March 26, 2013
How to plan, construct portfolios and select an advisor
The bulk of Swedroe’s book discusses the guiding principles for constructing a well-diversified portfolio and selecting an advisor. Our readers will not find much new information here, but clients may find it exceptionally valuable.
All of the information and advice Swedroe offers is accurate and thoughtful. I’ll comment on a couple of points which merit further consideration.
Swedroe relies on the Fama-French results. He recommends portfolios with a bias toward value and small-cap stocks using index funds such as those offered by Dimensional Fund Advisors.
While there have been few challenges to the so-called value premium, advisors should be aware that the small-cap premium has been questioned in recent research. Gary Miller and Scott MacKillop, of Wyoming-based Frontier Asset Managed, published a paper (reviewed in Advisor Perspectives here) in 2011 that showed the small-cap advantage has never existed.
Swedroe also says bonds should fulfill a subservient role in a portfolio. “Take your risks with stocks,” he writes. “The role of bonds is to provide the anchor to the portfolio, reducing overall portfolio risk to the appropriate level.”
Bonds, some contend, may have greater risk now than at any time in the last 30 years because of the potential for higher interest rates. Others, including fixed-income managers at firms like PIMCO and Doubleline, have obtained exceptionally good risk-adjusted returns with actively managed bond funds over the recent past.
Swedroe’s advice is to stick with shorter-maturity bonds as the portfolio’s “anchor,” but that dooms one to near-zero interest rates. In today’s environment, advisors need to consider a more expansive role for bonds than simple risk reduction for their equity allocations.
One way to invest like Buffett
Those are minor nits to pick among the valuable advice Swedroe offers. Advisors who employ actively managed funds or strategies may not want their clients to read this, but passively minded advisors should recommend this book to their clients.
There is one other way, however, for advisors and clients to invest like Warren Buffett – and it contradicts Swedroe’s and Buffett’s advice against buying individual stocks. They can buy shares of Berkshire Hathaway.
We discussed this in a recent article. Berkshire is not really an individual stock; it’s a holding company that controls approximately 80 other companies. Its low turnover and fees give it an edge over traditional mutual funds – including some index funds, as the author of that article claimed.
While advisors and clients shouldn’t for a moment think they have Buffett-like skills when it comes to picking stocks, they can get very close by having a modest allocation to Berkshire in their portfolio. In any case, investors will be well served by reading this book.
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