A shares portfolio designed for anyone who is at risk of having an idiot grandson ruin their lifetime of hard work and investing.
Scott Pape, Australia’s Barefoot Investor, released his much anticipated Idiot Grandson Portfolio through his subscriber website The Barefoot Blueprint.
Whilst some critics are saying there’s nothing new in the portfolio and that Pape has run out of things to say, others are exclaiming his brilliance and thanking him profusely.
I can understand some of the criticism against Pape as Part 1 of The Idiot Grandson Portfolio was 18 pages of re-hashing previous information and contained nothing actionable for the investor. Part II is where the details of the plan are found.
Then, there was the change of the portfolio name from Idiot Grandson, to Permanent Portfolio, and back again due to fan backlash (both times) which would have irked some subscribers.
The aims of The Idiot Grandson Portfolio are:
- to provide a dividend income to fund Pape’s financial education and counselling activities (yep, he’s giving up his financial advisor licence to become a financial counsellor)
- provide a steady income
- be permanent and passed through down the generations
- be ‘set-and-forget’
Pape and his trusty sidekick ‘Mike’ reported they spent many hours filtering through all the Listed Invested Companies (LIC) and Exchange Traded Funds (ETF) currently listed on the Australian Stock Exchange (ASX).
They decided on index funds for their set-and-forget portfolio due to instant diversification. When you buy index fund shares you are buying a little bit of a lot of different companies in the index, or the list that makes up the best performing companies on the stock exchange.
For example, the Vanguard Australian Shares Index ETF, also known as VAS on the ASX has shares in:
|1||Commonwealth Bank of Australia|
|3||BHP Group Ltd.|
|4||Westpac Banking Corp.|
|5||Australia & New Zealand Banking Group Ltd.|
|6||National Australia Bank Ltd.|
|7||Woolworths Group Ltd.|
|9||Telstra Corp. Ltd.|
|10||Macquarie Group Ltd.|
So when you purchase one VAS unit, you are effectively buying a share in the companies listed above plus another 286 businesses.
Also, due to their low management fees, index funds are the preferred choice.
According to Pape’s research they counted 114 LIC/LITs and 201 ETFs, resulting in 315 managed funds in the ASX.
The First Cut
For the Idiot Grandson Portfolio, a process of elimination was used to narrow down the selection from 315 index funds down to just 3.
The First Cut removed any funds that had management fees higher than 0.40% p.a. If you are looking for the management fees on shares you already own they may be under a heading titled MER (management expense ratio) on the share company website.
By looking on the website for the Vanguard Australian Shares Index ETF (VAS) from earlier, you’ll find a management fee of 0.10%.
The example given in the 48 page portfolio plan shows an investment of $182,000 after 30 years with a management fee of 0.10% p.a. and having a projected $3,082,660 end balance.
In comparison, using the same scenario but with 1.25% p.a. in management fees, the end balance is a much lesser $2,188,751.
With this in mind, Pape culled 114 LICs down to just 10, and 201 ETFs to only 60. From the original 315, there were 70 left.
Whilst it was brutal, it was a clear cut culling which was easy to understand.
The Second Cut
The second cut from the remaining 70 starts to get complicated and is not fully explained for the novice investor. It mentions avoiding finance fads, synthetics and derivatives but gives no explanation of what these are and why they are undesirable.
If the purpose of educating investors during Pape’s final year as a financial advisor was a serious goal, then the concepts mentioned above would have been explained.
The Idiot Grandson Portfolio then goes on to cutting out all:
- High dividend paying funds
- Small company funds
- Equal weight funds
- All industrial funds
The reasons are given for each of these four types of funds and why they were cut, even if they had low management fees.
Although, I’m baffled why small company funds were excluded when they are specifically mentioned in the Barefoot Investor’s ‘Break Free Portfolio’ which is also a set-and-forget scenario.
In the Break Free Portfolio strategy plan, Pape recommends that 15% of your investment should be small company index funds. Yet, here with the Idiot Grandson Portfolio, small companies were given the chop.
Bonds and REITS (real estate investment trust) with a combined 30% in holdings from the Break Free set-and-forget portfolio were also nowhere to be seen.
For the record:
Investing fads are current popular trends that relate to investments. Investing fads are normally characterized by a temporary excessive enthusiasm for a certain investing style, which is usually unsustainable in the long term: Investopedia
A synthetic is the the artificial creation of an asset using combinations of other assets: InvestorWords
Generally belonging to the realm of advanced investing, derivatives are secondary securities whose value is solely based (derived) on the value of the primary security that they are linked to. In and of itself a derivative is worthless: Investopedia
After the Second Cut, The Idiot Grandson Portfolio was left with 6 LICs and 13 ETFs.
The Third Cut
The First Cut was straight forward and easy to follow along with.
The Second Cut started to get hazy with the details and would be difficult for the everyday investor to fully understand.
Then it states for the Third Cut that ‘management must be aligned with our interests’. When I saw that sub-heading, I wondered where it was going and how Pape was going to expand on ‘aligned with our interests’.
Pape openly declares he made a judgement call to choose only not-for-profit funds, reasoning that all profits go back into improving the product (and not feeding a fat cat manager) which will theoretically lower the costs to the investors.
From the original 315 index funds, 5 LICs and 5 ETFs remained.
The portfolio was then divided into Australian and International shares.
The Final Ten
I find it interesting that Pape and Mike disagree about the final portfolio.
To create a dividend income, Mike believes the entire portfolio should be made up entirely of Australian shares.
On the other hand, Pape wanted to include international shares (with a focus on capital gain rather than dividends) in the portfolio in case his hypothetical idiot grandson decides to sell some future Australian shares to buy international shares.
I must admit I’m not convinced by Pape’s storytelling here, especially as it’s not grounded in fact.
As the Barefoot Investor is Pape’s creation, it’s no surprise that Pape’s opinion influenced the final portfolio allocation (I’d like to know what Mike really thought of Pape’s portfolio plan):
- 75% Australian
- 15% the world, except the USA
- 10% the USA
There were 10 finalists, which were narrowed down to 3.
Although, the portfolio plan stated there was minimal difference between the 10 funds and it came down to personal preference.
For this reason, it’s more useful to know the 10 finalists, rather than the 3 place getters.
The top 6 Australian index funds, as according to the Barefoot Investor:
- AFI: Australian Foundation Investment Company
- ARG: Argo Investments
- AUI: Australian United Investment Company
- DUI: Diversified United Investment Company
- MLT: Milton Corporation
- VAS: Vanguard Australian Share Fund ETF
And the top 4 international index funds:
- VEU: Vanguard All-World ex US Shares Index ETF
- VGAD: Vanguard MSCI Index International Shares (Hedged) ETF
- VGS: Vanguard MSCI Index International Shares ETF
- VTS: Vanguard US Total Market Shares Index ETF
Epilogue for an Idiot Grandson
If Pape’s idiot grandson thought he was going to inherit millions, he’d be in for a shock.
The end of the portfolio has an epilogue in the form of a letter ‘Grandpa Pape’ has written to his grandson.
In it the poor bereaved grandson finds out that he has inherited ‘zero’ dollars and has now become responsible for overseeing the portfolio created purely to fund Pape’s financial education and counselling work.
Is that the kind of grandparent you’d strive to be? Leave nothing for your grandchild?
It’s great to help others, but shouldn’t you also support your family.