Tag Archives: investment

Proposed Allocation

Two weeks ago I wrote an article on Seeking Alpha discussing the ETFs that will comprise the core of our future portfolio . My goal, in all aspects of my life, is to always be learning and growing. Part of that process is to challenge myself and my ideas. My wife and I have run a bifurcated portfolio , comprised almost exclusively of individual stocks, for the past several years. While I thoroughly enjoy researching and valuing companies currently, I can see that the day is coming when I’ll want to be a much more passive investor. I anticipate achieving semi-retirement a couple years out, and at that time I’d like to transition to a portfolio which is maybe 30% individual stocks… with the rest being index ETFs and cash. Recently, I have begun to think it’s arrogant to think that our portfolio of (mostly) individual stocks can provide the diversification we require… while ‘not’ also requiring a great deal of time to manage. I also received a few comments and emails last week asking me why I wasn’t just proposing a portfolio of strictly ETF and index funds. I want to retain 20% to 30% of the portfolio in individual funds, because there are some truly amazing companies available to the investing public. I expect these companies to compound our capital for decades to come! So why not just invest in these amazing individual companies?! Two reasons: 1) I may be wrong, and it’s pure arrogance to think otherwise; and 2) I don’t believe there are enough of these truly amazing companies, that I could build a diversified portfolio out of them… even if I had the time to manage it. Simply put, I am looking to strike the right risk/reward balance. With that background expressed, below is my desired portfolio allocation. Please note that this includes my wife’s and my capital, as well as the trust fund we set up for our children. 25% Individual Stocks 20% Cash (or cash equivalents)* 15% Vanguard Total Stock Market ETF (NYSEARCA: VTI ) 15% Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) 15% Vanguard FTSE All-World ex-U.S. ETF (NYSEARCA: VEU ) 10% Vanguard REIT ETF (NYSEARCA: VNQ ) *Reduced by 10% when bonds re-enter our portfolio Individual Stocks First, let’s talk about what these categories mean. Within Individual Stocks, I mean both the amazing companies I want to hold for the long term (like Union Pacific (NYSE: UNP ), Visa (NYSE: V ), Coca-Cola (NYSE: KO ), etc.) and the “Deep Value” opportunities that present themselves from time to time. While these “Deep Value” opportunities usually manifest themselves as small and under-reported companies, they can also take the form of commodities or alternatives. Agricultural commodities are looking interesting to me today and gold will likely be appealing in a few months. My intention with this group is that the vast majority of this group be long term holdings… and the remainder be allocated toward alternatives and deep-value trades. Bonds You may have noticed, correctly may I add, that our portfolio will not have a bond allocation for the foreseeable future. Given our young age, mid-thirties, and the ultra-low interest rates… we have chosen to shift any bond allocation to other areas of our portfolio. If rates were to suddenly jump a tremendous amount, it’s possible bonds could join our portfolio… but it’s not likely for the foreseeable future. U.S. Stocks The next question I am likely to receive surrounds how we could only allocate 15% to U.S. Stocks (in the form of Vanguard’s Total Stock Market ETF ( VTI )). I will be quick to point out that the ‘vast’ majority of the individual stocks we invest in, are in fact US stocks. Therefore, it’s reasonable to assume that nearly 40% (25% individual stocks and 15% VTI) will be invested in U.S. stocks. Given that I am paid in U.S. dollars and the property we own is in the U.S., I don’t feel like we are short-changing our homeland. Around 40% of the world’s global equity capitalization is sold on U.S.-based markets. Therefore, I feel my U.S. stock allocation is right where I want it to be, especially when you back cash out of the equation. Emerging Markets I frequently receive email questions concerning why I think Emerging Markets are so well-represented in our portfolio. The simple fact is that the majority of global growth will come from countries which are now called “emerging”. Around most of the developed world, populations are barely growing… if they are growing at all. However, the populations of “emerging” markets are growing much more rapidly. There is some elevated risk that those local governments won’t enforce the rule of law, or more likely that those governments will nationalize your investment, but I think that is a risk in developed countries as well… just a little bit smaller risk. Foreign Stocks There are a ton of companies in this world, with plenty of market capitalization to go with them. To gain exposure to these markets, we will utilize Vanguard’s FTSE All World ex-U.S. ETF ( VEU ). It is important to note that nearly one-fifth (18%) of this ETF is comprised of companies from emerging market economies, so there is this overlap. The rest of the ETF is comprised of companies from developed counties (like Germany, the U.K., Japan, etc.). Real Estate Cash-flowing real estate can be a great investment. Unfortunately, our investable capital is not enough to purchase a diversified real estate portfolio in our part of Florida. We can, however, invest in real estate through Vanguard’s REIT ETF ( VNQ ), with the added benefit of instant diversification and much-improved liquidity. If I had the time and inclination to be a full-time landlord, I would prefer to go that route… but it seems unlikely on any large scale. So, with the funds listed above, we intend to transition to a simpler… and less time consuming… investment approach. Last week, I sent an email out to our subscribers discussing which current investments I was looking to rotate out of in the coming months. I also identified a few of the investments I shouldn’t have made, as I think it’s important to learn from our mistakes. If you would like to receive emails like these in the future, sign up for our email list by completing the box on the right side of our homepage. I hope this holy week is fully of good times and great memories for you all. Take care. What do you think of our allocations, and how do they compare to your own? Disclosure: Long VWO, KO, UNP, V. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. I am not a financial professional. The information above can be found at Vanguard.com.

