What I Do With My Personal Portfolio

By Jack Forehand, CFA (@practicalquant)

Josh Brown of Ritholtz Wealth Management wrote an interesting article a month or so ago about how he invests his money and it got me thinking about how more investment bloggers should do the same thing. It is one thing to talk about the investing concepts you believe in, but the additional step of seeing how you put those concepts to work in practice can be valuable.

So in that light, I decided to follow his lead and write an article on how I invest my money.

But before I start, I think it is important to first make it clear that the things I hold in my portfolio, or the things that anyone else who writes about markets holds in theirs, should have no impact on what you do with your portfolio. Every person is unique and everyone has many different factors that impact how they manage their money. I think looking at someone else’s portfolio is much more useful from the perspective of analyzing the thought process they use to arrive at what they own rather than a recommendation to own any of those things. As you will see as I go through this process, there are several decisions I have made that could certainly be challenged by an outside observer. Investing money is a difficult process and there are many more factors that go into it than just what produces the best return.

Now with that disclaimer out of the way, on to my holdings.

What I own

The majority of my assets are in three things: real estate, public equities, and my ownership stake in Validea. Depending on what that ownership stake is worth, it could be my biggest asset or smaller than the other two, but either way, it is an illiquid private company, so for my planning purposes, I don’t really consider it.

I have lived in Connecticut for most of my life and my largest asset outside of Validea is my house here. We renovated it in 2010 and I didn’t want to take on any debt to do it, so I waited until I could pay for it with cash.  My wife is from Georgia and all her family is down there, so once we got married, we bought a second home about 50 miles north of Atlanta and now spend part of the year there. Thankfully, house prices are much lower there than they are in the Northeast.  I rent my Connecticut house when we aren’t in it to offset the cost of the second home so I was able to buy it without increasing my costs beyond what I paid for my primary house.

In my overall financial picture, these two houses are my biggest assets. The Georgia house has done well financially since the real estate market is booming down there. The Connecticut house has not, since people seem to be lining up to leave the Northeast. I would lose money on one if I sold it and make money on the other, so it is probably a wash.

For my public investments, I am 100% equity and always have been. With my long-term time frame, I have never seen a use for bonds. That has worked out very well for me despite enduring the bear market of 2008. I am a big believer in factor investing, particularly value investing, and my portfolio reflects that. My portfolio is currently tilted toward small-cap value stocks and toward international stocks (I am 30% international, which tilts me toward non-US stocks relative to your average US investor, but it is actually a US tilt relative to the global market portfolio) and is invested in the same strategies we invest our clients in. To state what you are likely thinking, yes, both of those exposures have not been good ones over the past 10 years. But they were significant positives from 2000 to 2007. I am a long-term investor and I think the evidence is pretty clear that the only way to get the rewards from factor investing is to be able to sit through the periods of underperformance. So I have stuck with the approach and plan to continue to.

I couple my equity portfolio with a tail-risk hedging strategy. As someone who worked in the investment business in 2008, I learned just how exposed I am to the stock market. Not only did my portfolio fall significantly, but so did my income, the value of our business, and the value of my real estate. Basically everything I have went down. After that, I decided that if market valuations got high again, I would hedge a portion of my portfolio. My goal here is not to protect from run of the mill corrections or the regular ups and downs of the market. I am more worried about the major bear market periods where the value of everything I have will fall significantly. I want to have one thing that falls less during those periods. I implement this in a systematic way, though, to keep my emotions out of how it is done.

Finally, I have my daughters 529 plan, which is in Connecticut’s program that offers a variety of bad TIAA CREF investment options. It isn’t optimal, but it provides exposure to the market over time. We started contributing to that the day she was born in order to hopefully stay ahead of the rapidly rising costs of college.

That basically covers everything I have. My only other significant asset is a racing sailboat. But to use the word investment for that would be a huge stretch. To understand the returns that come from owning a racing sailboat, the best exercise to use is to dig a hole in your back yard and to begin dumping money in it. When you are done, you still will likely have a better return than I have on the boat. But I am a big proponent of enjoying life and sailing is my favorite thing to do, so I am willing to live with the losses and make up for it by being frugal in other areas of my life.

Critiquing My Approach

If I’m going to write about what I own, I think it’s only fair to also write about how I might evaluate it if I was an outside observer. There are a few areas that I might question:

[1] Why such a high percentage in real estate?

Real estate is typically not a great investment. It produces lower returns than equities and it requires significant ongoing costs. So I certainly understand that my investment in real estate is more about my personal happiness than generating any kind of investment return. I don’t even like to use the word investment for it because I am not investing in it with the goal of generating a return. But the decision to renovate my house and to pay cash for it vs. investing that money in the market over the past decade has certainly been a losing one. For me, the peace of mind of having less debt is worth it, but if you looked at the decision from a capital efficiency perspective, you could definitely draw the conclusion that it was not the correct one.

[2] Your portfolio is a perfect storm of things that haven’t been working recently

Another fair criticism. Small-cap value and international exposure have both performed poorly in the past decade and have been a disaster over the past five years. You could certainly argue that I shouldn’t have stuck with them. You could also argue that indexing is a better choice. But I am a big believer that market history is our best guide as to what works, and the long-term evidence to support both is still there. I have written in many of my articles that I think most people should invest passively because periods like this are really difficult to sit through, but I am personally willing to do it and I believe long-term rewards will come from that decision. As I talked about in this article, though, I could be wrong. Also, on the positive side, having my portfolio 100% in equities and not using bonds given my long-term time horizon has worked out very well despite the fact that some of my portfolio tilts have not.

[3] Why is Someone with a 20+ year time horizon hedging?

I hope to never retire. I like what I do too much and would go crazy trying to play golf all day or sitting on a beach. But if you were looking at my situation using conventional retirement planning, I have about 25 years to go. That time horizon would call for a high level of equity exposure and would not call for hedging. But I am doing it anyway. For me, knowing that I have protection should a major negative market event occur is worth it, and I know that I am also giving up some long-term return to do it. This comes back to the previous point that everyone’s situation is different. If I didn’t work in the investment management business, where everything I have goes down at once during a market decline, I would be pursuing a different strategy.

[4] The boat is a money loser

I can’t argue with this one, so I won’t try. But sometimes doing something you love requires looking at more than a profit and loss statement (obviously provided that you can comfortably fit it into your budget). I don’t really go on vacation much and limit spending in other ways to offset what I spend on the boat. Now if I could only figure out a way to improve my finishes in the races, I would be on to something.

Everyone is Different

Ultimately, I don’t think there are too many conclusions that can be drawn from any of this. Every situation is different, and even people like me who do this for a living will often make decisions that are sub-optimal from a long-term perspective due to circumstances that are specific to them. I also am just as subject to my emotions and biases as everyone else. So the way I invest my money certainly deviates from what a portfolio optimizer would tell me to do. Investing your money is a lifelong exercise. And it is one that has no right answer. I am just doing what works for me and I hope it ultimately will help me reach my long-term goals. 

Photo: Copyright: 123rf.com / hatza

Jack Forehand is Co-Founder and President at Validea Capital. He is also a partner at Validea.com and co-authored “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies”. Jack holds the Chartered Financial Analyst designation from the CFA Institute. Follow him on Twitter at @practicalquant.