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BACK IN 2017, I WROTE about an oddity in my portfolio—an actively managed mutual fund that I bought without much thought to how it fit with my overall financial goals. Today, I have a confession. That fund isn’t the only oddity I own. In the interest of transparency—and because I hope readers will find it instructive—here are five more oddities, plus the thinking behind each:
How do I explain these inconsistencies? Don’t I believe my own advice? Am I knowingly violating key investment principles because I think I know better—not unlike investment manager Cliff Asness, who once suggested it was okay for investors to “sin a little”? No, I wholeheartedly believe in the investment principles I advocate and I’m not trying to outsmart them. Here’s how I think about my apparent inconsistencies:
1. Yes, I have a collection of individual stocks, but that paints a misleading picture. The overwhelming majority of my portfolio is in a simple mix of index funds that’s designed to weather the stock market’s ups and downs. That, in my opinion, is the most important thing—to get the big picture right. No portfolio is entirely free of oddities.
2. All but one of the individual stocks in my portfolio represent tiny percentages. Many are just 0.1%. So why bother with them at all? The truth is that these are all vestiges from earlier in my career when I worked as an equity analyst—that is, as a stock-picker.
I keep these stocks because they’re reminders of the counterintuitive reality of stock-picking. On the one hand, there’s no doubt that the rewards when you pick a winner can dwarf the returns of a humble index fund. Indeed, in recent years, it has seemed easy to pick winners. Companies like Apple and Amazon aren’t exactly secrets, and their stocks have done phenomenally well.
But that’s just one side of the stock-picking coin. Here’s the other: What the data show, time after time, is that it’s incredibly difficult to build a portfolio of market-beating stocks. When I look at my own portfolio, I see this in living color. I can pat myself on the back for buying Netflix years ago. But I can’t escape seeing GE alongside it.
I also can’t escape the memory of A123 Systems, an electric car battery maker that went to zero. If I had allocated my A123 investment to Tesla instead, it probably would have put my kids through college. The bottom line: There’s no experience like your own experience. Maybe I pay a small price for hanging on to this motley collection of stocks, but they’ve more than paid for themselves with the large role they play in my investment mindset.
3. Owning a big winner is great, but it can leave you in a tricky spot. Suppose you own one or more of the so-called FAANG stocks—Facebook, Apple, Amazon, Netflix and Google (a.k.a. Alphabet). When stocks like these deliver outsized returns, it can leave an investor with two less-than-ideal options: You either live with the risk inherent in an outsized position—or you pay capital gains taxes to reduce it.
The challenge: Looking forward, you never know whether a big bet is going to help or hurt. If you did, there wouldn’t be any question of whether to hold it or sell it. That’s the situation I’m in, and it explains my one hefty individual stock position. Since I don’t have a crystal ball, I’ve adopted a split-the-difference approach, selling some shares, donating some and holding some. The lesson: In managing your portfolio, there will inevitably be challenges and imperfections. Don’t worry too much about these things. As noted in No. 1 above, worry more about the big picture.
4. In my work as a financial planner, I try to be my own guinea pig. That explains the stock-bond fund that I despise so much. I thought it would be a great all-in-one solution, but I’ve since discovered its many drawbacks. Unfortunately, I bought it during the last recession at a low price, so there would be a tax bite if I sold now. There is a silver lining, though. Like the individual stocks, it’s a reminder of what not to do. That’s a small price to pay if I can use this experience to help others avoid the same pitfall.
5. Real estate is a challenging asset class. Almost without exception, my own portfolio—and that of my clients—is invested in stocks, bonds and cash investments. But that leaves a big hole: real estate. Many investment advisors use real estate investment trusts (REITs) to fill this hole, but I’ve never found this to be a satisfying solution. The returns of publicly traded REITs aren’t much to write home about, while nontraded REITs are something the SEC has written about.
This explains the investment partnerships I’ve tried out. They’re all in real estate. The results? They’ve been pretty good, even after the high fees, but it’s been very uneven. One project owns the land under a supermarket. That’s delivered steady but unexceptional returns. Another built apartments in an up-and-coming area, and that provided a quick, positive return.
But offsetting that gain is another project that’s been mired for years in a zoning battle and may be a total loss. I still don’t recommend private funds of any kind, including real estate, private equity and hedge funds. I just don’t think that, on average, they’re worth the fees, the opacity and the risk. But if you do go down this road, be sure to diversify. That’s always important, but it’s even more important in this realm.
6. English philosopher Carveth Read said, “It’s better to be vaguely right than precisely wrong.” If you ask why I recommend an overweight to value stocks but haven’t implemented it myself, this is the reason. When building a portfolio, there are some things that are important—and some things that are really important.
