Tuesday, December 11, 2007

CoffeeHouse Portfolio with a Double Espresso Shot

I came across the Coffeehouse portfolio one day several years ago while evaluating various ‘couch potato” investing approaches. The first thing I noticed was that the Coffeehouse is based on low expense Vanguard index funds and then I noticed that it was comprised of a lot of the same funds that I already owned. Wow, I was in the Coffeehouse and didn’t even know it. I agreed wholeheartedly with the simple low cost approach and with diversification across a broad spectrum of the market. I decided to adjust my plan percentages to align more closely….. with one major exception that I will explain later.

First, here is a Coffeehouse investment portfolio that employs a simple philosophy of diversifying in different baskets and capturing the entire return of each basket. Note this portfolio can be constructed using a fund company other than Vanguard, but its hard to beat VG’s low expenses.

The performance results of a simulated Coffeehouse portfolio projected back in time is provided below in comparison to the annualized S&P 500 results. The performance is based on rebalancing the portfolio yearly to its original allocation. The simulation resulted in an annualized 16 year return of 11%.

This is a very stable portfolio with little downside risk. It is interesting to note the performance during the bull markets of the late 90’s and the bear markets that followed. The large swings that many experienced during those times have been smoothed out considerably using the Coffeehouse allocations.

The Double Shot
The biggest difference between my portfolio and the Coffeehouse is my allocation to Large Cap growth stocks at the expense of fixed income investments. As a young investor with a long investment timeframe, I have been willing to take considerably more risk. As a result, I have a much larger weighting in Large Cap Growth and much less in bonds and cash. I also favor international funds with a higher percentage (18%) and have an additional small exposure to Gold (2%).

Watering it down
As I transition to retirement, I am more interested in stability and steady growth. Consequently, I anticipate making incremental changes to my portfolio so that I will eventually arrive at the Coffeehouse allocations. The first change will be to convert a portion of my IRA holdings from equities to bonds. This strategy will also take advantage of the tax efficiencies of holding bonds in a tax sheltered account. For more on this see: Improving your Tax Efficiency.

No comments:

Post a Comment