How writing an Investor Manifesto can help you stick with your plan

Any index-loving buy and hold Boglehead investor like myself knows that the more you mess around with your portfolio, the more likely you are to screw it up. Yet, I couldn’t help myself. Despite taking the time to establish a portfolio allocation several years ago, I still found myself making changes all the time. I would read an article or book touting a particular asset class, and I’d go in and add a couple more percentages here or there. The market would drop, and I would decide that cash was better and reduce my contributions out of fear.

The truth is, I can’t trust myself. Despite how grounded I thought I was as an investor, fear and greed are powerful forces. I did many of the things that I thought only stupid investors do.

So, I decided to do what I’ve done in other arenas in my life to help me articulate and adhere to a plan – write a manifesto on what I’m trying to accomplish, why it’s important, and how I intend to go about it. Financial writer Meb Faber provides a great step-by-step on how to write an investor manifesto here, which I adopted as the following:

  • Articulate your investment goals and core principles.
  • Starting from scratch, come up with your ideal target asset allocation for your portfolio. Don’t forget to establish the amount of cash you wish to hold as well, or you could be tempted to hold less/more depending on market whims.
  • Come up with clear step-by-step plan on how you plan to move from your current asset allocation to your ideal one. For me, this included reducing a few big stock holdings and using existing cash in the portfolio to buy more equity index funds through automated purchases.
  • Decide how you will manage your portfolio going forward. I realised I had been spending way too much time recording and analysing my portfolio, probably several hours a month. Not only was this a waste of time, it was contributing to my mucking around problem.

So here’s what my investor manifesto looks like:

Our portfolio goals and principles
  • The MsModelMinority portfolio goal is to achieve 4% real returns in the long-term (10yrs+), while keeping volatility at a moderate level for our own sanity.
  • Purpose of this portfolio is to 1) support FI (75% of expenses), with expectation that we will still generate some income during our working life, 2) pay for major expenses (e.g. house renovation, kids’ education), and 3) fund nest egg in older age when we are no longer able to work.
  • We do not need to generate income (in form of cash dividends) in the foreseeable future. If cash is needed, we will sell winners and rebalance to target asset allocation.
  • We understand that a max draw-down could be in range of -40%. However, we believe that markets do recover and and in long-term a 4% real return should be achievable as long as we “stick with the plan”.
  • We do not believe in market timing. We will mitigate risk by diversifying across asset classes, across time, and across individual stocks.
  • We know that we are our own worst enemy when it comes to achieving success, because we may often feel as if we can market time and will be tempted to react out of fear or greed. Case in point here. So, we will implement rules/processes and hold each other accountable to ensure that we “stick with the plan.”
  • We will use a low-cost, passive investing strategy. We understand taxes can also be a huge drag on returns and will continue learning ways to reduce. We will strive for simplicity as much as possible.
  • We know that our risk tolerance is moderate/low and losing money will hurt more than missing an attractive opportunity. We will follow the #1 principle of all top investors: Do not lose money! We will only invest in things we fully understand and in which we can see multiple paths to upside.
Our target asset allocation
  • We know that for a buy/hold strategy, the exact percentages of the asset allocations don’t matter since they will all fall within returns of 200bp of each other (over 40yrs, per here). The key is to not muck around with the allocation and “stick with the plan!.”
  • In terms of cash, we will keep 6 month of expenses in emergency fund (e.g. checking/savings) and any expected major expenditures in next 3-5 years in liquid assets (e.g. CDs). Beyond this, we know that excess cash is better off invested as lump-sum rather than over time per here, and that even if we choose to dollar-cost average it should be done within one year.
Rationale
Within Total Portfolio
Equity
65% of my non-cash portfolio into Equity
Within Class
65%
Domestic
Of the Equity Allocation, 60% goes to Domestic
60%
39%
   Large-Cap
Of the Domestic allocation, 50% to Large-Cap
50%
20%
   Small-Mid
Of the Domestic allocation, 25% to Small-Cap
25%
10%
   Value (Large)
Of the Domestic allocation, 25% to Value
25%
10%
Foreign
Of the Equity Allocation, 40% goes to Foreign
40%
26%
   Emerging Markets
Of the Foreign allocation, 25% to Emerging Market
25%
7%
   Developed World Int’l
Of the Foreign allocation, 50% to Developed
50%
13%
   Int’l Small Cap and/or Value
Of the Foreign allocation, 25% to Small Cap/Value
25%
7%
Alternatives
10% of my non-cash portfolio into Alternatives
Within Class
10%
   REIT
Of the Alt allocation, 50% goes to REIT
50%
5%
   Commodities
Of the Alt allocation, 50% goes to commodities (recommended to hold 3-8% overall portfolio)
50%
5%
Bond
25% of my non-cash portfolio into Bonds
Within Class
25.0%
   Total market bond fund
Of the Bond allocation, 50% to Int. investment grade
50%
13%
   Corporate bond fund
Of the Bond allocation, 25% to Corp investment grade
25%
6%
   TIPS
Of the Bond allocation, 25% to TIPS
25%
6%
How will we move from legacy portfolio to our target allocations?
  • Our biggest gap is being over-invested in my company stock (11%), and under-invested in foreign equity (20% vs 26% target). We intend to get my company stock down to 7% by end of 2018, shifting the funds into foreign equity.
  • We also still have 4% in AMZN. We intend to get this down to 2% by end of 2018, shifting the funds into US large-cap (likely the US low-volatility fund).
  • We do not plan to shift any more cash into our portfolio. Any excess cash will go into liquid accounts given uncertainty of future.  Inflow to portfolio will come only from the eBay vesting.
  • We will keep buying into equities, through automation of $30K/yr (60% in SWSTX – US total stock market, 40% in SWISX – int’l developed).
How will we manage our portfolio going forward?
  • 1x/quarter, we will conduct maintenance to keep our portfolio aligned with target allocations, while accounting for tax impact. We will also look for opportunities to tax loss harvest, review performance, and update our spreadsheet and Morningstar tracker. Once inflows stop (e.g. I stop working) and our portfolio is fully aligned with target allocations, rebalances should only be done 1x/year.
  • 1x/year, we will do a rebalance and a thorough review of our portfolio, including:
    • Tax: Are our assets in the right buckets (taxable vs tax deferred)? Can we find new vehicles (e.g. HSA) to shield? Are dividends too much of a drag with taxes and can we reduce? Munis?
    • Expenses: Are we choosing the lowest cost funds?
    • Cash: Do we have right amount? What are major expected expenditures in next 3-5 years?
  • There is a VERY HIGH BAR for making any changes to target allocations. This should only be done with sign-off by both of us, and we need to articulate a very strong case as to why this is necessary.
  • There is no reason to spend a lot of time managing our portfolio. In fact, the more time we spend, the more likely we’re going to screw it up.
So that’s my plan, evolved over many years of trial and error in my own financial life. Writing it all down only took an afternoon, and I believe it was well worth the effort. Already, I feel a huge relief by having clear rules on what I am allowed to do.

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