The Ultimate Buy-and-Hold Strategy - Portfolio 5

In Portfolio 4 we looked at dividing the equity portion of our investment between large- and small-cap stocks and between large- and small-cap value stocks. This diversification has improved the historical return of our portfolio to 12.1 percent and only increased volatility slightly.

Merriman’s final step is to include international stocks in our portfolio. Like U.S. stocks, foreign stocks also go up and down, but usually they are not in sync with the fluctuations of the U.S. market. This makes them a “non-correlated” asset, meaning it responds to different external forces and has its own up and down trends that do not match the U.S. market. In other words, when one is going down the other is still going up, so that when the two trends are combined their short-term movements cancel each other out, smoothing out a long-term (hopefully) upward curve.

According to Merriman, there are two reasons international stocks are non-correlated with U.S. stocks. First, and most obvious, the companies are operating in a different world markets, subject to different economic forces. Second, any gain or loss of a stock in that foreign market also has to be ‘translated’ into U.S. dollars at the current exchange rate, which is another ‘non-correlated’ factor in and of itself.

Just as we balanced large-cap stocks with small-cap and value stocks with growth stocks so also it is equally important to diversify our international stock holdings. Portfolio 5, therefore, will add international large-cap growth and value, international small-cap growth and value as well as a some emerging markets stocks which should provide significant growth opportunity.

Although in the article Merriman adds one further tweak to his portfolio, this really is the basis for his Ultimate Buy-and-Hold Strategy in which we attempt to increase our return while reducing our risk. Based on historical data, if in 1970 you had invested $100,000 in this portfolio, it would have grown to nearly $8.5 million.

Merriman has “suggested portfolios” available on this web site depending on where you have your investments. Since mine are at Schwab, I used Schwab’s fund screener to determine the international funds I think I should invest in:

Now that I have a better understanding of Merriman’s Ultimate Buy-and-Hold Strategy, I need to come up with my own investment plan. How am I going to put his advice into practice, especially with my limited capital.