call it a day.

You didn't say that your friend even asked you about your risk tolerance. Are you comfortable with your portfolio dropping 50-60% in a really bad market? If not, you shouldn't be 100% stocks. And what return to you NEED over the long-term? Do you want to take on excess volatility if you only need say a 4-5% CAGR?

I see what you are saying and I didn't post about the interview process he did with me. In a nutshell, he "interviewed" me by having 2 separate one hour phone calls where he did inform me about the risks with this strategy and based on my answers that is what he recommended.

I don't mind the volatility but I am getting a lot of feedback on here to take into consideration before I go with this strategy. 

CorpRaider

  • Bristles
  • ***
  • Posts: 439
    • The Corpraider Blog
Re: Portfolio strategy
« Reply #23 on: March 12, 2018, 08:15:07 AM »
I don't really like it, unless you told him you are more comfortable seeing actual company names in your portfolio and receiving dividend checks. 

Also, I wonder what he charges for all that stock picking.  Maybe he does it for cheaper than even an index fund, if he sits there once he gets you invested. I do like that he shows you his portfolio and he buys the same stuff.



« Last Edit: March 12, 2018, 08:22:20 AM by CorpRaider »

appleshampooid

  • Bristles
  • ***
  • Posts: 284
  • Relentless Snacker
Re: Portfolio strategy
« Reply #24 on: March 12, 2018, 09:43:53 AM »
I agree with most of the replies here - you should educate yourself first about index funds and the tax consequences of dividends among other investing basics.

In addition, it bears repeating that I would never have a friend manage my money. Free or not, this is a recipe to destroy the friendship if something bad happens.