In my last post under the heading, Andrew’s Money,I explained why I was investing $20,000 in Canadian bonds at the beginning of September, 2012.
My purchase decisions, as always, are dependent on my portfolio goal allocation. That might sound complicated, but it’s highly likely that my portfolio (and my investment decisions) are far less complicated than yours are.
And that’s a good thing, considering that I’m really not that smart.
In an IQ test, you’d probably beat me—so would most of my students. This mental shortcoming, however, didn’t stop me from building a one million dollar investment portfolio while still in my 30s.
Emotional intelligence (as it relates to fear and greed) is–as Warren Buffett suggests–far more important than an investor’s IQ.
My goal is to have roughly 42% of my portfolio in bonds, with the remaining money split between the U.S. index and the International index.
As a 42 year old without a corporate or government pension to eventually look forward to, I want my bond allocation to match my age, and I increase it slightly each year.
That’s a textbook allocation, and nothing I personally made up.
As mentioned, I’m really not that smart. But I am smart enough to ignore stock market predictions by investment gurus. Why? Because they’re usually wrong. History proves that, over and over.
As Kenneth Fisher wrote, in his excellent 2011 book, Markets Never Forget:
CXO Advisory Group measures so-called gurus—folks who make public market forecasts…And the average accuracy of this group, as measured by CXO? As I write, it’s 47%
Gurus earn a failing grade. There are easier (and more profitable) ways to invest.
This is how my portfolio looked at the beginning of September, 2012:
- 41.3% Canadian bond index (as a Canadian, I have a home country bond bias)
- 30.4% International stock index
- 28.3% U.S. stock index
The $20,000 I added to bonds in September brought my fixed income allocation close to 42% of my total. The remainder of my money was split between the U.S. stock index and the International stock index.
Now take a look at how the prices of those indexes have changed since September 4, 2012 (the date my previous purchases cleared)
|
Exchange Traded Fund Ticker |
September 4, 2012 Prices |
October 26, 2012 Prices |
Price Changes |
|
$71.81 |
$72.28 |
+0.06% |
|
|
$31.84 |
$33.28 |
+4.5% |
|
|
$28.84 |
$28.90 |
-0.03% |
|
|
$24.87 |
$24.99 |
+0.05% |
(*Note: the price of the index itself is no indication of how expensive it is)
You can see how the gap grew between my U.S. index (which gained 0.06%) and my international index (which gained 4.5%). But despite the international market’s recent run-up, it wasn’t always a stellar performer. Its poor returns to June 2012 was a primary reason I bought $29,000 of the international index in June. You can read about it in in this June 2012 post, titled Millionaire Teacher Adds $29,000 to international stock index.
Since that date, however, the International index has risen 18.86% including dividends.
My international stock index has been running away from the rest of my portfolio. Was it a “correct” market call on my part to add $29,000 to this index in June, 2012? Of course not. I don’t make market calls. I was just adding to the lagging component of my portfolio—rebalancing back to my goal allocation by adding fresh money to the indexed asset class that was dragging its butt.
And today, in an attempt to re-align an equal weighting between my U.S. stock and International stock indexes, I placed an order to buy $21,000 of my U.S. stock index.
No, I didn’t sell anything to come up with the money. I prefer to keep my transactions costs low, and I only sell to rebalance if my allocation shifts far from my goal allocation. As mentioned, my goal allocation is 42% bonds, with the remainder split between the U.S. and International stock indexes.
Most people, unfortunately, chase rising asset classes. They feel good about buying investment products that have recently risen in price. And they shun investments that have fallen.
If that’s you, don’t be too hard on yourself.
Most people (including most financial advisors) act similarly. And this kills their returns.
In the Boston-based Dalbar study on investor performance, it was shown that the average investor in U.S. stocks between 1990 and 2010 underperformed the market by 5.31% per year. In 2011, they did even worse. The average investor in U.S. stocks lost more than 5%, while the U.S. index gained 2.12%.
Even when investing in bonds, most investors try timing their purchases and they pay for their overconfidence. From 1990-2010 the average bond investor in the U.S. made 1.81% per year. The bond markets, however, returned 6.89%.
It’s human nature to think that you will do well if you buy the stock, fund or index that is “doing well right now” but if that’s the way you think, you’ll be disappointed with your long term investment results. You’ll buy high, rather than dollar cost averaging, or rebalancing a diversified portfolio to ensure that you take advantage of asset class dips. As billionaire Ken Fisher has said, it’s extraordinarily difficult, emotionally and psychologically, to equal the returns of a stock market index.
I explain this philosophy in my book, Millionaire Teacher. If you would like to learn more, please check it out.
