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Hello again, folks! Welcome to The Green Swan. Before I get to today’s post, My Investment Portfolio, I have a big announcement to share. The Green Swan eBook is published and available for sale! The Green Swan eBook is over 30,000 words, 82 pages on normal 8.5 x 11 paper, and over a year in the making to help you get on the path toward financial independence! To find out more, visit The Green Swan eBook page.
My Investment Portfolio
Today’s post is a follow up to my recent post, Invest to Win. In that post we dove into why I felt comfortable with an all stock portfolio. Today’s follow up, My Investment Portfolio, will go into the composition of my actual investment selections and why I’ve structured it the way I have. I will lay out my key investment principles, as well as take a trip to the confessional as I don’t always practice what I preach…
Note that today’s article was the result of reader inquiry so I appreciate the comments! Keep them coming!
First, let me hit you with some truth! Here are my current investments and corresponding percent weights of my entire portfolio.
I take a relatively hands off approach to investing. I track my performance closely, but I don’t dig in and do a lot of deep research on the front end or scour reports to determine the best stocks or funds to invest in. I’ve come to appreciate the value of index funds in recent years and how they tend to outperform actively managed funds over the long term. Lately I have been putting all new investments into index funds which has helped reduce the total percent of my portfolio in actively managed funds.
By taking a more hands off approach, I can still get strong returns in line with the overall market performance while being able to focus more of my free time on other things such as my job, my family and social life, and lately more on the blog…
Principles of My Investment Portfolio
Index funds are widely popular and brought to prominence primarily by Vanguard. They are fairly easy to understand as well. They are known for being low cost investments that track specific indexes very closely, such as the S&P 500, Asian and European exchanges, etc. There is basically an index for every type of investment you would be interested in which makes it very easy to widely diversify your investments by owning only a handful of index funds.
Why I like Index Funds:
- You can pick just 3 or 4 funds and be fairly well diversified by:
- Company (no individual company representing a large percent of your holdings)
- Company Size (i.e. large and small cap companies)
- Geography (i.e. domestic, international, and emerging markets, etc)
- Low cost of ownership (i.e. minimal administrative fees)
- Performance will track more closely to the overall market and the index it is specifically tied to
- You are completely along for the ride, if markets begin to drop you can expect your performance to drop equally
- Equal weighting to the index makes it practically impossible to generate outsized returns
Actively Managed Funds
Actively managed funds do provide a purpose too. By definition, these funds have a team of managers that are hired (and paid by your administrative fees) to hand pick a wide variety of investments that match the funds target (as detailed in its prospectus—oooohhh big investment words, sorry ignore that). In theory, the active managers are more in tune with the market and various individual companies and can identify the winners and losers. Where I see this being a particular advantage is in certain sectors that are more risky or require more research, such as small cap companies, international and emerging markets.
The universe of small cap companies is vast, so active managers who dig through and research can identify and invest in the presumed winners, rather than buying in index fund which will invest in the entire universe of small cap companies. Similarly with emerging markets, where there is not a lot of publicly available information on companies, mutual fund managers who know the markets closely and have performed significant research can pay off with outsized returns.
Of course, sometimes their bets are wrong, but in theory, their bets should be right more often than not.
The other primary situation where actively managed funds can generate returns better than the overall market is in times of economic duress. Again, in theory, active management can take a proactive approach when the market starts going sideways or begins to decline by moving more of your investments into cash and thereby shielding it from the market declines.
These are the primary benefits that I see for actively managed funds. It of course takes more time and research to find good actively managed funds, or the best funds to suit your needs, as well as more closely monitoring of its performance on an ongoing basis.
Why I Own Some Actively Managed Funds:
- To capitalize on potential outsized performance they should produce, especially in small cap and international markets
- My H.S.A. is in active funds because of a lack of options, unfortunately
- Greater administrative fees than index funds
- Increased level of research and monitoring required by me
- More volatile earnings (i.e. some years you may vastly outperform the market, others you may vastly underperform)
Individual Company Stock
Lastly, another option for owning publicly traded equity is simply buying directly into a company’s stock.