VTINX: An Excellent ‘Set And Forget’ Retirement Income Fund

Summary VTINX is a fund-of-funds, but Vanguard does not charge any additional management fee. Globally diversified- about 30% equities, 70% fixed income. The fund’s ten year record puts in the top 10% of its peers. Morningstar has set up a group of mutual fund categories for Target-date retirement funds. These funds often appear in 401k and other retirement plans. A Target-date portfolio provides a diversified exposure to stocks, bonds, and cash for investors who have a specific scheduled retirement date. These portfolios aim to provide investors with an attractive level of return and risk, based solely on the target date. Over time, management adjusts the allocation among asset classes to more conservative mixes as the target date approaches. Morningstar divides target-date funds into the following categories: Target-Date 2000-2010 Target-Date 2011-2015 Target-Date 2016-2020 Target-Date 2021-2025 Target-Date 2026-2030 Target-Date 2031-2035 Target-Date 2036-2040 Target-Date 2041-2045 Target-Date 2050+ Retirement Income Many mutual fund families offer target-date mutual funds that roughly correspond to the Morningstar categories. For example, Vanguard currently offers twelve target-date funds: Target Retirement 2010, Target Retirement 2015, Target Retirement 2020, Target Retirement 2025, Target Retirement 2030, Target Retirement 2035, Target Retirement 2040, Target Retirement 2045, Target Retirement 2050, Target Retirement 2055, Target Retirement 2060, Target Retirement Income In theory, Target Retirement Income is the only one that is not supposed to continually change over time. Each of the other funds gradually evolves until seven years after their retirement income date when they are merged into Target Retirement Income. For example, Target Retirement 2020 will eventually resemble the Target Retirement Income fund in the year 2027. Of course, theory is not always the same as practice. In practice, Target Retirement Income has not been entirely static over the years. There have been several changes since inception: 2006: the allocation to stocks was increased from 20% to 30%, and three foreign stock funds were added. 2010: the allocation to foreign stocks was increased from 6% to 9%, and the three foreign stock funds were consolidated into Total International. 2013: A 14% position in Total International Bond was added, and Inflation-Protected Securities and Prime Money Market funds were dropped and replaced with Short-Term Inflation Index. 2015: The international equity allocation will increase from 30% to 40% of the equity allocation, and the international fixed income allocation will rise from 20% to 30% of nominal fixed income exposure. Overall Objective and Strategy The Target Retirement Income Fund is designed for investors already in retirement. The primary objective is current income with some capital appreciation. The fund currently invests in five Vanguard index funds. The fund holds approximately 30% of assets in equities and 70% in bonds. Fund Expenses The Vanguard Target Retirement Income Inv ( VTINX) is a fund-of-funds, but Vanguard does not change any management fee to assemble the funds for you. The expense ratio is 0.16% only because the five acquired funds. This is 67% lower than the average expense ratio of other mutual funds in this category. Minimum Investment VTINX has a minimum initial investment of $1,000. Past Performance VTINX is classified by Morningstar in the “Retirement Income” or RI category. Compared with other mutual funds in this category, VTINX has had solid performance, largely because of its low expenses. The fund is more defensive than most of its peers, and tends to outperform in weak markets like 2008, while underperforming in very strong years like 2009. These are the annual performance figures computed by Morningstar since 2005. VTINX Category (RS) Percentile Rank 2005 3.33% 3.30% 48 2006 6.38% 7.34% 56 2007 8.17% 4.46% 1 2008 -10.93% -18.06% 6 2009 14.28% 18.36% 80 2010 9.39% 8.94% 42 2011 5.25% 1.60% 9 2012 8.23% 9.01% 67 2013 5.87% 7.36% 56 2014 5.54% 4.36% 19 YTD -0.53% -1.99% 5 Last 5 Years 4.99% 3.67% 10 Source: Morningstar Ten Year Performance Graph VTINX – Current Portfolio Composition Vanguard Total Bond Market II Index Fund 37.3% Vanguard Total Stock Market Index Fund 18.0% Vanguard Short-Term Inflation-Protected Securities Index Fund 16.8% Vanguard Total International Bond Index Fund 16.0% Vanguard Total International Stock Index fund 11.9% The current SEC Yield is 2.06%. Mutual Fund Ratings Lipper Ranking : Funds are ranked based on total return within a universe of funds with similar investment objectives. The Lipper peer group is Income. 