The Coffeehouse Investor's worry-free financial portfolio

Oct 11, 2011

Ever since the 2008 financial meltdown, a lot of us have been losing sleep over our investments and 401(k) plans. But a financial adviser in Kirkland has a simple approach to reducing the stress.

On this week’s Money Matters, KPLU’s Dave Meyer talks to Bill Schultheis, author of The New Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life.

Unless you're a Warren Buffet, Bill says trying to outperform the stock market is a waste of time:

"By trying to beat the stock market average, it’s easy to forget that the stock market has historically provided an excellent investment return, and by trying to beat an already good thing, investors are virtually guaranteed to end up below it."

There are three basic Coffeehouse principles:

Develop a long term financial plan

Set up a savings plan and stick to it. Determine how much you can invest each month. Set up automatic deposits so you won't be tempted to spend the money instead. Take advantage of the tax sheltering offered by 401(k) plans and IRAs.

Diversify across different asset classes

Split your money among stocks, bonds and real estate. One example: 50 percent in stocks, 40 percent in bonds, and 10 percent in real estate. Younger investors can afford more risk and should put more money into stocks than bonds. One method is to invest your age in bonds; a 60-year-old would put 60 precent into bonds while a 30-year-old would only have 30 percent in bonds.

Capture the entire return of each asset class

Index funds are the key. Equally divide your stock money among large cap, small cap, large value, small value, and international stock index funds. The bond portion of the portfolio can go into an intermediate bond index fund. For real estate, invest in a REIT (real estate investment trust) index.

Does it work?

Annualized returns for the example portfolio pictured above amount to 9.10 percent for the past 19 years. During that time, there were only 3 years when the portfolio showed a loss. The worst year, as you'd expect, was during the meltdown in 2008 when the portfolio dropped 20.21 percent. But it gained 20.26 percent in 2009 and 14.68 percent in 2010. Full details are available at the Coffeehouse Investor website.

You can find a model Coffeehouse Investor portfolio, complete with specific fund recommendations, in the Lazy Portfolio section at Annualized returns of that portfolio for the past 10 years were 5.5 percent, compared to 2.74 percent for the S&P 500.

Money Matters” is a KPLU feature covering the economy, investments and more. The feature is published here and airs on KPLU 88.5 during Morning Edition and All Things Considered on the second and third Tuesdays of the month. It also airs on Weekend Saturday Edition.