Messy Portfolio Admissions

“In the beginner’s mind there are many possibilities, but in the expert’s there are few.”

— Shunryu Suzuki, Zen Teacher

I was reminded of this quote in last week’s Substack post by Robert Waldinger as I was reflecting on my post last week about diversification in a retirement portfolio. I am not at all an expert in finance and have approached this with a “beginner’s mind.”

Rather than to try to pontificate on what everyone else should do, I thought I’d simply share (or admit!) what we personally do and why. I hope the readers of this post find this viewpoint helpful.

Advisors

This is one of my favorite quotes.

"The big money is not in the buying and the selling but in the waiting."

— Charlie Munger

As such, I really didn’t want to be the kind of investor that was constantly checking economic indicators, earnings reports, and market movements. While we do have some self-directed brokerage, and we have made some angel investments on my own (more on this later), Marsha and I decided to trust a set of advisors to pursue mainstream strategies.

These advisors include JPMorgan Private Bank, CIBC Private Wealth, and Radnorwood Capital on the public equities and fixed income side. We also utilize SMK Capital, Wilkinson Corporation, and Alumni Venture Group to invest in alternatives. Each of these groups has their own advantages, and if people are interested, I can write more about each or any of them.

Each of these advisory firms does take fees. Many other retirees have chosen to go the route of “roll your own” as individual investors, and there are good resources for individual investors like AAII.  I personally appreciate that advisory firms are doing the research at scale to customize mainstream strategies to service the particular needs for our family. And one of these needs given my health issues is the ability to seamlessly transfer relationships to Marsha and our kids when appropriate, as opposed to forcing them to become sophisticated individual investors, too.

Home Equity

In our retirement years, we have placed much less value on home equity for our primary residence. We decided to live where we wanted to live and to not try to optimize our choice based on its investment value. Condominiums appreciate more slowly than single family homes and don’t come with the land values that appreciate significantly. Still, we appreciate the walkability and the lifestyle associated with urban condominiums,

In 2016 when we purchased our Portland condominium, we were able to secure a fixed 3.25% interest rate. Rather than to reduce future mortgage payments, we decided to put down the minimum (20%) to secure that rate and borrow as much as we could to put in the market with the understanding that the market would likely deliver better returns than our home equity.

While the equity that we have in our Portland condo isn’t nothing, I don’t consider it really part of the investment portfolio. I view the mortgage interest, property taxes, and condo fees as just like a very high rent to live in this part of town. We also don’t have to think about home and garden maintenance either!

I would also note here that we don’t invest in rental properties that we manage ourselves either. We had one in the past and have experienced firsthand the underlying tax benefits of depreciation and the overall capital gains benefits of the property appreciating. Still, being a landlord wasn’t the lifestyle we wanted to pursue.

Investment Buckets

The rough way that I think about our investment portfolio is like a 40/50/10 across timeframes.

• 40% is in a “balanced” 60/40 core portfolio, which is professionally managed across cash, fixed income, and equities. We view this as our “core portfolio” from which we draw funds in the present and near future. We use JPMorgan Private Bank to manage this portfolio, as well as to service our banking needs.
  
  For color, the biggest equity holdings are SPY (The largest and oldest S&P 500 ETF), CUSUX (A Six Circles US Fund), and CIUEX (A Six Circles International fund).  Six Circles are broad-based, low-fee mutual funds that take into account JPMorgan’s proprietary views on the market.
  
  The biggest fixed income holdings are CBTAX (A Six Circles Tax Aware Bond fund), VWIUX (A Vanguard Tax exempt bond fund), and CRDOX (A Six Circles Credit Opportunities fund, which includes higher yield opportunities).
  
  Overall, this part of the portfolio runs a pretty “vanilla” playbook. Of course, 2022 was a downer for this segment of portfolio as both stocks and bonds were down in 2022, so we understand there are flaws with this part of the strategy but we view this as “safe” and not messy.
  

• 50% is in pure equity targeted at growth, which includes retirement accounts, managed brokerage accounts across several advisors, and self-directed accounts. We have these growth accounts spread across advisors. In general, the aim is to not touch these accounts to allow for the “waiting” as recommended by Charlie Munger. Of course, we could touch them, if necessary, as they are largely in stocks, mutual funds, and ETFs.
  
  In general, this “bucket” has more plays in it. For example, at CIBC, we “buy and hold” a small portfolio of very good individual stocks. Our biggest equity holdings at CIBC are Apple, UnitedHealth Group, and Visa, not because of the initial investment amounts but just because they grew so much over the years.
  
  Radnorwood operates a technology-oriented fund with a tendency to transact a lot more frequently. Its biggest holdings right now are Arista Networks, Nvidia, and ServiceNow.
  
