Rethinking my approach -- comments?

[brewer12345]

I have lately come to the realization that I am pretty stressed out managing my portfolio in part because I have less and less time to manage more and more assets. I am a small cap investor primarily, but this leaves me with a lack of diversification and frankly, since I haven't seen many screaming bargains lately, I'm having a hard time putting money to work.

I also spent some time playing with the Gen X RE spreadsheet and I realized that with our current investments and planned savings over time (conservatively stated), we really only need to make 4% over inflation over the next 15 years to retire at about 45. In other words, there is little motivation to run a very concentrated portfolio and take risks for higher returns. Shooting the moon actually considerably ups my chances of missing my target retirement date because I could blow myself up in more scenarios that if I had a diversified portfolio.

I have had these thoughts percolating in my head for a while, and I think it is time to start taking action. I will be slowly moving existing assets into a diversified portfolio of funds or ETFs, and all new contributions will go this way. Eventually, I'd like to be managing the small and midcap parts of my portfolio, and farm out the large cap, international and fixed income parts to index funds or high quality, low cost managers. I'm keeping the small cap part in my control because I have confidence in my abilities and know that I can do well with this part of the portfolio.

I am thinking about a target of something like this:

Large Cap US - 30%
International (diversified) - 30%
Fixed Income - 20% (possibly less)
Small & Mid caps - 20%

I'd like to add some REIT exposure (maybe 10%), but I think that that asset class is wildly overpriced right now, and I have a very large exposure to residential real estate already through homeownership. I'm also open to the possibility of some commodities exposure, but I haven't thought this through yet. Clearly commodities are volatile and uncorrelated with equities or bonds, but is there any real reason to invest in these? What have returns been over long time periods?

Any thoughts about my general portfolio targets? Is the international piece too high? Any obvious asset classes I am missing?

I will be investigating possible investment vehicles to move money into, but this will be a slow process. I will probably do the research soon and transform the portfolio over a year or more.

It sounds like you're ready to read Berstein's "The 4 pillars of Investing" or Swedroes "What Wall Street Does not want you to know"

Either book discusses asset classes and will help you choose which balance of classes will give you piece of mind.

[Nords]

I have lately come to the realization that I am pretty stressed out managing my portfolio in part because I have less and less time to manage more and more assets.

More people need to be in this situation! I guess the best that can be said is that your version of the problem is better than having plenty of unemployment time to manage less & less assets.

Since I haven't seen many screaming bargains lately, I'm having a hard time putting money to work.

Add Warren Buffett & John Bogle to this list.

You have to hit your comfort zone. The biggest challenge is making sure that your portfolio is adequately capitalized against your personal inflation rate (healthcare, prescription meds) and capital expenses (new roof, replacement vehicles, fantasy vacations).

The portfolio looks fine; there's a growing school of thought that international returns will continue to be goosed by the dollar's decline. Our best performer this year has been Tweedy, Browne Global Value (TBGVX) but iShares' international ETF also looks good (EFA). Dollar hedging seems to be the only difference.

The dollar's decline may also be contributing to higher commodity prices (although demand is probably more significant than currency trading). There's a lot of detailed discussion about commodities and the "perfect ER portfolio" at raddr's board. It may not give you a solution but it'll give you plenty of ideas to consider...

http://www.raddr-pages.com/forums/viewtopic.php?t=208

[brewer12345]

Cut-throat, I have read more finance textbooks than I care to even consider, so it is unlikely in the extreme that Bernstein is going to tell me anything I haven't already read. I'm more just looking for real-world comments on my proposed port allocation. I will be digging up correlation and total return figures for various asset classes before I commit to doing anything.

[fire5soon]

Also on the Raddr pages is this paper:

http://raddr-pages.com/Retire%20Earl...ityFutures.htm

-Jay

[brewer12345]

Much obliged, folks. So perhaps a restated target allocation might be:

30% LC Equity
30% Diversified Intl Equity
20% small and mid caps
10% fixed income
10% commodities

I see that Bernstein sells port op software on his site. Anyone use this? Is it worthwhile, or am I likely to end up with basically the same results?

[unclemick]

I'm burdened somewhat with 30 yr old trash from the past - very small amounts of timberland and a gold mine claim - but continue to follow efforts over at raddr's board to identify effective asset class instruments in commodities and to a lessor extent PM/metals and even lessor things like foreign currency CD's.

In the 60's and 70's, I fell prey to the real estate/gold/silver/foreign bond/multi asset class investing of the day.

I did pass on collectible guns and freeze dryed food - except for back packing. Growing up out West and having a mining engineer in the family hasn't helped either. If Wall Street has figured out how to feed the ducks with an acceptible product - I may become convinced - but not yet. The potential deserves further investigation.

