Eating Your Own Cooking

A Financial Networking Tip and How I Invest My Own Money

Photo: Pixabay

When I used to go to FinTwit networking events I didn’t always enjoy meeting new people.  I know that sounds harsh, but I recently realized that it wasn’t the people that were the issue.  It was the way I was trying to build rapport.

Most networking conversations start with the same dreaded question: “What do you do?”  You then go on about your role and they do theirs and, unless you guys have some great attraction towards each others’ work, the conversation gets boring rather quickly.  Yes, you can ask about where they are from, where they went to school, etc., but unless you get lucky and find some common ground, it isn’t all that fun.

Fortunately, I chanced upon a different approach that made my conversations at financial networking events much more engaging.  After meeting someone I like to ask:

So, how do you invest your own money?

It might seem extreme to ask this to someone you just met, but I’ve found that most people are very open about this.  In fact, not only were people willing to tell me their allocation percentages, one person even logged into their 401(k) on their phone and showed me their portfolio, balance and all.  I was blown away by the response.

As I started to think about it more, I realized why the question was so effective at creating a positive reaction.  First, it doesn’t exclude anyone.  Whether you have $100 or $100M, you can discuss your investment philosophy.  Second, it leads to so many other questions.  You pick stocks?  Which ones?  Why not go completely passive?  Why exclude gold?  Why not Bitcoin?  You can go on and on.

This kind of conversation helps you learn about someone’s personality and can provide you with a new way of thinking about your investments.  However, the most important reason why this question is effective is because no one talks about it.  For example, my boss, Josh Brown, just recently wrote about how he invests his own money after 10 years of being a financial blogger!  As soon as he wrote it, Twitter went nuts.

And I know why.  We love the transparency because few people have written instruction manuals on how to invest.  Yes people say, “Buy Stocks” or “Buy Bonds,” but they don’t always say how much?  Should you just do 110 – your age for your percentage in stocks?  What about international markets?  Should I include commodities, trend-following, etc.?  This is a complex question and seeing what people do with their money is a better clue than what people say they do with their money.  Or as Nassim Taleb famously said:

Don’t tell me what you think, show me your portfolio

So, without further ado, I am going to show you my portfolio.  For compliance reasons I cannot list specific tickers, but I can say that the asset manager with most of my money may or may not have a ship in their logo 😉

My personal investment philosophy is:  To continually buy a globally-diversified set of income-producing assets through passive investment vehicles while paying low fees.

My current allocation is:

  • 40% U.S. Large Cap Equities (S&P 500)
  • 30% World Equities (non-U.S.)
    • 15% Emerging Markets
    • 15% Developed Markets
  • 10% U.S. Real Estate Investment Trusts (REITs)
  • 20% U.S. Intermediate Bonds (duration ~5 years)

All of these are ETFs, but mutual funds could provide similar results.

Is this allocation optimal?  No, and it never will be unless I get lucky.  My portfolio has already underpeformed the S&P 500 since I started investing in 2012, but that’s fine with me.  As I have written before, even in an optimal portfolio some of your assets will lose money/underperform in almost every year.

Has this been my allocation since 2012?  Generally yes, but practically no.  I used to have 50% in U.S. stocks, but have since increased my international exposure.  I also used to have 5% in gold, but then I realized why I couldn’t hold gold for the long run.  I even had 2% in Bitcoin, but sold all of it between $12,000-$13,000 recently.  I will explain this decision in greater detail in a future post.

Why 20% in bonds?  I still ask this question everyday.  Maybe it should be 25%.  Maybe it should be 15%.  Maybe I should stop being weak and put it at 0% (lol jk).  I don’t know.  But I do know that the rebalancing bonus is real and I would prefer to have some dry powder for this rebalancing when stocks eventually crash.

As you can see, the questions can go on and on.  You also may have noticed that while my investment philosophy sounds coherent and straight-forward, the implementation has been messy.  The act of rebalancing across your retirement accounts (i.e. 401(k) and IRAs) can be a chore in itself that we haven’t even started discussing (and won’t).

To make this easier, I recommend allocating all of your retirement accounts in the same way so that they are, for all practical purposes, duplicates of each other.  After rolling over my 401(k) into my IRAs I did this and now both my Traditional and my Roth IRA hold the exact same funds in the same percentages.

