The Perfect Portfolio

A Revolutionary Approach to Personal Investing

Leland B. Hevner

• Publisher: Wiley
• Year: 2009
• ISBN:
  9780470456729
• Edition: 1
• Topic: Commerce
• Subtopic: Investissements et valeurs mobilières

Today's world of personal investing is not a friendly place. Individuals are assaulted with an unending barrage of financial news, "expert" advice, investing tools, trading systems, and more, to the point where they are overwhelmed. As a result, most people simply entrust their portfolios to third-party advisers and, in doing so, lose control of their financial security.

Nobody is more familiar with this situation than author Leland Hevner. As President of the National Association of Online Investors (naoi.org) and a longtime educator in this field, he understands that to succeed in today's chaotic markets you don't need more news, advice, or analysis tools. Instead, you need a completely new and simpler approach to building an effective portfolio on your own—one that includes updated investing concepts and dramatically new ways of looking at the market. That's why he created The Perfect Portfolio.

Written in a straightforward and accessible style, this reliable resource shows you, step by step, how to use a revolutionary approach to investing called the Perfect Portfolio Methodology (PPM). Developed by Hevner over the course of his successful career and based on input from hundreds of individual investors, the PPM allows you to capture incredible returns under any market condition without exposing yourself to unacceptable risk or requiring you to devote an extraordinary amount of time to the investing process.

The journey to creating your unique Perfect Portfolio is divided into three parts:

• Part I reveals the problems faced by today's investors, outlines a new approach for solving them, and gets you started by showing how to design the Core Segment—or foundation—of your Perfect Portfolio
• Part II details how to "supercharge" your Perfect Portfolio's returns by adding a Target Market Segment consisting of five newly defined asset classes
• Part III illustrates how you can bring the Core and Target Market Segments together to form a Perfect Portfolio that meets your unique investing profile and current market conditions

This is a book that financial advisers will not want you to read. Why? Because it takes them out of the loop by empowering you to make informed and profitable investing decisions on your own. The Perfect Portfolio places the power to control your wealth firmly in your hands, where it belongs.

The Perfect Portfolio is more than just a book. It also includes a supplemental online component you can access via the Web at www.perfectportfoliobook.com. The use of this resource is not required to take full advantage of the book's content, but the information and tools presented in the online component can enhance your overall learning experience.

PART I

THE PROBLEM, THE SOLUTION, AND GETTING STARTED

Our journey toward creating the Perfect Portfolio is divided into three Parts as briefly described in the Preface to this book. Part I consists of three chapters.

I start in Chapter 1 with a description of the problems that face individual investors on a daily basis. I illustrate these problems with discussions I have had with students in the college classes I teach.

With the problem defined, I then lay out in Chapter 2 a solution to these problems using a revolutionary new approach to investing that I call the Perfect Portfolio Methodology, or PPM for short.

We begin in Chapter 3 the process of creating a Perfect Portfolio by building its Core Segment, consisting of the traditional asset classes of Cash, Stocks, and Bonds.

After completing Part I of The Perfect Portfolio, you will understand the problems that need to be solved, you will understand the new approach to personal investing I am proposing for addressing these problems, and you will know how to build the foundation of the Perfect Portfolio in the form of its Core Segment.

Then in Part II of The Perfect Portfolio, you will learn how to supercharge the portfolio’s returns potential by adding a Target Market Segment consisting of five new asset classes that I have defined for this approach.

And finally, in Part III, we bring the Core Segment and the Target Market Segment together to form a Perfect Portfolio that meets your unique goals, matches your personal investing style, and works in current market conditions.

CHAPTER 1

The Woeful State of Personal Investing and the Need for Change

A VIEW FROM MAIN STREET

As I fiddle with the overhead projector at the front of the room, people start to file in for the first session of an investing class that I teach at Montgomery College just outside of Washington, D.C. They find their seats, and as I turn to face the group of about 20 people, I see a cross-section of the U.S. public. Most are older and probably retired. Many are middle-aged and in their peak earning years. There are a surprising number of younger people who look like they are fresh out of college and just starting their earning careers. And, as usual, there are more women than men.

