EC Building A Lifetime Portfolio, Part II: What To Consider Owning Now

<< Read How To Build A "Lifetime" Portfolio - Part I

The Asset Allocation chart we showed in Step 1 of this series (here) engendered considerable valuable discussion. While I addressed all issues raised in that area, I want to say here, as well, that when I transferred the chart from our monthly investment publication, the text box crediting the source of that chart did not come through on what I submitted. Mea culpa! I take others' hard work as seriously as I do my own and appreciate their willingness to share the results of their research. That chart came from Novel Investor. If you'd like to see the full-year ended 2014, that is now posted there as well.

Until the Swiss Swooping Swan (we can't really call it a Black Swan; it was wholly unexpected given the Swiss central bank's protestations of just 48 hours prior, but it is not a cataclysmic event for US investors) the prevalent investing mantras went something like this:

  • "Be long the dollar, short the euro. There is no stopping the juggernaut that is the US dollar. Where else can you go?"
  • "Europe, China, Australia, Asia, et al are struggling. There's no upside there."
  • "Interest rates must rise now since the Fed must control inevitable inflation."
  • "Emerging markets are dead, or at least in an extended coma."
  • "Utilities, bonds and REITs must fall this year as rates rise."
  • "Commodities are dead. Copper, iron, cottonoilgas, you name it - if it is subject to supply and demand, it is dead."

As further evidence that an Asset Allocation model protects you from market risk more effectively than simply buying a benchmark index fund, I believe that every one of those assumptions are now called into question as the Swiss, the Danes, and others have now tried to protect themselves from the inevitable and finally announced QE from the European Central Bank (working with and through the various national central banks, of course.) The point is that we never know when there will be a shot out of the blue that upsets our most treasured assumptions and calls into question our investing direction. Owning different asset classes reduces that risk considerably.

With market history on our side, we will continue to allocate assets in a diverse manner, placing some funds into the areas that offer the most compelling valuations no matter what the CNBC talking-their-book talking heads expect. For instance, we don't buy or sell something called "the EC." We buy great European companies / multinationals that will continue to be great European companies / multinationals.

We have tried to position our family and client portfolios for what we believe will be the sweet spot of this aging bull market, but we still diversify "just in case." I believe the confluence of low rates, low inflation, institutions with money to spend, the typical small stock bias for the first two quarters, and the third year of the presidential election cycle will make for a most wonderful time of the year and possible a timely denouement for the bull, with the final year (if it proves to be) typically the one with the greatest volatility and the greatest overall returns.

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Joe Economy 4 years ago Member's comment

Thanks for the article, some interesting ideas to ponder. Would like to hear your thoughts on how the expenses of owning managed funds, ETFs, and mutual funds eat away at profits as compared to owning individual stocks. Can an investor diversify enough by investing in individual stocks? Secondly, although many people look to the great investors of our era for stock picks like Buffet and Soros, Buffet himself recommended that the novice investor is better off investing in a simple S&P500 Index fund rather than try to pick individual stocks. Some contradicting views from the legend himself who made his fortune by investing millions in picking stocks!

Perhaps the biggest challenge the novice investor faces is "fear". Holding on to stocks when they dip is very hard for many people, so they sell. They then wait for a stock to show signs of growth and get caught in the buying frenzy, and buy (when the stock is on the upswing). The best advice I heard is to seek stocks for the long haul that have deep rooted histories of success be that in revenues and growth, or alternatively in yield growth. Interested to hear your thoughts.

Joseph Shaefer 4 years ago Author's comment

Sure -- once you've paid the buy commission and dealt with any bid/ask spread, there should be no expense in holding an equity until you pay a commission to sell and deal with any bid/ask spread on the sale.

With an ETF, closed-end or open end mutual fund, you will pay for the managers' offices, cars and other perks in the form of "expenses." However...

What you are also paying for is their closeness to the markets -- they are watching it daily so if some untoward news item is rumored or hits, they can, respectively, place trailing stops or sell quickly. And, to your point above, they offer diversification within the bounds of their charter. If you then decide to build a portfolio that includes funds from different sectors and asset classes, you effectively hire these fund managers to do what you intend, be it the kids' education in 7 years, retirement in 30 years, etc.

Never be penny-wise and pound-foolish. Rather than see an Enron blow up in your face, it may well pay these expenses you wouldn't pay with individual stocks in order to gain diversification and the satisfaction of not having to watch everything yourself.

Dick Kaplan 4 years ago Member's comment

This was a great series, thanks.

Joseph Shaefer 4 years ago Author's comment

Hello again, Ms Brown!

I specify ETFs and funds because that's 85-90% of what we manage for our clients and suggest readers consider as part of their own 'Lifetime' portfolios. But among the great multinationals in Europe I certainly would consider Nestle, Anheuser Busch InBev, Unilever, Daimler (Mercedes' parent,) Siemens, Bayer, LOreal, BMW, LVMH Moet Hennessy and SAP...

Marcy Brown 4 years ago Member's comment

Would you care to name any of the 'great European companies/multinationals' you like? You only specify funds...