morgan housel, andy cross, & megan brinsfield · a foolish portfolio morgan housel, andy cross,...

HowtoConstructaFoolishPortfolioMorganHousel,AndyCross,

&MeganBrinsfieldMeganBrinsfield istheDirectorofFinancialPlanningforMotleyFoolWealthManagement,LLC(“MFWM”),anaffiliateofTheMotleyFool,LLC,andaninvestmentadviserregisteredwiththeU.S.SecuritiesandExchangeCommission.TheviewsexpressedhereinarethoseofMs.Brinsfield anddonotnecessarilyreflecttheviewsofMFWMoranyofitsaffiliates.Thesecommentsmaynotberelieduponasrecommendations, financialorinvestmentadviceoranindicationoftradingintent.

1. Enoughtopreventafewlosersfromravagingyourwealth.

2. Fewenoughsoyourreturnsdon'tjustmimicanindexfund.

Howmanystocksshouldyouown?

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-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

DowJonesIndustrialAverage(30stocks) S&P500(500stocks)

• Studiedthereturnsof4,700mutualfunds.

• Overa10-yearperiod,about80%underperformedanindexfund.

• Buttheaveragefundowned140stocks.

• Theaveragefund’s10largestholdings– representativeofitsbestideas– do,onaverage,beatthemarket.

• Mostfundsarespreadfartoothintohaveashotatbeatingthemarket.

InvestmentAnalysisandPortfolioManagement,KeithBrownandFrankReilly

“Owning between 12 and 18 stocks captures about 90% of the diversification of owning the entire stock market.”

65%

51%

72%

66%

64%

60%

58%

71%

68%

85%

44%

26%

48%

34%

37%

42%

30%

53%

54%

14%

Consumerdiscretionary

Consumerstaples

Energy

Materials

Industrials

Healthcare

Financials

Technology

Telecom

Utilities

Percentageofstocksthatlostmoney,1980-2014

Percentageofstocksthattrailedtheindexaverage,1980-2014

Recommendinvestorsown10-30stocks

Personallyowned100stocks

Onestock,Geico,increased200-fold

Madeupmostofhisportfolio

Accountsforallhislong-termoutperformance

Owned400-500stocksoverhislifetime

Mademostofhismoneyon10ofthem

“IfyouremovejustafewofBerkshire'stopinvestments,itslong-termtrackrecordisprettyaverage.”

Thisisacomplicatedtopicthatincorporatespersonalemotionsandrisktolerance.

Itisnotasscientificaspeoplewantittobe.

Becarefulowningfewerthan15ormorethan50stocks.

Shouldspreadacrossatleastfivemajorindustries.

Inanewportfolio,30stocksinequalweightscanbeagreatruleofthumb.

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Whatsayyou,Andy?

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KNOWTHY

SELF

3MagicalWordsinPortfolioManagement:

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- Timeline- VolatilityAppetite

“Selldownuntilyousleepwellatnight”–oldWallStreetproverb

- WhatYouEnjoy- Wanttofollowandstudy- Interestedinlearningmoreabout

KeyFactorstoConsider

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85% 67% 55%

RYR’sModelPortfolios

BuildingYourPortfoliowithFoolIQAssetClassq SmallCapq MidCapq LargeCapq International

Sectorq Servicesq Consumerq Financialq Energyq Healthq IndustrialGoodsq Technologyq BasicMaterialsq Communicationsq Utilities

Volatilityq Lowq Averageq High

Servicesq Everlastingq HiddenGemsq IncomeInvestorq InsideValueq MDPq DeepValueq Optionsq Proq RuleBreakersq Utilities

Service Analysisq Recommendationq BestBuyNowq CoreStockq CoreandBestBuyq Research

DividendYieldq >0.0%q >2.5%q >5.0%

1-MonthChgq 10%+q 0– 10%q -10%- 0q <-10%

3-MonthChgq 10%+q 0– 10%q -10%- 0q <-10%

3-YearChgq 10%+q 0– 10%q -10%- 0q <-10%

Motleyq Prosocialq Glassdoor 4or5q InYourScorecard

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BuildingYourPortfoliowithFoolIQAssetClassq SmallCapq MidCapq LargeCapq International

