09/29/2010

• Bill Schulthe, a former Smith Barney broker and author of "The Coffeehouse Investor
• Andrew Tobias, a Harvard alum and writer of 12 books including The Only Investment Guide You'll Ever Need.
• Scott Burns has covered personal finance and investments for nearly 40 years and ranks as one of the most widely read personal finance writers in the country

Bill Schultheis' Coffeehouse Portfolios

Scott Burns' Margarita

Tobias’ 3 Fund Portfolio

These are all easy to understand and easy to follow portfolios. They only require annual rebalancing and so it is not onerous to build and manage this portfolio.

Note that Tobias and Burns portfolios are identical so we combine them henceforth.

We will test the results in three dimensions:

Firstly, how does performance compare with a buy and hold strategy for a similar portfolio with monthly rebalancing. For this, we will compare the two portfolios against a 3 asset SIB and measure results.

Secondly, what impact does adding asset classes have on performance. Three asset classes would be considered insufficient diversification today and we will compare it with a 6 asset SIB with strategic asset allocation.

Here we can clearly see the benefits of adding extra asset classes. Note that the 6SIB portfolio was rebalanced monthly so there is probably more juice that can be extracted from this portfolio. This is not surprising and if you are looking to invest for the long term and rebalance infrequently, having the extra asset classes is not onerous and delivers significant benefit.

 

The final test is to compare strategic and tactical asset allocation. For this test we will compare the lazy portfolios with a 3 asset SIB with tactical asset allocation, we will also include a 6asset SIB with tactical asset allocation to see what best in class performance looks like.

 

Takeaways

• If you want a lazy portfolio, go for five or six asset classes – you won’t rebalance that often so having the extra classes isn’t a big overhead
• If you want to maximize returns, look for tactical asset allocation – it may be a compromise to have four or five asset classes with tactical asset allocation – historically that has delivered higher returns that buy and hold
• Consider using an on-line broker that allows on-click execution of trades at a fixed price – that makes the time and cost overhead low. 

labels:investment,

Symbols:TIP,VTI,SPY,IWM,BND,AGG,DBC,EEM,EFA,GSG,IYR,LQD,SHY,TLT,ETF,ETF,Portfolio,Building,Asset,Allocation,Bonds,Dollar/Currencies,Earnings,Economy,Hedge,Funds,

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09/26/2010

In our previous article, we discussed Hewlett Packard 401K plan. This article continues the series of case studies for various 401K plans for IT companies. It discusses Google 401K Plan and how portfolios in this plan are positioned in today’s market environment.

Google (NASDAQ: GOOG) is an internet search and advertising company that pioneered in search technology. It dominates search and its related advertising business. It is headquartered in the old SGI building in Mountain View, California. Google is well known for its talented employees and innovation friendly work environment. Google offers generous 401K match to its employees.

Google 401K plan consists of 15 funds. These funds enable participants to gain exposure to 4 major assets: US Equity, Foreign Equity, REITs and Fixed Income. The list of minor asset classes covered are

Large Blend: SPY, VTI
Mid-Cap Blend: MDY, IWR
Foreign Large Blend: EFA
Foreign Large Growth: EFG
Real Estate: IYR, ICF, VNQ
Intermediate-Term Bond: AGG, BND
Short Bond: BSV

As of 9/15/2010, this plan investment choice is rated as Above Average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are. It has the following detailed ratings:

Diversification – Rated as average (score: 62%)

Fund Quality – Rated as above average (score: 65%)

Portfolio Building  -- Rated as great (score: 92%)

Overall Rating: above average (score: 75%)

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA, both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical four asset SIB (Simpler Is Better) plan. This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity (SPY or VTI)
Foreign Equity (EFA or VEU)
REITs (IYR or VNQ or ICF)
Fixed Income (AGG or BND)

Performance chart (as of 9/15/2010)

Performance table (as of 9/15/2010)

Currently, asset classes in REITs (Real Estate Investment Trusts) (VNQ, IYR, ICF) and fixed income (AGG, BND) are doing relatively well. These asset classes are available to Google 401k plan participants.

