This piece is part of a new, ongoing series here on the
ETFs & Portfolio Strategy
page at Seeking Alpha.
The concept is for a money manager or RIA to field a hypothetical
portfolio construction question from an SA user about how to best
construct a portfolio that will help them meet their financial
goals and then proceed to build an effective portfolio that will
take their risk/reward profile into account. All participants in
this series are real-world professional investors who are
available to help individuals, companies, and financial
professionals construct intelligent portfolios. To submit a
question for a future edition of Build My Portfolio, email
Rebecca at email@example.com.
This edition of Build My Portfolio features Barry Randall, CIO
of St. Paul, Minnesota-based
. Barry founded Crabtree in 2008 following a 15-year Wall Street
career as an equity analyst and portfolio manager specializing in
growth stocks. In 2007, Barry earned a Wall Street Journal Category
King award for his co-management of the MTB Small Cap Growth Fund
I am a 41 year old Head Programmer at a top U.S. tech company
who makes roughly $250k a year after taxes. After funding my
401(k) and other expenses, I have roughly $90k left over. My
college loans have been fully paid off at this point and my wife
and I own our house in full (no mortgage).
In terms of life situation, my wife and I are expecting twins
in November. These will be our first kids. My wife is planning on
leaving her job at a top accounting firm once the twins are born
and will likely seek work again once the kids start kindergarten
so we will be living off just my income for the time being. The
good news is that between my wife and I, we have very well-funded
401(k)s through our respective jobs, totaling nearly $500k in
short-term CDs that are about to mature. We are concerned that if
we don't start really 'growing' this money, we will come up short
when it comes time to send our kids to college, grad school, etc.
We also would like to make sure we have enough for
As we recognize that we have a solid 18 years or so to
accomplish this first goal and significantly longer to accomplish
the second goal, we are willing to take reasonable chances with
our investments and have no desire to remain overly-conservative.
We recognize the risks that come with investing in stocks but
feel the chances for much greater rewards are well worth those
Please help us build our portfolio.
Morgan and Beth
Mountain View, California
Dear Morgan and Beth,
Before I get to the financial stuff, let me first congratulate
you on the forthcoming birth of your twins and extend my best
wishes to you both. And congratulations too on your foresight to
not only have accumulated quite a nest egg in your 401(k)s, but
also to have paid off your mortgage too.
I have read your question carefully and I believe I have a solid
plan to help you achieve the growth you're looking for. Fair
warning: my solution may seem somewhat counter-intuitive. But once
I have explained it, I believe you'll be confident in achieving
your goals. First, however, let me introduce you to my firm.
At Crabtree Asset Management, our specialty is growth and
technology. We offer clients a proprietary technology-focused SMA
product, the Crabtree Fund. However, we also provide overall
portfolio strategy and investment planning that extends across a
client's entire financial situation.
At Crabtree, we utilize not only our nearly 20 years of
investment experience, but also the timeless tools of
diversification, dollar-cost averaging, portfolio re-balancing and
generally keeping expenses low. Many Investment Advisors like to
tout "double-secret probation"-style investment strategies that
seem to magically apply to every scenario. At Crabtree, we use our
"house" product only where it's appropriate, but otherwise rely on
the proven strategy of low cost funds, typically Vanguard funds or
How proven is the low-cost fund advantage? Consider that about a
year ago, Morningstar analyzed its own fund performance data and
came to a startling conclusion
free login required to view this article
). To quote Morningstar's own Russ Kinnel,
"If there's anything in the whole world of mutual funds that
you can take to the bank, it's that expense ratios help you make
a better decision. In every single time period and data point
tested, low-cost funds beat high-cost funds."
What's more, Morningstar admitted that its own star ratings were
not especially effective as predictors of future performance. Again
quoting Kinnel, "How often did it pay to heed expense ratios? Every
time. How often did it pay to heed the star rating? Most of the
In cases where we recommend individual equities, we utilize our
internal research to locate companies that can consistently
generate cash while maintaining or growing market share. Companies
can always trade one for the other (i.e., dropping prices and
profit margins to gain market share) but our experience is that
doing both simultaneously creates alpha. I have been running and
testing a quantitative model for over 11 years that searches for
and finds companies with these alpha generating
At Crabtree, we adhere generally to the four box method: 25% of
your net worth each in equities, fixed income, real estate and
cash, with annual re-balancing if any of the four moves 5% from its
So with that in mind, let's review your current situation, and
what changes, if any, might position you better for the next 18
years and beyond.
