By Haddon Libby
Most people enjoy making investment decisions about as much as doing their taxes (the final, final day to file your taxes for 2017 is Monday, October 15th). This week, I want to show you that making basic investment decisions is as easy as ordering a coffee.
Let’s focus strictly on the equities (aka ownership of the companies) that you are investing in. We can tackle fixed income aka bonds in a future article.
When ordering a coffee, you have three sizes: Large, Medium and Small. Sure you can order an extra large but let’s not get caught up in that or using a word like Venti for Large, Grande for Medium or Small for Tall as that is all pretentious B.S. meant to make you feel better about paying too much (like many investment brokers).
Once you decide on the size of your coffee, do you want a standard drip or espresso shots? Most people order drips. As such, drip coffee will represent U.S. stocks while overseas stocks will be espresso drinks. While espresso sounds good, too much causes all sorts of nervous issues. It is essentially the same with stocks. Owning anything Turkish, Venezuelan, Italian or Brazilian right now might be too bitter and who knows what is coming out of China (see how coffee and investments are the same?).
Let’s review where we are in your coffee order (aka investment portfolio choices) and analyze that purchase behavior over a month, okay? Right now, you are having an espresso drink once a week and drip on the rest of the days. As we only get one coffee order a day, let’s guess that you will get a large on 4 out of 5 days, a medium one or two times a week and a small on most Sundays as you get to sleep in.
Translating this coffee order into your investment portfolio, you will have 85-90% invested in the United States with the rest overseas. 80% of your investments will be in large companies, 15% in mid-sized companies and 5% in the small ones. FYI, a large company’s stock worth more than $8 billion, a mid-sized company is $1 to $8 billion while small-sized companies are $500 million to $1 billion.
We only have one more decision to make: decaf, light roast or dark roast. Typically, younger people have more energy than their older relatives. Similarly, a young person can metabolize caffeine far faster than their grandparents or great grandparents. Face it, if you give a great-grandmother a triple espresso, she is likely to end up with a terminal case of tachycardia. When choosing companies to invest in of any size, growth companies are dark roasts, value companies are more like decaf and companies with a blend of both are more like a light roast. Value stocks typically pay dividends and grow more slowly while growth stocks do not typically pay dividends as they are plowing cash back into the business. When the economy is growing, growth stocks usually outperform value stocks.
Use this analogy when choosing your mix of equities and you should usually do just fine.
Choosing the right mix of investments is important but so too is knowing every penny that you pay on your investments. If you pay as little as an extra 0.60% per year, this CAN COST YOU five years of income in retirement. Ask yourself if your advisor or the funds that they push are worth that much.
Also, make your investment advisor provide you with a written summary of everything you or a third party pay when (s)he is working with on your behalf. Brokers and their firms often get hidden payments from funds or their companies and will use verbal dexterity in trying to avoid a direct answer. Any reputable advisor or firm will be happy to provide you with these assurances in writing. Any doubts, send me an email and we can sort out your situation together.
Haddon Libby is the Founder and Managing Partner of Winslow Drake Investment Management and can be reached at HLibby@WinslowDrake.com. For more information, please visit www.WinslowDrake.com.