[ESRBob]

Brewer,
I would add a Value Tilt to your asset classes if you haven't already.

Bernstein is probably different from the finance textbooks and tomes you might have already read, and may well be worth a look. He'll give you a good argument for finding less-correlated asset classes. You may already have got that (Modern Portfolio Theory benefits of reduced volatility) since I see you have a big slug of commodities in your mix. Bernstein calls this the "Other" category -- things like Commodities, Real Estate, Oil & Gas, Private Equity/VC and Market Neutral Hedge Funds. The latter two are my additions to Bernstein, and can be tricky to find, but the first three can all be found with reasonable funds. (A DFA advisor with a Schwab master account can get you into the institutional versions of key commodities funds (QRAAX, PCRIX) with no loads and low fees.) We have 20% of our total portfolio allocated to these "Other" categories.

ESRBob

[brewer12345]

Well, I already have RE exposure through homeownership, so that's taken care of. The part of my port that I will retain active management is generally invested in value-oriented stuff, and I intentionally look for exposures that don't correlate to market movements (like STON, which I am strongly considering).

[cute fuzzy bunny]

Hmmm...how does your home compare to strip malls in new jersey, medical office buildings in san francisco and apartment buildings in chicago?

Perhaps theres still a little more room for RE diversification?

[brewer12345]

Actually, the house might be reasonably close to the strip mall in NJ. Seriously, though, I think REITs are wildly overvalued and I already have enough RE exposure that I'm not about to jump at the chance.

[cute fuzzy bunny]

I dont disagree. I just wanted to present you with a different perspective. A lot of people dont consider REITS because they own a home and decide that it qualifies fully for real estate diversification.

Not buying reits for the reasons you gave are good ones.

I do own reits, in an amount almost equal to the value of my home. But I bought them when they werent as run-up...

[ESRBob]

Brewer,
Is home ownership really the same as having Real Estate exposure in a portfolio? One could argue that since you always need a place to live, owning a home makes you 'neutrally' exposed to real estate, renting makes you short the real estate market, and only when you buy rental property (or REITS or limited partnership investments in buildings) are you 'long real estate'.

Also, is your home even an 'asset'? By one fairly popular definition (Kiyosaki - the only thing he says that I think is on target), an asset is something that produces income. Anything else is consumption. Your home represents consumption in the form of the rent you don't get when you live in it. The fact that it has produced some capital gains (perhaps significant capital gains) still doesn't make it an asset in my view, since you need to live somewhere, and every other home has appreciated, too.

The only thing that I might consider an asset is the difference between the value of your home equity and the cost of a home you could comfortably downsize to. That net might be considered an asset that is not paying any income right now (or has a small holding cost -- taxes, income foregone.)

Hope this doesn't sound like splitting hairs, but I have friends who buy second homes, don't rent them, and still consider themselves 'investing' in real estate. I view them as simply cranking up their expenses, not investing at all. I think it is a popular and dangerous misconception.

ESRBob

[brewer12345]

Brewer,
Is home ownership really the same as having Real Estate *exposure in a portfolio? *One could argue that since you always need a place to live, owning a home makes you 'neutrally' exposed to real estate, renting makes you short the real estate market, and only when you buy rental property (or REITS or limited partnership investments in buildings) are you 'long real estate'.

Also, is your home even an 'asset'? *By one fairly popular definition (Kiyosaki - the only thing he says that I think is on target), an asset is something that produces income. *Anything else is consumption. *Your home represents consumption in the form of the rent you don't get when you live in it. *The fact that it has produced some capital gains (perhaps significant capital gains) still doesn't make it an asset in my view, since you need to live somewhere, and every other home has appreciated, too.

The only thing that I might consider an asset is the difference between the value of your home equity and the cost of a home you could comfortably downsize to. *That net might be considered an asset that is not paying any income right now (or has a small holding cost -- taxes, income foregone.)

Hope this doesn't sound like splitting hairs, but I have friends who buy second homes, don't rent them, and still consider themselves 'investing' in real estate. *I view them as simply cranking up their expenses, not investing at all. *I think it is a popular and dangerous misconception.

ESRBob

Kiyosaki is either a nutcase, a huckster, or both. I tend to come down on the third option. Based on the 5 seconds of him I saw on PBS a week or so ago, he has also become morbidly obese.

I see where you are coming from, but I find the argument to be strange, to say the least. If I own an asset, I receive the interim income that it produces as well as any capital gain or loss when I sell it. In the case of my home, I choose to consume the interim income in the form of a place to live, but that doesn't mean that it doesn't produce income. I definately experience the cap gain or loss when I sell. Sounds to me like this is an asset, and it is indeed real estate. Therefore, my total portfolio includes real estate exposure.

