Concept

Jonathan Clements has an article in the Journal today (subscription required) that caught my eye. He explores the idea of having 80% of you portfolio in low cost index funds and going for it with the other 20% of your portfolio.

This is not new, you know it as core and explore and the article says this but it might be worth thinking about here.

Mr. Clements does not believe that people can beat the market so they should not try. I view this differently. I don't think in terms of can you or can't you beat the market but more along the lines of do you need to beat the market?

Diligent savers, as a function of numbers not ego, may not need to beat the market. To that end, being close (either way) on a consistent basis is enough. If averaging 8% per year, with your current savings rate, gets you to where you need to be, why take the risks associated with trying to get 20% per year?

This line of thought is not right for everyone. I do believe in trying to add value with active management (that is my job after all).Adding value can be done in a couple of ways. For most of my clients this means staying relatively close to the market's return but having less exposure to the market and less risk than the market.

For example an investor that made 5% last year (vs. the S+P 500 4.8% total return) with only 70% in stocks and the beta of that 70% below 1.00, took less risk than the market. This is not a bad way to go. I fully acknowledge that a lot of people want to try for 15%-20% per year, but there are many ways to skin a cat.

Many of the products I have been writing about tie into creating many different themes in a portfolio without taking excess risk. The types of investment listed in the graphic above are becoming more mainstream with new products. They allow do-it-yourselfers to have much more sophisticated and balanced portfolios.