Financial advisor, writer, and TV personality Suze Orman has $25 million in liquid net worth, according to a recent New York Times report. Of this, she related that $1 million is in the stock market. The rest is apparently in zero-coupon municipal bonds, triple-A-rated and insured.
Financial advisor, writer, and TV personality Suze Orman has $25 million in liquid net worth, according to a recent New York Times report. Of this, she related that $1 million is invested in the stock market. The rest is apparently in zero-coupon municipal bonds, triple-A-rated and insured.
That's a very safe position. But will it yield the best return? Orman plans to receive a return of approximately 4% per year with a tax advantage bringing it up to 6% to 7% per year at best. If Orman does bring home 7% post-tax on $1 million over the next 20 years, and those with more diversified portfolios bring in a modest 8% post tax per year, what would that 1% difference mean, assuming management fees and turn over are the same? (See Chart A.)
Based on her approach, Orman will have nearly $3.9 million. The more diversified investor would have almost $4.7 million, a difference of $800,000 in the favor of diversification. Of course, this assumes that the past is some indication of the future.
If an $800,000 return to the diversified investor does not sound impressive enough, what would happen if Orman reinvested 80% of her entire liquid portfolio of $25 million? If Orman took $20 million and invested it in stocks rather than municipal bonds, she still would have $5 million in bonds for a rainy day. (See Chart B.)
At the end of 20 years at a 7% return, Orman would have more than $77 million. The diversified investor, on the other hand, would have $20 million growing at 8% over 20 years resulting in a return of $93 million. The difference in the diversified investor's favor is almost $16 million. Asset allocation is responsible for more than 90% of a portfolio's return, according to Modern Portfolio Theory proposed by Professors Markowitz, Miller, and Sharpe, winners of a 1990 Nobel Prize.
Asset allocation is the process of dividing a portfolio among major asset categories such as bonds, stocks, and cash. Its purpose is to reduce risk for a specified return by diversifying the portfolio. Although Orman may choose to invest against the principles of scientific financial wisdom, most physician-investors may want to pay attention to the men who won the Noble Prize. Otherwise, you could limit opportunities for putting money in your own pocket.
Dr. Mueller is a physician turned financial consultant and investment educator. She teaches others how to invest their own money using a Noble Prize-wining financial strategy. Her fee is hourly, not a percentage of assets. She welcomes comments at ShirleyMMueller@MyMoneyMD.com. For more information, visit her web site at MyMoneyMd.com.