Eating Your Own Cooking

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:

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