 |
Vanguard ETF: |  |
7.4%* |
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Diversified Core: | |
8.1%* |
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Six Core Asset ETFs: | |
7.3%* |
Articles on DVY
- Lazy Portfolios -- The Playoffs
10/19/2010
We have compared the performance of fifteen buy and hold portfolios from investing luminaries. Each of the portfolios was measured for performance against SIBs and their relative merits examined. We now move into a playoff round where we will compare the portfolios with each other and see if we can find an eventual winner and look at why they won and what we can learn from this.
When we were testing the portfolios against SIBs, we introduced a tactical asset allocation strategy which usually turned out to have the best performance. For this series of peer comparisons, we are only going to use a buy and hold strategy. When we find the eventual winner, we will then perform a final comparison with tactical asset allocation and see what we conclude.
The portfolios have been sorted alphabetically and we are going to start with the top part of the alphabet. The portfolios will be listed by decreasing number of asset classes and decreasing number of funds. We would expect that the portfolio with the greatest number of asset classes to have the highest returns and we will test that to see to what extent it is true.
Table of Lazy Portfolios and their classes and fundsPortfolio Classes Funds ETF Equivalent Fund Advice 5 11 Y Gibson 5 6 y Five SIB SAA 5 5 Y Aronson 4 11 y Armstrong 4 7 y Four SIB SAA 4 4 Y Burns/Tobias 3 3 Y - Paul Merriman's FundAdvice.com website has indexed porfolios for several fund companies. The basic strategy is the same as with all the other Lazy Portfolios, here with 11 no-load index funds
- Gibson's 5 Equal Asset Allocation Strategy comes from Roger Gibson’s widely read "Asset Allocation: Balancing Financial Risks.”
- The MyPlanIQ five asset SIB has index funds for each of the asset classes represented and rebalances monthly – this is primarily a benchmark portfolio
- Ted Aronson and his AJO Partners manage about $25 billion of institutional assets. Aronson puts his family's taxable money in this well-diversified portfolio of no-load index funds
- Frank Armstrong, author of The Informed Investor, proposed his portfolio for an MSN Money article
- The MyPlanIQ four asset SIB has index funds for each of the asset classes represented and rebalances monthly – this is primarily a benchmark portfolio
- 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/ Andrew Tobias, a Harvard alum and writer of 12 books including The Only Investment Guide You'll Ever Need.
Table of Lazy Portfolios and their Annual ReturnsPortfolio/AR(%) 1 Yr 3 Yr 5 Yr Inception Five SIB SAA 14.27 1.73 7.67 8.38 Four SIB SAA 10.76 0.17 7.11 7.40 Fund Advice 10.85 0.24 6.06 6.75 Armstrong 11.69 (1.76) 5.15 5.55 Burns/Tobias 0.45 (2.32) 4.54 4.48 Aronson 8.46 (1.10) 3.48 3.59 Gibson 8.63 (4.72) 0.08 3.43 The returns are now presented in order of highest to lowest of the five year returns. How do the returns compare to what we would have expected.- There was a wider spread than expected on the four and five asset class portfolios and the Burns/Tobias three asset class, three fund portfolio performed better than expected
- A five asset class portfolio came out on top – that was expected. The fact that an index based portfolio won out it also not surprising as index funds often outperform funds with active management
- The fact that a four asset portfolio beat a five asset portfolio demonstrates that picking the right funds in an asset class is important and that index funds deliver good results
- For a very simple three asset portfolio, the Burns/Tobias performance came higher in the league table
- The most surprising result is that the Gibson portfolio performed so poorly. When breaking down the long term results of this portfolio, the selection of asset classes has given the portfolio a modest return with a low drawdown index. In the significant market downturn over the past few years, it suffered (as did most buy and hold strategies) badly and has returned to its modest gains whereas other portfolios have had a higher drawdown ratio but a faster recovery
Table of Lazy Portfolios and their Draw Down RatiosPortfolio/DD 1 Yr 3 Yr 5 Yr Inception Aronson 6% 30% 30% 30% Fund Advice 9% 38% 38% 38% Gibson 7% 38% 38% 38% Four SIB SAA 9% 40% 40% 40% Five SIB SAA 8% 41% 41% 41% Scott Burns 9% 41% 41% 41% Armstrong 11% 44% 44% 44% We list the draw down ratios for each of the portfolios and it’s clear that with the recent turbulence, all of them are higher than would be desired.We will select the top two – which are the four and five asset SIBs to move to the final round where they will be put against the best two funds from the bottom half of the alphabet.
