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.

Quote of the Week - The Will to Win is Worthless without the Will to Prepare

One of my all time favorite quotations. This maxim is applicable to so many aspects of everyday life. We all want to win, but the one who wants it the most will prepare. Whether its studying for an exam, practicing for a sporting event, preparing for a speech, or researching a new idea, the one who spends the time upfront will be the most likely to succeed. That individual may not be the most athletic or the most talented, but they will be ready to do their best.

Just saying that you want to win rings hollow, if you have not already practiced hard. Your team mates will see through this. While your own conscience will allow the self doubt to creep forward and erode your confidence. Before long even you will question whether you can succeed.

Similarly, in matters of personal finance, we all want stellar returns that beat the market. But who is willing to do the due diligence required for planning, researching, analyzing risk and maintaining their investments to improve their portfolio’s performance?

Define a value, a goal and the steps to get there

Yesterday, I posted about the importance of having long term goals. Today, I describe one of my goals and how I plan to achieve it.

One of the things that I value is my environment. Its very important that I am content where I am living, working and playing. I was raised in the country and took much of it for granted at the time. However, after living in a large metroplex, I know exactly how important my environment is to my happiness. For instance I place a high value on clean air, low traffic, easy lifestyle pace, elbow room, privacy and natural surroundings (no concrete for me). My long term goal is to live on a small acreage in the country.

Now, how do I plan on getting there? First, I define a short term goal. My short term goal (2-3 years) is to sell my current home in the city.

Breaking that down even more to a 1 year goal, I have listed things that I need to do before I can sell my home. For instance, I want to replace a couple of windows, paint the exterior fascia, replace a shower stall and learn about selling a home by owner. I list these specific tasks and the timeframe that I plan to accomplish them. Because I know that these tasks are directly related to my long term goal, I am more motivated to get them done. And it feels great to check them off one by one knowing that I am making progress towards my ultimate goal.

Life is a Journey

Anytime an incident like the recent one in Omaha occurs, it reminds me just how fragile our lives are. Tomorrow seems inevitable, but there is no guarantee that any of us will be here for it. We must plan for our future and have goals in mind, but do not forget to live today. Life is truly a journey.

One of my favorite quotes is from Martina Navratilova. She has experienced much success in her life as a result of hard work and perseverance. She once said that “The moment of victory is much too short to live for that and nothing else.”

It is important to balance living for today with planning for your future. Everyone should have a set of goals that encompasses all aspects of their life. What do you value? Where do you want to be in 20 years? What do you want to be doing?

My list of values includes:

• My environment – where do I want to call home?
• Financial Security – what do I need to feel secure?
• Education – what am I interested in learning? What areas do I want to improve upon?
• Health – what activities do I expect to be able to do 20 years from now? How do I want to feel?
• Career – what kind of work do I want to be doing?
• Family and friends – what will these relationships be like in 20 years?
  
  After you define your values, you should be able to link specific goals to a value and then identify the steps required today, next week and next year to reach these goals. Like any big project, some goals can seem overwhelming, but remember your life occurs one day at a time. So take a step each day towards that goal and eventually you will arrive. In my next post, I will break down one goal as an example.

What your Credit Report can Reveal

Yesterday, I received a reminder from my MS Outlook calendar to request a credit report this month. The three credit agencies: Experian, Transunion and Equifax will each provide a free report every year, so by alternating between agencies you can get a report every four months.

What is in the credit report?
The format of the reports vary with the agency, but the information is generally the same. As an example, the Experian report provides the status of each credit card, loan and/or mortgage in your name. Detailed account information such as high balance, recent balance, date open/closed, credit limit and a balance history that can span a couple of years is listed.

The next section of the report lists the requests of all who have viewed your credit and the date of the request. You may not have initiated these requests, so you may not recognize some of these outfits. They might include:

• other creditors who want to offer you pre-approved credit
• an employer who wishes to extend an offer of employment
• a potential investor in assessing the risk of a current obligation
• credit reporting agencies to process a report for you
• your existing creditors to monitor your credit activity

In addition, the report lists your personal information such as variations of your name, addresses going back ten or more years, types of residence, past and present employers, phone numbers, social security number and date of birth.

And finally, the last section of the Experian report includes a Summary of Your Rights under the Fair Credit Reporting Act.

Why pull your own credit?
You know your credit is good, you have never had a problem, so why check it?
It has become incredibly easy to get credit – very few questions are asked. Gone are the days when lenders actually reviewed your history and assessed your risk before handing you a blank check. And as a result, it has become increasingly easy for people to steal your credit.

Checking your report is the only way to verify your credit and to find a problem before it gets out of hand. Strange things can happen. Sure there is the typical Identity theft case, where someone uses your information to get a credit card. But there is also the possibility that someone grabs your SS# and uses it to qualify for a job. At first, you might think that is great since all of their SS earnings will correspond to your SS#, but it won’t be so great when the IRS wants you to pay taxes on their earnings! Imagine the bureaucratic nightmare trying to prove that you did not make this money, let alone pocket it.

Even if you have no reason to believe there is a problem, it is prudent to request a credit report just for the peace of mind. It doesn’t impact your credit rating and its free.

How do I get my credit report?
The safest way to request a free report is to go to the Federal website (http://www.ftc.gov/freereports) and follow the link to the annual credit report site. The report is provided on line and can be saved to a folder on your PC’s hard drive for future reference. You can also request a report via snail mail, if you prefer.