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Articles on VISVX

  • Armstrong's Informed Investor Lazy Portfolio Feels The Commodities Pain

    04/18/2011

    The incidents in Japan, the Middle East and even as far back as New Orleans teach us the danger of living on borrowed time, the reactors, the governments the levees keeping things going -- just one more year. The temptation to delay until next time is very seductive until disaster strikes and the cost to repair, dwarfs the cost to prevent. Many working people put off their retirement investing -- just one more year until it becomes a "hair on fire" problem -- which it now is for baby boomers for whom retirement is a near and present danger.

    We continue to examine luminary portfolios to see what we can learn and use to further our investment portfolios.

    Frank Armstrong, author of The Informed Investor, proposed this portfolio 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
    • 31% in US equities is significant with a mix of large and small cap stocks
    • With 70% in equities, this is a growth portfolio
    • REIT is possibly underweighted
    • There is no commodity asset class


    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 6 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent: US Equity: SPY or VTI
    Commodity: DBC
    Foreign Equity: EFA or VEU
    REITs: IYR or VNQ or ICF
    Emerging Market Equity: EEM or VWO
    Fixed Income: AGG or BND

    Portfolio Performance Comparison

    Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Armstrong Original 10% 66% 4% 17% 5% 20%
    Six Core Asset ETF Benchmark Tactical Asset Allocation Moderate 10% 71% 9% 73% 13% 91%
    Six Core Asset ETF Benchmark Strategic Asset Allocation Moderate 13% 103% 3% 20% 7% 35%

    A detailed comparison can be found here

     

    Takeaways

    • 2010 was a good year for lazy portfolios and as we continue through 2011while equities are still performing well, not having a commodities option hurts returns

    • TAA has benefits in terms of being able to stay away from some area such as European equities

    • Index funds continue to show good results against managed funds

    • Larger asset class plans have the benefit of stability and good returns

    Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.  


    Symbols: VISVX, SCZ, VIVAX, SPY, IYY, VISGX, VBK, VFINX, IVW, VGTSX, EFA, VGSIX, IYR, VNQ, RWX, BND, AGG, DBC, VEU, ICF, EEM, VWO

     

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  • Bernstein No Brainer and Smart Money Lazy Portfolios Under The Microscope

    04/15/2011

    Retirement investing is now a "hair on fire" problem for Boomers who have no time to waste in getting their portfolios in order. The challenge is how to avoid being overwhelmed with conflicting data and shutting down.

    We present simple approaches to understand the path to higher returns with lower risk.

    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 we now examine in the light of a more active benchmark which has monthly instead of annual rebalancing.

    1. The smart money portfolio

    2. The no-brainer portfolio

    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 [simpler-is-better] with domestic, international and fixed income

    • It would be better to have some REIT or emerging markets exposure


    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 U.S. equities

    • 10% in international equities

    • 5% in emerging market equities

    • 5% in REITs

    • 40% in fixed income


    The smart money portfolio is more conservative and has two more asset classes but they only represent five percent of the portfolio each. With 80% of the portfolio in US and fixed income, it isn't very different from the no brainer portfolio.

    We are going to use the SIB (Simpler Is Better) Portfolio as a benchmark. The SIB comprise – market index funds (ETFs or Mutual Funds) from key asset classes that can be used to measure historical returns to show the impact of asset class selection rather than fund or stock selection. We are going to use a six asset ETF SIBs. This will enable us to see the type of returns we can expect and contrast Mutual Funds and ETFs

    The following funds are used:

    Asset Class Ticker Name
    LARGE BLEND VTI Vanguard Total Stock Market ETF
    Foreign Large Blend VEU Vanguard FTSE All-World ex-US ETF
    DIVERSIFIED EMERGING MKTS VWO Vanguard Emerging Markets Stock ETF
    REAL ESTATE VNQ Vanguard REIT Index ETF
    COMMODITIES BROAD BASKET DBC PowerShares DB Commodity Idx Trking Fund
    Intermediate-Term Bond BND Vanguard Total Bond Market ETF

     

    The strategic asset allocation strategy has 40% in fixed income and 12% in the other five funds.


    The tactical asset allocation strategy has 40% in fixed income and 30% in the top two asset class funds determined by the price momentum -- unless that performance is below fixed income when the money will be diverted to fixed income. If fixed income is performing below cash, the fixed income portion will be cash.

    Portfolio Analysis

    full chart

    Portfolio Performance Comparison

    Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    P William Bernstein No Brainer Nine Fund Portfolio Annual Rebalance 8% 79% 4% 20% 4% 21%
    P William Bernstein No Brainer Four Fund Portfolio 11% 87% 4% 18% 5% 19%
    Six Core Asset ETF Benchmark Tactical Asset Allocation Moderate 10% 71% 9% 73% 13% 91%
    Six Core Asset ETF Benchmark Strategic Asset Allocation Moderate 13% 103% 4% 20% 7% 35%

    Takeaways

    • Both Bernstein portfolios perform satisfactorily for a lazy portfolio – it is surprising that the no-brainer performs so well against its more diversified smart-money cousin
    • The Six Asset SIB buy and hold outperforms both Bernstein portfolios based on broader diversification.
    • Tactical Asset Allocation reduces downside risk and that wins in the current uncertain environment

    Symbols: BND, DBC, EFA, IVW, NAESX, RWX, SCJ, SHY, VB, VBR, VEA, VEIEX, VEU, VEURX, VFINX, VFSTX, VGSIX, VISVX, VIVAX, VNQ, VPACX, VPL, VTI, VTMGX, VTMSX, VTSMX, VTV, VWO

