- Relax: Doing Less With Your Investments
03/30/2011
In his latest Behavior Gap Newsletter, Carl Richards nails that feeling of confusion that comes when we learn first hand that “past performance is not a guarantee of future results.”
Investing isn’t like hiring a basketball coach, Richards argues, but rather like planting an oak tree:“You never plant a tree and then pull it out every time the wind blows just to check the roots.”
He also quotes this gem from Warren Buffett: “Benign neglect, bordering on sloth, remains the hallmark of our investment process.”
Why We Should Do Less With our Investments
In his book Wise Investing Made Simpler Larry Swedroe makes a similar point using a study conducted by a trio of academics. Edwin J. Elton and Martin J. Gruber of New York University, and Christopher R. Blake of Fordham University, examined 43 401(k) plans from 1994 through 1999.
Over those five years, the 401(k) plans added 215 new fund options for participants and dropped 45 funds from their plans. The funds added had a strong track record. Those that were dropped had poor recent performance.
The professors soon discovered that the new funds promptly underperformed those that had been given the heave-ho.
That brought the overall quality of the offerings down. Making matters worse, participants in the plans constantly chased performance by shifting money into last quarter’s top performers, the study notes.
Give Your Money A Chance To Grow
The argument Richards, Swedroe, and others make is simple. Having put thought and effort into setting up their investments, investors need to give them a chance to grow. That doesn’t mean you can’t appreciate their beauty and even check in on their performance now and again, but successful long-term investing requires patience.
If you have ideas for setting the right balance between enlightened remove and dangerous neglect, chime in.
Symbols: SPY, VTI, IYR, VNQ, ICF, AGG, BND, DBC, IVV, IYY, IWV, VV, DLN, RSP, SCHX, CLY, LQD, BLV, VCLT, DGL, IAU, DBG, AGOL
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- Will Harry Browne’s Permanent Portfolio Continue To Work?
03/29/2011
Portfolioist Article
March 25, 2011 by Geoff Considine
I just published an article over at Advisor Perspectives that is titled “What Investors Should Fear in The Permanent Portfolio” that looks at a very simple model portfolio proposed by Harry Browne. This portfolio contains equal allocations to four elements: stocks, gold, long-term government bonds and cash. Back in 1998 when Browne first proposed this portfolio in his book, Fail Safe Investing, it was decidedly harder to create your own version of this allocation model. Today, you can easily implement this portfolio at fairly low cost using four ETFs.
Harry Browne’s Permanent Portfolio has gotten a great deal of attention–and many new advocates–due to its solid performance in recent years when more traditional asset allocations suffered substantial losses. However, the question that investors need to ask is whether this will be a successful way to invest in the future.
I am not going to go through all of the analysis–but I will present three brief highlights here:
1) There is no question that the simple asset allocation in the Permanent Portfolio has done very well in the last decade and more.
2) The reliance on long-term bonds and gold has led to great performance but yields on long bonds are near historic lows and gold is near historic highs.
3) The Permanent Portfolio is not likely to fare well in a rising interest rate environment.
Ultimately, my conclusion is quite similar to that reached by William Bernstein, when he looked at this deceptively simple asset allocation. The statistics suggest that the Permanent Portfolio does indeed capture elements that will do well in a wide variety of market conditions. The danger for investors is piling into this strategy after a period that has been almost optimal for this approach vs. more conventional asset allocations. For many of the latecomers to the Permanent Portfolio, there is a substantial risk that they are chasing performance and are thus setting themselves up for much lower future returns.
Symbols: SPY,VTI,IYR,VNQ,ICF,AGG,BND,DBC,IVV,IYY,IWV,VV,DLN,RSP,SCHX,CLY,LQD,BLV,VCLT, DGL,IAU,DBG,AGOL,
Exchange Symbols:
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- Tactically Manage An Income Producing Portfolio With Commodity Exposure
03/25/2011
Coming out of the great recession, governments around the world have adopted loose monetary policies to prop up the economies. These include U.S. central bank's QE2 (Quantitative Easing act 2) and Euro Zone's bailout of troubling peripheral countries like Greece. The current natural disasters in Japan and other countries can only add more demand for the stimulus. These policies resulted in commodity hoarding, especially in material hungry emerging economies such as China.
