Investing for the timid and cowardly
Tess Vigeland: So I seriously hope you have taken our advice to heart, and are averting your eyes from the daily madness of the stock markets. Europe’s debt problems and our sad economy are combining to create a world of crazy.
If it’s all too much for you and you’re looking for a way to deal, how about something called a “coward’s portfolio”?
Dorothy in “Wizard of Oz”: Why you’re nothing but a great big coward.
The Cowardly Lion, weeping: You’re right. I am a coward. I haven’t any courage at all.
John Waggoner is a personal finance columnist for USA TODAY And he wrote about this recently. John, who is this portfolio geared for?
John Waggoner: It’s basically designed for those who are terrified by the stock market — which I think right now is about everybody. What we did is we took 20 percent and put it in a money market fund and we put 30 percent and put it in a bond fund. And the remaining 50 percent is in a stock fund, and not just any stock fund, but really one that’s craven, really as cowardly as possible. So we went for an equity income fund, which is, you know, kinda the milquetoast of the stock-mutual fund world.
Vigeland: So, this really is all about simplicity.
Waggoner: Absolutely. It’s all about simplicity and it’s about spreading your bets around. This is a time when you really don’t want any of your eggs in one basket. In fact, you want to be as diversified as humanly possible.
Vigeland: Well, have you done some math on how well they would do? Have you taken a look at, say, if you had done this 10 years ago, how would you have fared?
Waggoner: You would’ve fared fairly well, actually. Now, bear in mind the S&P500 is kind of like arm wrestling with a mouse at this point. But you could’ve done fairly well. I looked at the portfolio using fairly basic indices for it. And it’s gained 41 percent as opposed to 31 percent for the S&P500.
Vigeland: Over the last decade?
Waggoner: Over the last decade. Now bear in mind, 41 percent still isn’t great. On the other hand, it’s better than what you would’ve gotten in a money fund and it’s better than what you would’ve gotten in a stock fund.
Vigeland: Now you say 20 percent in, I think, money market funds and then 30 percent in bonds. What kind of bonds are we talking about?
Waggoner: Well, bonds are problematic right now because the reason this portfolio has done so well is that it’s just been a monster bond rally over the past 10 years. And you don’t usually hear those two terms together. But that’s what’s really kept the cowardly portfolio going.
Now, you have a couple choices: So you’re at the top of a bond market. And so, you can just suck it up and just keep your position there, because after all, you have your bonds because they’re there to protect you against stocks. You could buy individual bonds, like two-year treasuries. You’re not gonna earn anything, but as they roll over they’ll eventually yield more. And if you hold them to maturity, you won’t lose any money.
Vigeland: And for the other 50 percent, you mentioned just a basic stock fund. What’s the best way to go about picking one of those?
Waggoner: You wanna look at two things: Past performance is — as we all know…
Vigeland: Not indicative of future results!
Waggoner: Absolutely. So, there are a couple things you can control, one of which is your expenses. You wanna give as little to your mutual fund company, because after all, that will decrease your returns over time. And you also basically wanna look for one that has a good record of finding decent dividends-producing stocks. You want a fund that gives something back to you. Because you’re in there not only for the appreciation, but the income that this thing will throw off.
Vigeland: So it sounds like this really is not anything you would base on your age or anything like that. It really is all about your personal risk tolerance — which we talk about all the time — and this is a way to not perhaps be such a scaredy cat.
Waggoner: That’s right. It’s all about the terror. And as you become more confident, you can increase stocks. Bear in mind, those little voices that tell you “I’m underinvested” are usually leading you in at the wrong time. So, I’d say keep it simple, keep it cowardly, as things get better — and they do! — stocks will pick up where your bonds left off.
Vigeland: John Waggoner is a personal finance columnist for USA TODAY. Thank you so much for coming in.
Waggoner: Thanks for having me.
Vigeland: And we’ve got a profile of another investing strategy called “Locavesting.” On our Makin’ Money blog.
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