Portfolio Questions

The always readable and thought-provoking Ben Carlson wrote a great post full of questions last month. I’ve been considering them ever since, and thought about answering them here on the blog.

Unfortunately once I started doing so I found a lot of them were too technical and my answers weren’t particularly interesting.

So I decided to answer these questions from Humble Dollar instead 🙂

1. How much cash you will need from your portfolio over the next five years? That money should be out of stocks and riskier bonds—and invested in nothing more adventurous than short-term bonds.

None. I am planning to keep adding money to our investments and I don’t see any reason we would need to take money out. If that becomes necessary we would just reduce our saving or spend some cash instead of selling anything.

2. What’s the total sum you expect to save between now and retirement? If you look at that future savings as a cash holding and count it as part of your portfolio’s conservative investments, you may find your portfolio is far less aggressively positioned than its current investment mix suggests.

I’m not sure of the answer to this, as I plan to keep working after I ‘retire’. But this is one reason why my portfolio is as aggressive as it is (100% stocks). My wife and I currently have a high saving rate (over 50%) and are working hard on increasing our income so I expect our saving to make up most of our net worth gains over the next five years.

3. What market bets are you making? You might see how your portfolio compares to the global market portfolio—the world’s investments weighted by their market capitalization—and then ponder the risks you’re taking by overweighting, say, U.S. or foreign shares, large or small companies, and growth or value stocks.

I am probably overweight emerging markets, and that is because I think they were relatively cheap recently. Otherwise I just buy world stock index funds.

4. Do any individual stock positions account for more than 5% of your stock portfolio’s value? It’s dangerous to bet that heavily on any individual stock—and doubly dangerous if it is your employer’s stock.

No. I have some individual stocks, but most of my portfolio is in global stock index funds.

5. How much are you paying every year to invest? Even if you actively manage part of your money, consider anchoring your portfolio with index funds, so your weighted average annual expenses are below 0.4% of assets. Not sure how much you’re paying? That’s a bad sign—and probably means you need to simplify your strategy and have a tough conversation with any financial salespeople you use.

Too much. THEO charges 1%, although my holdings with them are a small part of my portfolio. Other holdings are more reasonable.

To begin with I was paying too much in fees to Rakuten (they used to have a minimum $25 charge to buy US-listed securities) but once I realized I switched to buying larger amounts less frequently. Rakuten also announced they will be reducing their fees from this month (to match SBI).

6. How did your stock funds perform in 2008 and your bond funds in 2013? Are you mentally prepared for losses like that? If not, you might adjust your portfolio now, before you find yourself panicking and selling in the midst of a market decline.

I wasn’t invested in stocks in 2008. I didn’t really notice anything with bonds in 2013 😉

I like to think I am mentally prepared for a stock market crash, but I guess we’ll see what happens when the next one arrives.

7. Would you be better off with market-tracking index funds? Take a hard look at how your actively managed mutual funds and individual stocks have performed since you bought them—and also consider the performance of the investments you’ve sold and would like to forget about.

Heh. Some of the individual stocks I bought have done badly, but others have done well. I am happy to continue putting most of my money into index funds and spending a small amount on individual (mainly dividend) stocks.

8. Should you allocate more to foreign stocks? The amount recommended by experts has increased over the years, with good reason: Adding foreign shares can reduce a stock portfolio’s overall volatility—plus foreign markets today are much better value than U.S. shares.

I own few Japanese stocks, a combination of wariness and the fact that it takes me longer to find information in Japanese than it does in English.

9. Are you using strategies that are either widely discredited or unlikely to succeed? At issue are things like market timing, day trading, technical analysis, options trading and short selling.

No, no, no, no, and no. I am a buy and hold investor who plans to never sell anything and live off the dividends.

10. When did you last rebalance? If it’s been more than a year, it’s been too long.

I don’t rebalance by selling things as a lot of my holdings are in NISA, instead I buy the things that have dropped or things that seem cheap. THEO rebalances automatically. I haven’t had my iDeCo account long enough to need to rebalance, but would consider doing so if the holdings were more than 10% off the target allocations.

Eeek. That shows how lax an investor I am. My philosophy is basically to throw excess money into the stock market and not think about it too much. I mostly buy things that pay a dividend and plan to live off the dividends in the (far) future.

The main reason I have a THEO account is to test the other side of the coin: the professionally designed and rebalanced portfolio. Over the next few years if they do much better than my other efforts I may shift more of my money in that direction.

Basically I think focusing more of my energy on earning and spending makes more sense for me. With my investments I focus on easy, simple principles like investing in low-cost index funds and holding for the long-term.

How about you? Are your answers different? Any capable investors out there?