It is critical to have anti-inflation anti-currency devaluation component. In this article, we explore the feasibility of adding commodity exposure to an income producing portfolio. Commodity ETFs are effective tools to cope with the current situations. In a portfolio that is designed to preserve capital for retirement needs. However, because of volatile and somewhat dangerous nature of commodites, one needs to actively manage such a portfolio by adopting tactical asset allocation strategies.
Income producing ETFs such as high yield stock ETFs and bond ETFs can be used to build a lower risk portfolio for retirement income producing purpose. We study the two plans: one is without commodity exposure and the other one with the exposure.
Retirement Income ETFs with Commodities plan is an extension to Retirement Income ETFs: adding extra commodity asset class with PowerShares DB Commodity Index (DBC) and GreenHaven Continuous Commodity (GCC). This plan consists of 37 funds. These funds enable investors to gain exposure to 6 major assets: US Equity, Commodity, Foreign Equity, Emerging Market Equity, REITs, Fixed Income. Compared with Retirement Income ETFs, this plan has two additional ETFs that represent the extra commodity asset class.
The following is the list of the candidate ETFs in the Retirement Income ETFs with Commodities:
| The list of minor asset classes covered by Retirement Income ETFs with Commodities |
Commodities Broad Basket: DBC, GCC
Diversified Emerging Mkts: EEM, VWO, DEM
Emerging Markets Bond: EMB, PCY
Foreign Large Value: PID, IDV
Global Real Estate: RWX
High Yield Bond: HYG
Inflation-protected Bond: TIP
Intermediate Government: IEI
Intermediate-term Bond: CIU, CORP, MBB
Large Blend: VIG
Large Value: DVY, SDY, VYM, FVD
Long Government: IEF, TLT
Long-term Bond: LQD, VCLT
Mid-cap Value: PEY
Miscellaneous Sector: PFF
Muni National Long: MUB
Muni Short: SHM
Real Estate: IYR, ICF, VNQ
Short Government: SHY
Short-term Bond: CSJ, VCSH
World Bond: BWX, WIP |
As of Mar 24, 2011, Retirement Income ETFs with Commodities investment choice is rated as and Retirement Income ETFs investment choice is rated as 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:
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).
Performance chart (as of Mar 24, 2011)
Performance table (as of Mar 24, 2011)
Discussions:
1. Commodity ETFs are volatile. In fact, PowerShare DB Commodity Index ETF (DBC) lost 32% in 2008 while iShares S&P GSCI Commodity Index (GSG) lost a whopping 46% in the same year.
2. Simply adding commodity ETFs to a strategic asset allocation portfolio (buy and hold with regular rebalancing) did not improve the returns in the past five years. This is again due to the big loss incurred in commodtiy ETFs.
3. Adding commodity ETFs as fund candidates in a tactical asset allocation portfolio, however, can improve returns. In the past five years, Retirement Income ETFs with Commodities Tactical Asset Allocation Moderate had extra 1% annualized return over Retirement Income ETFs Tactical Asset Allocation Moderate.
In conclusions. commodity ETFs are effective tools to cope with the current situations. In a portfolio that is designed to preserve capital for retirement needs. However, because of volatile and somewhat dangerous nature of commodites, one needs to actively manage such a portfolio by adopting tactical asset allocation strategies.
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:DBC,GCC,GSG,EEM,VWO,DEM,EMB,PCY,PID,IDV,RWX,HYG,TIP,WIP,IEI,CIU,CORP,MBB,VIG, DVY,SDY,VYM,FVD,IEF,TLT,LQD,VCLT,PEY,PFF,MUB,SHM,IYR,ICF,VNQ,SHY,CSJ,VCSH,BWX,
Exchange Tickers: (DBC),(GCC),(GSG),(EEM),(VWO),(DEM),(EMB),(PCY),(PID),(IDV),(RWX),(HYG),(TIP),(WIP),(IEI),(CIU),(CORP),(MBB),(VIG),(DVY),(SDY),(VYM),(FVD),(IEF),(TLT),(LQD),(VCLT),(PEY),(PFF),(MUB),(SHM),(IYR),( ICF),(VNQ),(SHY),(CSJ),(VCSH),(BWX)
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- Initiating Tracking of US Subclasses
02/22/2011
We are initiating weekly tracking of the nine different styles or subclasses in the US Equity asset class. We use ETFs to represent each sub-class. We track returns over 1, 4, 13, 26, and 52 weeks and aggregate them to get a trend score. We then track the trend score to see the direction of each representative ETF in the subclass. By using an ETF from the same provider, we are attempting to normalize out performance of the ETF over the performance of the subclass.