To summarize, Google 401K plan participants can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles. Currently, the tactical asset allocation strategy indicates overweighing on REITs and fixed income funds.

labels:investment,

Symbols:GOOG,HPQ,SPY,VTI,IWD,VTV,IWF,VUG,MDY,IWR,EFA,EFG,EFV,SCZ,IYR,ICF,VNQ,BWX,PCY,EMB,BND,IEF,TLT,BSV,MUB,HYG,JNK,PHB,VEU,ETF,Portfolio,Building,Asset,Allocation,IRA,401K,

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09/17/2010

Frank Armstrong, author of The Informed Investor, proposed thisportfolio for an MSN Money article. The two key points of the portfolio are that it has four asset classes (US, International, REIT, Bonds) and relies on market indices rather than active management.

 

The portfolio uses index funds because index funds eliminate manager risk. It overweights small-cap stocks as small-cap stocks have historically outperformed large caps stocks. The portfolio has a strong value tilt, based on the theory that, over the long haul, beaten-down stocks will perform better than high-flying growth stocks.

This should be a low cost, well performing portfolio.

 

The fund selection for testing the strategy is listed below with the ETF alternatives:

  

• 9.25% in Vanguard Small Cap Value VISVX  (SCZ)
• 9.25% in Vanguard Value VIVAX (SPY, IYY)
• 6.25% in Vanguard Small-Cap Growth VISGX (VBK)
• 6.25% in Vanguard 500 Index VFINX (IVW) 
• 31% in Vanguard Total International Stock VGTSX (EFA)
• 8% in Vanguard REIT VGSIX   (IYR, VNQ, RWX)  
• 30% in Vanguard Short-Term Bond VBISX (BND, AGG)

 

Things to note about the portfolio:

• This is designed as a lazy portfolio with limited rebalancing specified
• With 70% in equities, this would be considered an aggressive portfolio
• REIT is possibly underweighted

 

We will create historical returns of this portfolio as originally planned and then compare against strategic asset allocation (annual rebalance) and tactical asset allocation. This will measure:

• The impact of equal weighting of the equities – bonds will be fixed at 30% -- SAA strategy
• The impact of actively managing the equities – bonds remain fixed at 30% -- TAA strategy

We will then introduce a four asset SIB which will give a measure of the choice of funds. The SAA and TAA strategies will give the same weights to each of the funds but use simpler asset classes funds.

 

4 Asset SIB Breakdown with ETF alternatives

LARGE BLEND                    VTSMX       (VTI)

Foreign Large Blend            VGTSX      (VEU)

REAL ESTATE                     VGSIX        (VNQ)

Intermediate-Term Bond       VBMFX      (BND)

 

 

The results are shown below. There are a number of interesting things to note

• The closest comparison of similar strategies is the Armstrong Original versus the Armstrong SAA. The Armstrong original outperforms SAA which says that overloading the US stocks towards small value is successful
• All of the buy and hold strategies suffer from the “downturn dip” and the tactical asset allocation strategies perform much better
• The difference between the two TAA strategies is negligible 

labels:investment,

Symbols:DIA,IYY,VTI,DVY,ONEQ,QCLN,QABA,PWC,VTV,VUG,IWM,IWO,IWW,MDY,IJJ,IJK,VO,AGG,BND,SHY,VBK,IJS,VBR,IWP,IWS,VEA,EFG,EFV,VWO,VEU,SCZ,SPY,IYR,IVW,RWX,EFA,VNQ,Tactical,Asset,Allocation,asset,allocation,armstong,ideal,index,strategic,asset,allocation,

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09/16/2010

Retirement investing is an integral part of American personal finance. With $8.9 trillion parked in over 800 thousand retirement plans (401K), millions of Americans will increasingly rely on their 401K accounts to fund their future retirement needs. This article is part of a series of case studies we are conducting for various 401K plans. In this article, we will discuss how participants in Hewlett Packard 401K plan can achieve reasonable investment results using asset allocation strategies. We will also discuss how those portfolios are positioned in today’s market environment.

Hewlett Packard (HP) (NYSE: HPQ) is one of the largest IT companies. Founded by Bill Hewlett and Dave Packard in Palo Alto, California, HP was the earliest technology company that eventually led the formation of Silicon Valley. Today Hewlett-Packard has over 300 thousands employees world wide.

HP is known to be employee friendly. It has been named several times as one of the best companies to work for. Its 401k plan provides a well diversified array of high quality funds.

