The Ultimate Buy-and-Hold Strategy - Portfolio 3
I have enjoyed listening to Paul Merriman’s investment podcasts and his ‘Ultimate Buy-and-Hold Strategy‘ workshop was recently broadcast online. I am attempting to figure out how to allocate my investments and Merriman’s presentation spells out what he thinks is the best way to earn a superior, yet safe, return.
In my previous post looking at Portfolio 2, Merriman details the type of bonds that should be a part of our investment portfolio. Now he turns his attention to the equity portion of the portfolio. He begins by reminding us that large companies like General Electric, Citigroup, Microsoft, etc, which make up the standard pension fund’s equity portfolio, were all small companies at one time, and each grew rapidly and paid their early investors handsomely.
Small companies can grow much faster than huge ones, the first and most fundamental way to diversify a stock portfolio is to invest some of your money in stocks of small companies.
Merriman recommends weighting your portfolio heavy on the small cap stocks by splitting the equity portion of your investment portfolio in two, half in large-cap stocks and the other half in small-cap stocks. Now we have Portfolio 3, a pie with three slices. According to Merriman, from 1970 through 2005 this combination would have returned 11.2 percent annually, much better than the 10.4 percent return from Portfolio 1. The concentration of the small-cap stocks has, however, raised the standard deviation to 12 percent from 11.6, a small, but acceptable, increase in volatility.
Merriman says:
I think it’s interesting to note that in this hypothetical scenario, Portfolio 3 adds $1,042,078 to the long-term investment results of Portfolio 1, with very little additional risk. This difference is roughly 10 times the entire initial investment of $100,000.
Merriman does have suggested portfolios available on this web site depending on where you have your investments. Since mine are at Schwab, I have used their fund screener to find out what is available. The following small-cap equity index funds are available:
| Small-Cap Equity Funds | IRA Initial | Subsequent | Expense | Turnover |
|---|---|---|---|---|
| Schwab Small-Cap Index Fund (SWSMX) | $1,000 | $500 | 0.58% | 40.00% |
| Dreyfus Small Cap Stock Index (DISSX) | $1,000 | $500 | 0.50% | 14.00% |
And for the large-cap portion of the portfolio Schwab has the following funds available:
| Large-Cap Equity Funds | IRA Initial | Subsequent | Expense | Turnover |
|---|---|---|---|---|
| Schwab S&P 500 Index Fund (SWPIX) | $1,000 | $500 | 0.37% | 4.00% |
| Schwab 1000 Index Fund (SNXFX) | $1,000 | $500 | 0.50% | 6.00% |
Next in the series we will be looking at the place of “value” stocks in our portfolio.
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