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

May 19, 2011

May 23, 2011: A Stockless Portfolio? Yes We Can

Yes, it is possible to run your portfolio sans stock. I have toyed with this notion on and off for a while. A recent article by Money Morning Chief Investment Strategist Keith Fitz-Gerald addressed this concept quite well.

According to Fitz-Gerald, the allocation model looks like this:
Bonds 45%
Master Limited Partnerships (MLPs) 25%
Commodities 10%
Gold 10%
Preferred Stocks 10% (true, they are stocks but their performance is more bond-like)

Bonds should be split between high-yield corporate bonds and intermediate/short term investment grade municipals. IShares IBoxx $ High Yield Corporate Bond ETF (HYG) is recommended as is Vanguard's Short-Term Corporate Bond ETF (VCSH). PIMCOs Municipal Income Bond Fund (PMF) is an appealing choice to round off this portion of the portfolio.

Gold hedges the principal value of bonds. This is especially true, according to Fitz-Gerald, in a stockless portfolio. A good choice is the SPDR Gold Trust ETF (GLD).

Fitz-Gerald adds a healthy dose of Master Limited Partnerships. MLPs may trade like stocks, but technically they are different in character. J.P. Morgan's Alerian MLP Index ETN (AMJ)provides reasonable coverage for this portion of the portfolio, until a better method and index comes along.

Commodities can be covered by a stake in MarketVectors Agribusiness ETF (MOO) and PowerShares Deutsche Bank Commodity Index Tracking Fund (DBC). A higher yield commodity security is the Pimco Commodity Real Return Fund (PCRDX), yielding over 8%. In all likelihood, the long term trend for commodities is bullish.

Preferred Stocks are needed to include relatively high fixed dividends or inflation protected dividends present in some of these investment vehicles. The ETF choice here is the IShares U.S Preferred Stock Index Fund (PFF).

There are obvious downsides to a stockless portfolio. Fitz-Gerald points out the major hurdles. The current Fed zero interest policy is bullish for common stocks. Investors interested eliminating stocks are introducing additional risks to their portfolio by reducing the level of diversity and balance . Thus, I believe a non-stock portfolio is a significantly more volatile investment using the past four generational metrics for the market.

The much divined dividend appreciation method many investors flock to with common stocks is lacking, although this stockless portfolio appears to contain plenty of fixed income. Those seeking consistently rising dividends from stocks depend upon a company's track record to justify their dividend shill. Since the 1940s, they are correct. But bitter and unforeseen surprises may be in store for those absolutely, definitely sure beyond any doubt that this trend will continue - usually when it is least expected.

Importantly, Fitz-Gerald points out that by cutting common stock from a portfolio, it is definite that one would have to significantly increase personal savings to make up the difference with common stock's century-long historical performance. A 32 year old earning $50,000/year aiming for about $3200/month retirement would have to increase their savings from 12% to 16% of their annual salary. I am of the opinion that saving 20% of gross income is necessary regardless of one's retirement nest egg approach.

The objective of this unusual exercise is not to convince the reader that this type of portfolio is the best road to riches. It is published to encourage investors to think of alternative ways to manage and design a portfolio - to resist following the herd instinct chasing "sure bets" with common stocks, or a sector investment, as we lurch into an uncertain future. The past is littered with foolproof stocks and investment schemes gone awry.