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Your Questions Answered

March 2, 2009 – Because we get so many questions each week from Coffeehouse Investors, it is difficult to answer them all. Below are a few general questions that I feel will help the rest of you with your investment goals. Thanks for all your support and keep on writing!

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 Hi Bill, I have followed you for a long time. I am 60 and am watching my portfolio shrink and shrink. Yes I know we are beating the S&P but at what point do I panic and say sell just to preserve my status quo? If this goes on and on I will be working till I am 90.

First, do you have a financial plan to determine whether you are exposing yourself to too much risk? For someone your age, it is likely your portfolio should have a healthy dose of fixed income investments.

Unless you feel we are headed for a global financial meltdown of immense proportions, there is a good chance that common stock prices will be higher, maybe substantially so, three to five years from now, and so the dollars you allocate to equities, in my opinion, is a risk worth taking.

Given the situation with the U.S. dollar, how concerned are you about rampant inflation and the devaluation of the dollar? Anything a savvy, cost-conscious investor can do to prepare for that?

There is a good chance that we will have inflation but the future is always uncertain as we have seen demonstrated time and time again. TIPS (treasury inflation-protected securities) funds may be something you should explore as they will help hedge the effects of inflation.

You should also review your portfolio to make sure it is well diversified, spanning various asset classes to further reduce the impact of the market and economic volatility.

Bill, I’ve subscribed to the Coffeehouse Rules with much success. However, I am wondering if you would expect to increase the amount of exposure to international equities above 10%. Also, many “international” index funds only target developed markets and leave out new economies like India, Brazil and China. What to do?

-James

The 60/40 Coffeehouse Investor portfolio highlighted on this web site, consisting of a 10% allocation to large cap, large value, small, small value, international, and REITS, and a 40% allocation to bonds, is just one example of a Coffeehouse-type portfolio – not a hard and fast allocation rule.

For diversification purposes, it might make sense to increase your international allocation, either by increasing your current holdings or adding emerging markets to your mix.

Because of lack of re balancing in our portfolio I feel we lost more than we should have in last few months. Our portfolio is down by 15% since last October. And the annual return net of all expenses is 7.5% over the last 4 years. I am not sure if this is a good performance for a 25% bond and 75% equity portfolio? Am I demanding too much and unreasonable wanting to change? That is my real question that is that performance good in your eyes looking back to last 4 years. Is the 15% down reasonable in this market?

-Ozhang, PA

The benefit of creating a financial plan is that it allows one to (approximately) determine the level of risk needed to reach long term financial goals. Do you have a financial plan in place? Do you revisit and update it yearly? If not, why not? That is the most important component to building long term wealth.

In response to whether or not your performance is “good”, if you are invested in index funds with your equity portfolio, that question is irrelevant. It is what it is. It allows you to stay the course in both good and bad markets.

Should I take my SS retirement benefits – or those of my ex-spouse – now? (I’m 65 plus 10 mo.) I plan to continue working 2 more years.

-Hale, NY

There are many factors that go in to this decision, but generally, if you are in fairly good health, and don’t need the income from your Social Security, it would probably make sense to delay it as long as possible.

Hope this helps.