My Household Portfolio Management Process- Part One: Objectives

by: Michael Patenaude


Every investor has their own needs, objectives and risk profile.

Sharing portfolio management approaches can improve performance by sharing knowledge and experience.

My household portfolio plan is shared for comments and improvement.

Part one in a series focuses on portfolio objectives.


My wife and I are in our mid-fifties. We will retire from full time employment, if the stars align, in about five years. We're both self-employed consultants - I'm a project portfolio analyst and my wife is a writer/communications consultant.

I have created a customized investment management process to allow me to self-direct our portfolio. We do not have a company pension plan and will only be eligible for federal government pensions in Canada, much like Social Security in the US. The rest is up to us.

I've been a self-directed investor for a few years now, but have only had full control of all our accounts for the last couple of years. I've tried to develop a "portfolio for all markets" which is a derivative (very, very loosely) of the Permanent Portfolio invented by Harry Browne to be a passive, fail safe form of investment.

I am also a proponent of total return investing, not only growth, income, or dividend-growth investing. Intentionally I try to diversify and therefore deliberately seek out investments in all major asset categories. Finally, I have a growing interest in "alternative investments" such as private equity, but have not invested in that category yet.

My basic strategy, as implied, is to try to balance growth, income and safety. I like to buy and monitor assets, and perhaps unlike Mr. Browne, am actively looking for ways to improve the quality of my portfolio by adding holdings based on my assessment of fundamentals and value, while shedding assets violating these same principles.

I try not to let day-to-day market gyrations and the headline financial press sway my longer-term views. I further try to avoid hyped-up or "darling" stocks and chasing yield or growth (not always successfully). Finally, I try to minimize emotion in my decisions by following a process and concentrate on the few things I can control: my objectives, my risk tolerance and my asset allocation.

My process (with my wife's active advice) started with writing down concrete thoughts about investment objectives, risk tolerance and asset allocation. From there my process now involves making changes to portfolio composition by following our pre-determined portfolio rules. The third cornerstone of my process is to track our progress primarily against our own objectives rather than trying to "beat" some other measure of performance.

I am not trying to sell anyone on my plan and process - it is after all customized to our needs - but I do encourage everyone who doesn't already have a plan to create one.

I also believe that, like with an academic thesis, an investment plan and related process should be able to withstand scrutiny by peers and those with more expertise than myself. I am, after all, a humble student of personal finance, and recognize I have a lot to learn.

This article is the first in a series on how I set up and manage our household's investment portfolio. Future topics in the series will include risk management, asset allocation and re-balancing.

Thanks go out to Seeking Alpha contributors Bob Wells and more recently RoseNose for sharing their plans and inspiring me to write about my own.

Our Household Investment Action Plan

Part One: Objectives

Here are the objectives in our investment plan which I will discuss below:

  1. start retiring from full-time employment in about five years with enough savings to live comfortably for the rest of our lives
  2. make an average 7% compounded annual total rate of return in our investment portfolio (4.25% from asset growth and 2.75% from interest/dividends)
  3. before retiring from full-time employment, grow our retirement portfolio by 10% compounded per year (combining the rate of return and additional new savings)
  4. always have enough cash available to avoid having to sell securities (i.e., stocks or bonds) at a loss during a market downturn (and be prepared for a downturn to last up to five years)
  5. always have at least one full year's income in maturing bonds by using a five-year bond ladder (bonds are held to maturity and re-invested)
  6. keep enough cash, bonds and precious metal securities to ensure I don't lose sleep at night worrying about catastrophic losses in our portfolio
  7. follow a routine and disciplined portfolio review process: try to continually improve portfolio quality; watch for investment opportunities and compare them to our existing holdings; if there seems to be a good investment that we don't already own, consider either replacing an existing holding (preferably) or adding the new one

Objectives #1 to 3

For openers, let's look at the first three objectives in more detail - the first one alone is a pretty complicated statement when you analyze it and it will essentially determine objectives #2 and 3.

Let me repeat it if I may:

Objective #1: Start retiring from full-time employment in about five years with enough savings to live comfortably for the rest of our lives

Analytically, this objective has two components: how long we expect to live in retirement and what income we need in retirement.

As noted, we're in our mid-fifties. According to the World Health Organization, the overall average life expectancy for Canadians is 82 years of age; in the US it is 79. For planning purposes, let's say 30 years of retirement is a conservative number (assuming a retirement age of 60), one I'm comfortable with in case we're lucky enough to live long (and hopefully healthy) lives.

Knowing how much one needs for retirement is not an easy question to answer. There are several ways to approach this challenge, including:

  1. a multiplier of your current annual income (e.g., 25 times current income)
  2. a lump-sum amount (e.g., $1M)
  3. enough to cover a percent of your inflation-adjusted current income per year in retirement (e.g., 70%).

Obviously many factors come into play here such as your spending expectations in retirement and health and related expenses, to name a couple, which are beyond the scope of this article.

