4 Steps to Investment Success 1

From March through June, this column will explore each of these steps for successful investing in detail.

Do you update your smartphone more often than your portfolio? If so, consider the following steps:

  1. Investable Benchmarks
  2. Leverage
  3. Risk Control
  4. Leading Growth Stocks

Investable Benchmarks

Exchange-traded fund (ETF) indexing is widely considered to be the best way to invest. Asset class ETFs are often preferred for their strong relative performance, broad diversification, tax efficiency, ultra-low expenses and intraday liquidity.

In fact, Warren Buffett and Yale CIO, David Swensen, both disclosed their ETF portfolio prescriptions for investors. At InvestableBenchmarks.com, we report the performance for their portfolios and for our income and growth versions.

Buffett & Swensen

While Buffett and Swensen recommend growth portfolios, many investors are unable to accept the associated volatility. Portfolios with 70% or more allocated to risk assets (stocks and real estate) are very hard to handle at times.

In the 2008 stock market crash, the Buffett and Swensen ETF portfolios fell by -32% and -26%, respectively.

Income & Growth

Given the recent equity and housing market crashes, investors increasingly prefer income and growth portfolios, with 50% allocated to bonds. The best bond ETF has often been long-term Treasuries (TLT) because of its superior liquidity, security and non-correlation to stocks during extreme market volatility.

In 2008, the S&P 500 fell by -37%, while TLT gained 34%, and in 2002, the S&P 500 fell by -22% while TLT rose by 17%. Long-term Treasuries will not contribute a positive return every year, but this bond ETF has often been critical for portfolio protection when equities have crashed.

Crash Protection

Over the past decade, Income & Growth delivered a total return of 92%, or roughly 7% annualized. The total return was competitive with the Buffett and Swensen asset allocations, but this balanced portfolio only fell by -4% in 2008, exhibiting far lower risk.

The Income & Growth investable benchmark has 42% allocated to global equities (VT), 8% in REITs (VNQ) and 50% in long-term Treasuries (TLT).

Artificial Intelligence

To enhance diversification, many investors add real estate exposure to their portfolios with REIT index ETFs. While the Income & Growth investable benchmark includes an 8% allocation to U.S. REITs (VNQ), we temporarily shifted this allocation in 2016 to overweight semiconductors (SMH).

Given the rate that Amazon (AMZN), and artificial intelligence in general, are replacing human labor with smart machines, the strong relative outperformance trend in semiconductors may continue.


For many years, our firm, ETF Portfolio Management (ETF PM), advised clients against using portfolio leverage. However, early in 2016, we introduced our first leveraged income and growth portfolios, also known as “leveraged risk parity.”

In the April CVL issue, the second part of this series will cover leveraged ETFs and the risks and rewards associated with leverage in active and passive portfolios.

Risk Control

Experienced investors learn to expect the unexpected. Extreme market environments are unpredictable, and it is best to have efficient risk control plans ready.

In the May CVL issue, the third step to investment success will examine how certain leading portfolio managers utilize rules-based risk controls, including trend following, especially when using leverage.

Leading Growth Stocks

Everyone would like to be an early investor in the next great company that delivers a return comparable to Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN) or Facebook (FB).

At ETF PM, we recently purchased Tesla (TSLA) and Nvidia (NVDA) for clients well before those stocks became household names. In 2013, we strongly recommended Tesla before the stock rallied 154%, and last year, we “pounded the table” on NVDA, which quickly rose by 180% to become the top performing stock in the S&P 500!

In the June CVL issue, the fourth part in this series will cover leading growth stocks, our stock rotation process and top picks for the second half of 2017.

While past performance is never a guarantee of future results, be sure to catch all four steps to investment success!

David Kreinces is the Founder & Portfolio Manager for ETF Portfolio Management (ETF PM), a Thousand Oaks-based financial advisor. To learn more, visit ETFPM.com or call 866.409.5844.