|
Assets Class
|
Symbols
|
02/18
Trend
Score
|
02/11
Trend
Score
|
Direction
|
|
Russell Smallcap Growth
|
IWO
|
20.85%
|
19.88%
|
^
|
|
Russell Smallcap Index
|
IWM
|
18.7%
|
17.58%
|
^
|
|
Russell Midcap Growth
|
IWP
|
18.3%
|
18.8%
|
v
|
|
Russell Smallcap Value
|
IWN
|
17.28%
|
16.08%
|
^
|
|
Russell Midcap Index
|
IWR
|
16.68%
|
16.74%
|
v
|
|
Russell Midcap Value
|
IWS
|
15.91%
|
15.66%
|
^
|
|
Russell Largecap Growth
|
IWF
|
14.31%
|
14.08%
|
^
|
|
Russell Largecap Index
|
IWB
|
13.44%
|
13.04%
|
^
|
|
Russell Largecap Value
|
IWD
|
13.27%
|
12.67%
|
^
|
The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).
We note that most of the of the sub-classes are positive as the US bull market continues. We also note that Midcap is dropping in comparison to Smallcap - Midcap has been at the top of the list but is starting to be replaced by Smallcap. Finally we note that the order within a sub-class is Growth, Index (Blend), Value.
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Although the entire top three dropped compared to the prior week, the smalcaps dropped less than the midcap stock. The continuing bull market is moving investors away from the relative safety of large cap to the small cap stocks. The midcap, which had been a nice midway point, is being supplanted by the smallcap options as investors seek to maximize returns.
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The large cap stocks are solidly at the bottom of the table as investors look for higher returns. We note that the Largecap Value has the best performance in the short term even though it has had the poorest return over the longer time horizon.
We would expect to see this picture to remain for some time unless the unrest in the Middle East and North Africa causes investors to look for safer US equities.
Symbols:VCR,VDC,VIG,VWO,VDE,VEA,VGK,EDV,VFH,VEU,VSS,VUG,VHT,VYM,VIS,VGT,BIV,VCIT,BLV,VCLT,VGLT,VAW,MGC,MGK,MGV,VO,VOT,VOE,VMBS,VPL,VNQ,BSV,VGSH,VB,VBK,VBR,VOX,BND,VTI,VT,VPU,VTV,IJK,VBK,QQQQ,MDY,IWO,IJT,IJH,VB,VXF,IWP,IJR,VO,VOT,IWR,IJJ,VBR,IJS,IWN,RSP,IWM,IWS,VOE,VTV,IWC,SCHA,VTI,DIA,VUG,IWF,SPY,IWB,SDY,IVW,VIG,IVV,IWD,OEF,IVE,DVY,
Disclosure:
MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
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- E-Trade ETF Plan Hits Most of the High Notes
02/16/2011
ETrade All-Star ETF plan has recently been announced as no/low cost ETF plans become increasingly widespread. The company has attempted to make their selection on criteria such as low expense ratio, tracking error, liquidity, style purity, underlying holdings, and how well the ETF represents the index it seeks to replicate. In addition, ETFs chosen are passively managed, have at least 6-months trading history and are sponsored by a well balanced investment firm.
The growth in number of ETFs are such that many of them are still new. In our analysis, we ignore ETF's that have less than one year's history which may negatively impact returns in the short term but, over time, they will come on-line and provide greater diversification.
