How I Created My Portfolio Over A Lifetime - Part I

Includes: DIA, QQQ, SPY
by: Mark Bern, CFA



Three ways to build a portfolio.

What types of assets to include.

Patience and income have been the keys to my long-term success.



Obviously, there are many ways to construct a portfolio and allocate funds across different classes of assets. The method described here is how I do it. Having a set of principles and specific goals helps me to stay on the right path, and I hope my explanation will help readers to formulate a system of investing that works for them.

The methods I use as described in this and articles to follow are meant to provide a flexible set of guidelines that can be modified to fit any investor's needs. If you are just starting out on your lifetime investment adventure, it is important to establish a plan with reasonable, achievable goals and intermediate milestones. I focus on the next milestone to alleviate the frustration that can creep in upon setbacks (which are a natural part of investing). Each milestone is within reach in just a few years, so it is always achievable. Once a milestone is achieved, I just plod on toward the next one.

When I was in my 20s and just out of college, I started out with a goal to save $25,000. Back then (in the 1970s), that was a lot of money. I attainted that goal within four years after graduating. The next goals was to double it to $50,000; then $100,000; and each milestone thereafter was to hit the next $100,000. The great thing about having a plan and sticking to it is that it gets easier to achieve each new milestone, especially after hitting $300,000, because you are not doing it all alone. Your money is working for you, too. Or, at least, it should be if you are doing it right. I have to admit here that I strayed from the path a couple of times and got behind. I still had a lot to learn.

I was good at saving, but the investing part was not working as well as I had hoped. Initially, I was accepting more risk than I needed to in the hope that I could achieve those milestones faster. In contrast to the now-famous quote of Mr. Gecko from the movie "Wall Street," greed is not good for most investors. It generally gets in the way of consistency. When you win, you win big; but when you lose, you lose big! If an investment loses 50 percent of its value, it require a 100 percent gain just to get back to even.

So, it took me more than a decade to realize what I was doing wrong. Then I read an excerpt from a study that showed how 40 percent of the total return of the S&P 500 had come from dividends when measured over the very long term (as in a lifetime, or 30-50 years of saving and investing). Suddenly it dawned on me that by looking solely for appreciation, I might be missing as much as 40 percent of the potential that the stock market had to offer me. That was revolutionary and so began my investment approach evolution.

One other thing happened during my formational period. A married couple with a new baby, friends of mine, came to me with a question: If I had a baby (which I did not at the time) and wanted to put away money for his/her college education, how would I invest it? This is way before 529 plans, so that was not an option. It was also during the early 1980s when interest rates were sky high (like 15 percent for 30-year Treasuries). They didn't want to invest in stocks. So, I suggested that they invest in zero coupon treasury bonds, then referred to as CATS. They did. I didn't. They are happy. I am sad. They were able to lock in a 12 percent yield. By the time their baby turned 18 years of age, they were able to sell the bonds they originally bought at a price of $25,000 for well over $200,000. Of course, they had to pay taxes on the interest each year as it accumulated, and then they paid capital gains on the amount of appreciation above the accumulated interest, but that was well worth it. If they had held those bonds for the full 30-year term they would have accumulated nearly $750,000. This sort of investment return is not achievable in today's environment of artificially low interest rates. But the pendulum always swings and often to extremes, so be ready to jump on the opportunities that are available when they come.

The point to all this "experience" chatter is to frame the answer to why I invest the way I do. I invest with a long-term time horizon, even now at age 66. I need my money to last for at least another 20 years for me and my wife. I would also like to leave a nice nest eggs for our two children. Thus, my horizon extends beyond my own lifetime. That is, by definition, long term. And that is how I invest: for the long term and for a rising stream of future income for me, my wife and our children long after we are gone.

What is your time horizon? Think about that and make sure you define it well. You are not just investing for when you begin your retirement, but for at least another 20-30 years or more after. Make sure your goals align with those needs.

Three ways to build a portfolio

There are basically three ways to invest for the long term, in my opinion. This, of course, is predicated on a strategy of buy-and-hold for the long term. If you are trading in and out of stocks like I did before I learned my lessons, there are many other methods and systems to follow, none of which will be mentioned in this article. Sorry, but I am what I am.

  1. Buy on the dips
  2. Dollar cost averaging
  3. Buy only after a bear market

Of the three listed above, I mostly use the latter. That is why I wrote a lot of articles until about two years ago when valuations were still cheap, and also why I have not been writing as much for the last two years, as valuations rose to historically dear levels. I am not predicting a crash, although a bear market does seem overdue at this point. We are in the middle of a correction, and I have no idea whether it will turn into a bear market or if the markets will recover to set new records. That is a discussion for another place. But I am collecting my dividends and interest, accumulating cash for the next great opportunity when it does finally come.

Buying on the dips has worked wonderfully for investors since March 2009. It is a great way to systematically add quality stocks to a portfolio when valuations are below historical averages. Whenever the stock of a great company slips by more than ten percent (or whatever percent seems appropriate for that stock), buy some more. It is simple and it works during a bull market. But it does not work so well during a bear market. That should be obvious. If a stock falls ten percent and one buys, then it falls another ten percent and one buys, and then it falls some more and more, it can get nerve wracking and one may begin to question their own actions. The long-term investor will be fine over the very long term, but he/she may suffer losses in the short to intermediate term. The market will recover and, assuming the investor has bought high-quality stocks, so will the portfolio. The dividends will just keep on being paid, adding more cash to be invested to create more income. There is really nothing wrong with this method.

