Post New

I am noodling on a major change to my portfolio. I am 61 years old, healthy as far as I know. I spend considerable free time thinking about investing. It is fun, interesting, and sometimes consuming. My goal is to simplify my life and put things in order for the next generation.

I am currently almost 100% individual equities. Including 60%+ BRK. Top other holdings in order (MSFT, PCG, GOOGL, OXY, BAC, WFX, BA, PNC, USB)

I am Looking at the following mix:

Any observations or thoughts?

Portfolio Target
BRKB BRKB 37.5%
S&P 500 SWPPX/SPY 32.0%
QQQ QQQ 5.0%
QQQE QQQE 2.0%
MF 1 PRWCX 2.0%
MF 2 PRWAX 2.0%
MF 3 PRCOX 2.0%
MF 4 BFGFX 2.0%
Other Equities 3.0%
Cash / Fixed Income 5.0%
Residence&Other Assets 7.5%
Total 100.0%

WFC not WFX. Sorry for the typo.

Anything under 5% esp if it is a Mutual Fund will not make much of a difference. A simpler one might be

BRKB 35%
SPY 35%
QQQ 10%

Misc Equities 5%

Cash/Fixed 5%
Residence & Other Assets 10%

You could take the misc equities and move that to Cash/Fixed and you have a simple 80/20 Portfolio

-h

Simplifying life and putting things in order aren't financial objectives, though there is a lot to be said for them in other respects!

Judging from the proposed mix, am I right that your general aim is capital appreciation, and that you mainly hope to get it by owning large cap stocks with a tilt toward growth?

I agree with the comment by lswswein, that the small allocations to mutual funds don't accomplish very much.

For myself, I would not consider SPY or QQQ as LTBH choices from where we are at the moment.

Baltassar

For myself, I would not consider SPY or QQQ as LTBH choices from where we are at the moment.

I agree. I have posted a reply to you about these index fund ETFs in particular, posting to the Index Investing board here:
https://www.shrewdm.com/MB?pid=310681803

- Manlobbi

I am currently almost 100% individual equities. Including 60%+ BRK. Top other holdings in order (MSFT, PCG, GOOGL, OXY, BAC, WFX, BA, PNC, USB)

What's wrong with what you have?

If there are some that you yourself don'\t believe in the future of, that's a reason to sell a position.
But otherwise, the structure sounds fine.

If you have enough money to fund your retirement, there is no need for a buffer of cash and fixed income. You might have to sell a little stock when it's cheap sometimes, but you'll also sell some when it's expensive. Over the long run you'll get the average valuation, and get a positive real return you wouldn't get with the cash and fixed income.

Similarly, funds are mostly just a way to give fees to other people. If you must own one, own one that isn't capitalization weighted.

Jim

What's wrong with what you have?............. the structure sounds fine.

From Morgan Housel, "The Psychology of Money" (Thanks to the one who posted that book tip here):
Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer; just the answer that works for you........ Every investor should pick a strategy that has the highest odds of successfully meeting their goals

Wise words, resulting here in: Whether the structure is fine or not depends on the goals one has and can't be assessed without knowing those.

I should add:

My goal is to simplify my life and put things in order for the next generation.

That's a bit vague. Why it is complicated with a lot of Berkshire?

“ From Morgan Housel, "The Psychology of Money" (Thanks to the one who posted that book tip here):”


That was me. Over 4 million copies sold. I have given away 100+.

New Morgan book “Same as Ever” is good as well.

Wise words, resulting here in: Whether the structure is fine or not depends on the goals one has and can't be assessed without knowing those.

Sure.
But bear in mind that it's a portfolio built by the poster. Presumably those things were chosen for reasons which made sense to that person's situation, at least at the time.
And there is a strong correlation that the more changes one does to a portfolio, the more bad things happen.

My point is that there is usually no need to change a decently solid portfolio just because one might be approaching retirement, as long as it's not a "get rich quick" kind of thing*. The conventional wisdom to shift to bonds, for example, is stupid advice.

Jim

* in which case it's usually a good idea to at least consider changing it, without regard to the time to retirement!

My point is that there is usually no need to change a decently solid portfolio just because one might be approaching retirement

A possible reason I could imagine when Gator is saying "simplifying my life" and mentioning his age: While owning the index is a no-brainer when seen longterm one might see in contrast to that a need to constantly watch actively what happens and develops at Berkshire when Warren is not at the Helm anymore.

