Why I'm making two major changes to my personal portfolio
This week, I plan to make two big changes with my own money in stocks...
In short, I'll be selling 60% of my holdings in an exchange-traded fund ("ETF") that tracks the S&P 500 Index. I'll be replacing two-thirds of that with an equal-weight S&P 500 ETF. And the other third will go to an international-focused ETF.
The result will be a 40/40/20 weighting for the indexed part of my personal portfolio.
(Note that I'm making these moves in my retirement accounts. So I won't be paying taxes on the large gains I would otherwise realize from selling some of my ETF holdings. I wouldn't be making these changes in a taxable account.)
So today, let me give some background and explain my rationale for making this move...
For decades, I have given standard, general financial advice to other folks – my readers, parents, sister, children, etc. And it has been simple:
- Whatever your income is, spend less than this (after taxes, of course) every year – in other words, be a consistent net saver.
- Max out every year on your retirement plans – like an IRA, Roth IRA, 401(k), or 403(b). Ideally, have money withdrawn from your paycheck (especially if your employer matches it!) so that you never "see" it and aren't tempted to spend it.
- Set up your retirement account such that, as you add money to it, it's automatically invested in an S&P 500 fund.
- "Forget" that it exists. Don't fall into the trap of constantly checking it.
(For more on this, see my September 20, 2021 e-mail about financial advice to a recent college graduate.)
My wife and I mostly followed No. 1 and No. 2. But for the 18-plus years I ran various hedge funds, I invested our savings in my funds. I figured (correctly) that I could outperform the market.
But in 2019, I launched my old firm Empire Financial Research with the help of Stansberry Research. So I faced a significant constraint – which still holds true today here at Stansberry...
To ensure that subscribers always get our best, unbiased advice, editors like me aren't allowed to have financial interest in any security we recommend.
So back then, I decided to index roughly half of my and my wife's long-term liquid assets. (That excludes the value of the only real estate we own – our apartment in New York City.)
Today, our personal portfolio is 16% cash (earning about 4%). The other 84% is invested. Of that, a bit more than half is in a dozen public and private investments that aren't a good fit for Stansberry newsletters. And the balance is in the S&P 500.
Of course, the S&P 500 has been a fabulous investment over the years.
But some charts from Charlie Bilello's latest State of the Markets blog post have convinced me to diversify somewhat...
Take a look at the first one below. It shows that the ratio of the Russell 1000 Growth Index relative to the Russell 1000 Value Index recently hit an all-time high. That means it surpassed the peak of the Internet bubble in March 2000:
The second shows that the S&P 500 Information Technology Index relative to the entire S&P 500 has also hit an all-time high:
Lastly, the ratio of the S&P 500 (dominated by large-cap stocks) to the small-cap Russell 2000 Index is close to its April 1999 peak:
Meanwhile, consider the charts I shared in last Tuesday's e-mail. In that e-mail, I noted that more than 40% of the S&P 500's value was embedded in its 10 largest stocks through the end of July.
As such, an equal-weight S&P 500 fund like the Invesco S&P 500 Equal Weight Fund (RSP) is likely to outperform a market-cap-weighted one.
And regarding my decision to allocate money to international stocks...
In my August 4 e-mail, I noted that the U.S. market's value exceeds that of the next dozen countries/regions combined. As I said:
Such a vast difference raises an interesting question: Should investors be looking to diversify away from the U.S. market into foreign ones?
Well, I don't think that's a bad idea today...
I wouldn't argue with someone who wanted to take, say, 25% of what they invested in an S&P 500 Index fund and instead put it into an international-focused one like the Vanguard FTSE All-World ex-US Index Fund (VFWAX) or the iShares Core MSCI EAFE Fund (IEFA).
My decision to make the change was reinforced by the chart below in Bilello's recent State of the Markets post, which shows the massive outperformance of U.S. stocks versus international stocks:
But as Bilello noted in the post, there has been a reversal this year. Take a look at this chart he shared:
When it comes to ETFs, Vanguard pioneered indexing and generally has the lowest fees.
As such, two Vanguard ETFs that track international stocks look appealing: the Vanguard FTSE All-World ex-US Fund (VEU) and the Vanguard Total International Stock Fund (VXUS).
Again, the fees are low for both. VEU's expense ratio is 0.04% and VXUS's is 0.05%.
But when it comes to diversification, VXUS stands out. It holds slightly more than 8,600 stocks (versus a bit more than 3,800 for VEU). And it has more exposure to small caps and emerging markets.
Overall, my point here is that shifting some money into an equal-weight S&P 500 fund and international stocks looks like a good idea today.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.