Takeaways- Asset classes and number of funds in each class are an indicator of better returns but it’s not the only thing
- Index funds continue to show good results against managed funds
- or those investing in the very long term, looking at the draw down index is important because it will help you live with the fund selection you have made
- ETF’s can be used to implement any of these strategies
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- Bernstein's No Brainer and Smart Money Portfolios Reviewed
10/08/2010
Dr. William Bernstein is the author of the "Intelligent Asset Allocator" and "The Four Pillars of Investing." He's also a physician, neurologist and financial adviser to high-net-worth individuals.
He has proposed a number of lazy portfolios. There are two that will be examined today.The no-brainer portfolio comprises the following fund allocation- 25% in Vanguard 500 Index VFINX (IVW)
- 25% in Vanguard Small Cap NAESX or VTMSX (VB)
- 25% in Vanguard Total International VGTSX or VTMGX (EFA, VEA)
- 25% in Vanguard Total Bond VBMFX or VBISX (BND)
Things to note about the portfolio:- Heavily weighted towards domestic equities
- Similar to a three asset SIB with domestic, international and fixed income
- It would be better to have some REIT or emerging markets exposure
- We will compare the no brainer portfolio to a three and four asset SIB
Annual returns 1 year 3 years 5 years Bernstein No Brainer 10 -1 4 Bernstein Tactical Asset Allocation -3 0 6 Four SIB Strategic Asset Allocation 14 -1 5 Three SIB Strategic Asset Allocation 8 -4 4 Three SIB Tactical Asset Allocation -5 0 6 The Bernstein no-brainer tracks very closely with the four asset SIB. It’s interesting to note that the three asset Bernstein tracks closer to the four asset SIB than expected. So as a lazy portfolio, it performs satisfactorily. Year to date, however, the four asset SIB has better performance.
The tactical asset allocation strategies deliver better results with higher returns and lower volatility. The no brainer funds outperform the 3 asset SIB but underperform the 4 asset SIB which is to be expected.
The smart money portfolio comprises the following fund allocation- 40% Vanguard Short Term Investment Grade VFSTX (SCJ, SHY)
- 15% Vanguard Total Stock Market VTSMX (VTI)
- 10% Vanguard Small Cap Value VISVX (VBR)
- 10% Vanguard Value Index VIVAX (VTV)
- 5% Vanguard Emerging Markets Stock VEIEX (VWO)
- 5% Vanguard European Stock VEURX (VEU)
- 5% Vanguard Pacific Stock VPACX (VPL)
- 5% Vanguard REIT Index VGSIX (RWX, VNQ)
- 5% Vanguard Small Cap Value NAESX or VTMSX (VB)
To summarize:- 40% in US equities
- 10% in international equities
- 5% in emerging market equities
- 5% in REIT
- 40% in fixed income
Annual returns 1 year 3 years 5 years Smart Money 10 -1 4 Smart Money Tactical Asset Allocation -3 0 6 Five SIB Strategic Asset Allocation 14 -1 5 Five SIB Tactical Asset Allocation 8 -4 4 Four SIB Tactical Asset Allocation -5 0 6 Although the smart money portfolio has five asset classes, international, emerging markets and real estate are so under-weighted that they act as if they are a single class so, again, it’s more like a three asset class portfolio. The five asset SIB with strategic asset allocation has similar behavioral properties but clearly delivers better results based on superior diversification.