If Gator sees his Berkshire investment like that, potentially requiring in the future more time and attention, and sleeps better at night without having that thought on his mind, then I'd understand his intended changes, as for him they would indeed "simplify his life".


P. S. : One of many points I very much appreciate on Morgan Housel's book: That he repeatedly mentions that your investment strategy must make sense for you, no matter how little sense it might make for somebody else. His words let me sleep better at night with currently 25% of net assets in cash, more than in years and violating "The power of compounding". So it's far from optimizing returns but it gives me currently a better feel in my stomach - - - which has it's own value.

Thanks for all of your feedback.

Some additional points of clarification and thoughts.

1) When considering using equal weighted indexes, my concern is that many if not half of the S&P 500 never seem to appreciate over time. For example, the autos have gone no where for over 10+ years. Same as GE, in spite of recent rally. Banks as well. Polaris also comes to mind. I have read research that this observation is true. So emphasizing the whole group equally instead of allowing the few stalwarts to shine may have adverse consequences. Of course it is tough to gauge if the largest market caps are more overvalued than the average company verse their prospects. Last night I reread parts of Chris Bloomstrans annual write-up. He tried to address the point of potential overvaluation of the fab 5 or 7? He argued strongly that his portfolio of low leverage, low P/E stocks should outperform over time. But then I look at his performance and to be frank, mine is better over the past 15 years.

2) I am fully invested plus a little margin as I write. But on January 19, I have many covered calls that as of today's prices will be exercised and I will have almost 15% cash. This is one of the impetus for me considering a change. So most of my MSFT, GOOGL, and APPL will be exercised away. When I look at those stocks, I ask will I want to buy them back at current prices and my answer is no. So where do I deploy the cash? Of course implementing this plan will eventually require me to sell off some BRK. This I have been reluctant to do so far. I continue to sell covered calls. Most recently Jan 2025 500 calls for $1.80 ish.

3) I have plenty of losers in my portfolio as well. Some I have lost over 80%. Mostly biotechs. Banks have been a rough rides as well, but other than BAC they are all up at this point. I guess I am just beginning to accept that you can never know enough about an investment to avoid loss. My son is a flipper of motorized things and I always tell him the seller always knows more than the buyer. Keep that in mind when determining a price. So in spite of my investment performance, which has been more than satisfactory, is it worth it to take on all of the time commitment and stress to make an extra percentage or two over the S&P 500. Corollary, management always knows more than the investor when it comes to companies. It is fun and entertaining most of the time, but can be very frustrating as well. (That is why I quit rotisserie baseball 15 years ago. All the strategy and planning and then no consistent performance.)

4) So my goals while still evolving are coming from these perspective.

Given all this, I'm not sure what you have in mind is simply a change in the composition of your portfolio. If your aim is really to expend less time and energy on investing, wouldn't that mean, first of all, abandoning the covered calls? I speak in ignorance of the time involved, but my assumption is that investment methods that require repeated acts of good judgment take time and brain space. This is why I avoid them!

Mungofitch has discussed the merits of equal weighting about as well as can be done, but if that doesn't persuade you, there are of course index funds constructed on other principles.

But honestly, I can't help wondering if an investor who has enjoyed success using the methods you describe (big bet of BRK, options on the highfliers) is going to be all that happy with an unchanging portfolio of index funds?

Baltassar

When considering using equal weighted indexes, my concern is that many if not half of the S&P 500 never seem to appreciate over time.

I share your skepticism that a historical trend (outperformance of equal-weight indices) that has reversed over the past 20 years will inevitably revert any day now. It could, you never know, but it might be wise to wait for some indication it is actually happening before betting on it.

Markets are a complex system affected by many variables. They do change over time. There are still those who insist the average market multiple will revert to 15x and find themselves in the perma-bear camp, forever forecasting market crashes, because of this historical allegiance. Since those old truisms were established, technology and digitization have changed the economy in myriad ways difficult to translate into market forecasts. And here comes AI, another mega-change built on advanced computing. As the old saw goes, "It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so."

So most of my MSFT, GOOGL, and APPL will be exercised away. When I look at those stocks, I ask will I want to buy them back at current prices and my answer is no. So where do I deploy the cash?

Into cap-weighted index funds, as I understand your plan, which are dominated by the names you are selling, and other similar names currently trading at even higher multiples. In effect, you would be buying them back at current prices, along with a bunch of other stuff it sounds like you don't want to own.