The plan consists of 40 funds giving exposure to 5 major assets: US Equity, Foreign Equity, REITs, Emerging Market Equity, Fixed Income.
| Asset Class | Ticker | Name |
| LARGE BLEND |
RSP |
Rydex S&P Equal Weight |
| LARGE BLEND |
SPY |
SPDR S&P 500 |
| LARGE GROWTH |
IWF |
iShares Russell 1000 Growth Index |
| LARGE GROWTH |
MGK |
Vanguard Mega Cap 300 Gr Index ETF |
| LARGE VALUE |
IWD |
iShares Russell 1000 Value Index |
| LARGE VALUE |
DIA |
SPDR Dow Jones Industrial Average |
| LARGE VALUE |
VYM |
Vanguard High Dividend Yield Indx ETF |
| LARGE VALUE |
MGV |
Vanguard Mega Cap 300 Value Index ETF |
| MID-CAP BLEND |
VO |
Vanguard Mid-Cap ETF |
| Mid-Cap Growth |
VOT |
Vanguard Mid-Cap Growth ETF |
| MID-CAP VALUE |
VOE |
Vanguard Mid-Cap Value ETF |
| SMALL BLEND |
IWM |
iShares Russell 2000 Index |
| Small Growth |
IWO |
iShares Russell 2000 Growth Index |
| SMALL VALUE |
IWN |
iShares Russell 2000 Value Index |
| Emerging Markets Bond |
EMB |
iShares JPMorgan USD Emerg Markets Bond |
| Emerging Markets Bond |
PCY |
PowerShares Emerging Mkts Sovereign Debt |
| High Yield Bond |
HYG |
iShares iBoxx $ High Yield Corporate Bd |
| High Yield Bond |
JNK |
SPDR Barclays Capital High Yield Bond |
| Inflation-Protected Bond |
TIP |
iShares Barclays TIPS Bond |
| Intermediate Government |
IEI |
iShares Barclays 3-7 Year Treasury Bond |
| Intermediate Government |
AGZ |
iShares Barclays Agency Bond |
| Intermediate Government |
ITE |
SPDR Barclays Capital Interm Term Trs |
| Intermediate-Term Bond |
AGG |
iShares Barclays Aggregate Bond |
| Intermediate-Term Bond |
CFT |
iShares Barclays Credit Bond |
| Intermediate-Term Bond |
BIV |
Vanguard Intermediate-Term Bond ETF |
| Intermediate-Term Bond |
BND |
Vanguard Total Bond Market ETF |
| LONG GOVERNMENT |
TLH |
iShares Barclays 10-20 Year Treasury Bd |
| Long-Term Bond |
BLV |
Vanguard Long-Term Bond Index ETF |
| SHORT GOVERNMENT |
SHY |
iShares Barclays 1-3 Year Treasury Bond |
| Short-Term Bond |
BSV |
Vanguard Short-Term Bond ETF |
| WORLD BOND |
BWX |
SPDR Barclays Capital Intl Treasury Bond |
| WORLD BOND |
BWZ |
SPDR Barclays Cap S/T Intl Treasury Bond |
| WORLD BOND |
WIP |
SPDR DB Intl Govt Infl-Protected Bond |
| DIVERSIFIED EMERGING MKTS |
BIK |
SPDR S&P BRIC 40 |
| DIVERSIFIED EMERGING MKTS |
VWO |
Vanguard Emerging Markets Stock ETF |
| Foreign Large Blend |
EFA |
iShares MSCI EAFE Index |
| Foreign Large Value |
IDV |
iShares Dow Jones Intl Select Div Idx |
| Foreign Small/Mid Value |
SCZ |
iShares MSCI EAFE Small Cap Index |
| Global Real Estate |
RWO |
SPDR Dow Jones Global Real Estate |
| REAL ESTATE |
RWR |
SPDR Dow Jones REIT |
This is a good selection of funds which hit the main notes -- good choices in fixed income and the US and choices for international and domestic real estate as well as multiple selections in Foreign and emerging market classes.
