Inside a financial planner's portfolio
Ever wonder where the people giving you advice keep their money? Here's a peek into my personal portfolio.
NEW YORK (Money) -- Question: Financial advisers always know our net worth and investments, but we never know what they are invested in. What are the Mole's investments?
The Mole's Answer: What a great question! In the land of "do as I say not as I do," there are many stories about the adviser or fund manager selling expensive investments to others while investing themselves in ultra low-cost broadly diversified index funds. Could the Mole be one of those - preaching low costs, diversification, and rebalancing only to be in annuities, loaded-mutual funds, and hot performing companies and countries?
Well, I assure you that I'm not. Here's a look inside the Mole's portfolio. I'll start with my equities and then move on to fixed income.
The vast majority of my holdings are in broad index funds, with roughly two-thirds in the U.S. and one-third in international. I would love my portfolio to be as simple as owning the Vanguard Total Stock Market ETF (VTI) (.07% expense ratio) and the Vanguard FTSE All World Ex US ETF (VEU) (.25% expense ratio).
Unfortunately, neither of these existed when I started investing and, even with this recent stock decline, I'd have to pay too much in taxes to simplify and lower costs. For example, one of the Mole's mistakes in the early 90s was to buy the Dreyfus S&P 500 fund (PEOPX) which now has a 0.50% expense ratio - many times higher than alternatives. So my overall portfolio has an average expense ratio of 0.21% according to Morningstar.
I'm pretty much balanced by market capitalization, investment styles, and sectors, taking into account the self-awareness that I don't know what's going to be hot and what's not. I'm also balanced by countries according to market capitalization in my international portfolio. I'm happy to say I took my own advice by not putting everything in China and India.
Now I will have to offer up one confession. I have a little gambling portfolio. You heard me right, I do occasionally buy some individual stocks to have just a little bit of fun. And it is actually a lot of fun to tell people that I bought Citigroup at $3.67 a share and it quickly doubled. What is not fun is talking about the inevitable losers, so I keep them to myself. Now with this confession, allow me to add that I keep a tight rein on the size of my gambling portfolio so that the future welfare of my family will not be impacted by its success or failure.
I'm a believer that fixed income is my portfolio's shock absorber so I've never bought anything sexy like an emerging market bond fund. I once believed in bond index funds and had most of my fixed income in total bond funds or Ginnie Mae bond funds. Today, however, most of it is in the highest-paying certificates of deposits from banks and credit unions that are insured by the FDIC and NCUA, agencies of the U.S. government.
I'm still finding five-year CDs paying over 5.25% while a five-year Treasury is paying well under 2%. Here, I have the advantage over multi-billion-dollar institutions because $250,000 of insurance actually means something to me. Bank Deals is one blog that lists the better rates.
I also don't have my cash in money markets paying under 3%. I find the highest paying money market accounts backed by a U.S. government agency. Capital One Bank and Zions Direct are two banks that tend to offer some of the higher rates. I don't, however, ever chase three-month teaser rates.
Finally, I'm really intrigued by Treasury Inflation Protected Securities and the incredible real yield they are providing. I own some of the iShares TIPS fund (TIP). If all of the money the U.S. government is printing catches up to us in long-term inflation, this will help protect me.
Where I locate my assets is critical to my tax efficiency. I have the majority of my stock index funds in my taxable account where I pay lower dividend taxes and defer my capital gains. I trade so seldom that I still have unrealized gains. I keep most of my CDs within my IRA accounts. They are taxed at the highest ordinary income rates and I can defer them in an IRA or 401(k). I'm going to pay ordinary rates on my IRA no matter what they are invested in now.
I've made some investing mistakes in my life but I'm happy to say I've never bought an annuity or "permanent" cash value life insurance policy. And I've never put a penny into a loaded mutual fund. Primarily because the plan is to build wealth for me and my family, not to make others rich from my money.
So the bottom line is that I'm not quite as low cost as I'd like to be, and I do enjoy having a little fun playing with stocks. But for the most part, my unexciting portfolio is pretty much what you might think the Mole's would be. That said, it also tends to outperform the portfolios of most investors.