Tag Archives: ideas

4 Things To Understand About Your Portfolio’s Margin Of Safety

By Ronald Delegge Does your portfolio have a margin of safety? I ask that question because the total U.S. stock market (NYSEARCA: SCHB ) has been rocky over the past few weeks and now has a year-to-date (YTD) loss of -1.23%. And since most investors underperform the stock market and the index ETFs tied to it, it’s fair to assume many people have much worse performance. The concept “margin of safety” was originally developed in the 1930s by Benjamin Graham and David Dodd, the founders of modern day value investing. Unlike today’s faceless generation of “roboadvisors” that have never experienced a bear market, let alone survived one, Graham and Dodd lived through the Great Depression so they understood the importance of investing with safety. Although their idea was applied to selecting individual stocks at undervalued prices, Dodd and Graham’s principles about safety are applicable to anyone with a portfolio of investments that owns not just stocks (NYSEARCA: VT ), but bonds (NYSEARCA: JNK ), real estate (NYSEARCA: VNQ ), and even commodities (NYSEARCA: GSG ). Here are four things all individual investors need to understand about their portfolio’s margin of safety: Installing a margin of safety within your portfolio should always happen before a negative event In my online course, “Build, Grow, and Protect Your Money: A Step-by-Step Guide,” I teach how the prudent investor does not wait for a market crash or another adverse global event to build a margin of safety within their investment portfolio. Rather, your portfolio’s margin of safety – just like an insurance policy – is purchased ahead of the accident or crisis in order to protect your capital. Investing money without a margin of safety, whether done deliberately or out of plain ignorance, is negligent. Building an architecturally sound investment portfolio doesn’t happen by chance All structurally strong and healthy portfolios have three crucial parts: 1) the portfolio’s core, 2) the portfolio’s non-core, and 3) the portfolio’s “margin of safety.” (See image below) Each of these containers within your portfolio will complement each other by deliberating holding non-overlapping assets. “I’m a long-term investor” or “the stock market always bounces back” is not prudent risk management Some people have deceived themselves into believing their IRA, 401(k), or other investments require no margin of safety. This group of individuals generally believes they are too wealthy, too experienced, and too smart to have a margin of safety inside their portfolio. It’s a paradox too, because this same group that invests without a margin of safety (or insurance), has insurance (or margin of safety) on their automobiles, homes, and lives. Somewhere along the line, this group of people lacks the same prudent sense to protect their financial assets. Investing in gold and bonds is not appropriate for your portfolio’s margin of safety Many people along with certain financial advisors make the rookie mistake of believing that assets like bonds (NYSEARCA: BND ) or gold (NYSEARCA: GLD ) can be used for a portfolio’s margin of safety. Why is this approach fundamentally wrong? Because both bonds and precious metals – just like stocks and real estate – are subject to daily fluctuations and can lose market value. For example, anybody that bought gold at its height in mid-2011 is now down over 42% and should know from first hand experience that gold is an inappropriate tool for margin of safety money. In conclusion, implementing your portfolio’s margin of safety should happen when market conditions are favorable, not when it’s raining cannonballs. And if you’re caught in the unfortunate situation where you failed to implement a margin of safety during good times and market conditions have deteriorated, the next most logical moment to implement your margin of safety is immediately. Disclosure: None Original Post

Support The Environment And Profit With Fossil Fuel Free ETFs

The ongoing Paris climate talks have brought green investing back into focus. As concerns about the harmful impact of fossil fuels on the environment continue to grow, many investors are looking to eliminate fossil fuels related exposure from their portfolios and invest in cleaner alternatives. A growing number of institutional investors like pension funds, charities and endowments are increasingly divesting from fossil fuel companies. Recently, New York’s comptroller announced plans to invest the state retirement fund assets in companies with lower carbon emissions via an index designed by Goldman Sachs. Many retail investors are also interested in getting oil, gas and coal companies out of their portfolios, and fossil fuel free or low carbon ETFs are a great investment option for them. They help investors to exclude companies that are not aligned with their values and yet earn market-like returns. In the current market scenario, apart from moral and ethical concerns, financial concerns also should deter investments in fossil fuels. Looking at the shorter term, with oil price expected to stay low, fossil fuel investments look bad and even in the longer term, there is a case for avoiding these investments as governments all over the world work together to limit carbon emissions. To learn more about a couple fossil fuel free/low carbon ETFs – SPDR S&P 500 Fossil Fuel Free ETF ( SPYX ) and iShares MSCI ACWI Low Carbon Target ETF (NYSEARCA: CRBN ), please watch the short video below: Original Post

