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Don't Take It Personal

The financial advice industry markets to our desire for exclusivity and personalization. But for stocks, paying extra fees for personalization is typically a waste of money.

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Heard anything like this before?

  • You're special. So we match your goals to your portfolio.

  • You're special. So we offer tailored investments and customized accounts.

  • You're special. So we offer individualized asset management.

  • You're special. So we offer a bespoke process, uniquely for you.

But the truth is less flattering, and doesn't pamper our sense of self-worth.

Whether you're young or old...wealthy or not wealthy...working or retired...

Your stock portfolio should mostly be the same. You are not special.*

All investors should own stocks for only one reason: future growth. How can my stocks prudently get the highest expected future return?

And the answer knows no age, no financial strata, nor employment status. Certain types of stocks aren't more customizable than others (at least not to a degree that's helpful in constructing portfolios). The goal with stocks should be the same, and so the best designed portfolios should be, too.

Here are the basic tenets for success:

Don't let one company meaningfully drive your outcomes. History is full of horror stories that robbed people of their financial livelihoods: Enron, Lehman Brothers, Sears, Kodak, etc...don't put too much weight into any one company. You introduce a higher probability chance that one day you are fine, and the next day you are not.

Don't let one region meaningfully drive your outcomes. Japan's market famously peaked in the late eighties and didn't recover for 30+ years. The S&P 500 in the U.S. was negative for an entire decade from 2000-09. Don't overweight individual regions at the expense of underweighting others. It's a recipe for frustration.

Don't let a professional portfolio manager pick which specific stocks are best for you. Stock prices are already priced fairly — so it's not worth paying someone to attempt picking the future winners within the market (when you can just own the whole market itself for cheap). No one knows the future, and the data seems to reinforce this every year. For funds trying to outperform the S&P 500 index for the 15 years through June 30, 2023, less than 8% succeeded.

So, everyone. EVERYONE. For stocks.

Own a portfolio with broad exposure to the entire world, for a low fee.

When it comes to your journey with stocks, don't take it personal.

Thankfully for our notions of self-worth, there are at least two critical factors of your portfolio where you are special.

1. The weights of your stocks vs. bonds should be highly personalized.

Over long periods, the biggest driver of your outcomes as an investor is your asset allocation.

It matters a lot how many high-torque assets (like stocks) you own, versus how many low-torque assets (like bonds) you own. Broadly speaking, the longer time horizon you have, the higher probability that owning a higher-torque portfolio will work out best in the end.

2. Your bond portfolio should be highly personalized.

Unlike for stocks, there is no catch-all use for bonds (because there are so many different types!). Some help dampen volatility, provide stability or act as a safety net. Others are useful for tax strategies, for predictable income, or can help manage future liabilities.

The reason we accept lower expected returns for bonds is that to accomplish any of the above, a key feature of bonds is that they give us a lot of information about our expected outcomes — unlike stocks, bonds are set to mature on specific future dates and pay us back our principal, terminating our ownership of them. Whereas stocks don't expire.

The additional clarity we get from bonds is what allows for customization. And you need it. Because in this part of your portfolio, you are special.

As an example, here are two different types of bonds over the last 25 years: (1) ultrashort, risk-free bonds, and (2) intermediate-term, corporate bonds:

Anyone with a long-term time horizon might look at this and say...I should probably own intermediate corporate bonds instead of ultrashort, risk-free treasuries. More volatility but a higher return.

But it's more complicated than that.

If you have a long time horizon, why wouldn't you just own stocks?

The shapes of these lines reflect the risk spectrums. This is how it has worked over the long run. You don't deserve the higher returns if you want the smooth purple line.

But not everyone has a long-term time horizon, and so customization matters. As investors learned recently (we just experienced the worst bond market since 1842), you cannot simply buy "bonds" as the safety net of your portfolio. The category is too broad.

Assume it's the end of 2021, and you have short-term liabilities. Maybe you are trying to buy a house in the next few years, or you are in retirement and have spending needs.

Tough go if you had bought intermediate bonds!

The short-term outcomes of these same bonds funds were complete opposite of the long-term outcomes:

Unlike with stocks, these aren't entirely random outcomes, even over shorter periods. We knew ahead of time that intermediate bonds are very sensitive to interest rates, and if inflation spikes (as it did), that they could perform terribly. And with risk-free investments, we always know exactly what we will get.

These are both "bond funds" — but they are not for the same type of investor. One is expected to do better (but has downside risk if inflation spikes), and the other saves your ass if inflation spikes. I'm not suggesting you only need to pick one, either.

Overall, portfolio design is an art of mosaics.

It's rarely all of this and none of that. It's a palette of inputs, and a bespoke weighting schema.

The final result is unique to you. The process requires expertise.

The underlying stock component of the process is the easy part. Every investor should want the same thing from their stocks. Growth.

Unfortunately, we get very little clarity about what to expect from stocks, except that over long periods it's historically worked out better than bonds, and that over short periods we expect to occasionally, unexpectedly, have our faces ripped off.

These are the baffling facts about assets, risk spectrums, and clarity.

We can't change them. So we design around them.

Because the expertise also tells us that investors should unpack their unique needs, and make informed decisions about which bonds and bond funds to own. It's the harder part of the process, and evolves throughout your entire life as your goals and needs change.

Tailored. Customized. Individualized. Bespoke. Your bonds, and your weighting between stocks and bonds, should look different than nearly everyone else you know.

But as for stocks, just buy the suit off the rack.


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*This opinion relates to decisions around investment returns. If you have social or sustainable preferences (e.g. I don't want to own exposure to countries that discriminate against certain lifestyles, or I don't want to own companies with excessive pollution metrics — it's reasonable to consider instilling personal philosophies within your portfolio once you understand the tradeoffs of overweighting/underweighting/omission decisions.

But be aware these are decisions that do not improve your expected investment returns. Remember that prices adjust to be fair. If a company or region truly is terrible, investors will already have sold the price down to reflect that.

Like buying anything in life, crappy stuff gets discounted — the market's job is to make the average investor indifferent to various opportunities through these that all stocks seem like a similar value for the price. Historically, the poor performance of people that try to pick individual stocks tells us that the market has done a decent job at that. It's easy to pick the best companies, but prices make it extremely hard to pick the best investment ideas.


My blog posts are informational only and should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in my posts will come to pass. They are not intended to supply tax or legal advice and there is no solicitation to buy or sell securities or engage in a particular investment strategy.

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