by Dennis Miller
How much gold is enough? How much should you allocate to dividend-paying stocks? How much should you hold in cash? How can you sort through the vast number of opportunities out there?
When it comes to building and managing your retirement portfolio, it’s common to feel overwhelmed and just want to throw your hands in the air!
One of the biggest surprises since starting Miller’s Money Forever is the kind of questions I’ve received from our readers. The vast majority are about the process behind selecting investments and building a balanced portfolio, and very few are about this or that stock.
Most readers understand that sitting on cash during times of inflation is a bad thing. At the same time, they are reluctant to invest in an uncertain market.
Most of these folks have done well for themselves, accumulated a solid nest egg, and then cashed out some sort of 401(k) when they retired. Now they need to make that money last. As I’ve said countless times before, regardless of what field you were in when you earned your money, we’re all money managers now.
Many folks jump into retirement with a good bit of cash. Others start with a 401(k) full of mutual funds which they selected years ago based on vague adjectives like “conservative,” “aggressive,” or “high-yield.” Some even have a large accumulation of stock from their former employer.
When you start to manage your own money, you have to decide whether the vehicles that helped you accumulate your nest egg are going to help you make it last forever. Like many folks, you may quickly realize that your portfolio needs some revamping.
First, start with the overall structure of your portfolio. To keep risk under control, look at the breadth and depth or your portfolio. By “breadth” I mean the number of sectors you’re investing in. How much should you hold in cash, dividend-paying stocks, metals, utilities, etc.? How much should you allocate among all of the sectors out there?
Here at Miller’s Money Forever, we believe that you should hold at least one-third of your portfolio in cash or short-term cash instruments – and not all of that should be in US dollars.
It’s tough to do when yields are low. The key is to preserve that capital and try to find a safe way to earn some yield along the way. Our team discussed this at length in the September edition of Miller’s Money Forever, available to all of our paid subscribers.
Personally, I prefer to avoid recommending how much individual investors should have in each sector beyond the cash portion. Much of that depends on your age, sources of income, and most of all, your tolerance for risk. Some folks cringe at the idea of having as little as 5% in metals and metal stocks, yet others are quite comfortable having a much higher percentage of their portfolio in that sector.
My wife and I have friends where each spouse has a great, fully funded pension. They feel it’s secure, and they can both live off of it comfortably, even saving a little money along the way. They are much more comfortable with a higher percentage of their investment portfolio in metals than another set of friends whose only regular monthly income is a Social Security check that only covers about 60% of their normal living expenses.
As long as you don’t go overboard in any single sector, you should do what you’re comfortable with. Every person is different, which is why I balk at telling you much you should allocate to anything other than cash. What works for one person might not be right for you.
Once you’ve decided on the sector allocations that suit your pocketbook and personal comfort level, then you have to look inside each individual sector. That is the “depth” element of your portfolio.
You may have many individual investments within each sector with varying levels of risk. Take the technology sector as an example. Maybe you’re invested in a company like Microsoft – a solid company paying regular dividends. If you’re looking to add depth, consider adding a higher-risk, startup technology company with the potential for high reward.
I’ve found that color-coding investments by their respective levels of risk is a handy way to keep a personal risk-tolerance scorecard. Too much fire-engine red can help you see where you’re in too deep.
First, start with a blank piece of paper, and write the total amount of your portfolio on the top. Second, imagine for a moment that you’re starting with 100% of your portfolio in cash. Set aside one-third to keep in cash, and then determine how the remaining two-thirds should be allocated by sector.
There are many publications on the newsstands that show their version of the ideal allocation. Schwab sends us regular publications with pie charts showing aggressive, balanced, and conservative allocations. Personally, I look them over and consider them suggestions at best. At the same time, they give you a general idea and are a helpful place to start.
Understanding what’s right for you is the real key. You may want a certain amount of dividend income. At the same time, too large of an allocation in dividend-paying utility stocks, for example, might send your portfolio’s value down because their stock prices are heavily influenced by interest rates. The end result – your ideal sector allocation – should reflect your needs and personal risk tolerance. It may take some tinkering to get there.
Assuming you currently have a portfolio, break it down by sector to see how close you are to your ideal. Also, remember to color code each of your investments according to its risk level, a process I discussed at length in Getting the Most from Your Investment Newsletters. At that point, compare your current portfolio to your ideal. If you’re pretty close, good for you! If not, don’t panic.
You may discover that your sector allocation is fine, but your depth in one or more sectors is off. For example, you may have too many or too few speculative investments. Once you identify where you’re off, you can start to rebalance accordingly.
Balancing your portfolio is a process, not an event. Once you’ve outlined the ideal structure for your portfolio, you’ll need to find stocks or other investments to fill the gaps and make the necessary changes. But how in the heck are you supposed to do that?
In an earlier life, I taught a course called “Recruiting and Selection.” “Recruiting” meant finding the maximum number of qualified candidates, and “selection” meant picking the best qualified candidate to suit your needs.
For most folks, investment newsletters are their primary recruitment source. If you’re shy in one particular sector, find a newsletter written by an expert in that field. Casey Extraordinary Technology is a great example. It has approximately 30 technology picks in its portfolio; they are broken down into “big tech,” “growth tech,” and “junior tech,” which helps subscribers better understand the risk factors of each investment.
I look at every pick in the various newsletters I subscribe to as a potential candidate for my portfolio, as though I were collecting résumés to fill an open position.
Once you’re done recruiting, it’s time to move on to selection. That’s where our five-point balancing test comes in handy.
When Vedran Vuk, our senior research analyst, begins a project, he will start with a particular investment goal in mind. After filtering through thousands of options (with the help of some very expensive and sophisticated computer programs), he’ll narrow down the list considerably.
The next step is to apply our five-point balancing test to further identify the best candidate or candidates for our subscribers.
We use these five factors to cull the list of potential candidates and develop a short list of candidates for our subscribers. Then it’s a matter of experience and judgment… and I’m happy to have our research team to lean on.
As an aside, I am chuckling to myself as I type. One of the first stocks I ever bought was TCBY, because my wife and I liked their yogurt and their stores were clean. I got in late and never did make any money. Fortunately, my standards for evaluation have improved a great deal over the years.
The Miller’s Money Forever team is committed to helping our subscribers build and maintain their portfolios. Without a solid plan in place, there’s a good chance you’ll end up with a portfolio full of seemingly random stock picks that may or may not do well. Choosing stocks is only part of the battle; knowing how to fit them together into a sane portfolio is the key to finding the right level of risk for you.
The Money Forever portfolio, updated monthly in our premium subscription, shows readers how to understand the process of selecting investments, balancing picks among various sectors, and structuring their portfolio accordingly. We want our subscribers to fully understand our thinking behind the recommendations we make.
Fortunately for all, we take our subscriber feedback very seriously and strongly encourage it. If anything is ever unclear – or if there’s a topic you want to know more about – let us know! It’s important that our subscribers understand why we make the recommendations we do and how we got there. As a person who’s now retired twice, I know how important it is to truly turn your nest egg into “money forever.”
Please note, this whole article has been about how to develop your own plan and move forward. Vedran and I have just released the update to our Money Every Month report, a plan that outlines how to set up income to your portfolio every month with high yield dividend stocks. You can find out more about it with a letter that explains it here.