How to create a solid, all-weather investment portfolio

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

Many investors own what’s contemptuously known as “messy portfolios.” This, that, and the other thing. No rhyme, no reason, no coherence. They just bought all sorts of stuff over the years – and hardly ever sold a thing.

OK, let’s talk about how to create a solid, all-weather investment portfolio.

Here’s what you want from your portfolio:

1. Profits.

Actually, you want to make a lot of money when you’re young -- and keep all that money as you grow older. That’s why, by and large, you want to gradually shift from stocks to fixed-income investments as you age. Someone once said: “Don’t lose a lot of money after age 60.” I’d make that: After age 6 weeks.

2. Stability/diversity.

You don’t want to be worth $500,000 on Monday and $6.43 on Wednesday. Maybe you retired on Tuesday. Or maybe on Tuesday you had to pay the mortgage, the doctor, the hospital, or whatever – with $6.43.

For a stable portfolio, you need to own a diversified portfolio. One whose securities do NOT go up or down together in lockstep. Example: If you own oil stocks and oil prices go down, your portfolio would suffer a loss – unless you also owned airline stocks, where lower oil prices mean greater profits. And vice versa.

“Value” stocks and “growth” stocks alternate the days they spend in the sun. (Perhaps people buy value stocks when they’re nervous, growth stocks when they’re optimistic.)

Large company stocks and small company stocks also tend to trade places.

Growth stocks are pitchers who won 20 games last year. You want them to play on your team, you got to pay up. But they may be worth it.

Value stocks are pitchers who won 20 games year before last. Last year, they didn’t pitch. Arm trouble. They come cheap. And if their arms recover, you’ll make out like a bandit.

Which does better, value stocks or growth stocks? Over the years, value stocks. (One reason: They tend to pay dividends.) So your portfolio should tilt toward value stocks and value funds, especially as you approach my advanced age. (Value stocks tend to have price-earnings ratios below those they enjoyed in the past and below those of their competitors. To see if a fund is value, growth, or a blend, check Morningstar Mutual Funds, the newsletter.)

Large company stocks and small company stocks also tend to trade places.

Over the years, small-company stocks have outperformed large-company stocks. But only occasionally -- and unpredictably. So your portfolio should tilt toward large-company stocks – especially when you’re getting long in the tooth.

As for foreign stocks and funds, they might constitute 20 percent to 30 percent of your portfolio. Many people have less. Including yours truly.

Bonds move in a different direction from stocks about 60 percent of the time – so bonds always belong in your portfolio. And sometimes they outperform stocks for a long period of time. Like 2000-2010.

3. Simplicity.

The bigger your investment portfolio, the more diversified your portfolio should (and can) be.

But there’s a virtue in simplicity. It’s easier to track your portfolio – to check how it’s done compared with an appropriate index. You’ll also have less work at tax time – and so will your tax preparer. And with a tidy portfolio it’s easier to spot securities that warrant being defenestrated.

What’s the minimum number of stocks a stock portfolio should have? I’d say 15 or 20 – in different industries. The minimum number of mutual funds? If you own a good target-retirement fund, or a life-cycle fund, or a balanced fund, you don’t need many more funds.

4. Constant attention from a skilled investor.

Bad news. That’s probably not you. So consider subscribing to a newsletter that offers model portfolios. The Value Line Investment Survey and Morningstar StockInvestor have model portfolios for stocks. There are also newsletters with model portfolios for shareholders of Vanguard funds and Fidelity funds. And a newsletter for shareholders of funds in different families. My personal favorites: the Vanguard newsletter and MorningstarStock Investor. The Independent Advisor for Vanguard Investors costs $99.95 for a year (a special offer); 1-800-211-7641. Morningstar StockInvestor costs $129; 1-312-424-4288.

Here’s a model mutual-fund portfolio from the Vanguard newsletter – the “income model.”

FUND	SHARES	PERCENT
Int.-Term Invest. Grade	6,008	23
Dividend Growth	3,857	22
PRIMECAP Core	3,536	19
GNMA	2,598	11
Sht-Term Invest. Grade	2,547	11
MidCap Index	649	5
Health Care	94	5

This portfolio is roughly 45 percent in fixed-income investments and 55 percent in stocks. It has been in existence since 1991 — that’s one reason the number of shares varies.