  The JPMorgan accounts still remain concentrated to largely track indexes much like the equity portion of our core portfolio. However, with a focus on longer-term growth, there are also a number of smaller plays like a tech leaders ETF (JTEK), a midcap stocks ETF (IJH), and an emerging markets equity fund (JEMSX). There are also a lot of little plays in ETFs across Taiwan (EWT), China (MCHI), India (INDA), South Africa (EZA), Brazil (EWZ), and Mexico (EWW), Japan (BBJP), Canada (BBCA) as just some examples.
  
  Overall, we have tried to diversify this equity portion of the portfolio across different strategies. Because this part of the portfolio doesn’t get touched, we don’t get too bent out of shape with market twists and turns, and it’s been growing so far over the longer run. This is all a bit messy and spread out across multiple accounts, but the diversification does enable different strategies to play at the same time.
  

• 10% is in alternatives, which include real estate, private equity, venture capital, and angel investing. In general, these investments can’t be touched on our own timelines, as the return advantages generally come from the investor’s willingness to sacrifice liquidity.
  
  The primary reason we haven’t used JPMorgan Private Bank for this activity is that our numbers are too small to target our investments. With only 10% of our portfolio in alternatives and some growing skepticism about certain parts of this market (I can explain more if people are interested!), we chose to build a small portfolio of targeted alternatives with the help of smaller groups.
  
  In general, the real estate investments have been with workforce apartments, self-storage, and mobile home parks. Both Wilkinson Corporation and SMK Capital have been good partners here. Through no fault of the partners, these investments haven’t done that well since 2022, as the IRR (internal rate of return) for these investments was largely dependent on refinancing to return capital. The whole landscape of the banking and commercial real estate market got upended with the fluctuation in interest rates. Still, we haven’t lost our equity stakes in this real estate portion of the portfolio, even if the cash-on-cash hasn’t been what we expected it to be.
  
  The VC investments have largely been through Alumni Venture Group (both as a limited partner in VC funds as well as through participation in SPVs), with the notable exception of a direct investment in Trove. The angel investments have largely been through direct investments, but also through indirect investments, as I was a screening committee member and limited partner for Keiretsu Capital Fund IV. So far, the biggest VC loser has been Optimus Ride, a very cool autonomous vehicle company. The good news is that the tech still lives on, but the company’s rapid progress got stalled by the pandemic’s interruption of some very promising pilot deployments. Overall, the VC and angel investments as a category appear to be “up” but most of these are all “paper” gains associated with increased valuations, not actual exits yet.
  

  We also had a private equity investment with an ATM cash machine business, which is currently turning into a longer story! (Perhaps more on this one later as the news continues to unfold!)  The potential losses were not related to the pandemic but to some seemingly criminal activity. The good news is that the losses aren’t big, but it appears there will be losses to many investors, including us. There was $700M of investment involved in this debacle.

Of course, these percentages of investment allocations aren’t exact, but they represent the mental model we’ve been using for the investments. Again, I might not advise others to take the same approach as we did to balancing our portfolio, but I thought it might be helpful to share what we’re doing at a high level.

Line of Credit

Beyond the investments themselves, we also utilize a securities-based line of credit for income-generating activities. The Fed interest rate hikes in 2022 made for challenging banking situations for some commercial borrowers. While these hikes closed the door on many real estate and private equity transactions for investors, they opened up opportunities for higher rates for those willing to do direct private lending.

We were introduced to some lending opportunities, most of which were associated with Adult Care Homes, a growing business that offers seniors or those with disabilities a higher staff-to-resident ratio than typical assisted living communities. Adult Care Homes are generally run by small business owners who lease upgraded houses in residential neighborhoods that conform to the facilities standards and regulations. Despite a pent-up demand by interested business owners for these facilities, traditional lenders have backed away from upfront lending on these projects to retrofit residential housing to be Adult Care Homes. The traditional lenders, have instead held back to wait for refinancing opportunities on the developers’ projects until after businesses accrue 12-15 months of operating history on the facility leases. As such, to provide bridge financing for the retrofit before banks come in for refinancing, there was a short-term opportunity for potential lenders like us to come in and provide lending for these projects at higher interest rates. We have been making a small amount of money by pocketing the difference between the higher interest rates we have been receiving and our cost of borrowing through our securities-based line of credit. This comes with risk, but our loans are backed by secondary liens on the Adult Care Homes themselves.

A Mess?

Hopefully, this whole thing doesn’t seem like too much of a mess. If anything, this summary of where we ended up is likely a simplification of many of the lessons learned along the way. As mentioned in the beginning, I took a beginner’s mindset to investments with many possibilities. So, while the net is in traditional stocks and bonds, with a little bit of alternatives and a little bit of direct private lending, buried in there are a lot of reactions to past mistakes, too.

I like to remember the words of the late Daniel Kahneman.

"True intuitive expertise is learned from prolonged experience with good feedback on mistakes."

— Daniel Kahneman.

What feedback have you gotten on your mistakes?