A Portfolio for You, Not for Your Financial Planner

As many of you, I have been observing the writings of resume-rich bloggers gaming the Obama economy, new ETFs, gurus-on-call, talking heads (not be be confused with gurus) and listening to the media watchdogs, whether they be in the tank for the present political leaders or not.

Of particular concern to me is the utter lack of commentary (or strategies) to invest holistically. Everyone seems to be focusing on stocks, bonds and/or their cumulative funds and are missing or intentionally ignoring geo-political and taxation realities that the investor must take into account to navigate portfolio currents using the maxim,"it is not what you earn, it is what you keep" as the guiding light of any investment strategy.

Perhaps many are writing more for their audience and web stature.

First: Taxes.

If your financial planner does not include a legal and sound way to avoid taxes as an integral part of your portfolio, at all levels of government, look for someone else. Ditto for planners who will not venture away from paper investments. Most stick with tax "deferred" stances, which is a long term mistake, especially when tax rates rocket higher.

Frustrating for me are some who say that losing less is a victory. The glee from many who lost "only" x-amount of treasure! Pyrrhic, in my opinion. Or, that taxes are not a viable expense when figuring total return. We are taxed, as the Terminator stated when running as a Republican for Governor of California, 24/7. Local, State and Federal debt is going to be funded by taxation, likely coupled with inflated dollars. Your goal, and mine, should be to let others pay their fair share. Settled law states we are to pay the least amount of taxes legally owed.

Overlooked in tax strategy is the huge tax advantages owning and self-managing real estate. I prefer residential real estate. You have write-offs and phantom depreciation galore (which can be deferred until death via 1031 and similar property exchange programs, or simple refinancing). Both political parties are not about to hack away the benefits of owning property (your personal residence is not an investment as it produces no income, save a tax benefit). The real estate lobby rivals the public education and trial layer cartels within the Beltway.


Second: Portfolio

Real Estate: 35%. You must buy right and educate yourself on appropriate management. Now is a great time to launch yourself into this endeavor. My average returns since 1976 have been in handsome double digits each year after considering income plus write offs. No flipping for this buy and hold strategy. You are after total return ("what you keep") for the long haul. The tax advantages of real estate will allow you to go after some income and longer term capital gains regardless of future revenue enhancements courtesy of our political and judicial class.

World Money: 25%. I believe that most of us know that the United States is not the power it once was, and demographics tell us that it will grow sporadically weaker on the world stage as the welfare state encroaches upon the risk taking and hard work of our forefathers. The Fidelity Strategic Income Fund (FSICX) which is balanced between 31% corporate securities, 32% government agency and 29% securities based in foreign currency yielding 5.61% with $5b in assets priced at $9.75. Complimenting this gem of a fund would be anticipating the rise of inflation/devaluation of the currency that unfortunately appears to be in the cards for we Americans. IShares' Treasury Inflation Protected Securities (TIP) fills the bill here. Trading at $100.17with a current yield of 4.74%, this $13.2b ETF with a .20 expense ratio fits well with the aforementioned fund, or others of like consistency which you may prefer.

Commodities: 15%. A diversified basket of commodities fits with a world paying up for life's necessities and historical wealth preserving entities. I like PowerShares' Commodity Index Fund (DBC) because it does not grossly overweight any one commodity, such as fossil fuel. Trading at $23.20, earning a Morningstar 5 star rating for ETFs in class and possessing a respectable $2.9b in assets, DBC may well provide excellent capital gains without the manic gyrations of just one or a few commodities. If you must hedge towards fossil fuel, I believe Encana (ECA), the huge North American energy company focused in Canada is a worthwhile consideration. This excellently managed company that knows how to appropriately genuflect towards our environmentalist friends sports a 3.1% dividend and currently trades at a paltry price/earnings ratio of 5.6.

