Have you bought into the notion that only professional money managers know how to build wealth for you? Are you stoic enough to see your hard-earned money not growing even at a modest 6%? Have you banished the dream of comfortable retirement? You are not alone!
The hallmark of street smart approach to life — and even to investing — is to defy pervasive myths so that you can take control of your own destiny. In fact, you can beat professional money managers without spending more than 20 minutes of your time per year. All you need is to understand time-tested Gone Fishin’ Portfolio developed by Alexander Green.
Gone Fishin’ portfolio proves the wisdom of Oracle of Omaha very well by investing entirely into low-cost, well diversified Vanguard Index funds. After a friend of mine advised me to read this amazingly simple yet profound book of investing, I felt compelled to share this simple yet powerful wealth building portfolio.
If you have never heard of Vanguard funds, I recommend that you first dive deep into Jim Collins’s blog to know why he vehemently believes in Vanguard family of funds to build wealth for the long haul.
The cornerstone philosophy of the Gone Fishin’ Portfolio is to invest in well diversified Vanguard index funds in your tax deferred accounts to build wealth. This portfolio has a spectacular 15+% return since its launch in 2003.
Alexander Green believes that asset allocation alone plays a vital role in your portfolio’s long-term performance. He has developed his asset allocation model based on Harry Markowitz’s research paper “Portfolio selection,” published in the Journal of Finance. In 1990, Harry Markowitz won Nobel prize in economics for his groundbreaking research.
In a nutshell, theory espoused by Harry Markowitz underlines the fact that it is impossible to remove uncertainty from the markets, but you can mitigate long-term risk inherent in the market by devising a portfolio of uncorrelated assets like stocks, bonds and precious metals.
Importance of Rebalancing
Once you design a portfolio of uncorrelated assets, your investment is on auto-pilot. Depending on the superior performance of certain asset class, you will end up having your portfolio with different percentage weighing by each asset at the end of the year. It’s time to rebalance your portfolio. It’s wise to rebalance only after a year to avoid short-term capital gain(currently at 15%, and possibly 30% next year unless Washington can make any progress on the fiscal cliff).
Akin to smooth ride you get after balancing all four wheels of your car, your balanced portfolio allows you to invest more in the under-performing assets and, at the same time, reduces overall risk in the long haul.
Remember the Taxman
Average mutual fund takes 2.5% in annual cost each year. Taxes take another 2%, on average. — John Bogle
If you follow Gone fishin’ portfolio strategy and invest entirely in Vanguard funds, you will end up saving 2% each year in annual cost alone. But, don’t rest on your laurels yet. The taxman is about to become your silent partner, if you don’t think about ways to avoid paying taxes on your growing portfolio. The best way to find tax shelter is to invest all your money into tax-deferred account. By doing so you boost your portfolio performance by 4.5%.
Avoiding taxes on your portfolio is not an abdication of your civic duty; rather, it is to secure your retirement as evident from the stark performance difference between tax-managed and non-tax-managed portfolio.
Gone fishin’ portfolio is one of the simplest strategies you can use to grow your long-term portfolio at a double digit rate without dealing with anxiety to invest in individual stock. This New York Best seller proves that you don’t need to hire a pro to become wealthy; rather, you need to thank John Bogle.
Most individual investors would be better off in an index mutual fund. — Peter Lynch
A timeless investment guide that reveals how to consistently earn market-beating returns while reducing riskWhat every investor needs is a battle-tested strategy that embraces the uncertainty of financial markets-and life in general. One that will yield market-beating p...
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