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How to Reel in Another Great Year

BNY Mellon Wealth Management is running an advertisement in The Wall Street Journal with the headline “The Only Investors Staying the Course Are Those With a Broken Compass.”

This typifies much of what is wrong with the investment advisory industry.  You find True North not by following the right predictions but the right principles.  They don’t break down or change from year to year.  If your compass is haywire, it’s because you weren’t following the right principles to begin with. 

What are they?

  1. Spread your risk among non-correlated asset classes (stocks, bonds, real estate investment trusts, inflation-adjusted Treasuries, gold shares, etc.)
  2. Diversify across a wide variety of individual securities (or own mutual funds and ETFs).
  3. Keep a close eye on investment costs and taxes.
  4. Rebalance annually.

If you abided by these tried-and-true investment principles in recent years, you managed to hang on during the financial crisis and take full advantage of the recovery that followed.

The long-term returns with this strategy have been more than satisfactory. As I stated in my annual update a year ago, The Gone Fishin' Portfolio outperformed the S&P 500 every year since we created it almost a decade ago.

In 2011, however, it didn't. And the bar wasn't particularly high either. The S&P 500 was flat for the year. The Gone Fishin' Portfolio, using Vanguard's official end-of-year numbers – which are net of expenses – declined 3.19%. (Precious metal stocks and emerging markets were the two main culprits.)

Of course, with The Gone Fishin' Portfolio short-term fluctuations are meaningless. If you're investing to meet long-term investment goals, achieve a certain standard of living in retirement, or protect your nest egg from inflation, what's crucial isn't what your portfolio does from month to month (or even year to year), but whether it meets your most important financial objectives without taking more risk (or delivering more volatility) than you can handle.

From this standpoint, The Gone Fishin' Portfolio succeeds. It beat the S&P 500 over the past three, five and 10 years, and with far less risk than being fully invested in stocks.

It’s important to rebalance the portfolio once a year.  This is what keeps your asset allocation consistent.  Sell back those investments that have appreciated and use the money to add to those investment that have lagged.   (Or, if you have fresh money, simply add to lesser performing funds to bring each asset class back to its original target percentage.)  If you have any questions about this, refer back to my book The Gone Fishin’ Portfolio (John Wiley & Sons, 2008).  

I’m also pleased to report that owning The Gone Fishin’ Portfolio has never been cheaper.  Industry giants including Vanguard Group, BlackRock, Charles Schwab and State Street Corp. are locked in a race to see who can cut expenses the fastest, vying for investors who are increasingly sensitive to costs.

For example, Vanguard cut fees for investors in many of its index mutual funds by dropping the minimum investment required to buy its reduced-fee Admiral class of shares.  On broad stock-market index funds, that minimum dropped to $10,000 from $100,000 – and Vanguard automatically shifted qualifying investors to the cheaper shares. 

Fees on exchange-traded funds (ETFs) have come down dramatically, too.  If we enter a low-return environment, sharply reduced costs will matter more than ever.  As Vanguard founder Jack Bogle says, “In the investment fund business, you get what you don’t pay for.”

I don’t know anything that offers a better probability of long-term success with such a low level of risk.  Recall that The Gone Fishin’ Portfolio tackles seven major investment hazards:

  1. It addresses shortfall risk – the risk that you will outlive your money.
  2. It keeps you from managing your money too conservatively. (T-bills and certificates of deposit won’t do any heavy lifting.)
  3. It prevents you from running your portfolio too aggressively. (So you don’t have to worry about your portfolio going down in flames.)
  4. It eliminates individual security risk. (There are no individual stocks or bonds, so there is no possibility of your portfolio cratering because you own an Enron or Lehman Brothers.)
  5. It does a complete end-run around Wall Street’s mountain of fees.
  6. It prevents the IRS from taxing your portfolio to death.  (See my chapter on “How to Legally Stiff-Arm the IRS.”)
  7. It eliminates the risk of unwise delegation. No one cares about your money more than you do.  When you manage it yourself, there’s no “Bernie Madoff” risk.
  8. The portfolio has given consistently good returns yet requires you to devote just 20 minutes a year to it when you do your annual rebalancing.

Remember:  Time, not money, is your most precious resource. It is perishable, irreplaceable and, unlike money, cannot be saved.

The real beauty of this investment system is that it allows you to redirect your time to high-value activities, whether that’s work you enjoy, time spent pursuing your favorite activities, or just relaxing with your friends and family.

The Gone Fishin’ Portfolio gives you a superb opportunity to grow your wealth. But it guarantees you more time to devote to the people and pastimes you love.

Perhaps that is what recommends it most.

Alexander Green