Tag Archives: management

The Best Mutual Fund For A Conservative Investor Retiring Today

Summary The Vanguard Target Retirement 2015 Fund has a simple construction and a low expense ratio. Despite being a very simple portfolio, they have covered exposure to most of the important asset classes to reach the efficient frontier. This is quite simply one of the best constructed portfolios I’ve seen for a worker nearing retirement. Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Vanguard Target Retirement 2015 Fund Inv (MUTF: VTXVX ). This is the kind of fund I would suggest for using in a 401K account in planning out a safe retirement strategy . What do funds like VTXVX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of VTXVX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of VTXVX. Expense Ratio The expense ratio of Vanguard Target Retirement 2015 Fund is .16%. That is higher than some of the underlying funds, but overall this is a very reasonable expense ratio for a fund that is creating an exceptionally efficient portfolio for investors and rebalancing it over time to reflect a reduced risk tolerance as investors get closer to retirement. In short, this is a very solid value for investors that don’t want to be constantly actively management their portfolio. This is the kind of portfolio I would want my wife to use if I died prematurely. That is a ringing endorsement of Vanguard’s high quality target date funds. Bonds or Stocks The Vanguard Target Retirement 2015 fund is currently using a fairly equal allocation between bonds and stock. Over time that allocation will shift to hold more bonds and fewer stocks. The next section breaks it down further. Holdings / Composition The following chart demonstrates the holdings of the Vanguard Target Retirement 2015 Fund: (click to enlarge) This is a fairly simple portfolio. Only five total tickers are included so the fund can gradually be shifted to more conservative allocations by making small decreases in equity weightings and increases in bond weightings. The funds included are the kind of funds you would expect from Vanguard. The top 4 which create most of the returns are very solidly diversified passive index funds. The Vanguard Total Stock Market Index Fund (NYSEARCA: VTI ) is also available as an ETF. I have a significant position in VTI because it carries an extremely low expense ratio and offers excellent diversification across the U.S. economy. Volatility An investor may choose to use VTXVX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. Since the fund includes domestic and international exposure to both equity and bonds, that seems like a fair way to analyze it. (click to enlarge) When we look at the volatility on VTXVX, it is dramatically lower than the volatility on SPY. That shouldn’t be surprising since the portfolio has some large bond positions. Investors should expect this fund to retain dramatically more value in a bear market and to fall behind in a prolonged bull market. The chart above used returns since 2003 so it included a fairly solid fall in 2007. As you can see, the worst drop was significantly less damaging than what the S&P 500 incurred. However, this fund is being regularly rebalanced towards a more conservative weighting and the current portfolio is more conservative than the weightings would have been in 2007. The following chart isolates the last 5 years. (click to enlarge) The volatility has dropped down even further and the beta has fallen from .57 to .52. Within a few years that beta will probably fall under .50. The worst drawdown in the last 5 years was substantially less damaging for VTXVX than it was for the broad equity market. Opinions Warren Buffet has suggested that investors would be wise to simply buy the S&P 500 because many will underperform the market after adjusting for trading costs. To be fair, many will underperform the S&P 500 even before trading costs. For investors that can take on the risk of pure equity positions, that is fine. For investors that don’t have that luxury, this is a remarkably complete fund that works incredibly well as the core of a portfolio. For the investor nearing retirement with this as an option in their employer sponsored account, it should receive extremely strong consideration. Conclusion VTXVX is a great mutual fund for investors looking for a simple “set it and forget it” option for their employer sponsored retirement accounts. It is ideally designed for investors planning to walk out the employer door for the last time in the very near future. Vanguard doesn’t create target retirement date funds for every year, so the next option after this one is the 2020 fund. There is one thing I’d still like to see Vanguard do with this fund. I’d love to see them make an ETF version for easier use in taxable accounts and for investors with different brokerages.