Hewlett Packard 401K plan consists of 29 funds. These funds enable participants to gain exposure to 5 major assets: US Equity, Foreign Equity, Emerging Market Equity, REITs and Fixed Income. The the list of minor asset classes covered:

Large Blend: SPY, VTI
Large Value: IWD, VTV
Large Growth: IWF, VUG
Mid-Cap Blend: MDY, IWR
Foreign Large Blend: EFA
Foreign Large Growth: EFG
Foreign Large Value: EFV
Foreign Small/Mid Growth: SCZ
Diversified Emerging Mkts: EEM, VWO
Real Estate: IYR, ICF, VNQ
World Bond: BWX
Emerging Markets Bond: PCY, EMB
Inflation-Protected Bond: TIP
Intermediate-Term Bond: AGG, BND
Long Government: IEF, TLT
UltraShort Bond: BSV
Muni National Long: MUB
High Yield Bond: HYG, JNK

As of 9/13/2010, this plan investment choice is rated as Above Average based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are.  It has the following detailed ratings:

Diversification – Rated as great (score: 89%)

Fund Quality – Rated as above average (score: 76%)

Portfolio Building  -- Rated as above average (score: 72%)

Overall Rating: above average (score: 78%)

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA, both provided by MyPlanIQ). For comparison purpose, we also include the moderate model portfolios of a typical five asset SIB (Simpler Is Better) plan. This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity (SPY or VTI)
Foreign Equity (EFA or VEU)
Emerging Market Equity (EEM or VWO)
REITs (IYR or VNQ or ICF)
Fixed Income (AGG or BND)

Performance chart (as of 9/13/2010)

Performance table (as of 9/13/2010)

Currently, asset classes in emerging market stocks (EEM, VWO), REITs (Real Estate Investment Trusts) (VNQ, IYR, ICF) and fixed income (AGG, BND) are doing relatively well. These asset classes are available to HP 401k participants.

To summarize, Hewlett Packard 401K plan participants can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles. Currently, the tactical asset allocation strategy indicates overweighing on emerging market stocks, REITs and fixed income funds.

labels:investment,

Symbols:HPQ,SPY,VTI,IWD,VTV,IWF,VUG,MDY,IWR,EFA,EFG,EFV,SCZ,IYR,ICF,VNQ,BWX,PCY,EMB,BND,IEF,TLT,BSV,MUB,HYG,JNK,PHB,VEU,ETF,Portfolio,Building,Asset,Allocation,IRA,401K,

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09/14/2010

John Wasik has been a professional journalist and author for 30 years specializing in personal finance, the environment, investing and social issues. John has proposed a Nano plan investment portfolio which employs just a handful of index or exchange- traded funds (ETFs) to cover virtually the entire world of bond and stock markets. This portfolio is supposed to be rebalanced annually.

John Wasik presents a classic asset allocation strategy with simple buy and hold.

• 20% in Vanguard Total Stock Market VIPERS (VTI) – alternatives: SPY, IWM    
• 20% in Vanguard Total International (VGTSX) – alternatives: EFA, VEU, EEM, VWO, ADRE     
• 20% in Vanguard REIT VIPERS (VNQ) – alternatives: IYR, ICF
• 20% in iShares Lehman TIPS Bond (TIP)    
• 20% in iShares Lehman Aggregate Bond (AGG) – alternative: BND

 
Things to note about the portfolio:

• With 40% in fixed income, this would be considered moderate risk
• With VGTSX covering both international and emerging markets (albeit in one fund) this would be something between a 4 and 5 asset class portfolio
• VGTSX is not an ETF; while VGTSX can easily be replaced by VEU (Vanguard FTSE All-World ex-US ETF) we will keep VGTSX because it has a longer history for back testing

 We will make a comparison of the performance of this portfolio with

• Rebalancing every month as opposed to every year
• Simpler Is Better (SIB) portfolios we discussed in a previous article,
• Tactically managing the portfolio

 The first set of results compares strategic asset allocation performance. What we note is:

• All portfolios suffer from the sharp downturn and is what is driving the increasing move towards a tactical allocation strategy
• The lazy portfolio – rebalancing once a year performs as well as the monthly rebalancing
• Wasik’s portfolio performance matches the 4 Asset SIB closely
• The extra asset class in the 5 asset SIB enables it to outperform everything else

The second set of results compares tactical asset allocation performance. What we note is:

• The tactical asset allocation strategies clearly mitigate the downturn
• Wasik’s portfolio performance matches the 4 Asset SIB closely when tactical asset allocation strategies are applied to both
• The extra asset class in the 5 asset SIB enables it to outperform everything else

 
Takeaways:

