The Gone Fishin' Portfolio
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The Gone Fishin’ Portfolio: Annual Review 2016

When I unveiled our Gone Fishin’ Portfolio in early 2003, I called it a simple but sophisticated long-term investment system - based on a Nobel Prize-winning strategy - that would allow you to successfully manage your money yourself in 20 minutes a year or less.

That promise has been fulfilled.

Over the last 14 years, the portfolio - based on Harry Markowitz’s groundbreaking discovery that a portfolio of non-correlated assets can deliver higher-than-average returns with below-average risk - has outperformed the S&P 500.

gone_fishin_vs_sp500

The only things required are that you set it up - with Vanguard or your broker - and then take 20 minutes a year (at most) to rebalance it.

The system worked well in 2016, even though it was a year for the books.

The Dow kicked things off by turning in its worst five-day start to a year ever, plunging 1,000 points in the first week of trading. But by mid-March it was back in positive territory, and within a few months it was hitting new records. It finished the year near an all-time high.

Bonds also took investors on a wild ride. After the surprise Brexit vote, the yield on Treasurys hit an all-time low of 1.366%. But in the second half of the year, interest rates went into reverse and yields climbed more than a full percentage point.

The greenback defied the dollar bears by continuing its nearly six-year run, hitting a 14-year high against a basket of major currencies and a 31-year high against the British pound.

However, the big takeaway was that 2016 was yet another year where diversifying outside of U.S. stocks added little value. (Our domestic market has generated double-digit gains in five of the last seven years.)

High-grade and high-yield bonds, Treasury inflation-protected securities (TIPS), real estate investment trusts, and European, Latin American and Asian equities all underperformed the 12% total return of the S&P 500.

Yet our Gone Fishin’ Portfolio still managed to have a good year. Its total return was 11%.

True, this was a point less than the S&P 500. But we take far less risk here than being fully invested in equities.

Thirty percent of the portfolio is in fixed-income investments, spread equally between TIPS, junk bonds and short-term, investment-grade corporates.

We also have 5% in REITs, which underperformed the S&P 500 with a return of 8.3% in 2016.

And the strong dollar muted our return on foreign equities.

So how did the Gone Fishin’ Portfolio remain competitive last year? For starters, U.S. small caps did better than U.S. large caps.

We have 15% of the portfolio in the Vanguard Small Cap Index Fund (NAESX). The fund returned 18.2% last year.

We also use the more broadly diversified, multicap Vanguard Total Stock Market Index Fund (VTSMX). The small cap and midcap exposure gave a small performance boost. The fund returned 12.5% for 2016.

Plus, we have 5% in the Vanguard Precious Metals and Mining Fund (VGPMX). Over the last few years, owning gold and silver stocks has been like dragging an anchor. But 2016 showed why it pays to diversify. The fund returned 50.6%.

The goal of the Gone Fishin’ Portfolio is to conserve your assets, build your wealth and reach your long-term financial goals by generating inflation-beating returns with modest risk.

When I first unveiled the strategy 14 years ago, the idea of creating a portfolio of low-cost, tax-efficient index funds was fairly novel.

It is much less so now.

Investors poured hundreds of billions of dollars into Vanguard in 2016. That flow represents a growing trend away from active fund managers and toward so-called passive strategies that mimic indexes for a fraction of the cost of the typical mutual fund.

According to Morningstar, investors pay just $0.18 for every hundred dollars they invest with Vanguard, compared with $1.23 for the average actively managed fund and $0.77 for the average index fund.

Other mutual fund families are four to seven times as expensive as Vanguard. That’s one reason it now has more than $3.5 trillion in assets under management, the most of any mutual fund group.

Exchange-traded funds (ETFs) are also growing in popularity. U.S.-listed ETFs now hold more than $2 trillion in assets, and investors are adding hundreds of billions in net new investments each year.

Fund fees keep dropping, too. BlackRock, the sponsor of iShares, Charles Schwab and Fidelity all cut the fees on their funds and ETFs last year. The expense ratio of some ETFs is now approaching zero.

You can construct the Gone Fishin’ Portfolio using either Vanguard funds or ETFs. (Vanguard itself is a major sponsor of ETFs.) It’s the specific asset allocation - not the name on the fund - that is important.

The portfolio is made up of 10 low-cost index funds that represent 10 different asset classes. For 364 days of the year, we leave them alone (and “go fishin’”). Then once a year - it doesn’t matter which day although we use the last trading day each year for simplicity’s sake - we rebalance the portfolio.

communiques_asset_allocation_modelThe Dow keeps closing in on that big, round number.

That means you redeem a portion of the funds that have appreciated the most and add the proceeds to the funds that have lagged the most. This brings the original asset allocation back into alignment to start each new year. The discipline forces you to sell high and buy low, adding to your long-term returns while reducing risk.

The real-world philosophy that underpins both this portfolio and our entire Oxford investment system is this:

  1. It is not possible to consistently predict the economy or the stock market. (That is why economic forecasting and market timing are not part of this strategy or any of my trading services.)
  2. Asset allocation is your single most important investment decision, responsible for 90% of your portfolio’s long-term return. (The balance is due to security selection, expenses and taxes.)
  3. Over periods of a decade or more, more than 95% of all active fund managers fail to match the returns of their benchmarks. That is why we use index funds.
  4. All asset classes have periods of outperformance and underperformance. The smart investor takes advantage of this by owning a wide variety of assets and rebalancing annually.
  5. All else being equal, the lower your costs, the higher your net returns. You should use the lowest-cost vehicles available: ETFs and Vanguard mutual funds.
  6. You can further enhance your net returns by tax-managing your portfolio. Hold your tax-inefficient assets - such as interest-paying bonds and dividend-paying real estate investment trusts - in your tax-deferred retirement accounts. Hold your tax-efficient assets - like equity index funds - in non-retirement accounts. Doing this allows you to legally stiff-arm the IRS.

The Gone Fishin’ Portfolio is The Oxford Club’s most conservative strategy, allowing you to manage your serious money in a serious way.

With modest risk, low volatility and a high probability of long-term success, the Gone Fishin’ Portfolio provides an excellent foundation for your investment program.

Good investing,

Alex

P.S. For help setting up or running this portfolio, feel free to contact Josh Newman at Raymond James. (Minimum account: $50,000.) He also offers Members a complimentary portfolio review and retirement planning analysis. For more information, contact Josh at 770-673-2142, 866-299-0123 or Josh.Newman@RaymondJames.com.