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Building a Portfolio


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I was having coffee with a friend who has been (index) investing for a number of years, has read extensively and (perhaps) most importantly did not panic in the great recession.(High paying Silicon Valley jobs, a strong stomach and optimism are wonderful things!)

 

Anyway he wants to move out indexing and asked me for advice on building his portfolio.  He is thinking about dividing his portfolio in the following four equal parts (.25 each)

 

  • mechanically invested value, like Tobias's Acquirers Multiple
  • Alternative mostly real estate with perhaps an Angel investing flyer
  • Cash for really good opportunities in public or private markets (or the next crash) 20% of this (5% of portfolio) could go into merger arb type investments
  • Stocks he would pick himself (I think he can probably do a decent enough job)

 

I thought that this was a pretty good allocation and suited his goals, temperament and knowledge. (Longterm capital appreciation, tolerant of risks, but need to sleep at nights.) Although he probably should have some international diversification, that is another discussion.

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he wants to move out indexing and asked me for advice on building his portfolio.  He is thinking about dividing his portfolio in the following four equal parts (.25 each)

 

He has a full-time job. His proposed portfolio is way too complicated. How will he have enough time?

 

If he wants to scratch his investing itch, he should put new money into *one* of those four options. Keep current portfolio until he has clearly established his circle of competence.

 

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He may have substantial capital gains in his portfolio. If so, he should stick with his current index funds. It is unlikely that his proposed portfolio will outperform enough to recover his capital gains taxes.

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I was having coffee with a friend who has been (index) investing for a number of years, has read extensively and (perhaps) most importantly did not panic in the great recession.(High paying Silicon Valley jobs, a strong stomach and optimism are wonderful things!)

That's great, sounds like he has a strategy that has done well thus far.

 

Anyway he wants to move out indexing and asked me for advice on building his portfolio.  He is thinking about dividing his portfolio in the following four equal parts (.25 each)

And now it sounds like the "pressure to do something" has overwhelmed him into fixing what already seems to be working just fine.

 

Any of those four options will fail if your friend falls prey to the "urge towards activity".

 

For example, take option (1): mechanical value-investing. Tons of people try this at different points in time and the vast majority abandon it. There are only a handful of PMs who continue to do so. Most can't sit still.

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I agree with comments above.

 

Couple thoughts from me:

 

  • mechanically invested value, like Tobias's Acquirers Multiple
  • Alternative mostly real estate with perhaps an Angel investing flyer
  • Cash for really good opportunities in public or private markets (or the next crash) 20% of this (5% of portfolio) could go into merger arb type investments
  • Stocks he would pick himself (I think he can probably do a decent enough job)

 

I am not sure I buy the "mechanically invested value" approach. QVAL performance was atrocious last year. But we discussed it elsewhere and I think you don't want to revisit this. Even if I went with mechanical value, why not get PRF and be done with it?

 

I think "alternative" is a bunch of newish faddish crap. I've seen this in various more complicated passive portfolios and I never understood the attraction. Especially since people put this into things that are not really alternative. I.e. REIT is not the same as real estate. OTOH if you put money into real RE, you have to have someone manage it, take care of it, etc. Do you really want the trouble?

 

25% cash or bonds is reasonable based on Graham, so +1 on that.

 

Picking stocks: what others above said.

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Thanks for the responses.

 

He has a full-time job. His proposed portfolio is way too complicated. How will he have enough time?
He's semi-retired and comfortable(at least as far as I know.)

I think "alternative" is a bunch of newish faddish crap. I've seen this in various more complicated passive portfolios and I never understood the attraction. Especially since people put this into things that are not really alternative. I.e. REIT is not the same as real estate. OTOH if you put money into real RE, you have to have someone manage it, take care of it, etc. Do you really want the trouble?

This is the part that 'concerns' me.  The alternative is really alternative (we are in a couple of private RE deals together.) all private some self done, some 'sponsored'.  (We both belong to a group that has a ton of real estate deals coming through, small 10-25 million dollar deals with 20 to 100k chunks.) The investors in the group have averaged about 15 to 18% a year in these deals, including the great recession.

 

Any of those four options will fail if your friend falls prey to the "urge towards activity".

 

For example, take option (1): mechanical value-investing. Tons of people try this at different points in time and the vast majority abandon it. There are only a handful of PMs who continue to do so. Most can't sit still.

He is about as phlegmatic and emotionally detached from money as you can get. He has been studying this portfolio change for a year and a half. He has no urge to activity.

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My advice would be for him to keep letting his high income compound at 8% per year for doing absolutely nothing.

 

If he really wants to be more active, take 10-20% and invest in some individual stocks. Emphasize to him that he's probably decreasing his ROI in this scenario though.

 

Also, if a great private investment comes around he can simply cash out some of his index funds and go invest. No reason to have xx% sitting around in cash as a "potential private investment pile."

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I think "alternative" is a bunch of newish faddish crap. I've seen this in various more complicated passive portfolios and I never understood the attraction. Especially since people put this into things that are not really alternative. I.e. REIT is not the same as real estate. OTOH if you put money into real RE, you have to have someone manage it, take care of it, etc. Do you really want the trouble?

This is the part that 'concerns' me.  The alternative is really alternative (we are in a couple of private RE deals together.) all private some self done, some 'sponsored'.  (We both belong to a group that has a ton of real estate deals coming through, small 10-25 million dollar deals with 20 to 100k chunks.) The investors in the group have averaged about 15 to 18% a year in these deals, including the great recession.

 

Hmm, if the returns are so good, why does it concern you? Because you think they are not sustainable? Anyway, this is not an area I can advise in.

 

I guess I have similar question as others: if he has high wealth/income, why switch? why try to outperform at all? For fun and activity?

 

If he's high wealth, but not-high-current-income (as in salary), then I think 25% cash makes sense. Otherwise it depends on his wealth/income ratio. But still 25% cash IMO makes sense (so I guess I disagree with Travis on this).

 

Other than that, I think it's not a bad allocation. But really almost any "normal" portfolio would work.

 

 

 

 

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