The Passive Portfolio is meant to give good long-term returns with low effort. I wrote Steve’s Stock Trading Method that is geared for making short-term gains in stocks through value investing. It is labor-intensive and gives no consideration to asset allocation.
Slow and steady wins the race
Dollar-cost averaging is a technique investors use to make good gains over the long term. The markets go up and down. If you invest monthly you don’t have to think about “timing the market” and over the long haul, you’ll get steady results. The easiest way to implement dollar-cost averaging is your workplace savings plan (if offered). Also, whenever offered matching contributions in the plan, take them.
If you have other money to invest or wish to save beyond the workplace savings plan that’s when the passive portfolio option is attractive.
Famous investor Peter Lynch said, “In the stock market, the most important organ is the stomach. It’s not the brain.” You have to have patient month after month to see some losses and not sell, knowing that 5 years from now it will be worth it.
Investor success in selecting individual stocks is poor
“I’ll say it: Individual stocks are terrible investments for people just starting out,” Christine Benz, Director of Personal Finance, Morningstar. I add that it also requires constant research and vigilance. Remember that you’re competing in the market with some brilliant full-time professionals.
The American Association of Individual Investors founder James Cloonan “envisioned the use of the Level3 Passive Portfolio as a complete equity portfolio for individual investors who wish to manage their own portfolio but do not have the desire to get involved in individual stock selection. It can be used as an equity portion of a whole portfolio for investors interested in selecting some individual stocks and actively managed funds, but with a desire to keep the majority of their portfolio in index funds.” I have two of his passive selections included in my portfolio, see VOE and EQAL below.
Consider your asset allocation between cash, CD’s, bonds, and equities (stocks) before investing.
| Asset Category | Notes |
| Home equity | If you’re a homeowner, this might be a large percentage of your assets. |
| Liquid savings – cash, savings account, CD’s | This should be sufficient to sustain you for 3 to 6 months depending on your job stability and family considerations. |
| Corporate and government bonds | Bonds are considered less volatile than equities. Generally, asset allocation goes more towards bonds than stocks as people age as they’re more likely to withdraw their funds and have a limited horizon. |
| Equities (stocks) | Equities are more volatile than bonds but normally offer better returns. Dividend stocks can generate more income than bonds in the current low-interest-rate environment. |
Steve’s Passive Portfolio
A passive investor should invest in mutual funds or Exchange Traded Funds (ETF’s) to spread your investment across many companies. If you invest in one stock you’re at risk of losing everything in corporate bankruptcy or a significant loss if the company makes mistakes. The following collection of ETF’s provides broad exposure with low expenses.
| ETF Trading Symbol | Asset Type | Description | Net Expense |
| FMIL | Focused Stock ETF | Actively managed. The fund seeks long-term growth of capital. Normally investing primarily in equity securities. Identifying early signs of long-term changes in the marketplace and focusing on those companies that may benefit from opportunities created by these changes by examining technological advances, product innovation, economic plans, demographics, social attitudes, and other factors, which can lead to investments in small and medium-sized companies. | 0.59% |
| VOE | Mid-cap Stock ETF | The investment seeks to track the performance of the CRSP US Mid Cap Value Index that measures the investment return of mid-capitalization value stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Mid Cap Value Index, a broadly diversified index of value stocks of mid-size U.S. companies. | 0.07% |
| EQAL | Large-cap Stock ETF | The investment seeks to track the investment results (before fees and expenses) of the Russell 1000® Equal Weight Index (the “underlying index”). The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index. | 0.20% |
| PEY | High dividend yield Stock ETF | The investment seeks to track the investment results (before fees and expenses) of the NASDAQ US Dividend AchieversTM 50 Index (the “underlying index”). The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index. | 0.52% |
| SPLB | Long term corporate bond ETF | The investment seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Bloomberg Barclays U.S. Long Term Corporate Bond Index. The index is designed to measure the performance of U.S. corporate bonds that have a maturity of greater than or equal to 10 years. | 0.07% |
The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.