Why I Don’t Buy Individual Stocks:
To appropriately diversify your risk for any one particular company, it would require buying 20-30 individual companies (in my view anyway). The downside to this is:
- Far too much research required for me to pick and own just 20-30 companies
- Greater transaction fees having to buy into that many companies rather than just a few mutual funds
- Harder to diversify appropriately by sector (i.e. energy, finance, technology, etc) as well as geography and company size
“Hey, Green Swan, don’t you realize 12% of your portfolio is held in one company, your employer no less! Talk about risk!” – Peanut Gallery
That is true, so I probably need to explain why I don’t practice what I preach. Time to head to the confessional…
First of all, remember that I am a banker. And bank stocks hit it hard during the crisis. Remember the whole fear that the federal government was going to nationalize the banks. Yeah, that killed the stock price. In general, it drove bank stocks to very low lows, irrationally low. How many more times can I say low…? The markets were in chaos and acting very, very irrational. Bank stocks were low…
So being acutely aware of what was happening to bank stocks, I took a very calculated risk and put a whole lot of my 401k into my employer’s stock. Very risky bet at the time, but it paid off handsomely. There was a lot of upside to bank stocks at that time and I rode the wave for a good couple years. This year, that stock has taken a hit (all banks have), but I see even more upside as interest rates begin to rise in the future.
I want to continue to diversify out of my employer’s stock which I have done so successfully in recent years. A few years ago, it accounted for almost 20% of my portfolio, so getting it down to close to 10% has been good. My plan is to continue to sell out of it opportunistically, with no defined date of being completely out. But hopefully it is down to 5% of my portfolio or less in the next year or two.
Small Business Ownership
There is one last way of owning equity, albeit private companies (not publicly traded equity). This is rarely an option for most investors, but where you often see it is in family owned businesses, or if you yourself are an entrepreneur and own your own company. This can be very risky, but at the same time provide very handsome returns.
Let me explain one option that I’ve always been open to considering. There are small business brokers that coordinate the sale and purchase of small businesses. For example, think of the family owned business where the owner is ready to cash out and retire, that would be a business sold via a small business broker. There are countless other reasons a business may be put up for sale. Some of the large brokers are Sunbelt Brokers, BizBuySell, Viking, and many other local and regional brokers and they can be found online.Generally speaking, because of the risk profile, you can buy small businesses for reasonable prices. The problem is then you’d either have to manage it or hire someone else qualified to do so. In my view, it would take very special circumstances for an investment in a small business to be feasible, but they do provide attractive returns!
So it is time to head to the confessional again…
An opportunity for me to be involved in a small business has recently presented itself and my three other siblings. We plan on going in on a business together which will be run and managed by two of my siblings. This will require a sizeable, six-figure, investment on my part which I will be funding by liquidating a portion of my taxable brokerage account.
Trust me, there will be much more to come on the small business front and you can expect more detail in a forthcoming post. But having to liquidate a decent part of my portfolio will require a significant overhaul of my broader asset allocation to make sure everything is still in line. I will likely provide a forthcoming post on this update as well, once the transaction is complete which will likely be in August.
While I’ve laid out some of my key investment principles above, as you can see I don’t always practice what I preach. You can also see that I maintain a relatively risky portfolio, especially with the new and relatively risky small business investment I will be making. But my comfort in maintaining such a portfolio is because I am still young at age 30, earning a good income and I have a lot of working years left ahead of me.
Note: I use Personal Capital to manage and track my investment accounts and allocations. It is absolutely free to use and has some fantastic features when it comes to investment management. I highly recommend it to everyone. Note that if you sign up to Personal Capital by clicking the image below I may receive an affiliate fee. But rest assured that I would not recommend this tool so highly if I didn’t use it myself and love it.
Disclaimer: Please reference my Disclosures page. This post is for informational purposes only and is not to be construed as financial advice. If you need help with investing or financial decisions, please consult a financial professional.
To further the discussion, let me know what you think of my portfolio in the comments below. Would you be comfortable with a similar approach? Do you disagree with the analysis or conclusions above?
Thanks for taking a look!
The Green Swan
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