Imagine my surprise over the weekend when I discovered President Obama’s portfolio holdings. Although I’m crafty, I didn’t sneak into the West Wing; the President is required to file tax returns and investment documentation. Most investment strategies show up on these forms.
The biggest surprise?
The President can pick fights with Wall Street because he largely doesn’t rely on them for investment returns. Less than 10% of his portfolio is in equity investments, far less than is recommended for most people his age.
After fighting in the trenches as a financial advisor for well over a decade, I can see the method behind his madness. Don’t try to invest like he does. It probably won’t improve your retirement.
Let’s review:
The President’s Portfolio
– Around $500k in cash
– Between $50k and $100k in Vanguard S&P 500 Fund
– Over $1M in Treasury Bills and Notes
– 529 College Savings Plans
Here are the top five take aways:
1) His version of “safety” and yours probably aren’t the same. The President’s massive investment in Treasury Bills suggests that he’s looking to preserve capital, not grow his nest egg. Treasuries are among the lowest risk/lowest reward investments available.
Why he’s different than you:
You probably can’t afford to keep such a large percentage of your portfolio in low-earning investments. A President stands to make millions in the future on book deals, speaking engagements and consulting. His future investment plan can easily include some HUGE assumptions for future cash infusions.
If you’ve calculated your personal returns based on future income, are you sure that your numbers are realistic? I often see plans showing individuals working well into their 70s. Even if you’re healthy enough to work that late in life, do you want to include it in your plan? My clients working in their 70s largely did so because they enjoyed it, not because they needed some benjamins to pay the electric bill.
2) You can tweak your returns without adding much risk. He helps his anemic rate of return by moving some of his huge government bond exposure to Treasury Notes. The difference between treasury bill and treasury note gives him an extra 0.5% in this climate because of the longer duration.
How this applies to you:
For you and I, an extra 0.5% doesn’t help, but we can take similar steps. I wrote this spring about how adding high yield bonds can boost returns while not appreciably increasing risk. Look for investments where the perceived risk is higher than the actual risk and find greater returns. (I’d also put GNMA bonds in this category. They garner a much higher return than Treasuries and the actual risk, while greater than Treasuries, isn’t appreciably higher for the average investor).
3) Watch your fees. The President bets on the US economy by investing in the S&P 500. Instead of relying on investment managers for a return, he uses the Vanguard S&P 500 Index mutual fund.
Here’s a better method than the President uses:
In some cases, an exchange traded fund can lower fees even further. The iShares ETF version of the S&P 500, IVV, features an incredibly low 0.09% cost ratio, while the Vanguard fund the President uses has a still-low internal expense of 0.17%. The only difference? You’ll probably pay trading costs to buy the iShares ETF, while the Vanguard fund is free to purchase in most brokerage accounts. If you’re buying over only a few trades and plan to hold the fund for a long period of time, IVV might be a more cost-effective option.
4) He keeps a large cash reserve. $500k in cash is clearly too large for the average person, but that would be nice, wouldn’t it? Conservative investors should keep enough money to endure a long layoff in money market accounts.
Check out Don’t Be the Emperor With No Emergency Fund for more details on why this is important.
5) Invest in what you know. The President is betting big on future income streams, not on investment returns. As it sits, his portfolio isn’t huge for a man of his office, but I’m sure he knows that it will be in the future. Speaking engagements, consulting and book deals should allow him access to plenty of money without risking his investments in the stock, real estate, or commodities markets.
An example that might be closer to home:
I had clients once who herded cattle. They earned a 10% return year-over-year on their herd, without a ton of variation. We kept that the centerpiece of their portfolio, while creating a diverse mix of other investments to round out their returns. They were surprised I wanted them to continue buying cows. “Investment advisors want you to only use stocks,” Bryan said. I agreed with him. “I’m a fee-based advisor. You paid me money to give you the right direction. I don’t need to make money on convincing you to invest through my firm. If I were you, I’d stick with cattle because it earns a great return and it’s what you know.”
My last takeaway (and I won’t number this one):
The President appears to need a good investment advisor. He either isn’t comfortable with a suitably well-rounded portfolio or just doesn’t have the time. Either way, he’s lost considerable money to either not being educated in investments or to being too busy to care. The right advisor can help him boost returns, tweak his tax strategy and still focus on his “day job” so he doesn’t feel like a Wall Street trader. Investment advisors aren’t for everyone, but in this case, I think it’s warranted and a great idea.
Mr. President, although I’m no longer practicing, I’m ready if you need help. I’m sure the Secret Service can figure out my phone number.
That’s my story, now it’s your turn: What investments could you improve in your portfolio?
I see what you’re saying, but it’s likely he doesn’t care about money much at this point. The job comes with lifetime pension and health care for his family. As long as he avoids losing a lot of money doing something dumb, he will never want for anything meaningful. His retirement is about as secure as anyone’s can be even ignoring the hefty speaking fees ex-presidents can command.
Were I in his position, I would essentially ignore money too. Yes, it could be used for charity. But the bully pulpit he commands is far more valuable from a charity perspective (witness Carter) than any funds he might give away.
Hopefully, W., that’s my point. People shouldn’t look at his investments and duplicate them. He has many other roads to wealth while the average …er…. Joe, doesn’t.
I am pretty happy with my investments. My retirement is in VFIFX and my car replacement fund (which I think is becoming a pay my girlfriends student loans down after we get married fund) is in VBIAX. Both have low fees and decent returns I think!