I think there are two things worth pointing out here, though:

- owning your own home is likely to be very different than owning rental/commercial real estate or a portfolio of REITs. One might reasonably assume that gain/loss and income produced by these different flavors of RE might be very different over time.

- If you have a mortgage out on your home, you are effectively long RE and short the bond market. With my 15 year mortgage (now 14 years), I am effectively short the intermediate segment of the yield curve, and I retain a call option on the mortgage at par. This is not by accident. Rather, it reflects my view on rates and my desired amortization pattern.

[ESRBob]

It costs us about $550.00 a month to live in our paid for home. *Right up the road from my house, they just leased their home for $4100.00 a month. *That is about what I figured would be the going rent for my home.
So, the utilitarian cost savings to me is about $3500.00 a month.

Ex-Jarhead; (and Brewer)
I know what you are saying, and with real estate moving up so long all of us feel warm and fuzzy about our home ownership investments. They all seem to have capital gains unrealized but imbedded in them, so it feels like an asset or investment.

I guess I am taking a hard line, but I do still like the idea that an asset should produce income or be liquid, but by that definition I guess gold coins would not be an asset either, which doesn't sound right,( though it is liquid.) You can't move out of the house without needing another place to live, which is why even though a house is typically liquid (you could sell it) it isn't the same as a gold coin you could sell and not change your lifestyle.

I agree that your appreciated house which would throw off 4100 a month in rent income to you if you moved out is an asset, but as long as you do live there, even if you didn't pay much to get in there, you are consuming all that value/income. Naturally we have no choice: we need to live someplace. But since you can't realize the income, it makes it an unusual type of investment. Are there other parallels that could help me rethink the personal home as an asset?

ESRBob

I agree that your appreciated house which would throw off 4100 a month in rent income to you if you moved out is an asset, but as long as you do live there, even if you didn't pay much to get in there, you are consuming all that value/income. Naturally we have no choice: we need to live someplace. But since you can't realize the income, it makes it an unusual type of investment. Are there other parallels that could help me rethink the personal home as an asset?

I look at it as an ace in the Hole down the road. In terms of throwing off about $140,000 in a reverse mortgage. I would get to spend the money and live in the house.

[Jarhead*]

Ex-Jarhead; (and Brewer)
I know what you are saying, and with real estate moving up so long all of us feel warm and fuzzy about our home ownership investments. *They all seem to have capital gains unrealized but imbedded in them, so it feels like an asset or investment.

I guess I am taking a hard line, but I do still like the idea that an asset should produce income or be liquid, but by that definition I guess gold coins would not be an asset either, which doesn't sound right,( though it is liquid.) *You can't move out of the house without needing another place to live, which is why even though a house is typically liquid (you could sell it) it isn't the same as a gold coin you could sell and not change your lifestyle.

I agree that your appreciated house which would throw off 4100 a month in rent income to you if you moved out is an asset, but as long as you do live there, even if you didn't pay much to get in there, you are consuming all that value/income. *Naturally we have no choice: *we need to live someplace. *But since you can't realize the income, it makes it an unusual type of investment. Are there other parallels that could help me rethink the personal home as an asset?

ESRBob *

Hey ESRBob:
My original reply was to reinforce the thinking of Brewer 12345 about the fact that he might be overreaching an asset class by having a large bet on real estate by actively owning it, and on top of that buying more in the form of Reits. I tottaly agree with that thought. Although Reits invest all over the country, and in different forms, apts. offices, strip malls, etc., the same dynamics, (low interest rates, latent demand, etc. etc.),have driven both reits, and individual real estate to close to the nose bleed territory in the past 5 years.
As I mentioned in my prev. post, I recently took about 50% of my Reit investments off the table a few months back because I was feeling a little uncomfortable at the time, because of the above run-ups.
However, I have to admit to being somewhat at a loss to be able to pigeon hole home ownership as an asset class. (I have had many arguments with myself about the subject). In my previous life, had many rental properties that were "investments", (mostly purchased for their tax advantages), and really never viewd my home as an investment.
Have had a few discussions with Cutthroat on this very situation, and have decided that I pretty much agree with him and view my home as an "un-tapped resource."
Our home is far too big to be age appropriate for a couple of "old crows", but I am on the rim of a canyon, and close to walking distance to some very good fly-fishing streams.
So, in conclusion, I view my home as an "untapped resourse", and have resisted the temptation to sell at what I consider to be very close to the top of the current real estate cycle.
Regards, Jarhead

[ESRBob]

Our home is far too big to be age appropriate for a couple of "old crows", but I am on the rim of a canyon, and close to walking distance to some very good fly-fishing streams.

That is my idea of home ownership... I can see why you'd have no interest in moving! Here's to many years of enjoying your 'untapped' resource: may you never need to tap it!

best,
ESRBob