Where The Pros Stash Their Own Dough
When it comes to their own money, Wall Street pros know better than to listen to Wall Street hype. Learn from what they do, not from what they say.
(MONEY Magazine) – Pick up the financial pages or tune in to CNBC and you would swear that Wall Street's bright lights think that the way to make money is to ignore the stock market and instead flip real estate, exploit high oil prices and trade currencies. But if you start asking smart investment professionals what they do with their own money, you'll get some unexpected answers. We know, because we asked. Here are five of the most surprising, and enlightening, secrets we learned.
SECRET NO. 1 I Don't Try to Beat the Market THE PRO: HENRY BLODGET, ONETIME INTERNET STOCK SEER
"I invest the way I think most small investors should invest: via top-down asset allocation, using mostly low-cost index funds." That's not shocking advice. But what may be surprising is that it comes from former Merrill Lynch Internet analyst Blodget, whose bullish forecasts for Amazon.com and other stocks helped fuel the stock-picking mania of the tech and Internet bubble.
Blodget--now barred from the securities industry, partly for publishing positive research on a company he privately disparaged--is as dissatisfied with picking stocks as you may be with your old dotcom holdings. "In the past few years," he writes in an e-mail, "I have studied the academic research about active management (stock picking) and have been startled and depressed by the extent to which this hurts rather than helps investors (even professionals)."
Still, Blodget, 39 and now a financial journalist, can't completely shake the stock-picking habit. "I keep a fraction of the portfolio in a few multiyear holdings (mostly Internet)," he says, "but I regard this as a personal foible rather than a serious attempt to beat the market."
SECRET NO. 2 I Get Professional Help THE PRO: ALEXANDRA LEBENTHAL, MUNICIPAL BOND GURU
The president of Lebenthal is a third-generation veteran of the bond industry. Her husband, Jay Diamond, is a REIT executive. But when Lebenthal got a windfall from selling the family business in 2001, the couple decided that they shouldn't invest the money themselves. "My husband and I realized this was a pool of money we wanted to do the right thing with," says Lebenthal, 41. "We both said, 'We don't want to mess this up by investing in a lot of things willy-nilly, without all the pieces tying together.'"
Lebenthal turned to her brother Jim, an equity portfolio manager, for help. Chances are you don't have a brother in the business, and your net worth is a little shy of Lebenthal's, but the lesson holds: As your portfolio grows and you start planning for the long haul, getting a little advice can be a smart move. You don't need to make a major commitment to get started. Big fund companies are trotting out new advice services for their customers, and many financial planners charge hourly rates for one-time advice or periodic guidance.
SECRET NO. 3 I Act Like I'm a Child THE PRO: GUS SAUTER, VANGUARD
How much of your money should you put at risk in the stock market? A Vanguard life-cycle fund targeted for 2015 retirees has about a 50% stock-50% bond allocation, and its fund for 2025 retirees has about 60% of assets in stocks.
But the 51-year-old Sauter, Vanguard's chief investment officer, is more aggressive. He has 82% of his portfolio in stock funds. "A lot of people become conservative a bit early," he says. "With life expectancy increasing, I expect to live quite a while. And my money needs to be growing in the asset class that I expect to have the greatest return."
SECRET NO. 4 I Don't Care if I Have a Bad Year THE PRO: RUSS KINNEL, MORNINGSTAR
Advertisements for mutual funds trumpet their one- and three-year performance records as tallied by Morningstar. But Kinnel, the company's director of fund research, says he barely pays attention to those numbers when investing.
Instead, Kinnel focuses on whether a manager maintains a consistent investment strategy and the company behind him has a history of sound stewardship. "They should have a good track record of doing what's right for fundholders," says Kinnel. And he'd rather know how a fund has done over a decade than how it's done during the past year. "The long term tells you more about skill," says Kinnel, 39. "The shorter term tells you more about the current market environment."
One way to find the right funds: Select from the MONEY 50 list (see page 200), which screens for low expenses and management integrity (a characteristic that includes closing funds when their size can hamper their investing strategy). And, says Kinnel, you can learn a lot from a fund's public communications. Do managers offer up excuses for a bad year or do they instead discuss lessons they have learned?
SECRET NO. 5 I Avoid Paying Taxes THE PRO: ROB ARNOTT, MONEY MANAGER AND INVESTING THEORIST
Arnott, the editor of the Financial Analysts Journal and chairman of Research Affiliates, which manages $10 billion in assets, used to overpay the tax man. Today he focuses on investments with favorable tax treatment, such as timber, futures, certain derivatives, and tax-conscious mutual and hedge funds.
Arnott, 51, traces his tax sensitivity to a late-1980s assessment of his investing record, when he found that he beat the S&P 500 index, on average, by five percentage points on a pretax basis--but by a mere single point on an after-tax basis. "That's a lot of aggravation for an incremental 1%," he says. A later study he co-authored found that, on an after-tax basis, most mutual funds lagged the S&P. All the trading the typical fund does leads to heavy capital-gains liabilities. "That's a pretty damning indictment of the way taxable money is managed," he says.
You can forget about timber and derivatives, but you can learn about a fund's after-tax returns in the "tax analysis" section of its listing on Morningstar.com. You can also favor index funds, which have a smaller tax bite because they do little trading. And when looking at yield-producing securities, remember that dividends (other than those from REITs) are usually taxed at a lower rate than interest payments.