Emerging Markets: 15%. Remember when European investors profited billions from developing assets in the emerging United States back in the 1800's? I don't, but history tells us that money is best invested towards emerging societies that crave a better way of life. iShares' Emerging Markets ETF (EEM) trading at $31.75 with a yield of 2.15% and an index to love is a $29b asset play on the rest of the world meeting and eventually surpassing many developed nations of today. Key to their success will be the avoidance of nanny-state welfare and regulation that has stifled old Europe and threatens the United States.

Stock or Rock: 10%. Harry Browne was adamant that money was not only to protect and invest but also to enjoy. Pursuing a hobby, taking that great trip or donating to a favorite charity (remembering the old adage, "charity begins at home") should be within your grasp IF you avoid the stoic securities trap. Real estate business ventures may even allow you to write off a trip. If you prefer to follow investments, then add a domestic common stock fund to your portfolio. There are plenty of ETFs to consider. I like the IShares Preferred Stock Index Fund (PFF) trading at $31.99 and yielding 8.35%, the S&P 1500 Index ETF (ISI) trading at $41.51 and the S&P Small Cap 600 Value Index ETF trading at $47.50.

My portfolio submission may be torn to shreds by the purists, chartists and those Elliot Wave theorists who still thrive to perfect the science of alchemy. However, I suspect there are more than a few investors whom have successfully figured out real estate (not those who blame tenants, repairmen, Realtors, God,etc. for their failure in this area) and reason that the rest of the portfolio serves to enhance the geopolitical realities of investing. If I am incorrect in my assumptions, let me join just about everyone else writing now for the future.

Comments

[whidbey:]

Strangely haunting. Your real advice is very interesting but seems to over look the pain of management? It seems to be really 25-45% stocks, and rest bonds and hard assets?

Jun 22 10:00 AM

[Griller:]

Okay, Real Estate. "Now is a great time to launch yourself into this endeavor." You forgot to state how.

Jun 22 02:48 PM

[Archman Inv...:]

I enjoyed this article very much. I touched on a number of subjects and I thought the first section on tax implications was well written.

I happen to know many accountants. It amazes me how so few are in complete and utter denial about the future taxes that are coming down the pike over the next 25 years. 4 years ago I remember telling people that all our nations entitlement programs are going to require super high future tax rates, regardless of what we are being told today (and will continue to be told)

Here is how I have my portfolio set up:
Roth IRA: High yielding securities and high yielding foreign securities and high yielding foreign bonds.
Compounding tax free, withdrawals tax free.
In my opinion the best retirement vehicle out there.

Traditional IRA: What I believe to be the most useless IRA's available next to 401K's. These instruments and 401k's (all of which defer taxes until you withdraw the money and pay tax to uncle sam) are nothing more than giant piggy banks that the government is salivating over, for they know tax rates are going thru the roof in the future for all brackets to pay for everything under the sun (regardless of what we are going to be told to the contrary)
My Traditional is nothing more than a temporary resting place as I move the money (and pay minimal tax on it now VS later) into my Roth IRA.

Standard taxable account: I use this account for any triple tax free municipal bonds I own. No tax events here.

As the author stated: If your accountant or financial advisor is in denial about the next 30 years of massive tax increases coming out way (regardless of income bracket) fire them tomorrow and get with someone who is going to save you a lot of money in the future.

Jun 22 04:41 PM

[Marc Gerstein:]

Hmmm. You offer the portfolio as something holistic but I wonder if it comes more from one or more political axes to grind.

Taxes: Pardon my post-Reganomics political incorrectness but I'm happy to pay taxes because that means I'm making money. If I can increase my earnings and pay a lesser proportion in taxes, OK, I'll take it. But I'm not going to allow myself to become such a tax crusader that I wind up bypassing attractive opportunities simply because I'd rather keep money away from the IRS. I suggest the issue of taxation be considered as part of a common-sense balancing among all relevant factors, rather than a crusade.

Real estate, commodities, emerging markets, developed global markets . . . they are all fine (but as another commenter pointed out, you should suggest how to implement the real estate portion of your recommended portfolio), but I do wish you'd have explained why your recommended % are as they are.

I'm particularly intrigued by your downplaying of U.S. equities given your failure to make a convincing case business case for this. I noticed the verbal tidbits here and there that suggest you are unhappy with the current political scene, and I wonder about the extent of your emotional reaction to the huge equity market losses over the last couple of years.

But to underweight U.S. equities as much as you do, I think you need more than emotion and politics, and you may want to look very closely at some of the other economies that are assumed to be the next group of powerhouses. There's much to debate as to how "real" they are.

Let's take China, for one. Are you aware that even now, Chinese citizens are clamoring to get into the U.S., enduring decade-long waits for legal green-cards and all sorts of interesting schemes to slide through loopholes. Can you tell me an other time in the history of our planet when a rising economy was characterized by people wanting to get out?

Speaking of Europeans in the 1800s, as you did, you interestingly pointed out how they knew to profit from investing in the U.S. It was a slam dunk. It was a place to which everybody wanted to go. Did you see U.S. citizens in the 1800s chasing Europeans looking for sham marriages so they could leave the U.S. and get into Britain, France, etc.etc.? Heck no!

But guess what. Migration patterns today still point toward the U.S. and in fact, are even broader than in the 1800s. If you want to invest based on where people are looking for a better way of life, it seems to me like you need to be putting a lot more into the U.S. Now, this isn't necessarily my opinion: I'm just taking a clue from the countless global emigres, noting the places they are running from and where they are going.

Jun 22 04:51 PM

[TAS:]

Investing with a political axe to grind is not in my realm. We all have but one vote each so your political view as expressed would merely be cancelled by someone else's vote, thus it means nothing from an investor standpoint. Investing outside the conventional box is in my gameplan. Getting readers to think along a different investment path was the purpose of the blog entry today.



On Jun 22 04:51 PM Marc Gerstein wrote:

> Hmmm. You offer the portfolio as something holistic but I wonder
> if it comes more from one or more political axes to grind.
>
> Taxes: Pardon my post-Reganomics political incorrectness but I'm
> happy to pay taxes because that means I'm making money. If I can
> increase my earnings and pay a lesser proportion in taxes, OK, I'll
> take it. But I'm not going to allow myself to become such a tax crusader
> that I wind up bypassing attractive opportunities simply because
> I'd rather keep money away from the IRS. I suggest the issue of taxation
> be considered as part of a common-sense balancing among all relevant
> factors, rather than a crusade.
>
> Real estate, commodities, emerging markets, developed global markets
> . . . they are all fine (but as another commenter pointed out, you
> should suggest how to implement the real estate portion of your recommended
> portfolio), but I do wish you'd have explained why your recommended
> % are as they are.
>
> I'm particularly intrigued by your downplaying of U.S. equities given
> your failure to make a convincing case business case for this. I
> noticed the verbal tidbits here and there that suggest you are unhappy
> with the current political scene, and I wonder about the extent of
> your emotional reaction to the huge equity market losses over the
> last couple of years.
>
> But to underweight U.S. equities as much as you do, I think you need
> more than emotion and politics, and you may want to look very closely
> at some of the other economies that are assumed to be the next group
> of powerhouses. There's much to debate as to how "real" they are.
>
>
> Let's take China, for one. Are you aware that even now, Chinese citizens
> are clamoring to get into the U.S., enduring decade-long waits for
> legal green-cards and all sorts of interesting schemes to slide through
> loopholes. Can you tell me an other time in the history of our planet
> when a rising economy was characterized by people wanting to get
> out?
>
> Speaking of Europeans in the 1800s, as you did, you interestingly
> pointed out how they knew to profit from investing in the U.S. It
> was a slam dunk. It was a place to which everybody wanted to go.
> Did you see U.S. citizens in the 1800s chasing Europeans looking
> for sham marriages so they could leave the U.S. and get into Britain,
> France, etc.etc.? Heck no!
>
> But guess what. Migration patterns today still point toward the U.S.
> and in fact, are even broader than in the 1800s. If you want to invest
> based on where people are looking for a better way of life, it seems
> to me like you need to be putting a lot more into the U.S. Now, this
> isn't necessarily my opinion: I'm just taking a clue from the countless
> global emigres, noting the places they are running from and where
> they are going.