First, if you own a home in Silicon Valley outright, then that
amount of equity ($750,000?) more than fills the Real Estate box.
In fact, according to your letter, it seems to represent perhaps
60% of your net worth. So our solution will involve addressing your
exposure to the other three asset classes.
Second, since your 401(k) assets are in a cash equivalent (CDs
in your case), we'll move two-thirds of those assets into both
fixed income and equity vehicles to give you both diversification
and some of the growth you desire.
Third, because your professional life is 100% tied to the
technology field, your investment strategy should point you mostly
away from that sector. It would be easy for us to say, "you want
growth, you're obviously comfortable with technology, we're tech
specialists at Crabtree, let's do tech, tech and more tech."
But that simply wouldn't be prudent in your particular case. If
there were an economic downturn, or your firm was taken over by
another, you could easily find yourself unemployed. But this might
be occurring (recall 2002 and the bursting of the dot-com bubble)
at exactly a time when you might need to draw on your net worth to
support your family. So diversification extends beyond your
investments, to include your career.
The fourth unique aspect of your situation is that 18 years from
now (when your twins will head off to college) is conveniently the
year in which you turn 59 - the earliest age you'll be able to
withdraw funds from your 401(k) without penalty. You can use these
funds (less applicable taxes at that time) for yourself or your
kids' education - whatever you'd like.
So let's get to your specific plan:
1) Hold on to your house and take good care of it
2) As the CDs in your 401(k) mature, begin rolling that money
over into low cost equity and bond funds.
For equities we'll consider: Vanguard Growth Equity Fund
(ticker: VGEQX; yield: 0.66%; expense ratio: 0.51%), Vanguard
International Growth Fund (ticker: VWIGX; yield: 1.53%; expense
ratio: 0.49%) and Vanguard Selected Value Fund (ticker: VASVX;
yield: 1.51%; expense ratio: 0.47%).
As noted earlier, these funds, like all Vanguard products, have
low expenses. In addition, each has relatively low turnover
(<50% annually) and each of the three pays a modest yield that
is greater than the expense ratio. We would recommend putting 25%
of the equity allocation in each of the two equity funds, and 50%
in the value fund. The international product is growth- rather than
value-focused because the "value" in such a fund is based on
balance sheet figures, which we feel are less trustworthy than
income statement items, when considering non-U.S. financial
For fixed income, consider: Vanguard Long-Term Bond Index Fund
(ticker: VBLTX; yield: 4.65%; expense ratio: 0.22%), Barclays
Capital Long Term Corporate Bond ETF (ticker: [[LWC]]; yield 5.51%)
or the Barclays TIPS (inflation-protected) Bond ETF (ticker:
[[TIP]]; yield 3.92%).
Again, our choice of funds is consistent with research showing
that low expenses is actually a predictor of outperformance, and a
sub-portfolio comprising one-third weightings of these highly
liquid fixed-income products offers a blended yield of 4.69%.
3) Outside of your 401(k), start maximizing contributions to
your and your wife's IRAs with the aforementioned funds. You have
24 years of contributions (at $5k/year for you and your wife).
Although your current contributions won't be tax deductible because
of your high income level, any capital gains and dividend income
will accumulate tax free.
4) If you want to invest in individual stocks in your 'equity
box', I'd recommend [[IBM]], 3M (
), Verizon (
) and Caterpillar (
) among large-caps, and NIC Inc. (
), Red Hat (
), Cerner (CERN) and Ensco (ESV) among small- and mid-caps. These
eight companies are either currently or have recently been among
those that our aforementioned quantitative screen has found, when
looking for companies generating cash and maintaining or gaining
5) Once a year, tally up how much you have in each of the four
boxes, and how any individual stocks are doing and adjust your
balances and your contributions going forward. Fortunately, most of
your investible assets are in tax-shielded accounts, so there's no
need in the near term to engage in tax avoidance strategies for
Your primary goals were to grow your money for your kids'
college education, and make sure your own financial needs were met
thereafter. Now consider that an average year at an Ivy League
school is currently about $55,000, all expenses included. So with
$500,000 already socked away, your twins could attend a top
university for four years starting next year and you'd still have
money left over. So our plan for you focuses as much on preserving
the assets you have, as it does on growing those (and future
assets) to support you in your retirement.
[[IBM]] and [[EGOV]], which are in the Crabtree Fund model
portfolio, and in which Barry Randall is an investor.
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