The way I approach it is as follows:

  1. start with our current income before taxes
  2. subtract the amount we currently save every year (since we don't plan to save anything once we're no longer working full time)
  3. subtract the costs we incur while working that will no longer be incurred in retirement (e.g., professional fees and training, clothing budget for the office, disability insurance that protects against lost employment income, commuting costs, lunch money, etc.)
  4. add back something for expected additional travel and recreation expenses
  5. subtract what we expect to make in government pensions once eligible
  6. adjust all for inflation (which I will largely ignore in this article for simplicity, but encourage everyone to think about carefully)

This brings us to about 70% of our current income from employment.

The "math" to solve for our required amount of savings in our retirement portfolio is then driven by the "4% rule."

The 4% rule more or less says you can withdraw 4% of your nest egg every year, adjusted for inflation, and not expect to run out of money for 30 years. There is considerable controversy about this rule and some suggest it is not conservative enough (e.g., it should be a 3% rule).

I am pretty comfortable with the 4% rule for two reasons: because our retirement plan has enough discretionary income in it that we could always cut back if we have to; and because we expect our retirement portfolio to grow at a rate of greater than 4% (plus inflation) per year, even in retirement.

Here is an example of the math based on an exemplary $100,000 current income as the starting point (again, without adjusting for inflation):

Current income pre-retirement (example)

Income needed in retirement (70%)

Annual portfolio withdrawals

Required portfolio size ($70,000/4%)





Click to enlarge

Regarding objectives #2 and 3, knowing what we need to live on in retirement allows me to look at the current value of our retirement portfolio and plan for its growth.

I see that I need to make a 10% rate of return for the next five years to get us to our required starting portfolio size.

That's a pretty aggressive return, in my opinion, but I expect we can generate about 3% of that amount from savings. We have a long track record of saving money and hope to be able to continue doing so.

That leaves the portfolio to generate a 7% additional total return (something I hope to sustain indefinitely, even in retirement). I believe 7% is possible based on a 4.25% growth in asset value and 2.75% return from dividend and interest income, on average, per year.

To track everything, I keep a spreadsheet. I've not ruled out visiting my accountant or a for-fee financial planner to confirm my assumptions and calculations.

Objectives #4, 5 and 6

I am concerned, given how close we are to retirement, and the seemingly ever-increasing market volatility, that if a prolonged market downturn were to continue (like we've experienced in Canada and the US again recently) I may be forced to sell securities at a loss to generate the income we need.

I am being very conservative in this respect on a couple of levels. One is we're still five years out from ending full-time work, and two, I am planning for a worst-case scenario of a five-year period of decline and recovery in equity prices (at least I hope that would be the worst-case).

This may seem extremely pessimistic but if one looks at the Japanese stock market as the dreaded example, the Nikkei 225 (^N225) topped out at 38,916 on December 1, 1989 and as of February 17, 2016 was still only at 15,836. I hope something like that never happens in North America, but it is a sobering testimonial about how capital preservation could prove vital at some point in time.

To bring the matter closer to home, the S&P 500 (^GSPC) peaked at 1,527 on June 30, 2007 and took nearly 3½ years to recover. If one were just heading into retirement when the financial crisis hit it would have been most disconcerting to say the least.

I could go on with examples like the NASDAQ and the S&P/TSX 500 but I think I've made my point.

So, to allay my fears, I have enough cash and a five-year bond ladder in place that will provide at least a full year's retirement income each year for five years. Since we are still working, I reinvest the principal and interest fully. If we were retired, and equities were down in value, I would consider harvesting these bonds (and any interest and dividends rolling in) as they came due as needed, to avoid selling equities at a loss.

To further allay my worst-case concerns, I also hold a significant portion of our portfolio in bullion-related assets (but nowhere near 25% as Mr. Browne once suggested).

Many of course rail against this asset category, and I will discuss it further in a later article on asset allocation, but the experience of the last few weeks (as happened more dramatically during the financial crisis as well) has proven to me once again that having some holdings in this asset class can offset weakness in equities.

As of February 17, 2016, my bullion-related assets (in Canadian dollar terms) are up about 16% year-to-date. My equities, by comparison, are down about 5%.

Objective 7

My last objective is to stick to a process for managing our retirement portfolio.

As I said at the outset, I believe every self-directed investor needs to come up with a plan and process for portfolio management. This, for me, is the best way to avoid being sidetracked by irrelevant, short-term factors.

So I document this final objective as a constant reminder to myself to stick with the plan. I don't mind if the plan evolves, but it should do so relatively gradually, over the course of quarters or years, not hours, days and weeks. And it should do so based on knowledge and experience, not emotion.


I am trying to set up our retirement portfolio for long-term success by thinking strategically, focusing on the things I can control, and optimizing for a combination of growth, income and safety.

In this first part of the series I discussed our objectives and some of their implications. In my next article I will discuss how I approach risk management.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.