From Barron's 07/10/2006:

One for the Money

by BEN STEIN

ENVY PLAYS A BIG PART IN MY LIFE -- OR AT least it used to. When I was a child, I mostly envied rock singers and, especially, rockabilly singers. They looked so cool up there on stage, with their twangy guitars and d.a. haircuts, and they drove lowered Mercury cars. Some performers, like Jerry Lee Lewis or Elvis, were both rock and rockabilly stars. All of the great-looking girls screamed for them. They had fabulous Southern accents.

Now, the kind of guys I used to envy -- I don't envy anyone anymore because I have given up that vice -- run successful hedge funds. For performance that often barely beats -- if that -- high-performing no-load mutual funds, S&P indexes and other benchmarks, they get paid "two and twenty" and walk away with yachts, helicopters, custom-made saddles for their horses and custom-made suits.

Now, probably the single smartest financial aphorism I have ever heard comes from a brilliant financial manager named Ray Lucia. Ray happens to be both a financial whiz and a rock singer. His advice is straightforward: Humans have to match assets and liabilities. For most of us, our prime liability is funding our retirement. Ray works on doing that for his clients and does it well. But I don't think even he can save me from my lavish lifestyle. So, because I want to be able to fund my retirement, and since the rockabilly thing didn't work out, I thought of becoming a hedge-fund manager.

THE PROBLEM IS THAT I AM FAR TOO TIMID to handle anyone's money but mine. If I had a bad month and a widow called me in tears, I would probably leave the country or jump off a tall building. So, I won't be a hedge-fund manager. But if I did become one, or if I tried a very closely related daredevil act and started a mutual fund, I have an idea of what I would do.

It's incredibly simple and borrows from Bernie Cornfeld's idea of a fund of funds, except that it would be legitimate and its expenses (even after I took a cut for my services and for my dogs' needs) would be extremely low. The idea, which I am working on with my pal financial manager Phil DeMuth and with Ray ( neither of whom pays me), is a mutual fund made up of exchange-traded funds and index funds. The index funds would focus on the investment sectors that we think will be strong for the next 20 years.

Our holdings would include the DFA Emerging Markets Portfolio (ticker: DFEMX), a sector fund, as well as the iShares MSCI Emerging Markets Index (EEM), an ETF. (The big difference between them is that the DFA fund excludes Russia as too risky.) For the stock market's small and micro-cap groups, which have shown themselves to be so wildly better than the Dow for long periods, we would use the DFA U.S. Micro Cap Portfolio (DFSCX) or the Russell 2000 Value Index. For commodities, especially energy commodities, the ETFs that we would select would be the Energy Select Spider (XLE) or Goldman Sachs' heavily energy- weighted iShares GS Natural Resources (IGE). For larger companies in Europe, Australasia, and the Far East, we would simply use the iShares MSCI EAFE Fund ( EFA).

For the overall U.S. market, we would use a capitalization-weighted index fund like the Vanguard VTI. And because the utility sector has been very very good to me, I would include an energy index, too, like the XLU.

SELLING SHORT SCARES ME. Plus, I believe firmly that we shouldn't short America. So, to hedge, we would hold cash, which is now paying a lush yield after a long time in the desert. It has zero chance of losing value, except to inflation, and today is yielding about twice as much as the Dow industrials.

To get income beyond the dividends offered by our overseas, emerging-market and domestic large- and small-cap funds, we would own some high-yielding real-estate investment trusts and utility shares.

The theory behind this fund (insofar as a rockabilly cat like me needs a pointy-headed intellectual's theory) is that it is widely diversified and will catch the action pretty much wherever it is. It has some slight lack of correlation, mostly because of the cash. It also captures the small-cap and foreign stock groups that geniuses like investment researchers Eugene Fama and Ken French talk about so eloquently.

We'd change the allocation little by little, as sectors become too expensive or get cheap. Our approach takes advantage of the fact that over long periods (very long periods, to be sure), indexes beat all but the very best and rarest stockpickers.

Adding to our potential to do well: The costs of holding these exchange-traded funds and high-paying utility stocks and real-estate investment trusts would be very low. Except for the tax on the income from the utilities and REITs, it would be extremely tax-efficient (and we'd probably offer a version without the high current income, too).

My pal Phil DeMuth (a real person, not my alter ego, as some readers have theorized) has been running a fund like this for me for the past three years or so. In that time, it has grown from a medium five figures to well into seven figures. Now, to be fair, most of that is from my adding new money to it. But not counting that new money, the fund has grown by roughly 21% a year since I started it, while the S&P 500 has risen at roughly 16% in the same period. (Don't be jealous. I have lots of other accounts at other investment houses that haven't done anywhere near as well.)

A FUND OF ETFS, plus some income. That's my humble idea of a means to do what Ray Lucia insists we do: match our assets with our liabilities. Maybe I can talk Ray into doing it with me and we'll come up with rock songs to advertise it. ("Investment Advisor Confidential" will be our first tune.)

I'll almost certainly never do it for anyone else but me, however; I'm not a money guy. Unless maybe I can do it under another name. Like Jerry Lee Stein.