1 Yr#92 out of 587 funds 5 Yr#208 out of 457 funds 10 Yr#68 out of 266 funds Morningstar Ratings : The Morningstar category is Retirement Income Overall 4 stars Out of 144 funds 3 Yr 4 stars Out of 144 funds 5 Yr 4 stars Out of 132 funds 10 Yr 4 stars Out of 64 funds Fund Management The fund is managed by three individuals in Vanguard’s Equity Investment Group. Michael H. Buek, CFA, Principal William Coleman Walter Mejman Comments There is a lot of research showing that diversification across regions, asset classes and market capitalizations can enhance long term risk adjusted returns. That is a key idea behind Vanguard’s target date retirement funds which allocate funds according to expected returns and investor risk tolerance based on the number of years left until retirement. Diversification is also useful for those already retired. The Vanguard Target Retirement Income Fund provides a low cost, well diversified balance of income and growth. As of November 30, 2015, the fund had $10.58 billion invested. The fund’s fixed income holdings (around 70%) are well diversified including short, intermediate and long-term governments, agency and investment-grade corporate bonds. In addition, the fund owns inflation-protected, mortgage-backed and asset-backed securities and foreign bonds issued in non-U.S. currencies, but hedged by Vanguard to minimize currency exposure. The stock holdings (around 30%) are a diversified mix of U.S. and foreign stocks including large-caps, mid-caps and small caps. VTINX can serve very well as a core holding in a retirement account, and may also be used in taxable accounts by retired investors when IRA required minimum withdrawals are more than they need for living expenses. VTINX normally pays out quarterly distributions, but Vanguard allows you to set up your own automatic withdrawals as needed.

Junk Bonds: Time To Start Accumulating – Yield Over 21%

Summary Overselling mostly done in the junk bond space. I am buying for my retirement portfolio: CEFL – over 21% yield. Components of CEFL are trading at heavy discounts, and the security is on the rebound. CEFL: An opportunistic buy. Following my latest article on my high-yield “Model Retirement Portfolio” (6% Dividend Target) published Monday (December 14) on Seeking Alpha, recommending dividend investors to start buying the UBS ETRACS Wells Fargo Business Development Company ETN (NYSEARCA: BDCS ), the shares of the ETN have rallied around 3%. I believe there is much more upside to come, as the sector is still oversold with no real merit. If you have not started to buy, it is not too late. For those who have opted to buy the leveraged version, the UBS ETRACS 2X Leveraged Long Wells Fargo Business Development Company ETN (NYSEARCA: BDCL ), the shares closed over 6% up since Monday. I promised in my Monday article to give an update on the best time to start accumulating on junk bonds. Well, the time has come! I will provide guidance on the best approach. Update on the Junk market space The sector recently experienced heavy losses and a meltdown , leading to heavy redemptions by investors. This was sparked by rock-bottom levels of risk tolerance, persistent downside risk to commodity prices, and turmoil in emerging markets. However, recent comments from high profile investment banks have calmed down the markets: UBS (NYSE: UBS ) reported last Monday: Junk bonds sell off, oil drop worries are overdone. The Chief Investment Officer at Guggenheim Partners stated: There is a “buy” signal for junk bonds. A Goldman analyst stated that investors are being too pessimistic . BlackRock’s Senior Director stated on Monday that junk bonds won’t spark a new crisis. It will be contained. Tracking this sector, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) and the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ) both ended the week with returns (before dividends) of 1.66% and -0.18%, respectively, during the last 5 trading sessions. This is despite heavy losses for the week sustained in all the major indexes. So it looks like we are close to a bottom. Best way to enter the Junk Bond Space To be prudent, I am not investing directly into the junk market ETFs. I am investing with a much more balanced approach using the UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ), a leveraged Exchange Traded Note issued by UBS with a stated yield of over 26%. What exactly is CEFL? CEFL is a fund of “closed-end funds” (basically a