Two Year Performance Review

It's been two years since I purchased my first stock as a value investor, so I figured that it's time for a performance review. Don't put too much weight into this review, as I feel that it doesn't mean much until I've been investing at least 5 years. Although, if you really want to send me your money, you can leave a comment with your contact information and I'll let you know where to mail the check.

Below are the annualized returns that I've made since April 21, 2005:

• 24.6% annual return excluding stock purchases made within the last 6 months
• 23.2% annual return for Harley-Davidson (first stock purchased as a value investor)
• 33.0% annual return including purchases made within the last 6 months (not very meaningful given the short time that I've held recent stock purchases)
  

My goal has been to earn a 15% return, so I'm extremely pleased with these results. Especially considering in two years I've only purchased 7 stocks; of which I purchased 3 stocks within the last month. (The recent activity is due to a 401k rollover that I now control versus only being able to invest in a limited number of mutual funds or company stock.)

I haven't had to spend all of my time day trading, and I haven't lost any sleep at night worrying over my portfolio. Value investing is definitely the style of investing that suits my time (limited) and risk level (even more limited). Don't get me wrong, value investing takes time to research annual reports and other material and there is always risk associated with investing; however, I find that it makes the most sense and the most cents for me.

Portfolio Mix -- Stocks, Bonds, or Index Funds?

There are quite a few different approaches to investing. One of the first things to do when investing in my opinion is to determine your strategy and then stick with that strategy. Personally, I have decided to invest for the long-term as a buy and hold value investor.

Previously, I worked for a large company that provided a 401k with 10-15 mutual funds to choose from (and company stock). Because of this, I used the 401k as a vehicle to match the market and invested in the lowest cost, index funds available. To beat the market, I invested in individual stocks via my taxable investing account or a Roth IRA.

Now I work at a small company where we offer a SIMPLE IRA for our tax-deferred retirement vehicle. This provides the entire investing universe at my finger tips, which raises the question--What portion of my portfolio should be invested in stocks, bonds, or index funds?

Reading Christopher H. Browne's The Little Book of Value Investing makes me question if having a significant portion of my portfolio (15-30%) in bonds or index funds is really the best answer. Mr. Browne states that:

"If you don't need to tap into your nest egg to live, you can afford to take the high octane approach to investing. You can ride out any bumps along the way as you try to maximize your long-term returns. However, if your time horizon is shorter and you draw money from your nest egg to live, a bit more prudence is required. I like to think of an investment portfolio as a college endowment....Individuals should structure their financial affairs in a similar way. Spend an amount you think is less than the long-term returns you think you can earn on your portfolio. Five percent is not a bad place to start. If your portfolio can grow at 10 percent, you can increase the amount you spend at the same rate as inflation. However, stock portfolios are not passbook savings accounts. Your returns will fluctuate from year to year. For this reason, I like to keep three years of spending in short-term bonds to smooth out any down years in the portfolio."

To me this is quite an eye opener and very different from other advice that I have read, especially in regards to portfolio mix as you near retirement. Dave Ramsey in The Total Money Makeover recommends that "a fully funded emergency fund covers three to six months of expenses." Combining Mr. Browne and Mr. Ramsey's thoughts has led me to ponder a portfolio mix where all of your holdings are in high-quality, value stocks with the following savings:

• Base Savings/Emergency Fund: Up to age 30, maintain 6 months worth of expenses in a high-yield savings account, such as E*Trade's Complete Savings account currently yielding 5.05%.
• Savings Option 1: For every year above age 30, increase your savings by 1 month worth of expenses. By age 60, you would have increased your savings to cover 3 full years of expenses.
• Savings Option 2: Every 5 years above age 30, pull 5 months worth of expenses out of your investment portfolio to transfer into a savings account. This would keep more of your money in your stock investments for a longer period.

In both option 1 and 2, you could use short-term bonds or CDs instead of a savings account. However, I would recommend that the emergency fund be held in a savings account for liquidity.

What to do with Cash in Investment Accounts

Having consolidated my investment accounts into E*Trade, I now need to decide what to do with cash in these accounts. For my taxable brokerage account, one option is to transfer the cash into an E*Trade savings accounts that currently pays 5.05%. However, that option is not available for retirement accounts, such as SIMPLE IRA and Roth IRA accounts. I could simply leave the cash in one of the E*Trade sweep accounts, but they only have any APY of up to 0.40% for accounts with a balance of less than $25,000 (E*Trade Uninvested Cash Rates).

Another option is to find a mutual fund for parking cash in the short-term that has low expenses and a low initial investment. To find such mutual funds, I used E*Trade fund screener to search for the following:

• No transaction fee (NTF) funds
• Expense ratios of <= 0.50%
• Minimum initial investment < $250 (for IRAs)

This screen generated the following options for investing cash, short-term. Notice that the last entry is an S&P 500 index, which could be good for long-term investing.

Fund Name	Symbol	Exp Ratio	IRA Min	1/5/10yr Ave Ann Return
American Century CA LG-TERM T/F INV	BCLTX	0.49%	$0	4.25% / 3.96% / 4.83%
American Century CA Tax-Free Bond	BCITX	0.49%	$0	4.99% / 4.72% / 5.44%
American Century Tax-Free Bond Inv	TXTIX	0.49%	$0	4.14% / 3.80% / 4.69%
American Century AZ Municipal BD Inv	BEAMX	0.49%	$0	4.25% / 3.96% / 4.83%
American Century Tax-Free Bond Inv	TWTIX	0.49%	$0	4.20% / 4.06% / 5.00%
AMF Intermediate Mortgage	ASCPX	0.48%	$0	5.89% / 3.21% / 4.99%
AMF U.S. Government Mortgage	ASMTX	0.48%	$0	5.88% / 3.94% / 5.45%
AMF Ultra Short Mortgage	ASARX	0.46%	$0	5.06% / 2.72% / 4.22%
Columbia U.S. Treasury Index Z	IUTIX	0.36%	$0	4.54% / 4.21% / 5.72%
PIA Short Term Govt Secs	PIASX	0.35%	$0	4.74% / 2.61% / 4.38%
SSGA S&P 500 Index	SVSPX	0.18%	$0	11.74% / 6.62% / 7.46%