How I'm Remodeling My Portfolio for 2005

In early 2001, in an admirable display of transparency, I took our readers behind the scenes and let them look in on my annual rebalancing efforts and how I was putting my personal retirement portfolio together for that year. Many wrote to say they enjoyed learning that I'm still practicing what I preach — that is, I'm using the same strategies I recommend to SMI readers. So here's my personal investing portfolio for 2005 — take from it what you will. Just remember, it isn't intended to be a blueprint for anyone else to follow. You know that long-term personalized investing plan I'm always saying you need to have in place? Well, this is mine.

I like to diversify among strategies as well as among funds, and I have four that I have used for the past few years. Taking them all together, my money is spread across many classes of assets. Furthermore, each one is pretty mechanical, so I don't have to keep up with the news and agonize over what to do every time I turn around.

• The Fund Upgrading portfolio. This is where I put most of my money — 40% in this coming year. It offers the most diversification and is the one I have the most confidence in. I'm going to use the 70/30 allocation which we recommend for someone my age. I'll divvy up my allotted capital among the various risk categories in the same way I suggest you do (see Upgrading: Easy as 1-2-3 ). Of course, since the 70/30 mix isn't specifically shown, I'll have to improvise a little by splitting the difference between the 80/20 and 60/40 columns. I have enough capital in my account that it's reasonable to own as many of the recommended funds as are available to me at my broker. For smaller accounts, just buy the number-one ranked fund in each risk category at the time you make your purchase. This strategy is low maintenance, requiring only that I check the Recommended Funds page  each month and replace any funds as called for. I typically do this on the last trading day of the month. The orders can easily be entered via the Web.

• The Enhanced Just-the-Basics portfolio.  Next, I've carved out 20% of my assets to invest in a strategy that combines the virtues of our Just-the-Basics and Upgrading strategies. The indexed portion of your portfolio runs on autopilot while the other half invests in actively-managed funds that are reviewed once each quarter. This strategy requires a little more attention than Just-the-Basics, but offers the potential of market-beating returns as your reward. In our almost nine years of back-testing, it theoretically returned 13.2% annually versus 8.5% per year for the overall market. I'll enter the needed buy/sell orders over the Internet after I learn the names of the new funds for the first quarter in early January. Then the whole thing will be over until April when the first trading day of the next quarter rolls around.

• The Market Timing portfolio. I'm investing 30% of my retirement account based on a market timing strategy I developed back in the days when I made my living as a money manager. Yes, it's true I recommend you not try this approach because it can be very tough on the emotions. But experience can make a huge difference here, and it's worked fairly well for me over the years. I'm not going to provide any further details because I've said too much already. (See pages 173-175 in my book for an explanation of why I don't recommend market-timing for the average investor.)

• The Special Situations portfolio. That leaves just 10% for this safety valve of a portfolio that lets me invest in stocks and funds that catch my fancy (without derailing my overall plan). The largest holding in this portfolio is a sector fund I buy using the "sector rotation" strategy  we track online for our web members. For the 14 years ending in 2003, the strategy averaged 33.2% annually, and it only requires about 15 minutes a month maintenance. But the drawback is that it's a very high-risk strategy, so it's not suitable for a large commitment.

You don't need to do anything as complicated as this. Using just the Fund Upgrading strategy is good enough; it's got a great track record. Further diversification using additional strategies is strictly optional. The important thing is that you come up with an approach that's a comfortable fit for your temperament, relatively easy to maintain, and offers a realistic likelihood of helping you achieve your long-term goals.

• Editorials page
• SMI Investing Principles page
• SMI Fund Upgrading strategy
• SMI Just-the-Basics stragey
• Enhanced Just-the-Basics page 
• SMI Advanced Strategies page 

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