I sometimes watch Mack Wealthtrack on PBS (Fridays at 8 p.m.) because they interview interesting money managers. I am really looking forward to an upcoming interview with famed value investor (and native Canadian) David Dremen. A few weeks back, Ms. Mack interviewed authors Suze Orman and David Bach. I am not a big fan of Ms. Orman but I think Mr. Bach is all right. You cannot go too wrong telling people to “Spend less than you earn”, “Cut back on the daily latte” or “Pay yourself first” and god knows there are not enough people doing such things.
But soon enough, Mr. Bach was once again recommending his goofy asset allocation strategy (he suggested the same strategy in one of the ScotiaBank seminars last year):
It’s called the perfect pie approach. It is one third stocks, one third real estate, and one third guaranteed investments. Whatever you have to invest, your whole portfolio, your net worth, should be divided. One third real estate.
Lest you think that Mr. Bach is only suggesting a model portfolio and it should be tweaked for people with different circumstances, he is pretty clear that this strategy is for everyone: “What I’m about to share with you will work for a person who’s got $10,000,000 or person who’s got $100. Literally. It is a sophisticated plan, but it’s very very simple, okay?”.
So, let’s see how this will work for a 35 year old with $100,000 in net worth. She should make sure that she has exactly $33,000 in equity in her home, $33,000 in stocks and $33,000 in bonds. She will be paying 6% on her huge mortgage and at the same time earning 5% interest in her bond portfolio. Have you heard anything more ridiculous?
Mr. Bach does not stop there. He also has a suggestion for the stock portfolio: “And basically, with four ETFs, you can completely diversify your stock portfolio. It’s very very low cost.” The ETFs Mr. Bach is recommending are Diamonds (DIA), Spiders (SPY), Cubes (QQQQ) and the dividend ETF DVY. Can you spot the problem with the equity portfolio?
The transcript of the interview is available here.
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3 responses so far ↓
1 James // Jun 22, 2006 at 10:14 pm
Thanks, a good posting. I’ve been going over David Bach’s Smart Couples Finish Rich, and am finding it actually very useful.
So, whats the problem with his asset allocation and ETF reccomendations? They aren’t sensitive to ones individual investing needs?
Best,
James
2 Rick // Jun 22, 2006 at 10:29 pm
they are all US ETFs. no international exposure.
3 Eric // Jun 24, 2006 at 8:24 am
Thank you for bringing up the general malaise of the Investment industry in Canada. My 60 year old father recently visited Investors Group, whereby they tried to force him into a 60% fixed income strategy at age 60. The strategy earned a maximum of 5.5% annual return the past 3 years, even with a 40% stock allocation in the Canadian bull market of 2003-present. A simple spreadsheet suggesting that he will live to 90 due to his extremely good health suggests that by the time he is 90, he will die with $150k or less, which won’t be much in 25-30 years. There is no reward without risk, but a more logical strategy would earn 8% and leave him with over a $ 1 million dollars at his death.
None of the strategies today focus on the facts- clients live longer, prices are higher, and healthcare costs have and will go up. This means retirees need to invest with better investment allocations than their forefathers.
This among other reasons is why I no longer hold my investments at Investors Group, but have chosen full control of them via an independent Canadian firm. More should do the same.
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