Office Hours Summary…You Are Not Alone

Today, we’re going to do something that’s going to put you on the road to significantly better investing results.

On top of that, I believe it will set you apart from 99% of all the other investors.

It’s not theoretical. It won’t ask you to accept more risk. And it’s not complex. On the contrary, it’s actionable right this second, completely in-line with your personal risk tolerance, and simple to implement.

The question is whether you’ll actually do it.

First, some quick background.

Not long ago, I held another round of “Office Hours.” For those unaware, this is when I open up my calendar, sharing 30-minute phone calls with anyone interested. We discuss markets, various portfolios and strategies, the Broncos, good beers, whatever.

There were some interesting takeaways from these chats. First, nearly everyone I talked with seemed to believe that his or her fears/goals/portfolio/market challenges were largely unique…

They weren’t.

In general, many of you are often in the same situation, which, in a nutshell, is:

  1. Your portfolios are a bowl of soup of random investments, seemingly cobbled together over time
  2. Despite the fragmented, random nature of these portfolios, you are emotionally-wedded to your current holdings
  3. You tend to have a binary view on investing, meaning think in terms of either 100% in an investment, or 100% out (ie “should I keep it, or should I sell it?”)
  4. You harbor a secret desire to gamble, and are looking for me (or someone else) to forecast the future so you can satisfy this desire
  5. All the aforementioned takeaways persist and are exacerbated since you do not have a personal (written) investing plan.

So today, we’re going to fix this. Get out a pad and pen. You’re going to have homework.

Step 1: If you have at least 30 – 60 minutes (preferably more) right now, begin this very moment. If not, open your calendar, and pick a day/time when you’ll dedicate 100% of your focus to your portfolio.

Do this now. Put your scheduled time in your calendar. Don’t move on to Step 2 until you’ve done it.

Step 2: Without looking at your own portfolio, think about what portfolio you would construct right now, looking forward, if you had to sell everything and start over. We wrote about this nearly a year ago in a post titled “The Zero Budget Portfolio”. Give that a quick re-read to help calibrate your thinking.

As you consider this blank slate portfolio, start broadly. What’s the main goal of this portfolio? Capital growth? Income? A mix? Why? Over what time-frame?

Now, narrow down a bit. Given the portfolio goals you just identified, what asset classes will it include? In which global markets? In what allocations? Will it have tilts? What else?

Next, dig deeper. Of any chosen asset or market, which investment and/or fund do you feel offers you the best exposure?

This process can be as simple or detailed as you want.

Side note: Because you know what’s in your current portfolio, you may be tempted to let some of your actual holdings slip into this “blank slate” portfolio, even though they may not truly be what you want. Don’t let that happen. Be intellectually honest.

Write down each underlying asset that you want in this blank slate portfolio. For each asset, make sure you can tie its inclusion back to your overall portfolio goal (e.g. “I will own x shares of this commodity fund because it gives me the diversification I want to offset my broad equity exposure”).

For those of you who don’t know where to start, our white paper The Trinity Portfolio is a good template for how we think about the world of investing.

Step 3: Let’s now address your gambling bone…

Have a hot tip on a biotech that’s going to cure aging? Your son is sure that Bitcoin is going to $50,000? Have a hunch about that one stock you’ve been watching sink lower and lower for the last 15 months…but it’s about to pop now, you’re sure of it…

Pick a percentage of your investable assets to allocate toward gambling. The only criterion is it must be an amount no greater than what you could lose without having it affect your sleep at night. Whether that’s 0.05%, 2%, or 20%, be honest with yourself.

Next, turn the percentage into an actual dollar amount based on your portfolio size, then image burning that cash. Are you still comfortable? If so, great. If not, adjust the amount lower.

When you have a gambling position size that works for you, note it, but put it aside for the moment.

Step 4: Let’s now bring your current portfolio into the mix.

Line up your current portfolio beside your blank slate portfolio. Any holdings in your current portfolio that are not in your blank slate portfolio get the axe.

A good rule of thumb is any fund charging over 1% should go.  Or at least get a serious examination.  We talk about fees a lot on this blog and podcast, and if you want a free book on just how important they are you can read Global Asset Allocation.

