Dave, What Should I Do? (3)

Some of my friends want to invest with me, but I am not a total solution to anyone’s financial needs, because the only stuff I am managing is the risk capital.  All of my clients have to go through a suitability check, where I tell some of them, “No.  That is too much money to place with me.  You would be placing more money at risk than would be good for you.”

I do that even more with close friends.  Why?  They want to support me.  They have a non-economic reason to invest with me, so I have to be all the more prudent and tell them in many cases, “Not so much invested with me.”  Eeee, my wife worries about investing the money of friends.  So do I, but I also know that I have done well for myself over the last 20 years, and my friends could do worse than investing with me.

So, I have four friends to talk about tonight.

1) 91-year old widow, mother/mother-in-law of some dear friends of mine.  Has all of her money in a money market fund in a bank, and earning what is a very good yield for a money market fund.  Bank isn’t in the greatest shape, but the amount is below the FDIC’s limits.  She doesn’t need the money because she has a pension that more than cares for her needs, and she lives with my friends.  Very conservative lady; does not want to take risk, but she asked for advice.  The excess money would go to her children at death, she already gives them some excess each year now.

I ended up saying that I thought I could earn more for her, but that it was by no means certain.  I thought it would be 1 in 3 over the next ten years that the strategy might lose versus her money market funds.  The FDIC should be good if the US government is good, and for her likely lifetime it probably is.  So she decided to stay where she was.  Easy, and, it keeps the dear old lady from worry.

2) A friend, 55, wants to retire 65-70.  Owns two houses free and clear near DC.  Wants to invest all of his IRA assets with me.  I tell him, “No more than 50% with me, and the rest in bonds.”  So, he says that he has an account at Vanguard.  What should he invest in?  I suggest:

  • 23% Short-Term Investment Grade [VFSTX]
  • 23% High Yield Corp [VWEHX]
  • 23% Inflation Protected Securities [VIPSX]
  • 23% Total Bond Market Index [VBMFX]
  • 8% Long-Term Treasury [VUSTX]

Why did I suggest this?  Credit should do well over the next year, and this portfolio will hedge somewhat against inflation, and to a greater extent deflation.  The duration on this set of funds is below the market average, quality is above, and yield is above as well.  Also, convexity/optionality is above average, and will leave room to make changes.

3) Another friend, born 6 days after me (50), just changed jobs.  Wants advice on the new 401(k) plan, again Vanguard, but a different selection set.  They may want to invest some taxable money with me after that, but who can tell… one thing for sure, I never want to push anyone to invest with me.

I ended up suggesting:

  • 15% V Wellington Trust TIPS Portfolio
  • 15% V Short-Term Bond Index
  • 10% V Target Retirement Income Trust (30% equities)
  • 10% V Total Bond Market Index
  • 10% V FTSE All-World Ex-US Index
  • 10% Templeton Foreign Equity
  • 10% V PRIMECAP
  • 10% V Midcap Value
  • 10% Longleaf Partners Small Capital

That would give reasonable diversification across a broad number of scenarios, and a tilt toward equities versus bonds — 53/47%.

4) The widow of the dear guy I call “The Collector” asked for more advice.  I call him “The Collector” because he bought new funds frequently with new money over many years, and he had a reasonably good eye for managers.  I can kind of guess when he bought them — many did quite well in their time.

But she wants income, so she wants to sell a couple of funds that she owns, and buy some Wells Fargo.  I have no objection to the sale of the funds, but she will not earn much income from Wells Fargo, and she already has too much single stock risk , including existing holdings of Wells Fargo.  What I need to tell her is to use the proceeds add to her holdings in Vanguard Wellington and Wellesley Income funds, both very well run.

I also need to explain to her that total return matters more than current income.  Income can be generated by liquidating small amounts of funds expected to underperform.  (I have given her a list tagging funds add, keep, reduce.)

So it goes.  It is a tough time to be investing, but as a new friend pointed out to me recently, quoting T. Rowe Price, “The hardest time to invest is today.”  Sage words.  The present is always a balance between bullishness and bearishness.