An easy way to invest your portfolio, part 2

Marketplace Staff Jan 5, 2007

KAI RYSSDAL: We took a bit of a breather last week for the holidays and we gave one of our most popular stories another spin. It was a report by Steve Tripoli about diversifying your portfolio. Dozens of you wrote to us wanting to know more about something called the lazy portfolio. So we decided to bring in somebody who knows a whole lot more about it. Jim Pinney is a financial planner with Pinney and Scofield. And Jim I’m guess the term lazy portfolio is a little misleading?

JIM PINNEY: It is actually. The method that’s in those really is discipline and structure. Most investors when they own mutual funds own what you would call a random collection of funds. They own them all for the reason, mainly because they think they’re going to do well. Usually that means that they’ve already done well, and that usually means that one of them is not going to do well and then the person is going to get unhappy. The lazy portfolio idea, at least the way I see it, is to have a defined percentage of your money in each of a set of asset classes. One half in the United States, one half abroad, one half large stocks, one half small stocks, one half growth stocks, one half value stocks. That would give you 12 and a half percent in each of eight. When the 12 and a half goes down to 10 you buy it back up to 12 and a half. When it goes to 15 you sell it down. Now you have a method. You can sit with that for the rest of your life.

RYSSDAL: It sounds like hard work, it doesn’t sound lazy to me at all.

PINNEY: It’s structured. You decide in advance what you’re going to do. You don’t allow yourself to be pushed around by your own opinions or anybody else’s opinions about what the market is going to do. You just sit still. Each of those stock slots should be filled up with an index fund. You should not use actively managed funds because you’re going to be putting money into what’s going less well.

RYSSDAL: We’re going to buy things that are falling?

PINNEY: That’s right. You sign up for a method here, you sign up for an approach. The approach is to be diversified. And that always means that something is going to do better than something else. And rather than being unhappy about that and taking the one that did not do well out and shooting it — and you don’t do that. You hold on to it under the idea that what goes up goes down and what goes down goes up. So if the U.S. does real well and the internationals don’t, you’re going to be moving some money out of the U.S. and into the internationals — into the stuff that’s not doing well. It’s very important.

RYSSDAL: Objectively though that’s a hard thing to do. It’s really tough to write that check to your brokerage buying something that’s falling.

PINNEY: Yes, it’s hard. If you knew which one of these asset classes was going to do the best from now until the end of your investment lifetime, you would put all your money in that. But you do not know. If you concede that you cannot know, then this is the best way to deal with that. You know there’s this idea, yeah you make money by buying low and selling high. That means you have to pull the trigger. That means you have to be willing to buy them when they’re low. That means how did they get low? Well they got low by going down. They didn’t get low by going up.

RYSSDAL: You’ll take this with the spirit with which it’s intended I hope, but this doesn’t sound real sexy. The real sexy stuff is oh you can beat Wall Street and invest here and get with this fund manager, you know?

PINNEY: Don’t, don’t think like that. It’s a sucker’s game. It’s a trick to part you from your money. With our method, with this method, the core of your portfolio you never disturb. And that means that you have made both a buy decision and a sell decision in advance. That’s all you have to do.

RYSSDAL: Jim Pinney, with the financial management firm of Pinney and Scofield in Cambridge, Massachusetts. Mr. Pinney, thanks a lot for your time.

PINNEY: Thank you.

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