The Friedberg Family Portfolio-Revisited

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(For informational purposes only-a version of this article was previously published on September 14, 2010) 

“Of course. I favor passive investing for most investors, because markets are amazingly successful devices for incorporating information into stock prices.” Merton Miller

I love it when an economist espouses my opinion!  Short and sweet; this quote is the premise of the Friedberg Family Personal Portfolio.

• In PART 1 of this series, I talked about my investing FEARS.
• In PART 2 you learned how I began investing in individual stocks.

MAIN TOPIC: The Story Unfolds

Since the recent guest post, Perfect Investments for the Lazy Investor, by Mark from Buy Like Buffet garnered so much interest, especially from those individual investors out there, I thought I’d follow up with an overview of my current personal portfolio asset allocation.  

Today, the WHAT & WHY of the Friedberg family asset allocation is unveiled.

El Carino and I are within ten to fifteen years of retirement. Although I don’t know whether we want to retire at that time, I’m certain we would like the OPTION TO RETIRE. I am presently focused on captial preservation and modest growth.

The bulk of our assets are held in LOW COST INDEX MUTUAL FUND’S OR ETF’S.

Although we still have about 8-10 individual stocks in our personal portfolio, they represent a very small percentage of the total.

This is not a post where you will see our net worth, but what I think is more important, you will learn the percent we allocate to certain asset classes and why.

After many years of researching individual stocks, buying and selling in both our personal family portfolio and the professional portfolio I manage, I began to drift away from that approach. In 2008, I graduated with an MBA in Finance with a solid focus on investing and portfolio management.

Here’s a tiny summary of what I learned about investing:

• Although not totally efficient, the market is efficient enough to make it difficult to beat over the long term.
• Most successful managers fail to beat the market consistently over many years.
• An investor’s asset allocation accounts for about 90% of his/her returns. (That means the types of assets you choose are more important than individual stocks or funds). WOW-that was a big one!
• Invest more in stock type investments for an opportunity for greater returns along with more volatility (or RISK).
• Greater investment in bonds usually yields lower returns with less RISK (except for the past few years).
• There is a slight bias of the market over the long term for small stocks & value stocks to beat the market averages.

All of these findings describe HISTORICAL generalizations, not the future.

As anyone who has read an investment ad or seen a commercial on TV knows, the past is not a predictor of the future!

Armed with this wonderful historical investment information and a bit weary of individual stock analysis and upkeep, in 2008 I began moving toward a diversified index fund/ETF portfolio.

(If you are unsure of the meaning of any of these terms, stop by Investorwords and get the definition.)

BACKGROUND and RISK TOLERANCE:

Before picking an asset allocation you need a general idea of how much up and down (RISK) you can stomach in the value of your investment portfolio. Then you also need to make sure to take these steps before you even think about investing.

My risk tolerance is a bit higher than average. I remain fairly impassionate about the drops in value of our investment portfolio and don’t tend to overreact to these market declines. That said, El Carino and I are in the mid section of our lives and so would be hard pressed to recoup a huge loss. Also, for psychological reasons, I like to have access to some cash in case I need it for anything; it reduces my anxiety.

PRACTICAL APPLICATION: The Friedberg Asset Allocation Unveiled

For those graph enthusiasts, here’s a pie chart of the asset allocation of our investment portfolio: