The 'Hold Forever Portfolio' Fallacy

 |  Includes: ECH, ENZL, JNJ, NORW, PM
by: Roger Nusbaum

There was a Seeking Alpha article about a few dividend stocks that the author posits can be held forever. Investing magazines have had cover stories about funds to hold forever for as long as there have been investing magazines. The concept is fascinating; it would be great to buy six or eight or ten stocks, funds or a combo of the two and never have to make a selection again. People who are still accumulating could just buy in proportionally every month and of course the buying could be automated so the investor wouldn't have to do anything. Seriously, such a holy grail would solve a lot of problems for people.

If I were constructing such a portfolio, I might include client holdings Johnson & Johnson (NYSE:JNJ) and Philip Morris International (NYSE:PM) for domestic exposure; for developed foreign I might go with Global X Norway (NYSEARCA:NORW) and iShares New Zealand (NYSEARCA:ENZL); for emerging markets maybe iShares Chile (NYSEARCA:ECH), which a few clients own (I have a few shares too) and something covering Africa one way or another. I might include a couple of themes like water and infrastructure to tap into the ascending middle class. And I think a gold ETF would be important too.

For fixed income, I think some sort of global inflation protected ETF, maybe the new Australian Debt ETF from WisdomTree that will be converting soon from its New Zealand dollar ETF, one of the few closed-end funds that uses very little leverage and tends to be very boring (there are a few of these), and maybe then round it out with some sort of absolute return product that usually looks like a bond fund but avoids interest rate risk. That is 13 holdings.

You might think the above could be the bones of a pretty good idea or you might think that it stinks, but either way there are flaws to the mix and the concept. I think the above covers a lot of ground but misses a lot of countries and themes. As much as I believe in the long term prospects of the above, there are many other investment ideas I believe in just as much. Along the thematic line, I think water and infrastructure will continue to be very important for portfolios, but of course agriculture, fishing and cement could be far more important. Norway and New Zealand are great, but Canada, Israel and Australia could be orders of magnitude more important over the next 10 years. What about oil sands, coal and China? I can't stand solar as an investment theme, but maybe one day the solar crowd will be right in a meaningful way.

The other big conceptual flaw is that nothing can be counted on to stay the same forever. If things did stay the same, then American Twine would still be a Dow stock. A little more realistically, think about all the various themes that have come and gone in your investing lifetime. Ten years from now, a lot of themes we think of as being important today will have disappeared or at least become far less important investment themes. As an example: In the 1950s there was a mania or bubble involving TV manufacturers. We still buy TVs, but this is no sort of theme.

If somehow three years from now, desalination can be done for close to nothing, and somehow transporting desalinated water can be done for nothing, then there is probably no longer an investment theme there. I'm pretty sure that neither can happen by 2014, but it is a simple path to radically different prospects for the theme.

As for individual stocks, I am quite certain companies like Polaroid and Digital Equipment were "hold forever" names. The two individual stocks above are probably "hold forever" names now, but that does not mean that holders don't have to be on the lookout for any meaningful changes.

What about actively managed mutual funds? Peter Lynch retired. Bill Miller could seemingly do no wrong forever and now I wonder if he's just someone who has not learned from his mistakes (per Morningstar, it had 22% in financial services as of its last reporting date).

A forever portfolio would be great, but I don't think it is practical.