A Properly Diversified Portfolio is Only Part of the Solution
by Roger Nusbaum AdvisorShares ETF Strategist
Over the years in posts at the Random Roger blog I’ve talked about the extent to which many people interested enough in markets and investing to seek out blog content on the subject are likely the people of influence in their social and family circles for investing and other financial literacy issues.
In the last month I have had three such conversations; one with a family member, one with a fraternity brother and the other with one of the other firefighters on our department (I have been very actively volunteering as a firefighter since 2003).
The first two conversations were along the lines the most basic elements of portfolio construction in terms of equity exposure versus fixed income and how an emergency cash balance fits in. I discussed the extent to which every so often the stock market goes down a lot scaring the hell out of a lot of people but that it always comes back–the variable being how long it takes to come back. I also talked about how certain bond funds will likely get crushed if interest rates ever go back to normal levels.
Each of these two folks wants different levels of engagement with markets but neither wants very active engagement in terms of time they spend following what they own or the number of trades they need to make.
In terms of minimal involvement each of these folks could use one or two core equity funds and one fixed income fund that one way or another could spare them from bond market carnage if it ever comes.
You might not choose that type of portfolio for yourself or recommend that type of portfolio for clients but it can get the job done depending on the investor’s needs. Neither of the people I spoke to ever brought up beating the market which is interesting. Maybe this was coincidental but both simply wanted their money to grow and wanted to avoid any obvious landmines (if there are any).
For these relatively simple needs there are all kinds of products to help them or to help you help them including passive, active, some sort of rules based (almost a hybrid of active and passive) and of course multiple wrappers to access these strategies.
My colleague from the fire department retired late last year but is relatively young and is interested in monetizing one of his hobbies (I doubt he’s ever read my blog so I doubt he knows that term which may be a Random Roger original) and needed my help doing so.
He recently became an EMT and is looking to hire out on large fires in a couple of different capacities related to his EMT certification. The work on large fires is difficult as the days are 12-16 hours which means a lot of time and a half so the check from a two-week assignment can cover two-three months of living expenses for someone whose mortgage is paid off and otherwise lives a modest lifestyle.
While I know my colleague is a market participant I do not know the particulars of his involvement so to the extent his portfolio has to generate an income, he will need less of an income from the portfolio if he can get out on a couple of fires which is exactly the context of what the hobby monetization discussion has always been about.
A diversified portfolio is going to be a part of the equation for all three people. It would be great if everyone could save enough to meet whatever their needs turn out to be but will not be the case and as people of influence, our friends and families may need help figuring this out and they will turn to us for answers.
The picture is from the Rupert Fire in 2011.