My brokerage account is similar to my retirement accounts, but I own no U.S. REITs and only allocate 30% to S&P 500 with the freed up 20% going into U.S. value factor funds (Yes, I still believe in value).

My emergency fund is 6 months worth of expenses, with 3 months cash in a high-yield checking account earning 2.25% and 3 months in NY Tax Exempt Muni Bonds.  Since I don’t have a family and my liabilities are limited, I think 6 months of cash reserves is enough…for now.

Do I regret any of my investment decisions?  Yes and no.  I don’t regret any allocation changes or what I have owned historically.  These were learning experiences and worth the cost of ownership.

However, I do regret not investing even more in my own skills.  After hearing about how Michael Kitces invests mosts of his money in his own development/businesses on Patrick O’Shaughnessy’s podcast, I realized I probably should have done the same when I was in my mid-twenties.  I did spend a lot of time learning programming and bettering myself, but I have one of those personalities where I feel like I did not behave optimally.  I could have done a lot more with my time, but maybe that is a part of the learning process too.


Eating My Own Cooking?

The question you might be wondering is, “How similar is my portfolio to the one that is recommended by my firm to our clients?”

When it comes to “eating your own cooking” you don’t have to be exact, but you should be directionally similar.  It won’t matter much if you have 10% more of factor X or 10% less of geography Y.  It does matter if you preach passive investing in global equities, but then day trade commodities.  At the end of the day, it all comes down to following your core investment tenets.

My core investment tenet is to buy income-producing assets and then let markets do their work.  I don’t have a perfect plan for how to implement this, but I have allocation guidelines that have kept me on track throughout the last 6 and a half years.

So, now that you know how I invest, do you feel like you know me better?  Do you feel like we would have an engaging conversation in real life?  If so, at your next financial networking event, consider asking:

How do you invest your own money?

Thank you for reading!

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This is post 134. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data

 
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15 Responses

  1. Anonymous commented on Jul 23

    Hi Nick, I’ve been sharing my portfolio design for years with Seeking Alpha members. I’m retired and now taking a distribution since the beginning of 2018. In retirement I concentrate on income creation and let price tag along.

    My only market action is the BUY more income shares to continually grow the income stream. Using my current strategy yielding 10% for over 5 years shows me there is an alternative to income investing. My quarterly-reports show portfolio balance, distributions and surplus dividends for continual reinvestment in a visual chart format.

    In my latest report Investing in high yield assets comes with challenges and I show all aspects both good and bad. But the main focus is the increasing total income growth despite price volatility controlled by market sentiment. Thanks Nick for a common sense strategy you follow and good luck in this market.

    https://seekingalpha.com/article/4273109-2019-half-year-10-percent-yield-update-truth-behind-high-yield-revealed

  2. Anonymous commented on Jul 23

    I like the fact that often people tend to advocate an investing strategy without following it with their own money.
    Thank you for sharing your portfolio and I find it aligned with your previous posts.

    It’s a good motivation to read how you processed the information and the evolution of your portfolio.
    I believe that you should invest in what resonate with you and also won’t stress you out or disturb you in your sleep.
    On my side I got
    10% RE+REITs
    28% European Bonds
    26% Shares on which
    + 46% SP 500
    + 4% Russel 200
    + 25% Stoxx 600
    + 5%MSCI Europe Small Caps
    +15% MSCI Emerging Markets
    + 5% Topix
    36% Cash (which represent 3 years salary)
    I don’t feel secure enough in investing my cash into the share allocation but I’m working on it.

  3. Anonymous commented on Jul 23

    I would disagree with the advice to keep the allocation identical across all your accounts. This definitely makes things easier, but it’s not tax efficient.

    A 60/40 mix in a traditional IRA and a 60/40 mix in a Roth IRA is MUCH less tax efficient than having all your equities in the traditional IRA and all the bonds in the Roth IRA. It would be even better to hold capital gain generating stocks in a taxable account.

    It may not make sense to adjust the existing holdings but adjusting new contributions could have a big payoff in the future in the form of a smaller tax bill.

    • Nick Maggiulli commented on Jul 24

      “A 60/40 mix in a traditional IRA and a 60/40 mix in a Roth IRA is MUCH less tax efficient than having all your equities in the traditional IRA and all the bonds in the Roth IRA.”

      If your tax rate now is the same as it is in retirement then this statement is NOT true. If you think it is, please re-do your math.

