Simplicity In All Things Including Portfolio Management

by: Roger Nusbaum

Summary

Someone whose career is more volatile like a salesman of some sort is more of an equity; so their portfolio, the theory goes, should be more bond-like.

Someone with more stability like someone covered by a union or tenure is more bond-like and should tilt their portfolio to more equity exposure.

I am all for factoring in employer stock into the equation with a caveat being that the attributes of the stock be properly taken into account.

By: Roger Nusbaum, AdvisorShares ETF Strategy

The weekly ETF column in Barron's looked at research by Moshe Milevsky from York University in Canada that "believes an investor's career - or "human capital" - is often her biggest asset and should be incorporated into her portfolio just like any other investment." Someone whose career is more volatile like a salesman of some sort is more of an equity; so their portfolio, the theory goes, should be more bond-like and someone with more stability like someone covered by a union or tenure is more bond-like and should tilt their portfolio to more equity exposure.

The article cites Enron employees as an example because the stock many of them held got wiped out and many lost their jobs. The article then went on to connect the idea to looking through ETFs to assess total exposure to company stock. If you work at a mega cap company that has a large weighting in all of the broad benchmark indexes and you own shares directly, then you should take the overall exposure into account. The article then cited an investment advisor who considers industry exposure in this context. For example, energy is about 6% of the S&P 500, so someone with 20% of their assets in energy by virtue of company stock may not want further energy exposure in their investment portfolio.

I am all for factoring in employer stock into the equation with a caveat being that the attributes of the stock be properly taken into account. An employee of a lottery ticket biotech company can probably own big pharma without threat of duplication and there will be countless other exceptions like this.

However, the idea that a job that is in the realm of being normal should dictate asset allocation strikes me as being very incorrect. I will concede exceptions (never say never) but if you're 60 and either of your parents is alive then you need to plan on being around for a while. And if you are going to be around for a while you probably want your money to last and that circumstance is far more important in determining a suitable asset allocation.

Someone with a "volatile" job that has a lumpy income should probably have a bigger emergency fund, but I would argue that three-month or six-month or whatever number of months cushion you choose to set aside is more a function of financial planning than it is asset allocation.

To the extent financial planning and investing are often best when it is simplest, Milevsky's theory seems to make the task more complicated than it needs to be. There is often an emotional appeal to having a sophisticated portfolio - a cocktail party factor. This is unnecessary for most people and potentially problematic for some.

An example I have used before; in the middle of the worst of it in late 2008 a reader commented that it would be best to just put it all in a fund run by John Hussman and forget about it. I was quick to point out what a terrible idea that would be. His strategy is legitimately sophisticated, has had bear market success and does have a negative correlation to domestic equities but over the last ten years his growth fund was down a lot while the category is flat and the S&P 500 has almost doubled.

A basic stock and bond portfolio is a great starting point for building an effective portfolio. Exposure to things like factors and alternative strategies, when implemented correctly, will enhance a basic stock and bond portfolio, not attempt to replace it. My idea of enhance is trying to manage normal volatility and reduce the full impact of large declines.

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.

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