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Settling Down

Marc Bisbal Arias

I’M TOLD THAT younger investors tend to trade more. That’s because those of us in our 20s and early 30s tend to be more confident—and perhaps overconfident—and that leads us to actively manage our portfolios as we seek to outpace the market averages. On top of that, it takes time to learn what works and what doesn’t, and that can also lead to frequent trading.

That brings me to 2021 and the four key portfolio changes I’m making:

1. Sell actively managed funds. Over the past few months, I’ve reduced my holdings of actively managed stock funds by 85%. I still think these funds could perform well, but I now believe index funds are more likely to deliver decent performance—and without the risk of lagging behind the market.

“Attempting to beat the market must also introduce the risk of underperforming the market as well,” writes financial advisor Ashby Daniels in How I Invest My Money. “If we don’t need to beat the market to achieve our financial goals, what sense would it make to introduce the possibility of moving us further from our goals?”

In other words, why chase higher returns that may never materialize at the expense of risking an investment return I’d be happy with? The opportunity cost is too high.

Still, selling my actively managed funds has been hard. First, it meant realizing losses and admitting my mistake. Second, I couldn’t help thinking, “What if these funds start outperforming?” But fearing I’ll miss potential gains wasn’t a good reason to stick with these investments. If I were constructing a portfolio from scratch, I wouldn’t invest in these funds, so why hang on to them?

In the past few months, two friends asked me how to start investing. I found myself recommending low-cost index funds. That made me realize my holdings didn’t reflect my views—and that prompted my portfolio makeover.

2. Add other asset classes. I started the year with just two index funds: Vanguard Group’s S&P 500 index fund and its European stock index fund. I wanted broader stock exposure, so I recently added Vanguard’s global and emerging market stock index funds.

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Because different parts of the stock market tend to be highly correlated, I also wanted to add an uncorrelated asset class, such as real estate investment trusts, gold or commodities. I ended up picking real estate investment trusts, because they offer exposure to physical assets and they kick off regular income.

3. Increase my stock exposure. In an article last July, I wrote that I didn’t want more than 70% of my money in stocks. Now, I believe it could be a bit higher, given that I won’t need this money for the foreseeable future.

In fact, I’ve ended up with less in stocks than I intended. Amid the pandemic, I drastically cut back on travel, eating out and entertainment. These account for most of my discretionary spending. Because I don’t usually spend much anyway, my savings rate increased significantly—and I accumulated a lot of cash. To bring that down, I’m planning to raise my monthly stock market investments.

4. Simplify my finances. My ideal portfolio is one that requires little maintenance. In the past, I opened checking accounts at different banks, looking for higher yields. But the extra interest I received was modest and probably not worth the effort, plus I had to deal with the mental clutter of more paperwork and passwords.

Similarly, the active mutual funds I used to own resulted in multiple investment accounts, each with the respective fund management firm. But with the brokerage firm I now use to buy index funds, everything is in one place.

Marc Bisbal Arias holds a bachelor’s degree in business and economics. Marc started his professional career at Morningstar, performing research and editorial tasks. He currently lives in Barcelona, Spain, where he spends his spare time trying to understand the financial markets and human behavior, as well as reading nonfiction, listening to podcasts and watching TV shows. Follow Marc on Twitter @BAMarc and check out his earlier articles.

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Roboticus Aquarius
Roboticus Aquarius
7 months ago

…and almost 25x expenses saved up. Nice work!

Guest
Guest
7 months ago

If someone is moderately interested in doing a little work to improve their portfolio’s performance, then spending the time to find portfolio managers (not funds but portfolio managers – remember, investors were investing in Peter Lynch, not Magellan) who run actively managed funds can be very rewarding. There are many who have excellent, long term track records handily outperforming their benchmarks over the medium and long term. I have found that owning a mix of both actively managed and index funds has worked very well over the past 40 years.

parkslope
parkslope
7 months ago
Reply to  Guest

Could you provide documentation that “many” portfolio managers have outperformed their benchmarks over the long term?

Roboticus Aquarius
Roboticus Aquarius
7 months ago
Reply to  Guest

Not only would those statements benefit from documentation as parkslope asked, but also: managers who do outperform their benchmark very often engage in style drift. You may think you own a US small cap fund until you look at the holdings and find Amazon, Google, and Tesla. I have used active funds on occasion, but it was typically to fill a niche where I didn’t have access to index funds.

That’s not to say active funds can’t work, but using them does mean you are taking on extra (uncompensated) risk.

Rick Connor
Rick Connor
7 months ago

Nice article Marc. I like how you referenced you discussion with friends and how that made you think about your portfolio. I find questions from and discussions with friends and colleagues a great opportunity to review my own ideas and actions. There is so much to learn about finance; it is one of the best aspects of it.

Scrooge_McDuck88
Scrooge_McDuck88
7 months ago

I have been adding International, Value, and Small Cap exposure (25%) for the last 4 months. I only have 25% now in US large cap equities. 25% cash, 25% spread in bonds/debt instruments/etc…

As the US get’s more and frothy, I think it’s a good time to move money into markets with lower valuations.

Roboticus Aquarius
Roboticus Aquarius
7 months ago

Most of my portfolio is fixed, but 10% of it is allocated tactically. I hope you picked right. My base portfolio is light on Lg Cap exposure! With the recent rotation into Int’l growth, Sm Cap and Emerging Markets, it’s been a good half year.

I’m going to share a thought on US value: the pandemic resurgence seems to have spooked the investors crowding into that space these past few weeks. I suspect value and growth may trade off leadership for a while based on pandemic news. Full disclosure, I’m about 50/50 SCV and SCG. No SC Blend funds.

Steve O
Steve O
7 months ago

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 very 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.
The 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 do not know what the hell you are buying.

greglee
greglee
7 months ago

I agree with all your revisions except for #1. I have never been persuaded by the arguments against active funds, and starting from a 1972 investment in TR Price Growth fund, active TRP active funds have always done very well for me. Since 1992, I’m up 12.65%/year.

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