The US selections have one in the top ten performance ranking and so US there is room for improvement there.
|
TKR
|
Name
|
Rank
|
5 Yr AR%
|
3yr AR%
|
1yr AR%
|
MPIQ Score
|
|
IWO
|
iShares Russell 2000 Growth
|
5
|
3.73%
|
5.45%
|
39.77%
|
55.4%
|
|
VO
|
Vanguard Mid-Cap ETF
|
12
|
3.60%
|
3.05%
|
36.00%
|
47.8%
|
|
VOT
|
Vanguard Mid-Cap Growth ETF
|
13
|
0.00%
|
3.26%
|
42.68%
|
47.6%
|
|
IWN
|
iShares Russell 2000 Value Index
|
18
|
1.61%
|
3.65%
|
32.80%
|
41.5%
|
|
RSP
|
Rydex S&P Equal Weight
|
19
|
3.45%
|
3.58%
|
27.38%
|
39.7%
|
|
IWM
|
iShares Russell 2000 Index
|
20
|
2.26%
|
3.50%
|
29.63%
|
39.4%
|
|
VOE
|
Vanguard Mid-Cap Value ETF
|
22
|
0.00%
|
2.95%
|
29.26%
|
33.7%
|
|
DIA
|
SPDR DJ Industrial Average
|
27
|
4.35%
|
0.33%
|
19.15%
|
28.3%
|
|
IWF
|
iShares Russell 1000 Growth Index
|
29
|
3%
|
2.21%
|
17.76%
|
26.4%
|
|
SPY
|
SPDR S&P 500
|
30
|
2.07%
|
-0.11%
|
21.68%
|
25.7%
|
|
IWD
|
iShares Russell 1000 Value Index
|
36
|
1.14%
|
-2.81%
|
18.67%
|
16.7%
|
|
MGK
|
Vanguard Mega Cap 300 Growth
|
NRV
|
|
MGV
|
Vanguard Mega Cap 300 Value
|
NRV
|
|
VYM
|
Vanguard High Dividend Yield Indx
|
NRV
|
NRV means not ranked because the trading volume was below our cutoff
There is no commodity alternative. This may have been less important in the past, but with inflation almost inevitable, a commodities option such as DBC would make sense.
As of Feb 15, 2011, this plan investment choice is rated as average based on MyPlanIQ's 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 (89%)
Fund Quality -- Rated as below average (17%)
Portfolio Building -- Rated as average (42%)
Overall Rating: average (49%)
It is important to note that the fund quality rating is lower because of the lack of history -- as time marches on and the ETFs create more of a trail, we expect that rating to increase.
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 5 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
Emerging Market Equity: EEM or VWO
Fixed Income: AGG or BND
Performance chart (as of Feb 15, 2011)
Performance table (as of Feb 15, 2011)
Currently Real Estate, US Equity and Commodities are doing well. US Equity and Real Estate available to Etrade All Star ETFs participants.
The plan runs neck and neck with the benchmark but we would expect it to pull away as more of the funds establish history and can be used in the portfolio.
To summarize, Etrade All Star ETF plan ticks most of the boxes but would be strengthened by adding commodity choices.
Disclosure:
MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
Symbols:SPY,VTI,EFA,VEU,EEM,VWO,IYR,VNQ,ICF,AGG,BND,HYG,JNK,PHB,CIU,BIV,GWL,PFA,IVE,IWW,JKF,VTV,ELV,PWV,RPV,SCHV,SCZ,EFV,PID,DWM,IFGL,RWX,IGOV,BWX,WIP,IVV,IYY,IWV,VV,DLN,RSP,SCHX,SHY,SHV,VGSH,PLK,USY,TLT,TLH,IEF,EDV,VGLT,TLO,PLW,IVW,IWZ,JKE,VUG,ELG,QQQQ,RPG,SCHG,IJJ,IWS,JKI,VOE,EMV,PWP,RFV,UVU,IJH,IWR,JKG,VO,MDY,EMM,PJG,DON,EZM,MVV,IJS,IWN,JKL,VBR,DSV,PWY,RZV,UVT,IJR,IWM,JKJ,VB,DSC,PJM,DES,SAA,UWM,SCHA,GMM,PXH,DEM,SCHE,CLY,LQD,BLV,VCLT,PCY,CSJ,BSV,VCSH,IEI,VGIT,ITE,IJK,IWP,VOT,EMG,PWJ,RFG,UKW,IJT,IWO,JKK,VBK,DSG,PWT,RZG,UKK,TIP,DBC
labels:IRA,Retirement,Investment,ETF,Portfolio,construction,
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- American Express Provides Above Average Investment Choices in Its 401K Plan
12/06/2010
- Retirement Income Portfolio Building Using ETFs and Asset Allocation Strategies
11/12/2010
