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The Gone Fishin’ Portfolio Reels In Another Good Year

The Gone Fishin’ Portfolio is based on four bedrock principles:

  1. Your single most important investment decision is your asset allocation. (How you divide your portfolio up among stocks, bonds, real estate investment trusts, etc.)
  2. You need to rebalance your portfolio annually to reduce risk and increase returns.
  3. You should keep a close eye on fund expenses, commissions, and other investment costs, minimizing them wherever possible. And…
  4. You should use an “asset location” strategy to keep investment taxes as low as possible. That means keeping tax-inefficient investments like bonds and real estate investment trust in a qualified retirement plan (when possible) and putting tax-efficient investments like stock index funds in your non-qualified accounts.

What is “the best asset allocation”? This is something we can only know in the luxury of hindsight. Last year, for instance, investors who bet everything on large-cap U.S. stocks were big winners. The S&P 500, with dividends reinvested, returned 32.4%, its best annual performance in 23 years.

However, investors who took this same tack and had everything invested in large-cap U.S. stocks in 2008 took a drubbing. The S&P 500 plunged 37%.

Given that no one can know in advance which years will be good and which one bad, the key is to accept this uncertainty and asset allocate. In other words, divide your portfolio among various, non-correlated investments. (Non-correlation, in technical terms, means that when some assets zig, others will zag.)

The recommended asset allocation for The Gone Fishin’ Portfolio is 30% in U.S. stocks (split between large-cap and small-cap stocks), 30% in international stocks (divided between Europe, Asia and Latin America), 10% in high-grade bonds, 10% in high-yield bonds, 10% in Treasury Inflation-Protected Securities (TIPS), and 5% each in real estate investment trusts (REITs) and gold shares.

We implement this strategy through Vanguard mutual funds and ETFs. Why Vanguard? Let me count the ways. It is the nation’s largest and most respected investment company. It has a broad range of mutual funds choices that cover all 10 asset classes. And it is the world’s low-cost leader. The average mutual fund family charges annual expenses that are six times higher than Vanguard’s.

How did the Gone Fishin’ Portfolio perform in 2013? It returned 15.3%. You can easily derive (or verify) the annual performance – net of costs – by checking the performance of the 10 Vanguard funds that make up the portfolio.

Once you’ve invested in the funds, the only action required is the 20-or-so minutes it takes each year to rebalance the portfolio, bringing the asset allocation back to its original alignment. In other words, you sell down the assets that have appreciated the most and add the proceeds to the assets that have lagged. This has the salubrious effect of forcing you to “sell high and buy low.”

To simplify return calculations, we rebalance the portfolio on the last business day of each year. But the actual date you choose is unimportant. The important thing is do it, as this action both increases your returns and reduces portfolio risk.

Some might reasonably ask why they should use a strategy that – while generating a double-digit return – substantially lagged the performance of the S&P 500 last year. The answer is that 2013 was an odd duck, one that made diversification look foolish. Virtually everything underperformed the S&P 500, from bonds to real estate investment trusts to emerging markets to gold shares. (Especially gold shares, the worst performing asset class of 2013, down 35%. Ouch.)

But there are a few things to bear in mind. The first is that asset allocation is a long-term investment approach, not a short-term trading technique. It doesn’t really matter which asset class performs best this year or next if you’re investing to meet long-term goals. The second is that – with 40% of assets outside traditional equities – this is not an all-stock portfolio. The Gone Fishin’ approach is considerably safer than putting all your eggs in the stock market, something advisable only for those with long horizons, a high tolerance for risk, plenty of patience and fortitude, and extraordinary optimism about the future. Almost no one, in other words.

The Gone Fishin’ Portfolio, or something very much like it, should serve as the foundation for most investors. Why? Because it avoids the five major investment risks:

  1. Being too conservative. In this case, your net worth doesn’t grow fast enough to exceed inflation or meet your investment objectives.
  2. Being too aggressive. Extreme optimism is a benefit in the business world but can prove your undoing in volatile financial markets.
  3. Trying and failing to time the market. Remember that there are only two types of market timers: those who don’t know what they’re doing and those who don’t know they don’t know what they’re doing.
  4. Using expensive fund managers who underperform their benchmarks, as more than 95% of them do over periods of a decade or more. ETFs and Vanguard index funds are effective, low-cost and tax-efficient.
  5. Unwise delegation. Bernie Madoff and his ilk can’t run off with money they don’t manage.

While the Gone Fishin’ Portfolio lagged the S&P 500 last year, it certainly hasn’t over the last 11. Take a look at the chart below. I unveiled this portfolio in 2003. If you had invested $100,000 in the S&P 500 at the time and reinvested dividends, it would have turned into $240,353. Not bad. But the same amount invested in the Gone Fishin’ Portfolio, with dividends reinvested and an annual rebalancing, would have turned into $298,484. And, again, this is a much less risky approach than being fully invested in stocks.

Investment success is not about following the right predictions. It’s about following the right principles.

That means asset allocating properly, diversifying broadly, minimizing expenses and taxes and rebalancing annually. It may not be as exciting as an afternoon at Churchill Downs, but it does have one big benefit. It allows you to spend your time living your life rather than fiddling with your portfolio.

Calculate what that’s worth.

In short, the Gone Fishin’ strategy works. And we have more than a decade’s worth of verifiable, real-world, net returns to prove it.