Perhaps this isn't the best moment to set up your port for future generations. Years when the major indices are up double digits are generally not the best time to buy them from a value perspective, especially if the gains are based more on multiple expansion than earnings growth. Macro forecasts are hazardous, but we have yet to see the long tail effects of the fastest series of fed funds rate hikes in history. It seems quite possible it will provide better entry points in the next couple of years than are available now. In any case, there's always another bear market coming. We just don't know when. To be sitting on 15% cash in these circumstances doesn't seem crazy conservative to me.

Cash may be a poor long-term choice, but at present you can keep up with inflation (in the U.S.) and maybe earn a point or two of real return in short-term treasuries while observing Rule No. 1 and awaiting a better entry point. One thing we know for sure is your future returns in equities will depend upon the prices you pay. That never changes.

"The conventional wisdom to shift to bonds, for example, is stupid advice."

I'm glad to see someone discussing this. Asset allocation is the biggest decision we make, bigger than individual security selection, and yet we get widely differing advice from skilled advisors. Bogle recommended a bond allocation equal to one's age. Target funds from Schwab, Vanguard and others give similar bond allocations. However Buffett recommends a 10% allocation to bonds. Is anyone aware of an academic study of optimal asset allocation?

"Is anyone aware of an academic study of optimal asset allocation?"

One tool that I've found useful is the spreadsheet available at Retire Early,

retireearlyhomepage.com

The spreadsheet shows historical portfolio value as a function of time to retire and allocation.

"The spreadsheet shows historical portfolio value as a function of time to retire and allocation."

Actually it shows portfolio values and matching probabilities.

As we know, the future portfolio value depends on the current interest rate and stock market valuation. Long term, the optimal allocation is always heavy in stocks. However near term (5-10 years), with 3-month T-Bills currently yielding 5.4% and the P/E on the S&P 500 at 23 ($4553/$196 Dec 31 earnings estimate), my guess would be that the optimal allocation is heavy in T-Bills. Thoughts?

Just don't tell my 77 year old Mother - I've got her 120% long equities with no bonds.

My understanding of the academic literature on asset allocation is that it is possible to show that, at any given moment in the past, there was an optimum asset allocation (in risk/reward terms, risk being TBD); but that it is not possible to know what an optimum allocation will look like in the future; in which future it will remain subject to change anyway.

I think the real problem is not the elusiveness of optimality, but concern that diversification per se no longer provides much protection from the swings of the market. Even people who expect to pay something for reduced volatility are finding the price too high for what they get.

Baltassar

I'm glad to see someone discussing this. Asset allocation is the biggest decision we make, bigger than individual security selection, and yet we get widely differing advice from skilled advisors. Bogle recommended a bond allocation equal to one's age. Target funds from Schwab, Vanguard and others give similar bond allocations. However Buffett recommends a 10% allocation to bonds. Is anyone aware of an academic study of optimal asset allocation?

I found this study useful in helping me make some sense of the Buffett allocation for his wife, and the various options/risk factors to be considered when implementing a SWR. I’m basically holding an 80/20 given the overvaluation of the market. I’m keeping a lil’dry powder available. Eventually, I’ll move more towards 90/10, as opportunities hopefully emerge on the next, near term downdraft. However, as gross as it may be to some, and to be clear, I’m actually 80% BRK, so my asset allocation assumption of using BRK as a proxy for the index may be a faulty one and definitely inconsistent with this study.

https://blog.iese.edu/jestrada/files/2016/03/Buffe...

If you have enough money to fund your retirement, there is no need for a buffer of cash and fixed income. You might have to sell a little stock when it's cheap sometimes, but you'll also sell some when it's expensive. Over the long run you'll get the average valuation, and get a positive real return you wouldn't get with the cash and fixed income.

You've mentioned this number of times - you discount sequence of returns risk?

< Just don't tell my 77 year old Mother - I've got her 120% long equities with no bonds.>

Is 20% borrowed money? That’s not a good idea with current market valuation and interest rate.

"If you have enough money to fund your retirement, there is no need for a buffer of cash and fixed income. You might have to sell a little stock when it's cheap sometimes, but you'll also sell some when it's expensive. Over the long run you'll get the average valuation, and get a positive real return you wouldn't get with the cash and fixed income."

You've mentioned this number of times - you discount sequence of returns risk?