In my view, asset allocation and diversification are most important. I work hard to get those right, and that’s where I focus most of my time. Meanwhile, a tilt toward value is more like the icing on the cake, rather than the cake itself. Yes, I should add it, and I know I’m giving something up because I haven’t done it yet. But in the end, this helps illustrate a reality for all of us as we manage our financial life: No question, it’s good to have a true north in terms of investment principles. But if you veer a little to the left or the right, it doesn’t make you a sinner. It just makes you human.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, he advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman and check out his earlier articles.
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It’s good to hear that you’re an investment sinner. I have some oddities in my portfolio that date back to the early days of my investing. One of my oddities is the TRowe Price Mid Cap Growth fund which was recommended to me by my brother some 25 years ago. I have thought of selling it but the thought of paying taxes on it tells me just to deal with having it in the portfolio in spite of the high expense fee.
Wait a minute: that has averaged 14% return over the last ten years. The “sin” of some of the reputable firms’ active funds may be that they induce greed! The Vanguard mid cap growth index fund averaged a little lower than your TRP active fund at 12% and their active Capital Opportunity mid cap weighted fund has averaged 13% over 25 years with .44% fees. I realize these may all even out, especially with fees, but some mixing and matching seems an OK “oddity”.
Yes it’s been a decent performer. It’s an oddity in my portfolio because most of my other holdings are in index funds.
Now go and sin no more….
It sounds like you are about to write an article on the importance of considering taxes in adjusting our portfolio’s. Early in my career, when I happened to be a partner in an RIA firm, I discovered that my partner, also an accountant, had inadvertently left a client with huge tax bills because he recommended portfolio adjustments without consdering taxes. As someone who has owned GE, MCI, and bought airline stocks soon after 911, I too live with the reality that my stock portfolio has underperformed the S&P 500 at 1,3,5, and 10 year marks most of the times I look.
Also consider the bond market was a better investment than S&P500 since the burning of investment records and my cousin on 9/11. A good friend left POM to work at MCI, his 401k ended at $1000 about a 99% loss.
I use Morning star X ray because it is more accurate than say Vanguard asset mix/ portfolio watch.
I also use Catherine Austin Fitts Solari report . Her recent work with John Titus will make you rethink every thing. Going Direct Reset approved at the G7 central bankers’ meeting in Jackson Hole on August 22, 2019. The NY federal reserve fixed all stock market action since 2007. This report sure makes all portfolio adjustments a cruel joke.
March 2020 was made possible by the issuance of FASAB Statement 56 by the Trump Administration in October 2018. This federal law facilitates the transfer of government assets and operations to private hands on a non-transparent basis.
In 2000 US economy and the financial system laundered $500 billion to $1 trillion a year of all dirty money. Index funds help to make crime money legal. Perhaps we need to rethink index funds because you are buying all the sin.
I switched from stocks to bonds in late 1999, mid 2007 and November 2020.
Adam, what you call “inconsistencies” I call “spice”. I think it’s safe to say that the majority of folks on this website agree that it’s essentially impossible, over the long run, to “beat the market”. But someone has to win the lottery, right? So a few flyers here or there, either in an organized fashion as “fun money”, or with overweighted bets on sectors and such (my approach), it keeps one engaged with the process. Without even having run the simulation myself, it’d almost be interesting to compare the performance of the inconsistencies to the theoretical performance of that same money invested “by the book” in a broad based index fund. I’d be curious.
In 2012 I decided to hold no bonds until interest rates rose, and to stop selling any securities except for living expenses. I had a small investment in a municipal bond fund, which I must get rid of, but I couldn’t, so I compromised and sold half, The half that remains is my sin.
Yup. I own small slices of ARKK, ARKG, MTUM, Vanguard Multi-Factor, NTSX. I got out ahead of myself with Vanguard Minimum Volatility; that stung a little, given it’s super-high risk/return efficiency metrics before 2020. It’s good to get pricked now and then, to remind one of just how dangerous the most innocuous funds can be.
Still, our equity is 95% Index Funds. Fixed Income is mostly a highly rated Stable Value fund, plus some treasuries.
I think value is difficult to achieve with an ETF because you will get exposure to value traps, where the price is low for a very good and perhaps permanent reason. So to add a value component you must buy individual stocks where you have determined the value price will recover for some specific idiosyncratic reason. However in so doing you violate the “don’t be a stock picker” rule, which I also believe strongly in. I own one individual stock, which seems to be singularly exceptional, Amazon, and its in an IRA so no capital gains.
My father said, “Teach it to them in black and white. They will shade it in themselves.” I find myself sometimes wanting to “shade” my investments. The thing I worry about is the “drop dead” factor. If I would happen to end my time on earth rather abruptly, would my wife have to figure out what I was up to investment-wise? Fancy footwork is impressive, but whoever inherits my portfolio might appreciate the relative simplicity of my approach (index funds and one indidivual stock).