Eating Your Own Cooking

Wouldn’t you love to know how people actually invest. It’s one thing to follow somebody on Twitter or to read their blog, but at the end of the day we have no way of knowing if that person actually practices what they preach. I want to lay my cards on the table, and share how I invest my money.

First, I keep 6 months worth of living expenses in cash, you never know when the rainy days will come and I think this is a good rule of thumb. You don’t ever want to be in a position where you’re forced to sell your stocks at an inopportune time. For this reason, I think if you’re going to commit to the market, you need to give yourself at least five years. Even that doesn’t guarantee positive returns, although the odds are in your favor (87.3% of five-year rolling periods are positive).

I’m 31 years old and hopefully have decades of investing ahead of me. I do believe that stocks are the best way to participate in the growth of the global economy and my 100% core stock portfolio reflects that. I have 11 holdings in my portfolio, the majority of them are index funds. Sprinkled in are a few smart beta/factor tilt funds. Berkshire Hathaway is the only single stock I own. I am adding to my portfolio on a quarterly basis, putting slightly more money into the holdings that have had the worst performance over that time.

I firmly believe that having a portion of your portfolio out of stocks during a bear market is essential to protecting you from yourself. For this reason, 15% of my portfolio is in our tactical model, Goaltender. I’m not confident Goaltender will necessarily nail the top, but that’s not its objective. I’m confident that in a prolonged downturn, it will eventually go to the sidelines. The price of being tactical are the inevitable false positives, where you sell only to buy back in at higher prices. I’m fine with this; I’m willing to accept small paper cuts in order to avoid a giant gash.

I’ve proven to be a below average trader and my intuition has failed me too many times to count. For these reasons I’m not trading in and out of index funds and I’m not picking stocks (with the exception of Berkshire). I understand the limitations and the downside to what I’m doing. I know that there will be long periods of time where my account doesn’t appreciate, as well as long periods of time where my account goes down. I’m fine with both scenarios; I’m willing to take 100% of the downside as long as I capture 100% of the upside.