If I was running for President I’d do something similar – shift my investments away from everything with even the slightest sniff of controversy in order to appear squeaky clean. Look at the insane vetting of Mitt Romney’s assets… I mean, I look at my ‘Swiss Account’ (UBS) and I wonder if I’m still qualified to be President?
Also, you missed the President’s house in Chicago and the land he bought. He was underwater for a while on the house, but I’m pretty sure he’s back in the black on that investment. The land is, of course, the infamous ‘Rezko plot‘. He definitely has equity on that plot!
Uncle Joe,
I agree seems like an odd mix that doesn’t show a lot of confidence in the economy.
Did he and Michelle file jointly? Would he have other investments that wouldn’t be reflected on his personal income tax? Like shares of LLC or a holding company?
The President likely has that sort of portfolio to avoid scrutiny from the public. Think about it – he gets criticized for almost anything he does. If he had a lot of money invested in Wall Street or corporations, he may be criticized. Not worth the political risk.
I also like your point about his future cash flows. He’s going to make a LOT of money in the future, almost guaranteed. He could easily make $1M+ a year in speaking fees once he is done being President.
I agree. The scrutiny he faces is miniscule compared to that Mr. Romney is facing.
I understand that Suze Orman’s portfolio is similar. She can also afford to preserve capital.
I agree with the previous comments that he’s probably trying to avoid any hint of doing something shady. You’re right in that he’ll probably be able to make a nice chunk of money once he leaves Office. Great point on investing in what you know…too many people don’t heed that advice and end up on the losing end of investments as a result.
Interesting analysis of Obama’s investment profile. He is definitely an extremely unique case, both in how he is more setup to keep his money secure and in how he has to take public scrutiny into account. I’d be really interested to see what his portfolio looked like in the years before he decided to run for president. I’m sure he was getting a much better return on his money back then. Then once he’s out of office he’ll likely tweak things a lot again.
As for my own investments, I really need to get around to learning more about investing and finally move my money out of mutual funds. I’ve got a basic plan in mind. It’s just a matter of finding the time to do the proper research. I guess me and Obama are both just too busy 🙂
It would be really interesting to know how much the president makes (all income combined) after his presidency term(s). Is there any way of finding this out for previous presidents? I recon’ probably not?
While in office a president has no control over or access to his money from his “private” life. It is put into a trust & is invested conservatively for them until they leave office. While in office they only have access to the “salary” that a president is paid.
Correct, 1st Mil. The vast majority of these funds (and their placement) are from before he was in office. He had a fairly modest portfolio until his book deal. It appears nearly all the book money was invested in treasuries.
As 1st Mil, mentioned, he doesn’t have much options to invest his money–it’s a way to avoid conflict of interest. Using Vanguard index fund ( investing less than 10%) and US Treasuries is pretty conservative.
Like you said Average Joe, the average person shouldn’t duplicate this approach. One could even consider a company that pays a high yield versus the US Treasury…well, personal finance is personal!
I kind of like that he’s not invested in Wall Street — but maybe that’s just me. I wonder if he’s keeping his hands out of stocks because of conflict of interest issues?
The guy will likely never have a hard time feeding his family, so yeah, I agree, we shouldn’t emulate him. Unless we can charge a zillion dollars for speaking engagements! That should be our next step. 🙂
I’m building my new media kit. It’ll include a zillion dollar fee. I’m sure a bazillion people will go for it! 😉
Maybe he isn’t concerned with how much he makes considering he’ll be getting a $200k/year+ pension. He’d rather be safe than sorry I guess?
Maybe he knows something that we all don’t know! Yes, it does seem like a strange mix of things that he has going on there.
That would be a scary portfolio for most Americans; however, given his status/profile, I’m not concerned in the slightest. If most people had this portfolio, they would be risking financial security for an appearance of security (cash).
I haven’t heard of any former Presidents living on the street after their term was up, so I think he’ll be OK. I think after he’s done in politics he and Bill Clinton should open up a restaurant that serves chili dogs of something similar. They’d make bank.
You are right, I have no expectation to earn millions in the future I invest for growth so I will have sufficient funds to last me in my retirement.
I liked this glimpse into Obama’s investments. Fascinating!!!! I’m surprised he doesn’t have more equities. Maybe he worries about conflict of interest???? What are the 529s investing in? Probably fixed investments.
Comparing Obama’s and Ron Paul’s investment portfolio might make for an interesting post.
Yes, this is his portfolio from before he was President- you know, from when he was a US Senator considering running for President. I agree with Frugal Portland that I would think this is a strategy for avoiding any conflict of interest (or the appearance thereof) when he advocates for any changes in laws and regulations around Wall Street. It’s the reason that Presidents don’t get to manage their own money- no insider trading based on knowing that a new regulation is about to hit industry X or that the FDA is reviewing Patent Y to see if it will be renewed for another 10 years, etc.
At the same time, investing in Treasury Notes and Bonds, shows that he is willing to invest his money in this country. He’s been in a job that guarantees him a pension and lifetime health benefits for a long time. I think his investment strategy isn’t so much about maximizing returns from the money, but maximizing his current opportunities for future returns (you get more money for your book deal as a retired President than Senator) etc.
So in that sense, I think his investment strategy might be exactly right for him, and that we should all invest like him, in that, we should find the strategy that is exactly right for us.