“But I have major capital gains” you say (or any other excuse).

Fair enough. In that case, identify when and how you’re going to make the necessary change – regardless.

Think about it – allowing a suboptimal investment to remain in your portfolio year-in-year-out in order to avoid paying a capital gain is flawed thinking. Sure, you’ll suffer the short-term pain of the capital gain, but think of the opportunity cost of holding onto that bad investment.

On one hand, what if it rolls over? You’ve avoided paying taxes on it, but it’s now eroding your capital base. On the other hand, if it doesn’t roll over, but instead just trades sideways, think of the opportunity cost of that capital and what it could be doing for you in an alternative investment. Even a money market fund at 1% would be a better use for it.

So, if you have a reason why you don’t want to move from your legacy holdings to your blank slate holdings, identify the reason, then go through the mental hard work of finding the solution. It will take time, but you must do it.

Step 4.B: You can help yourself address Step 4 by expanding your thinking. As noted earlier, one of the similarities of the people with whom I chatted during Office Hours was they thought in binary terms – all-in or all-out.

It doesn’t have to be this way. In fact, it would be easier on your emotions, and help you sidestep many behavioral landmines, if you tiptoed into the pool rather than did a cannonball.  As we’ve said on the blog and podcast many times, it is completely fine to “go-halfsies”.

So, you have that one awful legacy holding with a huge capital gain? Okay, sell a quarter of it this year and write off the capital gain against the huge loss you’re going to take on that other dog in your portfolio which you’ll be purging. Next year, another quarter. Wash, rinse, repeat.

Be creative. Sure, selling may be hard for various reasons, but find the solution. Take the time to do it now.

Step 5: At this point, it’s time to write everything down, culminating in your overall investment plan.

This can be as detailed as you want. But in general, it’s going to have the following features:

  • Your general portfolio goal (Growth? Income? A mixture? Also, the reasons why this is your goal)
  • Your current holdings
  • What your holdings will be once you’ve implemented your plan (And an awareness of how each of those individual holdings will support your overall portfolio goal)
  • The strategy you’ll use to move from your legacy portfolio to your blank slate portfolio (Being deferential to taxes, the emotional benefit of scaling in over time, and so on…)
  • Your goals after having implemented your blank slate portfolio (Whether that’s a specific return… a desired diversification level… a desired yield amount… a return relative to the market… Basically, it addresses the question – “What will make me feel this portfolio has been a success or not?”)
  • What your plan is regarding your gambling investments – let them ride all the way to $0 if your thesis doesn’t play out? Sell at an appointed stop-loss? What about profits? Sell a certain percentage of the investment at a pre-determined level of gain? Let it ride for the long-term?
  • The future date at which you’ll rebalance and/or re-evaluate your broad portfolio
  • The criteria by which you’ll remove an asset from your portfolio. (Did it hit a stop-loss? Did your reason for owning it change due to various reasons? And so on…)
  • The methodology by which you’ll use new investable capital to add new holdings to your portfolio

You can obviously go far more granular, but if you do just this, it should put you miles ahead of nearly all other investors.

Here’s one final suggestion – automate your portfolio. In fact this is the method I use to invest all of my public assets.

Yes, you’ll still have to go through the short-term pain of creating your blank slate portfolio and transitioning to it from your legacy portfolio – but if you’ll implement your new, blank slate portfolio through an automated service, it will make your life exponentially easier. I did this through our Cambria Trinity Portfolios, and I cannot tell you how much better and simpler it has made my investing life.

So, let’s be realistic – you probably haven’t opened your calendar or gone through any of the steps at this point. But will you?

If you actually read the post I mentioned above, “The Zero Budget Portfolio” you probably recognized that it included the bones of the same action plan I just detailed. Now, recall that we wrote that post one year ago…but my Office Hours calls identified that practically no one had actually written out a plan.

It brings to mind that great quote from Abu Bakr which ends with “…Knowledge without action is futile.”

You can have all the investing knowledge in the world – which portfolio is probably best positioned for the coming decade… Which assets are going to outperform… Which investments in your portfolio are just taking up space…

But unless you act on that knowledge it’s all for nothing.

Take the time. Put in the effort. Get the results you want.