Portfolio Thoughts

Let me share with you my personal portfolio allocation. Not including cash at the bank, I currently have 95% of my invested assets in stocks and stock funds. The remainder is allocated 5% to bonds. Do NOT consider that a recommendation. I have built my personal investment strategy to follow the theory that if I have invested it, then I have invested for the long-term. Therefore, normally that allocation would be nearly 100% in stocks. It is very important to understand that I keep my safety reserves at the bank, in cash. When I am at my optimal allocation, I often refer to it as a barbell strategy, made up of cash on one end and stocks on the other. Let me offer some additional notes before I get to steps I am taking today within my portfolio to reflect what many might call an overvalued stock market.

  • In my household, we live within our income, therefore, I do not need to tap my high-interest savings each month to make ends meet.
  • I carry what many would deem to be an excessive amount of emergency reserves at my bank, but as a business owner and parent of young children, that strategy is my conservative offset to a portfolio that can be extremely volatile at times.
  • The majority of my investment assets are in retirement plans, and as a 40 year-old, I have a long time horizon before I plan to use those assets.

So let me tell you where (and why) I currently own some bond funds in my investment accounts. First, I own the bond fund which is a high-quality, short-term bond fund in my Joint TOD account with my wife.  I have this safer fund because my Joint account would be the first resource I would use if I ran through all my cash at the bank, and because right now I have been considering a real estate investment that would require some capital up-front. I almost always retain a little bit of cash or bonds in this account for the added layer of security. If the real estate investment falls through (and it appears it will), then I will still likely leave this money in the short-term, high-quality bond fund for reasons that I am about to cover.

I have stopped for the moment making regular contributions to my Joint TOD investment account and am following the general advice I have given to several clients. Many of my clients are concerned that the stock market is not only highly valued (i.e. stocks are overpriced), but also due for a correction. Whether that correction will be triggered by the political climate, event-driven, or just a slowdown of the economy is beyond the scope of this post. The point is that clients are very weary of investing in stocks after 9+ years of a bull market, dating back to March 2009. Logic then suggests that if you are not going to invest in stocks, one would invest in bonds. However, the price of bonds is inversely correlated to interest rates, therefore as interest rates rise, the price of bonds typically drop, thus in the short term, an investor may not receive the capital preservation they are seeking when investing in bonds.

A great alternative to consider…paying down debt. I am sure I can find an unending line of financial advisors who will dispute paying down debt, especially long-term debt at historically low interest rates. However, if you have ample emergency reserves and opportunity capital, and are fulling funding your retirement accounts, I would argue reducing debt is never a bad thing. (I consider opportunity capital to be money that is liquid, typically invested in a brokerage account, and can be used to invest in an opportunity such as rental property, real estate, a business interest, etc.) We have helped several clients payoff the mortgage on their primary residence this year, almost all of which had incredibly low interest rates. How many do you think have regretted that move? (Answer: None) Following that advice, I have been prepaying one of our automobiles this year in lieu of saving additional dollars in our Joint TOD account.

For those sitting on a large sum of cash, maybe from a bonus or an inheritance, consider using that money to pay off debt. Like our clients who used significant cash to pay off their houses, they can now invest the old principal & interest payments into their long term strategy – gaining the benefit of dollar cost averaging that money into the plan rather than a large lump-sum investment.

Do not be confused – this is not market timing! Market timing would be stopping the car and putting it in reverse. I liken this strategy to taking my foot off the gas and just decelerating my exposure to the stock market.  It will soften the blow if what will eventually be a market correction, reducing the emotional stress associated with that circumstance. Remember, emotional discipline is important, especially at times of great volatility. Knowing I have already taken some steps to address that now will help me manage that impulse to do something drastic later.


One thought on “Portfolio Thoughts

  1. Jamie, great commentary. I would add that as I got closer to retirement, paying off long-term debt like mortgages became very important. Not having that big monthly expense has a huge impact on cash flow. Refinancing to a 15-year mortgage, or making extra principal payments are ways to accomplish this goal.


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