How To Build A Stockless Portfolio

I've lectured on investment strategies the world over, but I recently got one of the most intriguing questions
I've been asked in a long time at the Global Currency Expo in San Diego, California.
An attendee asked me: "Is it possible to achieve decent performance if I don't want to include stocks?"
In short, the answer is "yes" -- though I wouldn't recommend a "stockless" portfolio because of the tradeoffs involved.
Still, it is possible to achieve a "decent" performance without stocks.
Here's how you'd do it.
A successful allocation model for a stockless portfolio would look something like this:
- Bonds: 45%
- Master Limited Partnerships (MLPs): 25%
- Commodities: 10%
- Gold: 10%
- Preferred Stocks: 10%*
*You could argue that these are actually stock investments and I would take your point. But for purposes of our discussion and our objectives of achieving stock-like returns, I think we need to include preferred stocks because of the high, fixed dividend they kick off that makes them more bond-like.
We'll take an in-depth look at the allocation model in a moment. But let's examine the negative points of a stockless portfolio first.Stockless Portfolio TradeoffsThere are negative aspects to owning a stockless portfolio.
To begin with, the U.S. Federal Reserve's loose monetary policy right now is bullish for stocks, so by forgoing equities, you'd be missing out on some big potential gains. At the same time, you'd be exposing yourself to more volatility and greater risks. You'd also miss out on some hefty dividend payouts.
Here's what I mean:- The Fed's Zero Interest Rate Policy -There are obviously going to be wiggles along the way, but generally speaking, the Fed's bailout policies should continue to factor into higher earnings, higher cash stockpiles, and continued reinvestment. That, in turn, suggests stocks are still the place to be - at least until something changes inside the Beltway.
- Volatility - Investors who eliminate stocks and refocus their efforts on other asset classes are introducing additional risks to their portfolio. The reason for that is very simple: By taking stocks out of the picture and putting a greater emphasis on the remaining asset classes, investors are reducing the amount of diversity and balance necessary to maintain stability. That makes their portfolios a lot more volatile.
- Lack of Dividends - While avoiding stocks may make you feel better, there's a good chance you'll be left behind - especially if you cut out dividend producers. Let me give you an example. Dividends are likely to grow at an annualized rate of 10% to 12% over the next five years. That means the effective yield on a portfolio that presently yields 1.9% will see its yield grow to 3.4% in five years, according to Don Kilbride, who manages the $5.72 billion Vanguard Dividend Growth Fund (MUTF: VDIGX). If you're not along for the ride, you'll have to make up this money somewhere else. It's also one more roadblock you don't need in a low interest rate environment.
- Out of the Frying Pan, Into the Fire - In their rush to avoid risk by removing stocks from the equation, investors simply may be trading one set of risks for another. That is, bonds aren't necessarily a safer investment than stocks. Bond values will fall dramatically when interest rates begin to rise in earnest, and that actually may be a rougher ride than the corresponding rodeo we'll see in equities.
- You'll have to save a LOT more - By cutting stocks from your portfolio you'd be eliminating a powerful upside. This in turn means you'd have to dramatically increase your savings to make up the difference. In fact, a 32-year old earning $50,000 a year who wants a targeted income of $3,125 a month in retirement would have to increase their savings from 12% to 16% of their annual salary, according to Money Magazine's Walter Updegrave. That translates into an extra savings of $167 a month to make up for the lost value -and that's on top of the $500 a month already going to retirement accounts in his projections. Jumping from 12% to 25% would require an extra $542 a month.
Building a Stockless Portfolio
Now that you're aware of the risks, we can take a closer look at our stockless portfolio asset allocation model.
This post originally appeared at Money Morning.
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