A Real-Life Question for the Board

DlphcOracl

I would like to get as much feedback as possible regarding the following (real, not hypothetical) situation:

A neighbor who is approximately 70 years old has suddenly inherited a substantial (well into five-figures) amount of money and has asked for opinions with regard to how to properly invest this sum. Clearly, this individual will not need the income derived from this portfolio to meet living expenses. He/she (H/S) is not a knowledgable or sophisticated investor and, frankly, does not want to become one. I have been asked to suggest an investment portfolio and, from conversations with this individual, it should be a portfolio that does not require constant monitoring, trading, etc. As much as possible, it should be a -buy-and-hold portfolio for at least the next decade and, hopefully beyond. I realize that changes in mutual fund managers, etc., make this impractical; nevertheless, that is the goal. I will say that I have very specific ideas with regard to how I would devise a portfolio but that is precisely why I am soliciting as much input from a large, varied group of other investors. I do not want my biases to adversely influence this. My ground rules --- which I believe will best serve this neighbor's needs and desire not to spend large amounts of time monitoring the portfolio or need to become an investing guru--- are as follows:

1. investments should be restricted to mutual funds and ETFs ---- no individual stocks, closed-end funds, alternative investments (gold bullion, etc.).

2. no more than 10 to 12 funds in the portfolio.

I have said nothing about weighting of equities vs. bonds, foreign vs. domestic vs. emerging markets, value vs. growth, small cap vs. large cap, etc. , and leave this up to you. If you feel strongly against the idea of designing a "hands-off" buy-and-hold portfolio then select funds with managers that will do this in both the equities and bonds arenas. I appreciate any and all suggestions, will read everything carefully, and then try to summarize and distill this information for this individual. If this information is not sufficient for him/her, I will then suggest that he/she take this information and work with one of several fee-only CFPs that I know who are conscientious and reputable.

All suggestions and comments regarding the portfolio you design will be greatly appreciated but, above all ---
KISS (keep it simple....).

hank

Hi Delphi: Notable is your omission of exactly what the friend hopes to accomplish with the investment and returns generated. I'll assume it's intended more as a "safety-net" should unforeseen circumstances arise. Otherwise, the $$ likely will go to heirs. I'll also assume you've dismissed using the funds to purchase an annuity or long-term care policy. And, it seems clear from your question that you're inclined towards fund investments.

OK - I'd set a goal of averaging over time 5% (+ or -) above average prevailing money market rates during that period. I choose this barometer because the various measures of inflation vary greatly and are highly subject to bureaucratic manipulation. Money market rates, while also subject to manipulation over shorter terms, do tend to track cost of living over longer periods.

Five figures is a substantial sum - but not an extraordinarily large amount to have to invest. For simplicity I like the number three - equally divided with periodic rebalancing no more often than annually. I'd select: (1) a good 60-40 "balanced" fund, (2) a good 40-60 "hybrid" fund and (3) a good diversified "income" fund able to hold no more than 20% in equities as stated in the prospectus. I believe such a mix has a good chance of generating a return 4-6% higher than prevailing money market rates over a 10 year time frame while experiencing average volatility approximately 35% that of the S&P - possibly less.

One modification, depending on your friend's take, would be to create four areas: the three mentioned prior AND a short-term bond or CD component. This would drop anticipated return to 3-4% above money market rates and expected volatility to less than 25% that of the S&P

At this point in the discussion I'd rather not suggest specific funds - as my knowledge is limited only to about a half dozen fund families with whom I have long invested. I'd imagine you and others can suggest some very good "fill-ins" for the 3 areas I've suggested. Regards

STB65

If I had money that I was only going to leave to my heirs, I'd put part of it in Berkshire Hathaway, even with Buffett's inevitable retirement or death. Presumably tax efficient and good companies even if Buffet isn't around. BBALX also seems to reasonably cheaply meet my requirements for money I would never need. It does, however, have a Lipper rating of 2 for tax efficiency, but it's 4's and a 5 (cost) otherwise. Don't know if the cost (.25%) balances out the tax cost for you.
Now, before I leave Fantasyland, I gotta find Tinkerbelle and get some fairy dust for my real portfolio.

Investor

I would keep the portfolio for such a person that is not going to be involved in management day to day as simple as possible.

Consider splitting the money in a couple of balanced and conservative allocation type of funds.

mns

Consider Vanguard Wellington VWENX as a one stop place to put the money and let the smart folks and Wellington handle rebalancing. No subsequent effort required, and the expenses are tiny at 0.17% per year. Two things though that I don't like about Vanguard Wellington, it's equity exposure is all large cap, and the bond sleeve duration is longer than I would prefer. Then again, their expenses are so low, they can take on some duration risk and still come out ahead.

One alternative is to consider the Manning & Napier Pro-Blend funds, which ever suits your friend's risk profile. These funds do include small and mid cap equities, but the expense ratios are just above 1%.

perpetual_Bull

I think Investor & mns have the right idea.

VGSTX ( Vanguard Star )
VWINX ( Vanguard Wellesley Income )
PONDX ( PIMCO Income )
FPACX ( FPA Cresent )
PRWCX ( T. Rowe Price Capital Appreciation )
AUXFX ( Auxier Focus )
MAPIX ( Matthews Asia Dividend )
ARTGX ( Artisan Global value )
FLPSX ( Fidelity low priced stock )
etc

Mark

For someone who doesn't want to learn or manage they might be best served by choosing one of the portfolio's recently described in the margarita investing article and let it be. See here:

http://assetbuilder.com/scott_burns/for_couch_potato_investors_2012_was_a_good_year_for_margaritas

perpetual_Bull

You can build a rather risk averse/potiontally high return portfolio with a handful of funds.

For example:

VGSTX 30%
VWINX 30%
PONDX 10%
ARTGX 10%
MAPIX 10%

This portfolio is very diversified ( light on small caps.. which is fine because they're overvalued ) Expense Ratio of .54 % & yields 2.85 % with roughly 50/50 bond & stock split.