One the strategy is moved over to tactical asset allocation, there are enough asset classes in the Bernstein portfolio for the Larger Chartresults to be clearly superior than a four asset SIB and close to the five asset SIBWe look at the two portfolios as a final comparison
Annual returns 1 year 3 years 5 years Bernstein No Brainer 10 -1 4 Bernstein Smart Money 10 -1 4 They are remarkably close to each other full comparison
Takeaways- Tactical Asset Allocation reduces downside risk and that wins in the current uncertain environment
- Both Bernstein portfolios perform satisfactorily for a lazy portfolio – it is surprising that the no-brainer performs so well against it’s more diversified smart-money cousin
- ETF’s can readily be used to implement these portfolios with good performance
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- Diversification, Style AND Asset Rotation Improve Portfolio Performance without Incurring Extra Risk
10/08/2010
In a previous article we compared the results of a highly diversified ETF portfolio with strategic asset allocation that permitted style rotation against strategic asset allocation without style rotation. We did this by restricting the other portfolios to one fund per asset class. We saw that style rotation squeezes out a little more in return for more trading. Putting this together with a “one-click” execution capability that Folio Investing offers offsets some of the effort.
Annual returns 1 year 3 years 5 years Folio SAA Moderate 12.43 3.26 8.15 6 SIB ETF SAA Moderate 11.53 2.51 7.89 6 SIB Index SAA Moderate 10.63 1.66 6.72 5 SIB Index SAA Moderate 12.44 2.16 7.00
In this article, we are going to step up to the next level and take the same portfolio and deploy strategic asset allocation – allowing the portfolio to flow with asset momentum and review what additional risk adjusted returns are delivered.
Strategic Asset Allocation will move funds in asset classes but each asset class will always have the same weighting in the overall portfolio.
Tactical Asset Allocation takes this one step further, enabling asset classes with poor market momentum to be swapped out for another class. Note that fixed income will never be swapped out but may have an increased percentage of the overall portfolio in turbulent times. This approach seeks to limit the downside while participating in the upside.
Intuitively we would expect higher returns offset against more trading activity.We are going to compare the Folio SAA moderate that delivered the best performance in the SAA category with a tactical asset allocation of the same portfolio and a 6 Asset SIB with both ETF’s and Index funds. This will enable us to compare- Tactical versus strategic asset allocation
- The benefit of multiple ETF’s per class versus a single ETF per class
- How ETF’s compare against market indices.
A snapshot of the results graph is shown above with summary data in the table below.
Returns Table of the Different Portfolios
Annual returns 1 year 3 years 5 years Folio SAA Moderate 12.43 3.26 8.15 Folio TAA Moderate 11.74 9.24 11.26 6SIBETF TAA Moderate 9.57 9.62 15.68 6SIBIndex TAA Moderate 8.41 9.22 13.43
The first thing to note is that tactical asset allocation performs better by mitigating downside risk. The strategic asset allocation has performed well as we recover from the sharp drops of recent years but with continuing uncertainty, minimizing downside risk. Again, the benefit of having one-click execution relieves much of the mechanical overhead in pursuing a tactical asset allocation strategy.It is also interesting to note that in this simulation, the best performance comes from the six asset class SIB with fewer fund choices than the Folio portfolio. The reason is that the Folio portfolio used more conservative bond choices that limited the downside but also, slightly reduced the upside. This is a tradeoff that each investor has to make as to whether they want to limit the risk at the cost of a little bit of upside.
Finally, both ETF portfolios perform very well against market index funds.Takeaways- Tactical Asset Allocation reduces downside risk and that wins in the current uncertain environment
- ETF’s perform very well against market index funds in both tactical and strategic asset allocation strategies
- Having a simple and low means of executing the trades is an essential part of a hybrid approach to make it easy on the investor
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- Armstrong Index Based Lazy Portfolio Returns Study
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 alternativesLARGE 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
Annual Returns 1 Year 3 Years 5 Years Original 8.83 -0.88 4.27 Armstrong SAA 13.91 -2.60 2.96 Armstrong TAA 12.71 7.30 10.43 4 SIB SAA 14.12 0.25 4.59 4 SIB TAA 12.32 7.15 10.21
Takeaways:- The Armstrong portfolio is a well constructed set of diversified assets based on market indices
- To reduce volatility in today’s economy, it might make sense to add commodities and emerging market equities
- The biggest impact on returns is moving to a tactical asset allocation strategy
- The SIB portfolios which can easily be executed with ETF’s perform very well and will be low cost
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- How Does Your Garden Grow?