• ETF’s are a good vehicle for any portfolio and with increasing track record, it’s possible to demonstrate good historical performance
• It is increasingly clear that deploying a tactical asset allocation strategy is key. All buy and hold strategies are going to suffer the same downturn properties and with choppy market conditions, minimizing downside risk is critical
• With a buy and hold, there is little difference between monthly or annual rebalancing so you can be very lazy if you don’t mind the downside!
• Five asset classes perform better in all cases – in the TAA case, the five asset SIB gives you an extra 6% a year since inception – doubling the asset base every decade

labels:investments,

Symbols:ti,vnq,tip,agg,veu,spy,iwm,efa,iyr,icf,bnd,eem,vwo,adre,

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07/29/2010

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12/03/2010

This report reviews Aflac Incorporated 401(k) Savings and Profit Sharing Plan plan. We will discuss the investment choices and present the plan rating by MyPlanIQ. Current economic and market conditions are discussed in the context of the investment portfolios in the plan. We will then show how participants in Aflac Incorporated 401(k) Savings and Profit Sharing Plan can achieve reasonable investment results using asset allocation strategies.

Plan Review and Rating

AFLAC Inc (Ticker:AFL) has the "Aflac Incorporated 401(k) Savings and Profit Sharing Plan".

Aflac Incorporated 401(k) Savings and Profit Sharing Plan's 401K plan consists of 11 funds. These funds enable participants to gain exposure to 3 major assets: US Equity, Foreign Equity, Fixed Income. The list of minor asset classes covered:

Foreign Large Blend: EFA, VEU, GWL, PFA
Intermediate-term Bond: AGG, CIU, BIV, BND
Large Blend: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX
Large Growth: IVW, IWZ, JKE, VUG, ELG, QQQQ, RPG, SCHG
Large Value: IVE, IWW, JKF, VTV, ELV, PWV, RPV, SCHV
Mid-cap Growth: IJK, IWP, VOT, EMG, PWJ, RFG, UKW
Moderate Allocation: AOM
Small Growth: IJT, IWO, JKK, VBK, DSG, PWT, RZG, UKK

As of Dec 2, 2010, this plan investment choice is rated as based on MyPlanIQ Plan Rating methodology that measures the effectiveness of a plan's available investment funds. It has the following detailed ratings:

Diversification -- Rated as (35%)
Fund Quality -- Rated as (33%)
Portfolio Building -- Rated as (36%)
Overall Rating: (35%)

Current Economic and Market Conditions

We have experienced an uncertain 2010: plenty of worries on whether the US economy will climb out of the great recession and recover.

• The Federal Reserve embarked on Quantitative Easing II (QE2) to stimulate the economy.
• The housing market is still at its low but largely stabilized.
• The unemployment rate is stuck at 9%.

Americans continue to face an uncertain future, given (among others) the high unemployment rate, large federal and local government debts and global trade imbalance. With such an economic backdrop, the stock and debt markets are going to be volatile. Despite this, markets have been resilient and appear positioned to rebound.

In this market it is even more critical to properly diversify and respond market changes. MyPlanIQ offers two asset allocation strategies: strategic and tactical asset allocation strategies ( SAA and TAA for participants in Aflac Incorporated 401(k) Savings and Profit Sharing Plan).

Strategic Asset Allocation is based on well known modern portfolio theory and its key features include: diversification, proper fund selection and periodically re-balancing.

Tactical Asset Allocation works on a diversified array of assets provided by funds in a plan and adjusts asset mixes based on market conditions such as asset price momentum utilized by TAA.

Portfolio Discussions

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical 3 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity: (SPY or VTI)
Foreign Equity: (EFA or VEU)
Fixed Income: (AGG or BND)

Performance chart (as of Dec 2, 2010)

Performance table (as of Dec 2, 2010)

Currently, asset classes in US Equity (SPY,VTI), Foreign Equity (EFA,VEU) and Fixed Income (AGG,BND) are doing relatively well. These asset classes are available to Aflac Incorporated 401(k) Savings and Profit Sharing Plan participants.

To summarize, Aflac Incorporated 401(k) Savings and Profit Sharing Plan plan participants can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles.

Symbols: AFL , SPY , VTI , EFA , VEU , AGG , BND , AOM , CIU , BIV , GWL , PFA , IVE , IWW , JKF , VTV , ELV , PWV , RPV , SCHV , IVV , IYY , IWV , VV , DLN , RSP , SCHX , IVW , IWZ , JKE , VUG , ELG , QQQQ , RPG , SCHG , IJK , IWP , VOT , EMG , PWJ , RFG , UKW , IJT , IWO , JKK , VBK , DSG , PWT , RZG , UKK

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