Sectorq Servicesq Consumerq Financialq Energyq Healthq IndustrialGoodsq Technologyq BasicMaterialsq Communicationsq Utilities

Volatilityq Lowq Averageq High

Servicesq Everlastingq HiddenGemsq IncomeInvestorq InsideValueq MDPq DeepValueq Optionsq Proq RuleBreakersq Utilities

Service Analysisq Recommendationq BestBuyNowq CoreStockq CoreandBestBuyq Research

DividendYieldq >0.0%q >2.5%q >5.0%

1-MonthChgq 10%+q 0– 10%q -10%- 0q <-10%

3-MonthChgq 10%+q 0– 10%q -10%- 0q <-10%

3-YearChgq 10%+q 0– 10%q -10%- 0q <-10%

Motleyq Prosocialq Glassdoor 4or5q InYourScorecard

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Whataboutyou,Megan?

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PortfolioConstructionin3Steps1. GutCheckonRiskTolerance2. WorkTowards“Ideal”

Allocation3. StayDisciplined

Megan’sTake

Butfirst,astory…Step1:GutCheck

FinancialPlannershateunnecessaryrisk— it’spartofourjob!Ourgoals:•Maximizingyourlifeoptionswiththeresourcesyouhave.• But“maximizing”isnotanabsolutemeasure.

Step1:GutCheck

ASampleQuestionAboutRiskTolerance

Step1:GutCheck

Back-of-the-envelopemathforyourapproximatestock/bondallocation:•“Icouldn’tbearitifIsawmy$1millionportfoliodecreaseto$______.”•Assumestockswilldecline25%andbondswillremainthesame•Example– maximumlossof12.5%yieldsa50/50portfolio

Step1:GutCheck

Disclaimer:Returnassumptionsareforillustrationpurposesandarenotaprecisereflectionofhistoricaldata.Thisisanestimationtoolonly,andactualresultscouldvarymateriallyfromthisestimation.

AVeryRoughGuidetoAssetAllocation

Step1:GutCheck

Valueof$1M Portfolio MaximumLoss Stock/BondEstimation

$950,000 5% 20/80

$900,000 10% 40/60

$850,000 15% 60/40

$800,000 20% 80/20

$750,000 25% 100/0

Disclaimer:Returnassumptionsareforillustrationpurposesandarenotaprecisereflectionofhistoricaldata.Thisisanestimationtoolonly,andactualresultscouldvarymateriallyfromthisestimation.Thisisnot intendedaspersonalfinancialadviceoraguidelinethatyoushoulduse inyourrealportfolio.

Your“Ideal”Allocation• There’snosuchthingastheperfectallocation.• Asplanners,wehelpclientsdetermineiftheirallocationisreasonable forthemgiventheircircumstances.

Step2:WorkToward“Ideal”

Otherdeterminantsofyouridealallocation• Whatareyourfinancialgoals?• Howlikelyareyoutomeetthosegoalsgivencurrentassets,savingsandspendingplans,andvaryinglevelsofinvestmentreturnsovertime?

Step2:WorkToward“Ideal”

EvaluateYourCurrentPortfolio• Morningstar’sPortfolioX-RayToolhttp://portfolio.morningstar.com/RtPort/Free/InstantXRayDEntry.aspx• PersonalCapitalwww.personalcapital.com• Compareresultstothestock/bondmixyou’veselected,usingRYRmodelportfoliosasaguide.

Step2:WorkToward“Ideal”

HowdoIknowwhattosell?• Companiesyoudon’twanttoown• Toobigortoosmallpositions• Taxbenefits

Step2:WorkToward“Ideal”

Rinse,Repeat•Repeatsteps1and2atleastannually

Step3:StayDisciplined

Butwhatabouttheimpendingmarketcrash?*

Marketdeclineswerepartoftheplan;theplanshouldnotchangeinthefaceofshorttermfluctuations.

*Disclaimer:Idon’tknowanymorethanyouaboutwhatthemarketwilldotoday,tomorrow,orinyearstocome.Pastperformanceisourbestestimateofthefuture,but itisnotaguarantee.Seriously.We’renot justsayingthis.Theworldisawonderful,crazy,unpredictableplace.

Step3:StayDisciplined

Questions?