morgan housel, andy cross, & megan brinsfield · a foolish portfolio morgan housel, andy cross,...
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HowtoConstructaFoolishPortfolioMorganHousel,AndyCross,
&MeganBrinsfieldMeganBrinsfield istheDirectorofFinancialPlanningforMotleyFoolWealthManagement,LLC(“MFWM”),anaffiliateofTheMotleyFool,LLC,andaninvestmentadviserregisteredwiththeU.S.SecuritiesandExchangeCommission.TheviewsexpressedhereinarethoseofMs.Brinsfield anddonotnecessarilyreflecttheviewsofMFWMoranyofitsaffiliates.Thesecommentsmaynotberelieduponasrecommendations, financialorinvestmentadviceoranindicationoftradingintent.
1. Enoughtopreventafewlosersfromravagingyourwealth.
2. Fewenoughsoyourreturnsdon'tjustmimicanindexfund.
Howmanystocksshouldyouown?
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-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DowJonesIndustrialAverage(30stocks) S&P500(500stocks)
• Studiedthereturnsof4,700mutualfunds.
• Overa10-yearperiod,about80%underperformedanindexfund.
• Buttheaveragefundowned140stocks.
• Theaveragefund’s10largestholdings– representativeofitsbestideas– do,onaverage,beatthemarket.
• Mostfundsarespreadfartoothintohaveashotatbeatingthemarket.
InvestmentAnalysisandPortfolioManagement,KeithBrownandFrankReilly
“Owning between 12 and 18 stocks captures about 90% of the diversification of owning the entire stock market.”
65%
51%
72%
66%
64%
60%
58%
71%
68%
85%
44%
26%
48%
34%
37%
42%
30%
53%
54%
14%
Consumerdiscretionary
Consumerstaples
Energy
Materials
Industrials
Healthcare
Financials
Technology
Telecom
Utilities
Percentageofstocksthatlostmoney,1980-2014
Percentageofstocksthattrailedtheindexaverage,1980-2014
Recommendinvestorsown10-30stocks
Personallyowned100stocks
Onestock,Geico,increased200-fold
Madeupmostofhisportfolio
Accountsforallhislong-termoutperformance
Owned400-500stocksoverhislifetime
Mademostofhismoneyon10ofthem
“IfyouremovejustafewofBerkshire'stopinvestments,itslong-termtrackrecordisprettyaverage.”
Thisisacomplicatedtopicthatincorporatespersonalemotionsandrisktolerance.
Itisnotasscientificaspeoplewantittobe.
Becarefulowningfewerthan15ormorethan50stocks.
Shouldspreadacrossatleastfivemajorindustries.
Inanewportfolio,30stocksinequalweightscanbeagreatruleofthumb.
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Whatsayyou,Andy?
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KNOWTHY
SELF
3MagicalWordsinPortfolioManagement:
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- Timeline- VolatilityAppetite
“Selldownuntilyousleepwellatnight”–oldWallStreetproverb
- WhatYouEnjoy- Wanttofollowandstudy- Interestedinlearningmoreabout
KeyFactorstoConsider
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85% 67% 55%
RYR’sModelPortfolios
BuildingYourPortfoliowithFoolIQAssetClassq SmallCapq MidCapq LargeCapq International
Sectorq Servicesq Consumerq Financialq Energyq Healthq IndustrialGoodsq Technologyq BasicMaterialsq Communicationsq Utilities
Volatilityq Lowq Averageq High
Servicesq Everlastingq HiddenGemsq IncomeInvestorq InsideValueq MDPq DeepValueq Optionsq Proq RuleBreakersq Utilities
Service Analysisq Recommendationq BestBuyNowq CoreStockq CoreandBestBuyq Research
DividendYieldq >0.0%q >2.5%q >5.0%
1-MonthChgq 10%+q 0– 10%q -10%- 0q <-10%
3-MonthChgq 10%+q 0– 10%q -10%- 0q <-10%
3-YearChgq 10%+q 0– 10%q -10%- 0q <-10%
Motleyq Prosocialq Glassdoor 4or5q InYourScorecard
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BuildingYourPortfoliowithFoolIQAssetClassq SmallCapq MidCapq LargeCapq International
Sectorq Servicesq Consumerq Financialq Energyq Healthq IndustrialGoodsq Technologyq BasicMaterialsq Communicationsq Utilities
Volatilityq Lowq Averageq High
Servicesq Everlastingq HiddenGemsq IncomeInvestorq InsideValueq MDPq DeepValueq Optionsq Proq RuleBreakersq Utilities
Service Analysisq Recommendationq BestBuyNowq CoreStockq CoreandBestBuyq Research
DividendYieldq >0.0%q >2.5%q >5.0%
1-MonthChgq 10%+q 0– 10%q -10%- 0q <-10%
3-MonthChgq 10%+q 0– 10%q -10%- 0q <-10%
3-YearChgq 10%+q 0– 10%q -10%- 0q <-10%
Motleyq Prosocialq Glassdoor 4or5q InYourScorecard
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Whataboutyou,Megan?