Dollar cost averaging works in a similar fashion but with a twist. The investor continues to invest the same amount at specific intervals. When the stock is high, one receives fewer shares. When the stock is low, one receives more shares. It is a method that is simple because it takes most of the decision-making about when to invest out of the equation. It does not really optimize investment return, though. And it is also reliant on buying quality companies to hold for the very long term. Even the best companies go through difficult times, but the best of the best evolve with the times and find a way to right the ship. Selectivity is always a key to investing.

Why do I generally buy only after a bear market? The simple answer is I like the lowest cost basis I can get. To expand on that answer a little: I prefer to not use trailing stops, so I buy at prices that only come along very infrequently. Why do I not use trailing stops, you ask? Because with high frequency traders [HFT] able to move the markets at the blink of an eye and with the creation of exchange traded funds, the chances of getting an order filled way below the stop prices is way too high. I have friends who got stopped out of long held positions at losses of 30 percent or more on the day of the flash crash on May 6, 2010, even though the trailing stops they used were set at no more than ten percent below the opening price that day. The Dow Industrials Index (DJIA) fell about 600 points in about five minutes and was down nearly 9 percent at its lowest point, only to spring back, recovering most of the loss for the day. There is more to this than HFTs at work here, but that is an explanation for another time or this article will become way too long.

I will discuss these varying methods in greater detail in another article with examples included for comparison.

What types of assets to include

The simple answer is "everything." The purpose is to achieve diversification. I will explain the purpose and my goals for diversification in another article. The basic rule is that by diversifying across different asset classes, an investor reduces the risk of having everything in a portfolio fall in value at the same time since some assets often move counter to one another.

These are the types of assets that I own:

  1. Individual stocks
  2. ETFs
  3. Individual bonds (corporate, municipals, federal government issued or backed)
  4. Bond funds
  5. Real Estate rental properties
  6. Precious metals

Should everyone own everything? Not necessarily. I will always maintain that the more one has, the more diversification one needs to hold onto one's capital. There is also the very real need to be familiar with each class of assets in which one invests. Always stick with what you understand. That is probably the most basic rule of investing, and possibly the best advice I can give to someone starting out. The next piece of wisdom is to never stop learning. By expanding what you know, you will open up new opportunities. It may take years to achieve a level of comfort necessary to actually add a new class of assets to your investment portfolio, but the patience and time it takes to gain the knowledge are worth the wait. As you understand more about each asset, you will also understand that there are better times to invest in each one. Recognizing the best time to invest in a particular asset is important. It also requires patience, a theme you will read throughout many of my articles.

Of course, it is possible to invest in just stocks and bonds and cover most of the bases. To get exposure to real estate, one can invest in real estate investment trusts (REITs). To gain exposure to precious metals, one could own gold or silver mining stocks, streamers or ETFs. To gain exposure to bonds, one can invest in bond funds or closed-end funds [CEFs]. There are both benefits and drawbacks to each method of gaining exposure. I intend to get into those issues in another article in this series as well. Promises, promises.

I want to spend more time explaining how I allocate my portfolio and how I adjust my allocations across various asset classes in greater detail, but that will need to happen in the next article or two in this series. Again, I am trying to keep the length of each article down to a reasonable level.

Patience and Income are the keys to long-term success

This is my guiding principle. It may not be yours and that is fine, too. But as I realized that owning assets that pay me to hold them can provide me with more cash to invest, I was hooked. Once I realized that there are companies that increase dividends every year, I never looked back. This worked to perfection in the beginning. Then came the first major stock market correction of my investing life, 1987. It was fast. It was brutal. It unnerved me.

That is when I learned about diversifying across asset classes. It also reminded me of how well my friends were doing with their CATS bonds so far. I realized that I needed to do something different if I wanted to protect that which I had worked so hard to accumulate. I have a great story to relay to you about real estate, but I think it will require an entire article to do it justice.

I now have income streams coming in from multiple sources, and the income rises each year. I plan to keep that as my short-term goal each year going forward. It really helps to focus on the income side of the portfolio during volatile market gyrations. The value can go up or down in the short term, but as long as the income keeps rising, I can feel good about what I am doing. The longer I do it, the more confident I am in what and how I am doing it.


If you want to be a millionaire, you need to invest like one. Wealthy people do not need the income from investments so they do not need to invest unless there are bargains available. Think about that for a moment. There are bargains available most of the time in one asset class or another. The key is to identify which one offers the best long-term value at any given time.

People who are not wealthy feel like they need to keep all of their cash invested all of the time. That is not how Warren Buffett does it. He likes to always have large amounts of cash available at all times. Have you ever wondered why? It is really simple. He likes having cash available for when a bargain appears. He does not invest just to keep his money working. He invests when he identifies a long-term value opportunity that only comes around infrequently.

Buffett considers cash as an option on the future. If you have followed his quotes for very long, you will recognize this concept. What he means is that great investing opportunities will always present themselves at some time in the future if one is patient and persistent enough to wait for their appearance.

There is so much more I want to cover, so I will try to submit at least two articles a week in the series for the next few weeks or until I feel most of what I want to write has been written. Until next time, do not rely on luck; rely on wisdom and hard work.

On to Part II

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.