The Impact Of Adding Small And Mid-Cap Funds To Dividend Growth Portfolios

Small and Mid-Cap funds provide better growth over the long run. Growth and income for early retirees or investors with longer time horizons. Dividend Growth of mid-cap ETF IJH as good as VIG. The fundamentals of Dividend Growth Investing are very appealing: You invest in a number of solid companies with a growing dividend that provide for increased income every year or in an index fund that tracks a dividend index, like SDY or VIG . Many of the companies that are suitable to provide a growing income stream are from the large cap and value segment of the market. The question I am trying to answer is if investors with a longer-term horizon who are not retired yet or maybe early retirees may potentially improve long-term returns without losing too much income by adding some small and mid-cap ETFs without introducing too much extra volatility. Let’s assume a portfolio of 50% Dividend Growth stocks as represented by the Vanguard Dividend Appreciation ETF and 50% evenly split between a small and midcap index ETF. I am using the iShares Core S&P SmallCap ETF (NYSEARCA: IJR ) and the iShares Core S&P MidCap (NYSEARCA: IJH ) for this purpose. VIG tracks the NASDAQ US Dividend Achievers Select Index, which consists of companies that have a record of increasing dividends over time. The current yield is 2.28% and the expense ratio is 0.1. The top 10 holdings are listed below: IJR tracks the S&P SmallCap 600 Index with an expense ratio of 0.12% and yields 1.37%. The top 10 holdings are: IJH tracks the S&P Midcap 400Index with an expense ratio of 0.12% and yields 1.54%. The top 10 holdings are: Comparing the returns for the portfolio consisting of 50% VIG, 25% IJR and 25% IJH to just using a dividend growth approach since 2007 (inception of VIG): Portfolio Initial Balance Final Balance CAGR StDev 50% VIG, 25% IJR and IJH each 10,000 18,908 7.40% 16.06% 100% VIG 10,000 17,571 6.53% 13.87% Period for Jan 2007 to Nov 2015 As expected, the more diversified portfolio had a better growth over the period. Extrapolating these growth rates to 30-year time horizon can make quite a difference: 7.40% growth rate for a 100,000 portfolio for 30 years: $851,390 6.53% growth rate for a 100,000 portfolio for 30 years: $667,049 These numbers are not inflation-adjusted Taking a look at the actual dividends paid definitely shows wide swings for the small cap ETF but the mid-cap ETF IJH seems to be doing even better than VIG for dividend growth. Year IJR Div IJR Div Growth IJH Div IJH Div Growth VIG VIG Div Growth 2015 YTD 1.136526 tbd 1.483874 tbd 1.344 tbd 2014 1.400564 28% 1.942176 12% 1.585 14% 2013 1.09278 -15% 1.727924 19% 1.388 -2% 2012 1.292742 85% 1.451346 30% 1.41 20% 2011 0.69955 15% 1.115373 150% 1.172 58% 2010 0.606336 377% 0.44677 121% 0.742 2009 0.127209 -29% 0.202447 -24% 0 2008 0.178755 0.2657 0.6283 Conclusions: The mix of mid-cap and small-cap stocks improve the long-term performance of a portfolio. For consistent income, I would stick to a mid-cap fund along with dividend growth investing. While the yield is lower for the mid-cap fund, it is not drastically lower than VIG. I used VIG for this analysis since it is tracking the Nasdaq Dividend Achievers index, is very liquid and has a long history. Higher yields plus dividend growth are quite achievable through individual stock investing if you are so inclined or by choosing a higher yielding index fund like SCHD which does not have a very long history yet.