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Putting the Gone Fishin' Portfolio to the Test

Your asset allocation - how you divide your portfolio among different asset classes – is your single most important investment decision.

If you have too little in stocks, you won't generate high enough returns to meet your financial goals. If you have too much, you may be unable to withstand the market's extreme volatility from time to time. (After all, this is your life savings we're talking about.) And if you try to jump in and out of the market at the right times, you will receive an education that makes the Ivy League look inexpensive.

What is "the best allocation"? We can only know in the luxury of hindsight. No one can consistently predict which years will be good and which ones bad. The key is to accept this uncertainty and asset allocate. In other words, divide your portfolio among various, non-correlated investments. (In technical terms, some investments will zig when others zag.)

Here is the recommended allocation: 30% in U.S. stocks (split between large cap and small cap stocks), 30% in international stocks (divided evenly 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 fund 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.

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 your assets back to the original allocation. In other words, you sell back whatever has appreciated the most and add the proceeds to whatever has 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 do it is unimportant. The important thing is not to forget, as this action both increases your returns and reduces portfolio risk.

The Gone Fishin' Portfolio 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 year.

Also, 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 very long time horizons, a high tolerance for risk, loads 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 form the foundation of your investment approach. Why? Because it avoids the five major investment risks:

  1. Being too conservative. This means 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 be 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 measured over 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 the last few years, it certainly hasn't since its inception 12 years ago.

I created 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 $274,257. Not bad. But the same amount invested in the Gone Fishin' Portfolio, with dividends reinvested and an annual rebalancing, would have turned into $309,916.

Here are the returns – verifiable through Vanguard – for each individual year:

Gone Fishin' Portfolio Annual Returns

Again, this approach is much less volatile than being fully invested in stocks.

In my 15 years as Chief Investment Strategist of The Oxford Club, I have repeatedly told Members that 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 doing what you really want.

Calculate what that's worth.

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

Good investing,