  4. Anonymous commented on Jul 23

    Why munis? Does the top marginal tax bracket kick in earlier than I think?

  5. Anonymous commented on Jul 24

    Some good points in the comments. Although there are many good books on investing, I have trouble finding good information on allocation based on tax-saving optimization. As as individual investor, I would love to read more about that. Any suggestions?

  6. Anonymous commented on Jul 24

    Love the FinTwit meeting tip – I’m guilty, I’d love to talk about how I invest my money (it’s a very lonely thing to do with few non-financial people wanting to hear about it or, to be honest, having much to say if they did).

    One thing that’s been banging around my head (plenty of empty space there) since I read this note and the link to the “why you won’t own gold for the long run” note is that the Dow took twenty-five years to regain its 1929 high. Hence, while not as bad as gold’s thirty-two year performance, to paraphrase, “imaging having 60% of your net worth in an investment that was unchanged for twenty-five years.”

    As I know you know, I’m not being snarky, but sincerely pointing out the risk of picking the worst (or best) long-term period of an asset class to justify investing or not in it. In a way, gold did what it’s suppose to do during its terrible three decades as it was negatively correlated to stocks during a massive, multi-decade bull market in equities. And gold was dealing with its own bubble in the early ’80s, like stocks were in the late ’20s.

    I’m not a gold bug – I invest in gold with the same enthusiasm that Churchill brought to democracy – but I see it as an ’70s-style-inflation hedge / Central-Banks-fail hedge. I hate having gold in my portfolio just a bit less than I’d hate not having it there.

  7. Anonymous commented on Jul 25

    Thanks, it’s interesting to compare. I’m in finance, manage my own investments for past 25 years.

    Our portfolios are very similar except that I skew to mid and small cap:
    – replace 40% US LC with 10% LC, 10% MC, 10% SC, and 15% global min vol (ship logo)
    – only about 10% EM. The missing 5% in this category is in my global min vol fund.
    – 5% Dev Markets & 10% Dev Mkt Small/Mid Cap
    – replace 20% Bonds with 20% Stable Value Fund*
    * (returning 3%, Excellent ratings among the six companies in the insurance pool).

    20% Stable Value, about 50% Index funds, and 30% active funds that are relatively passive in structure and relatively low fee (Vanguard/DFA/Fidelity). My total fund fees are a bit over 30 bpts, and with the plan fee it’s still below 35 bpts. I could go lower, but think I am getting value for the cost. I am still trying to decide if I might ever want to reduce SV and replace with Int Term Trsy bonds or Int Term Tips in some proportion. If you have any ideas on how one would either balance between the three or rotate, I’d be interested. (I generally buy and hold, but my process does mandate tactical adjustments in specific circumstances)

    On the 20% Fixed Income question, I figure 100% stocks until you are half way to your goal. Then 80/20 until you are within 10%. Then 60/40. When you retire, 40/60 (or, I am considering 60/40 with Global Min Vol as my sole equity component, the risk metrics are pretty similar. Free lunch, I am hoping.) 5-10 years into retirement, start bumping stocks. (I have a special needs child whose trust I need to fund.)

  8. Anonymous commented on Jul 26

    I love your networking idea, Nick, and am likely to put it to use myself in the future!

    As for how I invest my money, I’m not sure I could recommend it to any ol’ client, and still maintain a fiduciary standard of care. My money is roughly 75% in investment properties, and 25% in individual stocks, with a rounding error worth of bonds. My investment objective is to generate enough investment income in 10 years or less to replace my current income, and my ability and willingness to not only tolerate risk, but also to tolerate the pitfalls of such a portfolio (tenants calling at 3pm because they have no water; individual securities tanking 10%+ in one day over news, etc.) makes this portfolio work for me.

    If a potential client came to me, either with their own investments looking substantially similar, or expressing a desire, willingness and ability to invest in a similar manner, I would feel confident in being able to advise them on risks and to help manage expectations. Otherwise, I think you and the rest of the Ritholtz team are suggesting a no nonsense investment portfolio for most people, and I would likely do the same.

  9. Anonymous commented on Jul 31

    Fantastic Nick to share your asset allocation
    Anytime I meet people in my country that are a bit on the saving side with their financial position, I ask the same thing: what is your asset allocation?
    I would love to see a response to this question from fintwit members 🙂