I am retired and take educated guesses on all things financial.

June 21, 2009

June 21, 2009: A Portfolio For You, Not Your Financial Planner

As many of you, I have been observing the writings of resume-rich bloggers gaming the Obama economy, new ETFs, gurus-on-call, talking heads (not be be confused with gurus) and listening to the media watchdogs, whether they be in the tank for the present political leaders or not.

Of particular concern to me is the utter lack of commentary (or strategies) to invest holistically. Everyone seems to be focusing on stocks, bonds and/or their cumulative funds and are missing or intentionally ignoring geo-political and taxation realities that the investor must take into account to navigate portfolio currents using the maxim,"it is not what you earn, it is what you keep" as the guiding light of any investment strategy.

Perhaps many are writing more for their audience and web stature.

First: Taxes.

If your financial planner does not include a legal and sound way to avoid taxes as an integral part of your portfolio, at all levels of government, look for someone else. Ditto for planners who will not venture away from paper investments.Most stick with tax "deferred" stances, which is a long term mistake, especially when tax rates rocket higher.

Frustrating for me are some who say that losing less is a victory. The glee from many who lost "only" x-amount of treasure! Pyrrhic, in my opinion. Or, that taxes are not a viable expense when figuring total return. We are taxed, as the Terminator stated when running as a Republican for Governor of California, 24/7. Local, State and Federal debt is going to be funded by taxation, likely coupled with inflated dollars. Your goal, and mine, should be to let others pay their fair share. Settled law states we are to pay the least amount of taxes legally owed.

Overlooked in tax strategy is the huge tax advantages owning and self-managing real estate. I prefer residential real estate. You have write-offs and phantom depreciation galore (which can be deferred until death via 1031 and similar property exchange programs, or simple refinancing). Both political parties are not about to hack away the benefits of owning property (your personal residence is not an investment as it produces no income, save a tax benefit). The real estate lobby rivals the public education and trial layer cartels within the Beltway.

Second: Portfolio

Real Estate: 35%. You must buy right and educate yourself on appropriate management. Now is a great time to launch yourself into this endeavor. My average returns since 1976 have been in handsome double digits each year after considering income plus write offs. No flipping for this buy and hold strategy. You are after total return ("what you keep")for the long haul. The tax advantages of real estate will allow you to go after some income and longer term capital gains regardless of future revenue enhancements courtesy of our political and judicial class. Thus,

World Money: 25%. I believe that most of us know that the United States is not the power it once was, and demographics tell us that it will grow sporadically weaker on the world stage as the welfare state encroaches upon the risk taking and hard work of our forefathers. The Fidelity Strategic Income Fund (FSICX) which is balanced between 31% corporate securities, 32% government agency and 29% securities based in foreign currency yielding 5.61% with $5b in assets priced at $9.75. Complimenting this gem of a fund would be anticipating the rise of inflation/devaluation of the currency that unfortunately appears to be in the cards for we Americans. IShares' Treasury Inflation Protected Securities (TIP) fills the bill here. Trading at $100.17with a current yield of 4.74%, this $13.2b ETF with a .20 expense ratio fits well with the aforementioned fund, or others of like consistency which you may prefer.

Commodities: 15%. A diversified basket of commodities fits with a world paying up for life's necessities and historical wealth preserving entities. I like PowerShares' Commodity Index Fund (DBC) because it does not grossly overweight any one commodity, such as fossil fuel. Trading at $23.20, earning a Morningstar 5 star rating for ETFs in class and possessing a respectable $2.9b in assets, DBC may well provide excellent capital gains without the manic gyrations of just one or a few commodities. If you must hedge towards fossil fuel, I believe Encana(ECA), the huge North American energy company focused in Canada is a worthwhile consideration. This excellently managed company that knows how to appropriately genuflect towards our environmentalist friends sports a 3.1% dividend and currently trades at a paltry price/earnings ratio of 5.6.

Emerging Markets: 15%. Remember when European investors profited billions from developing assets in the emerging United States back in the 1800's? I don't, but history tells us that money is best invested towards emerging societies that crave a better way of life. IShares' Emerging Markets ETF (EEM) trading at $31.75 with a yield of 2.15% and an index to love is a $29b asset play on the rest of the world meeting and eventually surpassing many developed nations of today. Key to their success will be the avoidance of nanny-state welfare and regulation that has stifled old Europe and threatens the United States.

Stock or Rock: 10%. Harry Browne was adamant that money was not only to protect and invest but also to enjoy. Pursuing a hobby, taking that great trip or donating to a favorite charity (remembering the old adage, "charity begins at home") should be within your grasp IF you avoid the stoic securities trap. Real estate business ventures may even allow you to write off a trip. If you prefer to follow investments, then add a domestic common stock fund to your portfolio. There are plenty of ETF's to consider. I like the IShares Preferred Stock Index Fund (PFF) trading at $31.99 and yielding 8.35%, the S&P 1500 Index ETF (ISI)trading at $41.51 and the S&P Small Cap 600 Value Index ETF trading at $47.50.

My portfolio submission may be torn to shreds by the purists, chartists and those Elliot Wave theorists who still thrive to perfect the science of alchemy. However, I suspect there are more than a few investors whom have successfully figured out real estate (not those who blame tenants,repairmen,Realtors,God,etc. for their failure in this area) and reason that the rest of the portfolio serves to enhance the geopolitical realities of investing. If I am incorrect in my assumptions, let me join just about everyone else writing now for the future.

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