TILT TOWARD BETTER PERFORMING ASSETS

So you would be wise to use these Investing 2.5 principles when building up your portfolio.

Look at the same ratio of stocks to bonds (60% stocks and 40% bonds) that we looked at in Version 2.0 Investing. However, now in Version 2.5, you have many more asset groups, and many more stocks (about 12,000). Those stocks are spread all over the world, so no one country is going to collapse the portfolio. A single bankrupt company is not going to pummel your portfolio either.

Instead of all the stock holdings being in the S&P 500 (Version 2.0), the 2.5 portfolio now has 6% in each of the following asset classes:

US Small Value, US Micro Cap, US Large Value, S&P 500, Intl Large, Intl Large Value, Intl Small, Intl Small Value, Emerging Markets, REITs

The 40% of bonds is the same ratio but is now only short-term (five years or less) bonds.

VERSION 2.0 VS 2.5

Using the same amount of money but having a globally diversified, tilted portfolio can make a big difference—about $300,000. Notice that the risk/volatility (standard deviation) is slightly lower than the Version 2.0 portfolio.

INVESTORS DON’T MAKE WHAT THE MARKET GIVES

Investors have a bad reputation for letting their emotions drive too many of their investment decisions. Investors torpedo their portfolios when they get all excited about the market when it is up (and buy when it is high). However, then the market falls—and investors get scared and pull the money out of the market (and sell when it is low). Buying high and selling low is not a ticket to prosperity!

Buying high and selling low shows up in the numbers. As evidenced in the Morningstar study above, the average equity investor made 5.19%, while the average Version 2.0 investor (Index) made 7.07%.

WHAT MAKES CERTAIN FUNDS DIFFERENT

There are fund companies that use the principles of Investing 2.5 as they build up their mutual funds or Exchange Traded Funds (ETFs): they tilt their funds to have a slightly larger ratio of small, value, and profitability companies than the normal index fund.

GOOD ADVISORS ADD VALUE

Vanguard studied how much value a good advisor can add to an investor’s portfolio. They determined that overall, it can be as much as 3% per year. Here’s the breakdown:

NOT ALL ADVISORS ARE CREATED EQUAL

In the financial world, most folks who give advice are salespeople first. Their obligation is to their company, not to the investor.

Those that choose a role where the customer’s needs must come first are called fiduciaries. There will be an overall cost for their services—for example, 1.0% of the assets they look after—but beyond that charge, they will not make money from any funds, products or advice they give.

Make sure to find an advisor that will take on a fiduciary role 100% of the time. Because now that more consumers are figuring out the fiduciary role, some firms have responded by signing up to be a fiduciary some of the time. Like someone claiming to be a vegetarian some of the time…it does not work that way.

Get the financial advisor to put in writing that he/she will act as a fiduciary 100% of the time, with their signature attached. It is your money, and it is worth asking up-front questions.

DISCLOSURES

The information presented in this class reflects the views and opinions of Harvard Avenue, LLC, and is provided for general education purposes. It should not be construed as an offer to buy or sell investment products or securities. The information and data provided are for illustrative purposes only. The hypothetical portfolios shown are not meant to be actual portfolio recommendations.

The performance figures in this presentation often use hypothetical results. While we believe that this information provides value, hypothetical data can be misleading because it does not represent actual performance and should not be interpreted as an indication of actual performance.

Portfolios shown Reflect Annual Rebalancing

US Stock Allocations:

1970-1980: 70% US Market Equity, 30% US Small Cap Value

1981-2016: 60% US Market Equity, 30% US Small Cap Value, 10% REIT

International Stock Allocations:

1970-1980: 50% International Market Equity, 50% International Small Cap

1981-1993: 60% International Market Equity, 30% International Small Cap, 10% REIT

1994-2016: 40% International Market Equity, 30% International Small Cap, 20% Emerging Markets Value, 10% REIT

Bond Allocations:

1970-1996: 30% Short-Term Treasury, 70% Intermediate Term Treasury

1997-2016: 30% Short-Term Treasury, 50% Intermediate Term Treasury, 20% TIPS

Stocks:

Emerging Markets: Dimensional Emerging Markets Value Index from 1994

International Market Equity: MSCI World ex-US Adjusted Market Index from 1994

International Small Cap: Dimensional International Small Cap Index from 1970-1980

International Small Cap Value: Dimensional International Small Cap Value Index from 1981

US Market Equity: Dimensional US Adjusted 2 Index from 1970

US Small Cap Value: Dimensional US Small Cap Value Index from 1970

Real Estate Investment Trusts: Dow Jones Select REIT Index 1981-1993; S&P Global REIT Index from 1994

Bonds:

BofA Merrill Lynch 1-Year US Treasury Note Index from 1970-1980

Barclays Treasury Bond Index 1-5 Years from 1981

Five-Year Us Treasury Notes from 1970-1980

Barclays US Treasury Bond Index Intermediate from 1981

Barclays US TIPS Index from 1997