Jun 23 09:46 AM

[granger:]

I enjoyed the article. Food for thought.

Jun 23 01:43 PM

[Chancer:]

Just because immigrants want to come to the USA does not make it a good place for future financial investments.

Simple rational logic should tell you that the USA is not going to comeback as the great investment opportunity that it once was.

Economic growth in the U.S. is not going to be what it has been for the following reasons:

(1) Our past growth largely depended on leverage (credit). We have de-leveraged and it is not coming back to anything like it was.

(2) As the government has taken a more active role (some might call it interference) in the economy, growth will be muted by the government involvement- both active "hands on" involvement and more regulation.

(3) The rest of the world has become more competitive as the USA has become less competitive.

(4) Excessive government spending, the deficit, and the taxes needed to pay for all of this will suck a lot out of the economy. Increases in tax revenue also require growth: less growth equals less tax revenue at current tax rates and the need to increase taxes which further reduces economic growth.

(5) All of the above, resulting in less growth means less productivity and fewer good jobs. It also means a lower standard of living for Americans.

(6) Almost all of the investment professionals I have heard speaking lately have clearly stated that the best investment opportunities going forward are not in the USA- but outside the USA.

All of the above feeds on itself, clearly predicting further declines for the USA.


On Jun 22 04:51 PM Marc Gerstein wrote:

> Hmmm. You offer the portfolio as something holistic but I wonder
> if it comes more from one or more political axes to grind.
>
> Taxes: Pardon my post-Reganomics political incorrectness but I'm
> happy to pay taxes because that means I'm making money. If I can
> increase my earnings and pay a lesser proportion in taxes, OK, I'll
> take it. But I'm not going to allow myself to become such a tax crusader
> that I wind up bypassing attractive opportunities simply because
> I'd rather keep money away from the IRS. I suggest the issue of taxation
> be considered as part of a common-sense balancing among all relevant
> factors, rather than a crusade.
>
> Real estate, commodities, emerging markets, developed global markets
> . . . they are all fine (but as another commenter pointed out, you
> should suggest how to implement the real estate portion of your recommended
> portfolio), but I do wish you'd have explained why your recommended
> % are as they are.
>
> I'm particularly intrigued by your downplaying of U.S. equities given
> your failure to make a convincing case business case for this. I
> noticed the verbal tidbits here and there that suggest you are unhappy
> with the current political scene, and I wonder about the extent of
> your emotional reaction to the huge equity market losses over the
> last couple of years.
>
> But to underweight U.S. equities as much as you do, I think you need
> more than emotion and politics, and you may want to look very closely
> at some of the other economies that are assumed to be the next group
> of powerhouses. There's much to debate as to how "real" they are.
>
>
> Let's take China, for one. Are you aware that even now, Chinese citizens
> are clamoring to get into the U.S., enduring decade-long waits for
> legal green-cards and all sorts of interesting schemes to slide through
> loopholes. Can you tell me an other time in the history of our planet
> when a rising economy was characterized by people wanting to get
> out?
>
> Speaking of Europeans in the 1800s, as you did, you interestingly
> pointed out how they knew to profit from investing in the U.S. It
> was a slam dunk. It was a place to which everybody wanted to go.
> Did you see U.S. citizens in the 1800s chasing Europeans looking
> for sham marriages so they could leave the U.S. and get into Britain,
> France, etc.etc.? Heck no!
>
> But guess what. Migration patterns today still point toward the U.S.
> and in fact, are even broader than in the 1800s. If you want to invest
> based on where people are looking for a better way of life, it seems
> to me like you need to be putting a lot more into the U.S. Now, this
> isn't necessarily my opinion: I'm just taking a clue from the countless
> global emigres, noting the places they are running from and where
> they are going.

Jun 23 02:41 PM