Wednesday, October 29, 2008

The Gone Fishing Portfolio

As most people will have heard before : "Never put all your eggs into one basket". 

This saying is perhaps what everyone hears when they first start investing.  But how many of us truly understand what it means to diversify?

When I first heard of this saying, I thought it meant not to put all my investment money into 1 single stock.  How wrong was I!  The proper interpretation of this saying should be " Never put all your money into stocks alone "

Asset allocation is perhaps the single most important determining factor of any investor's investment returns.  Based on the Nobel Prize Winning Modern Portfolio Theory, rational investors ought to use diversification to optimise their portfolios.  This does not mean just diversifying within stocks in a single stock exchange but across countries and across other investment instruments like bonds, gold, commodities, fixed income instruments, etc.

In the book Gone Fishing Portfolio, Alexander Green who is the investement director of The Oxford Club proposes an asset allocation that beats both the S&P500 in returns for both good years and bad years by just spending 15 minutes a year for making your investment decisions.

In the Gone Fishing Portfolio, the Vanguard mutual funds is chosen because of its low cost and also because it provides an excellent diversification opportunity.  5 principal long term investments are used : stocks, bonds, property, cash and precious metals.

Your eggs are spread around by diversifying into investment instruments that do not perform similarly so that your overall investment is protected in both good times and bad times.

Have you been burnt by the recent selloff in the stock market?  Has your networth depreciated significantly?  This could be due to the fact that you have placed all your eggs into a single basket called the stock market.  Perhaps it is useful to take this opportunity to diversify your assets so as to optimise your returns for both good years and bad years.

The proposed asset allocation mix under the Gone Fishing Portfolio is as follows:


Vanguard Total Stock Market Index (VTSMX) - 15%
Vanguard Small-Cap Index (NAESX) - 15%
Vanguard European Stock Index (VEURX) - 10%
Vanguard Pacific Stock Index (VPACX) - 10%
Vanguard Emerging Markets Index (VEIEX) - 10%
Vanguard Short-term Bond Index (VFSTX) - 10%
Vanguard High-Yield Corporates Fund (VWEHX) - 10%
Vanguard Inflation-Protected Securities Fund (VIPSX) - 10%
Vanguard REIT Index (VGSIX) - 5%
Vanguard Precious Metals Fund (VGPMX) - 5%



2 comments:

  1. can i view the last 5 year performance of the gone fishin portfolio

    ReplyDelete
  2. I will try to look for it and post it if I find it.

    ReplyDelete

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