The following first appeared on Money & Markets.
Last week, I wrote that the 60/40 portfolio is dead.
So, it’s only fair to ask: If I believe that the bedrock of American retirement is toast … how do I invest my money?
Before I jump into it, I have to throw out the usual caveats. Just because I invest a certain way doesn’t mean that you should. I’m 42 and have two kids to feed (and a third on the way). You may be in a very different stage of life and have a very different set of circumstances. But that said, I’ll share how I invest my money.
With that out of the way, let’s jump into it.
How I Invest My Money
The first plank might surprise you a little. Even though I believe the 60/40 portfolio to be dead for the foreseeable future, I still have a little less than 15% of my portfolio invested in something along the lines of a 60/40 portfolio. It’s a 401(k) account, and my only options are stock and bond mutual funds. It’s the best I can do with the options at my disposal.
Still, it’s worth it. The tax savings and matching more than compensate for less-than-perfect investment choices. So, my first $19,500 in savings each year goes into the 401(k).
Moving on, if you’ve read my work for any length of time, you know I’m an “income guy.” A lot of my investment recommendations tend to revolve around income strategies.
So, it should come as no surprise that another 25% of my portfolio is investing in long-term dividend stocks, REITs, pipelines and other income-focused plays. I’m still a long time away from retirement, so most of these stocks are set to automatically reinvest the dividends each quarter.
Following the income theme, the largest chunk of my portfolio is invested in put-writing strategies. About 40% of the total is invested in strategies that primarily sell put options.
You’ve probably heard that the vast majority of options expire worthless. Well, that’s true. So, if you know they’re likely to expire worthless anyway … why not sell them?
If done correctly, selling out-of-the-money put options can be a conservative income strategy. You collect premium each month much like an insurance company. Once in a while, as with insurance companies, disaster strikes and you have to pay out. But if you manage your risk appropriately, those occasional disasters won’t bury you. And as with real insurance companies, put option sellers can buy “reinsurance” by buying even deeper out of the money put options to cap any losses.
Following again on the income theme, I have a little over 7% of my money invested in real estate (outside of my personal home) and roughly 5% in precious metals.
And finally, the remainder of my portfolio is invested in a hodgepodge of other strategies, some of which are a little experimental. I think it’s important for every investor to allow some chunk of their portfolio to be used on more speculative plays. You might not hit a home run on all of them, but on a few you just might.
Plus, indulging your more speculative side keeps investing fun and engaging.
So that’s it. That’s my current portfolio and how I invest my own money. I don’t expect (nor would I advise) that you copy it. But I hope it shows you that there really is life beyond the traditional 60/40 portfolio!
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management, a registered investment adviser based in Dallas, Texas.