fund of funds) issued by UBS. It comes in the form of an exchange-traded note (ETN) linked to the monthly compounded 2x leveraged performance of the ISE High Income index. Its objective is to capture the top 30 closed-end funds as determined by a ranking scheme, allowing investors to take advantage of both event-driven news and long-term trends of the U.S. closed-end fund marketplace. The note is leveraged, so it pays approximately twice the yield of the related index, which comes with a stated yield of 21.78% ( UBS ). The dividend is paid monthly via a variable monthly coupon. CEFL’s top ten components (making up 45% of total holdings) are depicted in the following table, which includes the weight of the security and the discount to net asset value (NAV) and return of capital for 2015. (click to enlarge) Advantages of Investing in CEFL Now: CEFL is not a pure junk bond play. It is a very diversified product which includes, among others, preferred shares, mortgage backed securities, corporate bonds, junk bonds, emerging market bonds, foreign government bonds, investment grade corporate bonds, high yield corporate bonds, and even certain stocks. It offers one of the most diversified ways to invest in the high-yield bond space, as it is basically a “fund of funds”. The security has been selling off since the beginning of the year, both from worries of higher interest rates and from the junk bond crisis. The shares have lost, after dividends, over 17% of their value. Signs of life and rallying the past week: CEFL is up 5.8% during the last 5 trading sessions. This is despite the heavy losses sustained in all the indexes. The S&P (NYSEARCA: SPY ) was down about 1.2%, while the Dow Jones Index (NYSEARCA: DIA ) was down 1.4%. It is a good time to catch them on the way up. CEFL components are still trading at a heavy discount to net asset value. As seen on the table above, the average discount of its 10 top components is 13.1%. So this security is on fire sale. CEFL provides exposure to emerging markets through its bond portfolio. With certain analysts predicting that emerging markets will start recovering in 2016 and 2017, along with the prices of commodities, CEFL will benefit from such a recovery. Several investment bankers, including Goldman, Guggenheim, UBS, and BlackRock, have just started being optimistic. Now that the fears of high rate increase by the Fed have started to dissipate (only 0.25% hike and prudent approach to future hikes), I expect the security to do well in the short and medium term. Other Important Information on CEFL: Not all the stated 21.78% yield is actual dividend. Part of it is a return of capital as some of these funds had to return part of the investment to their shareholders in order to maintain yield. If we have a look at the table above, the average “return of capital” for the 10 largest holdings is 15.3% for the year 2015 (to-date). If we assume the same percentage for all the securities, that will give CEFL an effective yield of 18.4%. CEFL’s dividend is also variable. The security of CEFL is twice leveraged. So any price movement in the underlying securities will have a double effect. Expect volatility, but do not worry much, the fundamentals are good. It may be wise to spread small purchases during a period of one week. Try to average down during down days. Conservative Diversification Please note that I use conservative diversification to protect my “high dividend portfolio”. I have started buying CEFL but will only allocate around 3% of my total portfolio to the security, especially due to the leverage effect. I advise investors to also take a prudent approach. For this investment, I am happy to get a dividend of over 20%, which means in 5 years, I should have all my capital back and the rest is pure earnings generating additional income. Get alerts for “My Model High-Yield Retirement Portfolio” (6% Dividend Target) I am currently sharing future opportunistic additions to my “Model Retirement Portfolio” (6% Dividend Target), for which I often use ETFs and CEFs to protect my “egg nest” against volatility and against the risk of investing in a single security. Furthermore, my conservative strategy includes scrutinizing and generally avoiding excessively high dividend securities, which may lead to disproportionate risk taking and heavy losses. My target is to have a conservative and well-balanced high-yielding 6% dividend portfolio to generate long lasting income and protect against inflation. Please follow me if you are looking for dividend safety, diversification, and sound investment ideas.