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PortfolioConstructionin3Steps1. GutCheckonRiskTolerance2. WorkTowards“Ideal”
Allocation3. StayDisciplined
Megan’sTake
Butfirst,astory…Step1:GutCheck
FinancialPlannershateunnecessaryrisk— it’spartofourjob!Ourgoals:•Maximizingyourlifeoptionswiththeresourcesyouhave.• But“maximizing”isnotanabsolutemeasure.
Step1:GutCheck
ASampleQuestionAboutRiskTolerance
Step1:GutCheck
Back-of-the-envelopemathforyourapproximatestock/bondallocation:•“Icouldn’tbearitifIsawmy$1millionportfoliodecreaseto$______.”•Assumestockswilldecline25%andbondswillremainthesame•Example– maximumlossof12.5%yieldsa50/50portfolio
Step1:GutCheck
Disclaimer:Returnassumptionsareforillustrationpurposesandarenotaprecisereflectionofhistoricaldata.Thisisanestimationtoolonly,andactualresultscouldvarymateriallyfromthisestimation.
AVeryRoughGuidetoAssetAllocation
Step1:GutCheck
Valueof$1M Portfolio MaximumLoss Stock/BondEstimation
$950,000 5% 20/80
$900,000 10% 40/60
$850,000 15% 60/40
$800,000 20% 80/20
$750,000 25% 100/0
Disclaimer:Returnassumptionsareforillustrationpurposesandarenotaprecisereflectionofhistoricaldata.Thisisanestimationtoolonly,andactualresultscouldvarymateriallyfromthisestimation.Thisisnot intendedaspersonalfinancialadviceoraguidelinethatyoushoulduse inyourrealportfolio.
Your“Ideal”Allocation• There’snosuchthingastheperfectallocation.• Asplanners,wehelpclientsdetermineiftheirallocationisreasonable forthemgiventheircircumstances.
Step2:WorkToward“Ideal”
Otherdeterminantsofyouridealallocation• Whatareyourfinancialgoals?• Howlikelyareyoutomeetthosegoalsgivencurrentassets,savingsandspendingplans,andvaryinglevelsofinvestmentreturnsovertime?
Step2:WorkToward“Ideal”
EvaluateYourCurrentPortfolio• Morningstar’sPortfolioX-RayToolhttp://portfolio.morningstar.com/RtPort/Free/InstantXRayDEntry.aspx• PersonalCapitalwww.personalcapital.com• Compareresultstothestock/bondmixyou’veselected,usingRYRmodelportfoliosasaguide.
Step2:WorkToward“Ideal”
HowdoIknowwhattosell?• Companiesyoudon’twanttoown• Toobigortoosmallpositions• Taxbenefits
Step2:WorkToward“Ideal”
Rinse,Repeat•Repeatsteps1and2atleastannually
Step3:StayDisciplined
Butwhatabouttheimpendingmarketcrash?*
Marketdeclineswerepartoftheplan;theplanshouldnotchangeinthefaceofshorttermfluctuations.
*Disclaimer:Idon’tknowanymorethanyouaboutwhatthemarketwilldotoday,tomorrow,orinyearstocome.Pastperformanceisourbestestimateofthefuture,but itisnotaguarantee.Seriously.We’renot justsayingthis.Theworldisawonderful,crazy,unpredictableplace.
Step3:StayDisciplined
Questions?