I know that these students are not day traders and few, if any, are experienced personal investors. These are average people with money to invest and they simply don’t know how to navigate the world of personal investing. I note that many have brought folders with them that I suspect contain broker statements they do not understand. At some point, either before or after class, they will spread these statements in front of me hoping that I will be able to decode them.

The overwhelming majority of people who attend my classes have off-loaded their portfolios, some of which are quite substantial, to advisers and brokers because they have no confidence in their own ability to make investing decisions. But as they have watched their portfolios stagnate or erode while being charged significant fees, these individuals have reached a breaking point. They have had enough of standing on the sidelines and watching their hard-earned savings fade away without understanding how or why. They want to understand and have more personal control of their portfolios, either by making their own investing decisions or at least being able to challenge their adviser’s recommendations, but they don’t know how. They have found their way to my class hoping against hope that it will be their first step toward becoming a more confident and independent investor.

Yet, students enter the class skeptical. Many believe they are about to hear a sales pitch from a broker or a financial adviser. They have experienced this many times before and are fully prepared to be disappointed if it happens again. Others believe they are about to learn new ways to pick stocks and mutual funds based on an incredibly successful trading system I am promoting. Still others believe I will be trying to persuade them to buy specific stocks or funds on which I receive commissions.

Therefore, my students are typically surprised when I tell them that I am not selling anything, that I am not going to give them specific investment recommendations, and that I will not reveal to them a shortcut to investing riches.

I tell them that I am a professional educator, not a professional salesman, and that what I am about to teach in this class is nothing short of a totally new approach to personal investing. They look at me with surprise when I tell them that this new approach will require that they forget most of what they have learned about investing to this point. I tell them that the only prerequisite to taking this class is that they clear their minds and be open to new investing methods that most of their advisers or brokers will look upon with the utmost of disdain. I tell them that what they learn over the next 12 hours of class work will enable even the least experienced among them to become confident, independent and successful investors. At this point, while many facial expressions show disbelief, I at least have their attention.

What I teach my students in the classroom is what I will teach you in this book. I therefore give you the same advice that I give to my students. Clear your mind of preconceived notions of how personal investing works. Open your mind to new ideas. Don’t compare what you read here to what you have read or been told elsewhere until you finish the book. Then decide if this new approach makes sense for you.

You are now a student of a radically new way of investing that takes the power out of the hands of salespeople and third party “experts” and puts it squarely into yours. By picking up The Perfect Portfolio you have shown that you are ready, willing, and able to accept the challenge.

The Current State of Personal Investing

Why is a new approach to investing needed? The answer is, unfortunately, because the world of personal investing today is broken. The financial services industry is not meeting the needs of people who are seeking to learn how to take more personal control of their portfolios. As a result, the investing public wants, needs, and demands change.

In my position as a teacher of personal investing and as President of the multi-thousand-member National Association of Online Investors (NAOI), I have the opportunity to interact with the investing public on a daily basis. I talk with hundreds of individual investors every year. I can see in their faces and hear in their voices that they are confused and often intimidated by the world of personal investing as it currently exists. When seeking to learn how to cope with this world, they are confronted with hundreds of investing books, countless newsletters, nonstop seminars for trading systems promising instant success, sales pitches from hoards of financial advisers, and a constant barrage of information from the financial media. The world of personal investing today is simply overwhelming for the average person trying to protect and grow their savings.

When confronted with this chaos, most people simply give up in despair and give their portfolios to financial advisers to manage. In essence, they are entrusting their financial futures to strangers who are far too often salespeople with fancy financial credentials. This situation is clearly unacceptable. But what can we do? What can we change?

I realized early in my teaching career that people did not simply need more investing tools, more information, or more expert financial advice. Rather, the public told me that they needed nothing less than a totally new approach to investing. They wanted a greatly simplified approach that would enable them to take more personal control of their portfolios and to effectively manage their investments on their own with confidence. To meet this goal, I developed the revolutionary Perfect Portfolio Methodology (PPM) approach to investing which I explain in this book.

