Wednesday, April 02, 2008

Madame X: Summing Up

Here are all the posts I've written on this topic:

Miscellaneous Funds
U.S. Large Cap
U.S. Mid Cap
U.S. Small Cap Funds
International Stock Funds
Bond Funds
Individual Stocks
Asset Allocation
Portfolio Overview

Overall, the portfolio is OK as a stock-bond portfolio for someone of Madame-X's age. It is reasonably well diversified across US and international stocks and stock capitalization classes and has a reasonable allocation to bonds. It has some good actively managed funds and some poor ones as well as index funds.

I've suggested increasing the international and large cap allocation a bit using new contributions as well as dumping some losing funds and getting a more rational allocation to actively managed and index funds in some cases.

I would also look at diversifying further. This can be hard to do without losing exposure to the stock market - as long as the additional asset classes have good expected returns this shouldn't be a real problem. The other solution is using leverage to gain more than 100% exposure. I invest in a variety of funds and financial firms that I classify as "passive alpha" - these are all investments which I expect to have a lower correlation with standard stock or bond index funds. They include:

• Real estate

• Hedge funds

• Private equity

• Commodities

• Very actively managed stock funds - where the manager makes no attempt to benchmark against an index. Examples are FAIRX and CGMFX. All those readers who think it is impossible to identify a good fund, have a look at these two. I also like Fidelity's Contrafund (which has nothing to do with Nicaragua :)) and Janus' Contrarian Fund.

• Other financial firms - such as Berkshire Hathaway - an insurance conglomerate - or Interactive Brokers - a market maker in the financial markets.

You have a strong exposure to real estate through your condo - though that is just one investment in one market. As real estate prices fall, funds that invest in real estate could become attractive.

Hedge funds are obviously usually out of bounds to retail investors in the U.S. But there are mutual funds that take short positions. I have shares in TFS Capital's Market Neutral Fund. I also have the Hussman Strategic Growth Fund, but I'm not recommending it :).

Private equity is another hard to access asset class. I don't recommend investing in Blackstone. On the other hand, Leucadia National is in effect a private equity company.

Commodities - you have an energy fund - there is also the option to buy ETFs exposed to commodities like gold. I don't have any in my portfolio - my exposure to a resource fund and the Australian Dollar and Australian stock market is sufficient I think. A non-energy mining oriented fund might make sense in addition, but that's very optional I think.

I'd look at 5-10% in any of these categories in the long-term.

Remember - all these suggestions are what I would do but aren't necessarily what you should do. As they always say - seek a second opinion, I am not a qualified/registered investment adviser.


Madame X said...

Thank you so much for all this detailed commentary! I am going to print them all out to mull over more-- it's been very educational already. I have to admit I picked some of these funds fairly haphazardly, so it's great to hear more about ways to evaluate them.

mw said...

just fyi, the link to the U.S. Large Cap analysis has an extra "l" at the end and so goes to Blogger's "Blog not found."

The detailed commentary is interesting. Thanks to both of you for providing it to all of us.

mOOm said...

You're both welcome! Yahoo etc. provide lots of data on funds, but most people don't know how to use it.

Tiredbuthappy said...

Wow, Moom! If you enjoy this type of thing and want to look at my portfolio, I'd be thrilled.

I've been thinking of buying a commodities fund to diversify, and maybe also some TIPS, but I am notorious for buying the next biggest thing after it's too late, and I'm thinking it would be foolish to buy these things now.

mOOm said...

Tiredbuthappy - E-mail me the data - funds/stocks and amount in each and I can look over it, though I don't think I'll be doing a blog series like this again soon! :)

On commodities, I am a bit suspicious too how far this can run going forward (see my latest post - investment option 4 for my Mom) - also depends if this is a commodity stocks fund, or invested directly in the commodities. I'm not getting out of the fund I'm in, but also I didn't add to it in my recent reshuffle. On TIPS - they have done really well recently. My thinking is that inflation is peaking here and the real return on TIPS currently is negative. So I wouldn't recommend them. I could be completely wrong about inflation though. But usually it peaks going into a recession.