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How I Invest My Own Money


“Don’t tell me what you think, tell me what you own.” I’ve written articles and posts on this website about a wide variety of ideas and strategies, so in this article I’ll share my thought process of how I’ve put it all together for my own personal situation. My ability, willingness, and need to take risk is likely different than yours, possibly a lot different, so this should not be considered investment advice or recommendations.

Before I dive in, I should generally describe the principles that make up my investment philosophy. I believe markets are not perfectly efficient, but they are highly efficient, where the path to higher expected returns is paved with higher volatility. I believe in factor diversification, so some of this volatility also means occasionally large tracking variance relative to conventional benchmarks such as the S&P 500.  There are many ways I diversify my portfolio including asset classes (stocks, bonds, cash, alternative strategies), geography (US, Developed International, Emerging Markets), and risk factors (market, size, value, momentum, profitability, volatility, term) just to name a few. Overall, it's important to have an investment philosophy that you can stick with through tough times.

 

Asset allocation:
 

“Stocks”: 70%

  • Equity mutual funds & ETF's
  • Dual momentum ETF

“Bonds”: 8%

  • Bond mutual funds & ETF's

“Cash equivalents”: 22%

  • Checking & savings accounts
  • Money Market mutual funds
  • Cash value of life insurance

“Alternatives”: 6%

  • Equity index option short strangles


This does not include other items that make up my personal net worth such as the present value of a future pension I’ll have from a prior employer, my current equity stake in Lorintine Capital, my home & associated equity, and other valuable personal property and belongings.


When I refer to stocks, I’m lumping together certain strategies like passively managed buy/hold/rebalance allocations to equity mutual funds & ETF's and a dual momentum strategy ETF.  I don’t own individual stocks as I build my portfolio around academic research which generally advises against buying individual stocks.  With bonds, I keep it simple with funds that are short to intermediate term and are high quality.

 

Cash equivalents are pretty straightforward, consisting of checking and savings, although I primarily use my brokerage account like a checking account because the cash balance is automatically swept into a high yield money market mutual fund. I have a debit card and checkbook for this account, ATM fees are rebated, and there are no minimums or transaction count requirements. This part of my portfolio simply acts as my source of short-term liquidity and emergency funds, along with my high yield savings account. If I have any large upcoming lump sum expenditures planned within the next few years, I’ll increase my cash position. I also consider my cash value in a small whole life insurance policy as a source of liquidity because I fund the contract annually up to the IRS “MEC” limit. This would not be recommended for most, as I have a deep understanding of how to make these contracts perform and I’m also a licensed insurance agent.


The last asset class in my portfolio is an alternative option strategy known as a short strangle that I implement as an "overlay" to my bond fund holdings. I prefer to sell equity index option strangles as my sole alternative strategy as it's a well documented "alternative risk premium" that should persist in the future. I keep it simple with this strategy, passively selling out of the money XSP puts and calls that are approximately one month from expiration.


The historical volatility for my asset allocation over the last 30 years is only about 10% due to the benefits of diversification. The Sharpe Ratio would have been around 0.7 according to backtesting I’ve done, although I have lower forward-looking expectations and would be very happy with 0.6 over the long term. With one month T-bills yielding around 0.1% today, this implies an expected return of approximately 6%. This might sound like a sobering dose of reality to most, but when considering it includes everything that makes up my liquid net worth and the record low interest rate environment we currently live in, I think it's realistic. 
 

Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

Edited by Jesse

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