What George Washington Can Teach You About Portfolio Diversification
by Carl Delfeld, Contributing Editor, Investment U
Friday, September 17, 2010: Issue #1347
When I lived in Washington DC, one of my favorite places to visit was George Washington’s Mount Vernon estate.
Washington was an avid student of the neoclassical architectural style and you can see his salute to balance and symmetry everywhere at Mount Vernon.
For starters, 32 equidistant poles surround the ellipse in the front courtyard, with a sundial placed at its exact center.
The uniformity continues inside the mansion… Take a look at the symmetry in the grand dining room. (Note to self: send them a painting for placement above the right chair!)
Even as the British were closing in, the General issued these specific instructions to his manager, written in 1776 from Harlem Heights: “The chimney of the new room should be exactly in the middle of it – the doors and everything else to be exactly answerable and uniform – in short, executed in a masterly manner.”
If only our approach to money management was so clear and precise.
But it turns out we can learn a thing or two from George Washington when it comes to investing and portfolio diversification.
Apply the “Washington Balance” to Your Global Portfolio
In today’s highly uncertain and volatile climate, do you have a balanced investment approach that marries capital preservation with growth?
For starters, consider one of the portfolios that I use as a building block for my private clients. As you can see, it’s divided equally into two main sections…
- “Safer” Investments: This includes 20% in long Treasuries, represented by the iShares Barclays 20+ Year Treasury Bonds (NYSE: TLT)… gold and silver, with 5% allocated to the SPDR Gold Shares (NYSE: GLD) and iShares Silver Trust (NYSE: SLV)… the Swiss franc, represented by its CurrencyShares Swiss Franc Trust ETF (NYSE: FXF)… plus 15% in cash investments.
- “Aggressive” Growth-Based Investments: The other 50% of the model portfolio is divided among strong equity positions and emerging markets. This includes 10% in the iShares S&P Global 100 Index (NYSE: IOO), an ETF that tracks the performance of 100 large-cap multi-national firms and 5% in the PowerShares International Dividend Achievers (NYSE: PID), which seeks to replicate the performance of U.S. and foreign stocks that have consistently raised their dividend payments to shareholders over the past five years.
The remainder is divvied up into more speculative emerging market equity positions – the broader WisdomTree Emerging Markets Small Cap Dividend Fund (NYSE: DGS) – and a more aggressive tilt towards specific markets like China, Germany and Singapore.
| Global Core | |
| Core Equity 100 S&P Global 100 10% PID Int'l Div Achievers 5% DGS Emerging Small Cap 5% |
Country/Sector Overweights GXF Nordic 10% JFC Jardine China 5% EWG Germany 5% EWY South Korea 5% EWS Singapore 5% |
| Commodity SLV Silver 5% GLD Gold 5% |
Fixed Income/Currency TLT 20 yr Treasury 20% FXF Swiss Franc 5% |
| Cash/Inverse Cash 15% SH EFZ EUM 0% |
|
Okay, so now that you’ve got a balanced portfolio, what else can you learn from George Washington?
Pick Your Battles… But Seize the Day
By nature, Washington had an aggressive personality. But he learned to temper it in the face of a formidable foe (the Brits), knowing that he possessed meager resources and an army that could be wiped out in the blink of an eye.
Instead, he practiced flexibility and patience. Rather than engage in a full-scale, direct confrontation with the British army, he settled on a “post-to-post” strategy. Using America’s vast terrain, the approach wore down his opponents and won some dramatic skirmishes.
The equivalent in the volatile investing world would be to pick your battles. Be mindful of risk and keep enough powder dry so you can seize great opportunities when they arise.
Diversification, Diversification, Diversification
Finally, one side of Washington that many miss was his enviable record as an entrepreneur and businessman.
Chafing under the yoke of his British buyers, Washington moved beyond dependency on tobacco and diversified into other crops like wheat, oats, corn and rye.
Yep, diversification is not a new concept! Washington knew how to cover his bases… and when it comes to your portfolio, you should, too.
He was also a pioneer in developing new crop rotation techniques. He invented a new wheat-threshing process, converted his grains into whiskey and pulled massive nets of shad from the Potomac, which he packed in barrels and sold throughout the world.
Unlike Thomas Jefferson, who was continuously mired in debt, George Washington ran a profitable enterprise where nothing went to waste. America was blessed to have such a capable and experienced man to lead its revolutionary army and launch its economy.
You can learn a lot from his approach when it comes to your investments. I like to call it the “Mount Vernon Strategy” – balance, patience and diversification.
Carl Delfeld
Any investment contains risk. Please see our disclaimer.
4 Responses to “What George Washington Can Teach You About Portfolio Diversification”
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Carl, enjoyed your writing about General Washington. Spent the day at Mt. Vernon recently. He is the greatest American. Providence guided his every move.
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Washington also had a back door, underground access /escape route to the river via a tunnel tied into the mansion basement. This was aptly portraid in the second National Treasure movie “Book of Secrets”, and shows Washington was well prepared, had “all the bases covered”,
leaving nothing to chance.
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Members of the Oxford Club will recognize Washington’s diversification strategy that manifests itself in their Asset Allocation Model.
Proper asset allocation, dividend reinvestment, annual rebalancing, tax and cost minimization, and trailing stops WILL make you a successful (and wealthy) investor.
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is equity investment still a good investment option with the global economic down turn, when are we going to witness another season of bullish market, alas the market is furstrating.
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