6 Seeking Alpha Series

Summary Where Can I Find Safe Income For Retirement? The Future Of Seeking Alpha and Seeking Alpha On Day 1 & 2. 7 Fat Years Of Event-Driven Investing. Preparing For A Market Collapse. The #1 Stock In The World. Some topics require more than one article on more than one day. In some cases, reader comments drive a series in a new, unexpected direction. In order to make sure that you can find these series in their intended order, I am posting them here for your consideration. Thanks to Seeking Alpha for publishing them and to the readers for reading them and offering (oftentimes) thoughtful feedback. Where Can I Find Safe Income For Retirement? Executive summary This 3-part series attempts to answer the following question: what do you do if you do not want to rely on a paycheck? This is for anyone looking for safety who does not want to overpay in order to get steady investment income. The Future Of Seeking Alpha Executive summary This 2-part series explores the big changes taking place at Seeking Alpha, including new management and new premium services such as Sifting the World . Seeking Alpha On Day 1 & 2 Executive summary How should a new investor begin? How can you get the fullest use out of Seeking Alpha? This is what I have learns over my years of writing on SA and my lifetime of investing. 7 Fat Years Of Event-Driven Investing Executive Summary What have I done at Rangeley Capital for the past seven years? I focus on the annual investment ideas that I have disclosed publicly for the subsequent year. I discuss the results of those ideas as well as similar opportunities available in today’s market. Then I switch gears to consider the prospective opportunities for the next seven years. The commonality between these ideas is that they do not depend upon any tailwind from the overall equity markets. I expect no such tailwind in the years ahead. Preparing For A Market Collapse Executive summary In an uncertain world, you can protect yourself with cash savings and disciplined position sizing. The key to being prepared is to have redundancy in each of the systems that you rely upon. For some investors, shorting expensive, risky, and precarious stocks can add to safety. In addition to a number of individual securities, I offer my best ideas for a country, sector, and asset class to short. The series concluded with a discussion of key metrics to help reveal when the best time to short might be. The #1 Stock In The World Executive summary At today’s prices, what is the world’s best stock? This 2-part series explores counterparty selection, volatility, how I find ideas and what I do with them, as well as my top three current favorites. Share this article with a colleague

