The best way to add yield to a portfolio is to ignore it. Here's why

The best way to add yield to a portfolio is to ignore it. Here’s why

Most people don’t factor in the time spent trying to beat a basic portfolio allocation

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Many investors dream of passive income. They picture themselves on the beach sipping a pina colada and enjoying the income of their portfolio rolling in. (But let’s be honest, the Hans Gruber yield days are long gone…) What would you do to achieve an extra 1% or 2% a year, and consequently, an extra $10,000 or $20,000 on your portfolio?

I know what the investment management industry would spend. Billions of dollars and a gazillion man hours of time trying to add just a smidgen of yield. David Swensen’s old book Pioneering Portfolio Management depicts the spread of top quartile versus median returns for active managers across a handful of asset classes and strategies. If you’re a stock manager you are top quartile if you add just 0.9% percentage points. In bonds, it’s 0.3 percentage points. (Granted this argument also applies to the reality that it makes more sense to be active where active helps, i.e. private equity, small/foreign, absolute return, and real estate.)

So, if I could tell you there is a way to add not just a little yield, but five or even ten percentage points to your annual returns? You’d be interested right?

Well, here’s my advice.

Do nothing. Actually, don’t just do nothing, stop doing what you were doing before. Let me explain.

I think it is a great endeavour for investors to spend time learning about investing and the history of markets. Bill Bernstein and I talked about this at length on my podcast. Having realistic expectations, and knowing how markets have performed in the past, will keep you from doing really stupid things in the future. Well, hopefully at least.

Lots of people study markets in the hopes of beating the market. What a lot of people don’t factor into their equation is the time spent to achieve that goal.

So, instead of figuring out how much extra juice we can squeeze out of that portfolio, let’s flip the equation around.

How much alpha do you have to generate to break even on the time spent to achieve it?

Below, we take a look at a handful of scenarios for investors making between $50,000 to $500,000 per year, with portfolios ranging from $100,000 to $10,000,000. We examine an investor who spends eight hours a week studying markets in hopes of beating a basic portfolio allocation.  We chose eight hours based on responses to a poll of mine with over 500 votes on Twitter

In nearly every case, it is a more realistic scenario to spend zero hours on investing, and simply work a few more hours and achieve a much higher yield on your entire portfolio.

Only once you achieve family office levels of wealth does it make sense to be spending any time on your portfolio. The best way to add yield to a portfolio is to ignore it!

This is one reason we are such strong advocates of the new digital advisors … not only do they automate the entire process, but they are low-cost, tax-efficient, and in many cases, commission free. And from someone who has automated his own process, as well as running it for over 400 clients, I cannot fathom ever going back.

So, the simple advice is this: Implement a low-cost, tax-efficient, rules-based portfolio. Pay low or no commissions. Automate it if you can. Invest in yourself. And then move on and order up that pina colada…

BTW, the final column is extra returns in percentage points needed to break even…

A $100,000 portfolio


Salary Portfolio Time value/hour Portfolio return Portfolio return $ 8 hours of research - Per Week Cost Total Return to Break Even Extra Returns needed to break even
$50,000 $100,000 $25 6% $6,000 $10,000 16% 10%
$100,000 $100,000 $50 6% $6,000 $20,000 26% 20%
$200,000 $100,000 $100 6% $6,000 $40,000 46% 40%
$500,000 $100,000 $200 6% $6,000 $100,000 106% 100%

A $500,000 portfolio


Salary Portfolio Time value/hour Portfolio return Portfolio return $ 8 hours of research - Per Week Cost Total Return to Break Even Extra Returns needed to break even
$50,000 $500,000 $25 6% $30,000 $10,000 8% 2%
$100,000 $500,000 $50 6% $30,000 $20,000 10% 4%
$200,000 $500,000 $100 6% $30,000 $40,000 14% 8%
$500,000 $500,000 $250 6% $30,000 $100,000 26% 20%

A $1 million portfolio


Salary Portfolio Time value/hour Portfolio return Portfolio return $ 8 hours of research - Per Week Cost Total Return to Break Even Extra Returns needed to break even
$50,000 $1M $25 6% $60,000 $10,000 7% 1%
$100,000 $1M $50 6% $60,000 $20,000 8% 2%
$200,000 $1M $100 6% $60,000 $40,000 10% 4%
$500,000 $1M $250 6% $60,000 $100,000 16% 10%

A $10 million portfolio


Salary Portfolio Time value/hour Portfolio return Portfolio return $ 8 hours of research - Per Week Cost Total Return to Break Even Extra Returns needed to break even
$50,000 $10M $25 6% $600,000 $10,000 6.10% 0.10%
$100,000 $10M $50 6% $600,000 $20,000 6.20% 0.20%
$200,000 $10M $100 6% $600,000 $40,000 6.40% 0.40%
$500,000 $10M $250 6% $600,000 $100,000 7% 1.00%

Meb Faber is co-founder and Chief Investment Officer of Cambria Investment Management L.P. He’s also the author of several books, including The Best Investment Writing Vol. I and II, both available at Amazon.

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