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.