My ETF Pick List: ETFs For Risk And Value Seekers

Summary As the economy is slowing down, it is worth having a look at options to protect your portfolio such as a short ETF. People overestimate their investing skills and therefore are at risk of losing money which can be prevented. ETFs offer the opportunity to investors who simply lack the time or expertise of a certain fund, industry or country but would like to reap the benefits. The water industry has taken a hit the last few weeks, creating numerous buy opportunities. Some people advocate not to invest in ETFs because you diversify too much of your wealth, and as a result, you might diminish your return. Moreover, you pay an additional cost for buying an ETF (the expense ratio). Yet, statistics have always shown that passive traded funds have beaten active funds over an extended period of time . In the same article, it is also shown that a higher expense ratio is often linked to lower performance rates. Furthermore, investors overestimate their ability to predict market events and, therefore, take too much risk in the market. Reasons enough to have a look at what ETFs have to offer. In this article, I will keep it simple and show a wide availability of ETFs which I consider having significant potential for any kind of investor, retiree to value and risk seekers. I always divide a small portion of my portfolio to ETFs to diversify but also to improve my mathematical odds in regards to obtaining better than average returns. The mathematical probability that you pick a winner out of 30 stocks is lower than obtaining a positive return out of an ETF which tracks 30 stocks at once. Furthermore, I sometimes lack the experienced expertise in a specific sector and, therefore, an ETF is a perfect solution to that problem. ETFs for risk-seeking investors As some people are worried about the progress of economies in the world, such as Germany (and as a result slowing down growth and tumbling markets ) I picked a few ETFs which could take advantage of this situation. This is useful for investors who lack knowledge about how to use option strategies or futures to short a market. One can short the American stock market by, for example, buying the ProShares Short QQQ ETF (NYSEARCA: PSQ ) or buying the ProShares Short Dow 30 ETF (NYSEARCA: DOG ). Keep in mind that short ETFs comes at a higher price as their expense ratio is higher than a normal ETF. In Europe, one could use the ProShares UltraShort FTSE Europe ETF (NYSEARCA: EPV ) to short the stock market of England. Plenty of choices and whenever the market tumbles down I would recommend any of these ETFs if you don’t want to be exposed to higher leverage such as with options or futures. As the bull market has been strong the last few years, the short ETFs have been performing dreadfully: While the opposite ETF, the PowerShares QQQ Trust ETF (NASDAQ: QQQ ), has seen outstanding performance over the last 5 years: Just to prove an important point, this is the performance of QQQ in comparison to Ford (NYSE: F ), Boeing (NYSE: BA ), Wal-Mart (NYSE: WMT ) and Exxon Mobil (NYSE: XOM ), 4 large American multinationals: The graph clearly proves the point that holding these 4 large American multinationals would not have outperformed the market over a period of 5 years. This builds a case towards ETF-based investing, especially as the world of academia has shown many times that investors overestimate their ability to predict market events and, therefore, take too much risk on the stock market. One more argument to prove my point is an example of the economy of Brazil. Once a growth economy, now their currency is hitting a shattering low while unemployment is at a 5-year peak. The ProShares UltraShort MSCI Brazil Capped ETF (NYSEARCA: BZQ ) has been through the roof as a result: This was a much easier choice in comparison to cherry picking any of the stocks on the Brazilian market. ETFs to protect against rising interest rates Furthermore, there are products called Exchange Traded Notes, debt instruments which allow the investor to protect themselves against either rising or diminishing interest rates such as these steepeners and flatteners , the iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) and the iPath U.S. Treasury Flattener ETN (NASDAQ: FLAT ). ETFs for investors seeking value Deep value is hard to find when the stock market is priced at a high P/E. Finding a winner in a bucket of stocks is even more difficult. This is especially the case when it comes to more unknown stocks in sectors which are being ignored by most investors. One of those sectors is the water industry. The water industry comprises of firms that provide drinking water and waste-water services (including sewage water treatment) and irrigation solutions to homes, businesses and manufacturers. The Water Industry (click to enlarge) Source : Water UN The water industry does not receive as much coverage as the solar industry and electric car industry. In my view, this is because the water industry is a bit more boring than the solar and electric car industry. Yet, in my view, it shouldn’t be and there are good reasons for that. Only half a percent of fresh water is being used worldwide while over 1 billion people are still having severe water supply issues: Source : Water UN The water scarcity problem will become much more severe in the coming years: (click to enlarge) Source : Water UN There are 3 water ETFs that play their own individual role in battling the issues of water scarcity. I’ve covered all 3 on Seeking Alpha before: the First Trust ISE Water Index ETF (NYSEARCA: FIW ), the PowerShares Global Water Portfolio ETF (NYSEARCA: PIO ) and the PowerShares Water Resources Portfolio ETF (NYSEARCA: PHO ). Their overall share prices have fallen over the last few months, opening a potential entry point. Conclusion This article is important as it perfectly addresses many of the issues numerous investors currently face – not having the expertise to invest in a sector due to lack of time, wary of investing due to the bull market and the realization that many investors don’t obtain profitable returns overall. Investors tend to overestimate their skills and not every investor is successful. Yet, by following a simple basket of stocks, you enhance your chances of obtaining a positive return while lowering your overall risk. The Brazil ETF clearly indicates that you can also obtain solid above average returns with ETFs. ETFs are an important part of my portfolio due to the above-mentioned reasons. Yet I also hold numerous stocks and financial derivatives in my portfolio (as I work in that specific industry) and consider myself knowledgeable on the industry those firms are active in. When it becomes too specific, I consider ETFs as a good alternative choice. Therefore, I consider the water ETFs as a good value investment for the future. The underlying fundamentals of the water scarcity problems are so underestimated currently in the world that it’s simply a waiting game until investments in these firms will grow significantly. Now is the time to buy these firms. Scarcity of water will spur bright technologists and scientists to invent large scale new technologies in this industry. This will become a very profitable commerce in the future.