Financial Literacy

How to Bulletproof Your Portfolio, Part 2

In my last column, I discussed the many uncertainties facing investors today.

Just a few things that no one can predict with any certainty are economic growth, inflation, currency values, commodity prices, scientific discoveries, technological breakthroughs, bull and bear markets, election outcomes and future legislation.

That’s before we get to possible bolts out of the blue: a major terrorist attack, a hedge fund blowup, war in the Middle East, an epic natural disaster (think California quake, the big one), a crippling cyberattack, or something we haven’t even considered.

For all these reasons, it makes sense to take 10 proven steps to bulletproof your portfolio.

In my last column, I covered the basics: saving more, asset allocating properly, rebalancing annually, and avoiding the siren song of the economic forecasters and market timers.

Here are the final five steps that will wrap your nest egg in Kevlar…

6. Cut your investment costs.

In most walks of life, you get what you pay for. This is emphatically not the case when it comes to investment managers.

Every year, three out of four active fund managers fail to outperform their unmanaged benchmarks. Over periods of a decade or more, more than 95% of them fail.

Do you really want to pay hefty fees to someone with less than a 1-in-20 chance of delivering the goods?

Investment fees and returns are inversely correlated. The more your advisor makes, the less you do.

This is particularly true in the fixed income area. Ten-year Treasurys currently pay 2.3%, for example. If you plunk for a bond fund with a 1% expense ratio, the fund is taking 43% of your annual return.

The goal is for you to get rich, not your broker or advisor.

7. Minimize your tax liabilities.

During my time as a money manager, I was surprised how many people paid little or no attention to the tax consequences of their investment maneuvers.

Minimizing your annual tax bite is crucial to reaching your long-term financial goals. How do you do it?

  1. Avoid actively managed mutual funds. Not only do the vast majority of them underperform their benchmarks – see No. 6 – but you’ll get hit with regular capital gains distributions, even in the down years.
  2. Minimize turnover. Warren Buffett rightly notes that the capital gains tax is not a tax on capital gains. It’s a tax on transactions. So he makes as few as possible, insisting that his favorite holding period is “forever.”
  3. Do your short-term trading in a qualified retirement account. This way your gains compound tax-deferred.
  4. Also hold high-yield stocks, Treasury inflation-protected securities (TIPS), real estate investment trusts (REITs) and taxable bonds in your retirement account. Otherwise, you’ll owe taxes on the dividend and interest payments each year.
  5. Outside your retirement account, hold winners for at least a year. This way you’ll qualify for more favorable long-term capital gains tax treatment.
  6. At the end of each year, offset realized capital gains with realized losses. You can buy the losing security back after 30 days.
  7. In your taxable accounts, favor individual stocks, equity index funds and municipal bonds. These allow you to control – or avoid – taxes.


8. Follow strict buy and sell criteria.

You should have a checklist for every security you buy and an ironclad discipline for every one you sell.

For example, if you are a growth investor, you shouldn’t plunk a dime into a stock until you see competitive products, rising market share, strong sales and earnings growth, a high return on equity and good margin protections (like patents, trademarks and copyrights).

If you are a value investor, you should insist on a sustainable business model, plenty of recurring revenue, a low price-to-earnings ratio or price-to-book value, a high margin of safety and a sustainable dividend with a reasonable payout ratio.

When do you sell? Only when certain conditions are met. In our Oxford Trading Portfolio, for example, we use a 25% trailing stop.  Whenever a stock pulls back 25% from its closing high – or our original entry price – we sell.

This protects our profits in the good times and conserves our principal in the not-so-good ones.

9. Hold realistic expectations.

Have you ever met someone gung-ho on a new diet and fitness regimen?

They will tell you that they’ve given up pasta, bread and other carbs. They will drink alcohol only on the weekends. (And then just a glass of wine with dinner.) They will go to the gym five times a week. And so on.

What happens? A month later, they tell you they gave up. It was too hard.

But the real problem was unrealistic expectations.

You want to lose 22 pounds in a year? Forget about working miracles. Lose an average of one ounce a day. One ounce. Over 365 days, that equates to 22.8 pounds.

That’s realistic because ice cream is still on the menu. (Just not the chocolate waffle cone.)

The same is true of investing. Apply proven principles that work day after day and your molehill will turn into a mountain. All you need is time.

10. Recognize the enemy in the mirror.

My colleague Bill Bonner, head of The Agora, has a familiar saying: “Investors don’t get what they want. They get what they deserve.”

That pithy remark encapsulates everything I’ve said in these last two columns.

Stock market investors want to buy low and sell high. But how can you do that if you get interested in stocks only when it’s late in a bull market and valuations and complacency are high? Or if you sell in a panic every time there is a correction or bear market?

It’s tough to control your emotions when your life savings are at stake. It’s only human to feel excitement or hope or fear or greed.  But it’s not smart to act on them in your investment portfolio.

Successful investors have a plan. And they stick to it.

Investment success doesn’t accrue to those with the biggest brains, but to those with the strongest stomachs.

No one knows with any certainty what the future holds.

But history shows that if you abide by these 10 proven principles, your portfolio can withstand all the bullets that will eventually come your way.

Good investing,



An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.

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