Sequence of returns not an issue "If you have enough money to fund your retirement".

How much is enough? If you have to ask... ;-)


Buffett (2014): "But I've told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there's a terrible period in the market and she's withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She'll do fine with that. And anybody will do fine with that. It's low-cost, it's in a bunch of wonderful businesses and it takes care of itself."

He also said "Vanguard would be fine, and Berkshire would be fine...I wouldn't want to be touting Berkshire".

Sequence of returns not an issue "If you have enough money to fund your retirement".

Sure.

But over the long run you'll not get the average valuation.

In fact, SWR and the average return are only very slightly correlated.

https://earlyretirementnow.com/2017/05/24/the-ulti...


Buffett (2014): "But I've told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there's a terrible period in the market and she's withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She'll do fine with that. And anybody will do fine with that. It's low-cost, it's in a bunch of wonderful businesses and it takes care of itself."

This is what I do myself, but only because I have a <3% WR.

The Cash Cushion approach is really caught between a rock and a hard place. Either the drawdown is so long that you can’t possibly have enough cash to make it through or the drawdown is short enough that the cash cushion likely wouldn’t have made a big difference.

https://earlyretirementnow.com/2017/03/29/the-ulti...

https://earlyretirementnow.com/2021/09/14/bucket-s...
https://earlyretirementnow.com/2023/01/25/discussi...
https://earlyretirementnow.com/2018/05/23/the-ulti...

"Sequence of returns not an issue "If you have enough money to fund your retirement".

How much is enough? If you have to ask... ;-)"


Good one.

I left the corporate life March of 2019.

I generally have kept 3 years of cash for expenses on hand. I have never owned a bond in my life. Rest is mostly in Berkshire, Apple and Google.

I have real estate that could be sold but I sleep well at night.


one could argue 5 years of cash would be safer. To each his own.

This is what I do myself, but only because I have a <3% WR.

The Cash Cushion approach is really caught between a rock and a hard place. Either the drawdown is so long that you can’t possibly have enough cash to make it through or the drawdown is short enough that the cash cushion likely wouldn’t have made a big difference.

Yes, agreed, but the optimum portfolio is no good if we can't stick with it.
I like having cash available. I pretty much do 90/10.

---

Buffett's 90% SPY 10% cash advice wouldn't have worked great for the year 2000 retiree:
https://www.portfoliovisualizer.com/backtest-portf...

Starting Jan 2000 with $1M:
SPY/Cash withdrawing 4% currently has $419k, enough for about 6 more years. Might just squeeze out 30 years.
BRK/Cash withdrawing 4% currently has $4 million.

That's rebalancing each year. Buffett might say the 10% cash could have been used more intelligently. Maybe so.

"And the reason for the 10% in short-term governments is that if there's a terrible period in the market and she's withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time."

My question is without looking in the rear view mirror, how do you know when you're in a terrible period...a down month, 2 months? When do you switch to the 'reserve tank' from the main?

Sounds elementary, but i believe its a reasonable question. If every time the market squiggled and you tap reserves, you'll need to refill the reserve tank, hence forced selling at some random point.

Sept 11, Covid, '09 banking crisis are obvious...but other normal squiggles are just that.

m

It strikes me that target funds allow fund managers to create lots of different funds, presumably with extra charges.

I would have thought that a pension fund should be (say) 70:30 in equities : bonds/cash a year before retirement, and the same a year after retirement, whether or not an annuity was bought. A sensible allocation is a sensible allocation, even if an insurance company has taken the assets and offered an income stream. If the person runs the pension themselves then it's even more clear that the allocation shouldn't change.

ETFs are great, but imho there are far too many of them. If it was my decision, I'd scrap all the target funds - make them just use 60:40 or something.

SA

It strikes me that target funds allow fund managers to create lots of different funds, presumably with extra charges.

Have you looked at Vanguard?

https://investor.vanguard.com/investment-products/...

8 basis points gets you a very diversified portfolio.

Don't like the stock/bond mix? Pick one with a later retirement date or one of the fixed allocation Lifestrategy funds.

I think thats pretty good. I am 98% long equities, and have zero bonds in my brokerage. in my 98 % +/- 75% is brkb.
I have the equiva;ent in assets in property , which I have begun to sell down.Probably over the coming 5 years.

IMHO thats my hedge against inflation and outliving my assets with a life expectancy now of +/- 20 years.

Post New

Berkshire Hathaway FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.