Short Takes: Portfolio Construction, Switching Advisors, and more
I haven’t found much financial writing to recommend lately, and I haven’t written myself, so I thought I’d write on a few topics that are too short for a full-length post.
Be ready for anything
I sometimes see this advice in portfolio construction: be ready for anything. On one level this makes sense. It’s a good idea to evaluate how it would affect your life if stocks dropped 40% or interest rates rose 5 percentage points. Would you lose your house or would it just be a blip in your long-term plans?
However, those who give this advice sometimes use it to mean that you should own some of everything that performs well in some circumstances. So they advocate owning gold, commodities, Bitcoin, and other nonsense along with stocks and bonds.
Just because you always own at least one thing that is rising doesn’t mean your overall portfolio will do well. What you want is a portfolio that is destined to do well over the long term, with the caveat that you’ll survive any shocks along the way. This means controlling leverage and risk. It doesn’t mean you should own a bunch of unproductive assets.
Switching advisors
“My guy has done very well for me.” People think their returns come from their advisors’ great choices, but returns really come from a rising market. When markets inevitably fall, many of these people will dump their advisors looking for something that doesn’t exist: an advisor who can steer them away from losses. What a good advisor can do is help you choose a sensible risk level, keep you from making impulsive decisions, tax planning, and other services unrelated to portfolio construction.
How I would run my portfolio if it weren’t automated
For a DIY index investor, my portfolio is fairly complex. I’m able to maintain it with little work because I run it with an elaborate spreadsheet that automates almost all decisions. What would I do if I couldn’t automate it this way? I’d own just VEQT for stocks, and a mix of VSB and high-interest savings accounts for my fixed income. I need to be able to ignore my portfolio for weeks at a time without anything bad happening.
Insurance
It’s not hard to compare the premiums of insurance policies from different insurance companies. What is difficult is figuring out whether they’ll pay you or fight you if you make a large claim. If I had useful information about which insurance companies are fair and which are most aggressive in denying claims, I might be willing to pay a higher premium to a better company.
I hold VGRO in all my accounts even taxable. I know it isn’t optimal but it is easy.
ReplyDeleteI just focus on adding more savings.
That seems perfectly rational to me. Where I am now with investing was largely determined by all the steps I went through to get here. If I had figured out that stock-picking is a bad idea early on, and asset-allocation ETFs had been available earlier, that might be what I'd be using now.
DeleteThe question regarding the customer-friendliness of insurance companies is very valid. I, too, am willing to pay more for a higher probability to be treated fairly in case of a claim.
ReplyDeleteWithout any objective information about that, I probably need to trust my insurance broker when they tell me that insurer A is easier to deal with than insurer B. In my specific case, they recommended Intact over RBC Insurance for home+car insurance.
I'm specifically interested in what will happen with a large claim. I haven't had much luck with insurance brokers, but maybe I just haven't found the right one.
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