09/16/2010
Jim Lowell edits MarketWatch's ETF Trader, an investment letter employing a momentum-based exchange-traded-fund strategy for long-term investors. Large/small stocks, proposed his Sower's Growth Portfolio. This is a diversified portfolio of exchange-traded funds. The view is that a growing economy tends to create a growing portfolio.This portfolio is heavily equity and US focused. It is a diversified portfolio of exchange-traded funds including Big-caps ETF (DIAIYYONEQ PWC), Midcaps ETF(MDY), Small-caps ETF (IWM) and foreign ETF(EFA).The fund selection for testing the strategy is listed below with the ETF alternatives:
US Equities- 10% in Diamonds Trust DIA (SPY)
- 15% in iShares DJ U.S. Total Market IYY (VTI, DVY)
- 7.5% in Fidelity NASDAQ Composite ONEQ (QCLN, QABA)
- 7.5% in Power Shares Dynamic Market PWC (VTV, VUG)
- 10% in iShares Russell 2000 IWM (IWO, IWW)
- 15% in Mid Cap SPDR Trust MDY (IJJ, VO)
International Equities
- 25% in iShares MSCI International EAFE EFA (VEA, EFV)
- 10% in iShares MSCI Emerging Markets EEM (VWO)
Things to note about the portfolio:- 100% in equities is an aggressive portfolio
- 65% in US equities is high in today’s market environment
- There is no real estate (IYR, VNQ, ICF) or fixed income which would likely result in improved performance today
- With three asset classes (US, international and emerging markets), this can be mapped against a 3 asset class SIB
We will make a comparison of the performance of this portfolio against strategic asset allocation (equally spread assets), tactical asset allocation and against 3 asset class SIB portfolios we discussed in a previous article,The 3 asset class SIB breakdown- Large Blend VTSMX (ETF VTI)
- Foreign Large Blend VGTSX (ETF VEU)
- Intermediate-Term Bond VBMFX (ETF BND)
There are a number things to note about the comparisons:- The Lowell SAA and TAA were driven with a 100% in equities -- the TAA strategy will move to fixed income (cash) should the momentum drive it that way, the SAA strategy will not
- The 3 asset SIBs are using an aggressive model portfolio that still includes some fixed income
Summary Returns of Lowell's Portfolios Annual Returns 1 year 3 Year 5 Year Lowell Original 9.04 -5.38 2.25 Lowell SAA 13.14 -13.6 1.83 Lowell TAA 6.23 5.26 13.26 3 SIB SAA 7.03 -3.39 3.29 3 SIB TAA -4.23 0.63 5.76
The results are shown above. There are a number of interesting things to note :- The choice of funds, even if diversification enables reasonable returns
- Before the downturn, the original portfolio was outperforming everything except the dynamic allocation of the original strategy
- The strategy falls foul of the 2008/2009 downturn and tracks pretty closely with any buy and hold strategy
- The three asset SIBs have a fixed income fund that enables slightly better performance in choppier market conditions
- The Lowell choice of funds allows the tactical asset allocation strategy to outperform the three asset class SIB with TAA
- The 2008/2009 downturn shows the benefits of a tactical asset allocation – even if it means moving equities to cash
Takeaways:- The Sower’s growth portfolio is a low maintenance portfolio that is heavily weighted towards US equities. In the long term, there is still confidence in the US economy but following this portfolio and strategy will give you some heartache
- This portfolio was created when the sort of downturn we experienced in 2007/2008 was not envisioned -- it's hard to imagine that this portfolio would still be recommended today
- Migrating to a dynamic strategy with the same funds provides much higher returns. Given a dynamic strategy, it would make sense to add some fixed income such as AGG, BND, SHY, CSJ rather than just cash
- Conventional tactical asset allocation with the right number of asset classes (at least five) still provides the best performance
- ETF’s give you a good degree of choice a good vehicle for any portfolio and with increasing track record, it’s possible to demonstrate good historical performance
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- Practical and Effective ETF Based 401K Plan
07/29/2010
- Investing with Styles Can Pay off
07/09/2010