The PPM greatly simplifies the investing process. It shows you how to create an incredibly powerful portfolio using only nine key Asset Building Blocks. It frees you from the tedious process of analyzing individual stocks and mutual fund styles. And it gives you a logical structure for designing a portfolio that meets your unique needs and is responsive to changing market conditions. In short, it fixes what is broken in today’s personal investing market.

But before presenting a solution, it is beneficial to understand the problem the solution is designed to address. The purpose of the next section of this chapter is to shine a bright light on the obstacles that individual investors face today. In doing so, I hope to convince you that a new approach to personal investing is needed. I also show in this first chapter that a new approach is possible and what it will look like.

I begin by illustrating the problems faced by average people with money to invest using the words of students in the personal investing college classes I teach.

Questions from the Classroom

It is 9 P.M. on a blustery March night. I have just finished a three-hour session of my class, titled “Effective Investing Using Online Resources,” at Montgomery College on the outskirts of Washington, D.C. This is one of four weekly sessions that make up the entire program.

While the class is officially over for the night, I know that it is not finished. Students are lining up at my desk to speak to me one on one. Each wants to discuss a personal finance issue that they do not feel comfortable raising during class. Even though it is late, everyone is tired, and they are missing American Idol, they stand patiently, folders in hand, waiting for their turn to engage in a private conversation about their mysterious financial situation.

My students know that I am not a registered financial adviser. I told them at the beginning of the class that I cannot give them specific investment recommendations. But this is not what they are seeking. They simply want to talk to a knowledgeable and objective third party who is not selling anything and whom they feel they can trust. So they wait.

It would not be hard for me to simply list the problems faced by individual investors today. But a sterile list of such items would not do the topic justice. The full scope of the problem is better understood when presented within the context of real-life, human experience. These are experiences that I believe you may be able to identify with on a personal level.

Each of the following questions and related discussions represents a real issue presented to me by a student whom I will refer to by first name only. These are only representative examples of hundreds of similar issues that I address every year. Taken as a whole, they tell me that the world of personal investing today is not a friendly place in which to travel and is in desperate need of change.

Margaret—The Problem with Advisers

Margaret is a 58-year-old teacher who has over $500,000 of investment money. She has entrusted it to an adviser to whom she pays a yearly fee of 2 percent of the total amount invested. The returns she has been receiving have been less than market averages and she is concerned. She knows little about investing (which is why she is attending my class) and has put her complete faith and trust in her adviser. She suspects something is wrong but does not even know the questions to ask of the financial professional with whom she is working. She is afraid to offend him by challenging his judgment. In a one-on-one discussion following the class period, she shows me her latest broker statements and asks for my comments.

A quick scan of her statements reveals a list of rather mundane mutual funds, all of which have a load, which is nothing more than a sales commission to the broker/adviser. I ask to see an investing plan that the adviser has developed defining her investing goals, time horizon, risk tolerance, and so forth. None exists. I ask to see a prospectus for each of the funds in her portfolio. I am handed glossy marketing brochures instead.

Her portfolio is very poorly thought out and ill-designed. It seems there was little effort made to find investments that meet Margaret’s unique goals and risk profile. It is clear to me that the main driving force behind this random mix of funds is to earn commissions for her adviser.

While most financial advisers are ethical, many are not, as this example illustrates. Biased advisers looking to maximize their income with commissions are one symptom of a financial services industry that is not serving the public well. Margaret is by no means the only one of my students who has shown me a portfolio that is designed to meet the goals of the adviser as opposed to the goals of the investor.

My advice to Margaret is to use the worksheets and Web sites I provide in class to perform a complete due diligence process on each fund she owns. (I provide many of these same resources to you in upcoming chapters.) I tell her to look at the risk, return history, and expenses of each, and then compare these factors to other funds in the same category. Web resources that I show her make such an analysis quick and simple. Armed with this information, she will be able to sit down with her adviser and have a meaningful discussion. She will be able to ask relevant questions and expect reasonable answers. If she does not get them, I suggest that she either look for another adviser or, better still, implement the new approach to investing that she is learning in my class.

John—The Problem with Expert Stock Recommendations

John is a 42-year-old lawyer. He has an adviser who manages a p...