    Disclosure:

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned

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  • Investing with Styles Can Pay off

    07/09/2010

    Portfolio construction consists of the following steps

    • Decide personal risk profile which determines the target allocation in risk assets.
    • Decide asset allocation method: strategic or tactical or both (strategic does not change target asset allocations while tactical can alter allocations more actively)
    • Decide target allocation for each asset in a strategic asset allocation
    • Periodically rebalancing portfolios

    For a portfolio using strategic asset allocation, with long term target allocation being fixed (and only changed when major events such as approaching to retirement and children college education spending, for example), one can further enhance a portfolio return and reduce the risk by rebalancing and fund selection in an asset class. It is reported that adopting proper timing and way to rebalance a portfolio can improve return and reduce risk (see Daryanani opportunitstic rebalancing article).  In this article, we focus on fund selection.

    In a well designed portfolio for retirement plans (401K or IRA), it is a popular practice to have funds with various style exposures. In a stock/equity asset, a fund style is defined as value style (growth/blend/value) and size style (large/mid/small cap). The Morningstar 9 boxes of styles are essentially the combinations of the 3 value and 3 size styles. In a fixed income asset, a fund style is a combination of credit risk (junk/investment grade) and interest rate risk (short/intermediate/long) for corporate bonds or a just interest rate risk for treasury bonds.  In an actively managed portfolio, it is a well recognized and widely practiced method to select funds based on style rotation to improve a portfolio alpha or return. For example, in an article published in Journal of Asset Management (May, 2007), B. Arshanapalli , L. Switzer and K. Panju concluded that active multi-style rotation strategies can be devised to outperform the best performing buy-and-hold portfolio.

    MyPlanIQ maintains an index fund based plan or an ETF based plan using candidate funds based on those in a lazy portfolio proposed by Fund Advice Paul Merriman and maintained by MarketWatch.com (called Fund Advice Ultimate Buy and Hold Portfolio) (see here for the independently tracked portfolio on MyPlanIQ.com). The candidate funds and the original allocation are as follows

    Index ETF Allocation
    Vanguard Interm-Tm Trs (VFITX) iShares 3-7 Year Treasury (IEI) 20%
    Vanguard Short-Tm Trs(VFISX) iShares 3-7 Year Treasury (SHY) 12%
    Vanguard Intl Val (VTRIX) iShares MSCI EAFE Value Index (EFV) 12%
    Vanguard Dev Mkts (VDMIX) iShares MSCI EAFE Index (EFA) 12%
    Vanguard Inflation-Prot (VIPSX) iShares TIPS Bond (TIP) 8%
    Vanguard Small-Cap Idx (NAESX) iShares Russell 2000 Index (IWM) 6%
    Vanguard Small-Cap Val (VISVX) iShares Russell 2000 Value Index (IWN) 6%
    Vanguard Value Idx (VIVAX) iShares Russell 3000 Value Index (IWW) 6%
    Vanguard 500 Index (VFINX) SPDR S&P 500 (SPY) 6%
    Vanguard Emerging Mkt (VEIEX) iSharess Emerging Market Stock (EEM) 6%
    Vanguard REIT Idx (VGSIX) iShares Dow Jones REIT Index (IYR) 6%

    The funds cover five asset classes: U.S. Equity, International Equity, Emerging Mkt Equity, U.S. REIT and Fixed Income. They have various style exposures for U.S. stock market (equity), International Stocks and Fixed income.

    MyPlanIQ Strategic Asset Allocation (SAA) selects funds with the best risk adjusted returns for each asset class when rebalancing.  The following table compares the Strategic Asset Allocation (SAA) moderate portfolios in both index fund and ETF plans as well as the original portfolio (both MyPlanIQ SAA moderate portfolios have 40% allocation in fixed income). We also include the strategic asset allocation moderate portfolio in MyPlanIQ Five Core Asset ETF Plan that consists one fund for each asset class.

    As of 7/2/2010

    Portfolio 1 Yr Return 3 Yr Return 5 Yr Return Since 12/2000
    FundAdvice SAA Moderate Index Funds 17% -1.0% 5.1% 7.4%
    FundAdvice SAA Moderate ETF 16.7% -2.2% 4.8% 7%
    FundAdvice Buy and Hold Index Funds 14.5% -2.4% 4.1% 5.7%
    Five Core SAA Moderate 16.9% -3.4% 3.93% 5.6%

     

    From the above table, we can observe:

    • Diversification over styles improves return (FundAdvice Buy and Hold vs. Five Core SAA Moderate).
    • Style rotation adds 1.3-1.7% returns over buy and hold (SAA Moderate ETF or Index Funds vs. FundAdvice Buy and Hold).

    The above observations are consistent across thousands of plans MyPlanIQ maintains. We should also point out that better fund/style selection does not alter the overall portfolio risk allocation, which is a major advantage over an actively managed tactical asset allocation portfolio.

    At the moment, for U.S. stocks, MyPlanIQ SAA favors small cap (IWM), small cap value (IWN). For fixed income, it favors Inflation-protected treasury (TIP).

    labels:investments,IRA,401K,

    Symbols:vti,spy,veu,efa,vwo,eem,iyr,icf,vnq,dbc,gsg,bnd,agg,tlt,lqd,tip,iwb,oef,iwd,iwo,iwm,ijr,iwn,iwp,iwr,ijh,iws,dvy,iwc,efv,iww,iwv,iwz,VFITX,VFISX,VTRIX,VDMIX,VIPSX,NAESX,VISVX,VIVAX,VFINX,VEIEX,VGSIX,

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