Invest like the guy who signs our money

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Jack Lew, as Treasury Secretary, signs our dollar bills. In my mind that gives him some credibility in the field of investing. Based on a recent Bloomberg article that described his own personal investments, I give him fairly high marks on his approach. Here’s what we know.

Government disclosure documents show that part of Lew’s assets are held in five large and well known index ETFs, those that track the Dow Jones Industrial Average, the S&P 500, the Nasdaq 100, the Russell 2000 and the S&P Midcap 400.

What we like about these holdings is that they are all low expense ETFs, meaning only a very small fraction of his investment is spent on management fees. Keeping expenses low is a key determinant of performance, so he’s on the right track there. And by tracking published indexes we know these funds will not get sabotaged by bad stock selections, mistiming of the market, or other gaffes that active fund managers may make.

faux diversification

If we have concerns about these holdings (with the caveat that he owns other securities in another account that is not disclosed in detail), it is that they are all US stocks. We’re happy that the Treasury Secretary shares our faith in the US economy, but we’d advise any investor to diversify with international holdings, both developed economies and emerging markets. Spreading eggs across these other asset baskets is a fundamental step in portfolio management.

What we see in Lew’s portfolio is not unusual. We call it faux diversification. Holding several funds, each with dozens or hundreds of stocks, may feel like prudent diversification, but it is like having a closet full of identical white shirts. The Dow, the S&P and the Nasdaq 100 are not only all domestic funds, they’re all full of very large companies that largely move in the same direction at the same time.  They may be slightly different, but couldn’t be called diverse.

For most investors, we’d advise to spread assets not just to foreign stocks, but to other asset classes that may respond differently to political and economic news, such as holdings in smaller companies, bonds, real estate and gold.

Passing grade

Mr. Lew got low marks for his signature when he was confirmed as Treasury Secretary (he now signs in something much closer to human writing).

Jack Lew's old signature
We give him a better grade on investing, maybe a low B, thanks to his use of index ETFs, but of course there’s always room for improvement.

Lew can be added to a growing list of prominent names that hold indexes in their own portfolios or advocate them for individual investors: Warren Buffett, David Swensen, Peter Lynch, and Charles Schwab.

 


 

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