Tag Archives: portfolio

Millennials: Here’s Your Best 2016 Investment Portfolio

Congratulations! Here you are. A successful millennial. For the sake of argument, we are going to put you in the middle of this group, generally described as being born roughly between 1980 and 2000. We’ll stipulate that you are born in 1990, so graduated college in 2012 and are now four years into your working career. At 26 years of age, you have a long and bright working future ahead of you. You are clever enough to know that you should start investing now. At the same time, you are not all about money. You don’t want to be a slave to your investments, you want your investments to be a slave to you, and give you both the time and freedom to devote to the things that are important to you. Click to enlarge I’ll cut right to the chase. There are a ton of investment strategies from which you can choose. Here is the one I would suggest. First, open a brokerage account at Fidelity Investments. Second, buy these six ETFs, in the weightings shown: 45% – iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ) 10% – iShares Core High Dividend ETF (NYSEARCA: HDV ) 30% – iShares Core MSCI EAFE ETF (NYSEARCA: IEFA ) 5% – iShares Core MSCI Emerging Markets ETF (NYSEARCA: IEMG ) 5% – iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG ) 5% – iShares TIPS Bond ETF (NYSEARCA: TIP ) Third, set up a schedule to rebalance regularly back to these weightings. That’s it. We’re done. I told you I would keep this brief. You can simply stop right here and implement the plan that I suggest. I’m guessing, though, that you won’t. You’d like to know a little more. OK, then. Feel free to read as little or much of what comes next as you wish. I’ll share a few basic thoughts, and then provide some links to yet further reading if you so desire. What’s So Great About This Portfolio? Simplicity: Containing only six ETFs, this portfolio will be extremely simple to both maintain and track. However, simple does not mean simplistic. I’ll talk about this a little more in the “diversification” section below. Low Costs: The cost, or overhead, is extremely small. Simply put, the greater the expenses your portfolio incurs, the less that makes it into your pocket. If you follow the links to the ETFs I provided above, you will notice that they sport expense ratios of between .03% and .20%. At the allocations I suggest, I calculate that your overall weighted expense ratio comes out to .0835%. That’s right. About eight hundredths of one percent. The rest? Into your pockets, to compound and grow. Zero Commissions: This is an important one. Likely, you will want to set up a regular investment plan, investing small incremental amounts on a regular basis. While ETFs are a great investment vehicle, if you have to pay $8-10 for every transaction, you lose the benefits very quickly. The ETFs I suggest are included in the 70 iShares ETFs that Fidelity allows you to trade commission-free. Diversification: Within the portfolio, you will gain exposure to both domestic and foreign stocks (including a modest allocation to emerging markets), bonds, and TIPS (Treasury Inflation Protected Securities). The weightings I suggest are relatively aggressive; appropriate for someone in their mid-20s to approximately 30. At the same time, I am including an element of defensiveness in the portfolio by including a small weighting directed at quality, dividend-paying stocks, as well as bonds and TIPS. These selections will both generate a little income that you can reinvest over time as well as offer a measure of protection should the market experience a steep decline; allowing you to rebalance the portfolio. Background and Further Reading Finally, let me share a little background information regarding how I came to this specific recommendation, as well as links to some further reading. Late last year, as part of my work as a contributor for Seeking Alpha, I researched the 2016 investment outlooks of several respected investment houses. Using that research as a guide, I created The ETF Monkey 2016 Model Portfolio . Next, I set up and tracked three iterations of the portfolio: Vanguard , Fidelity , and Charles Schwab . While, as I will explain below, I chose to feature Fidelity, you could follow the basic principles set out in this article and set up your portfolio at either Vanguard or Charles Schwab. The key, of course, would be to select ETFs that you could trade commission-free in each case. When I set up the portfolio, I must admit that my initial bias was in favor of Vanguard. Vanguard is a legendary provider, and offers a large selection of ETFs with some of the most competitive expense ratios in the marketplace. However, as I reported in my Q1 update , the Fidelity implementation was actually the top performer of the three. This slight outperformance has continued as of the date I sat down to write this article. Therefore, I decided to use Fidelity as my provider of choice. Finally, here is a little more detail on some recent changes to the iShares Core S&P Total U.S. Stock Market ETF , the largest component of my recommended portfolio, as well as some thoughts on portfolio rebalancing . I hope this brief article has offered a helpful starting point. Feel free to drop your questions and comments below, and I will do my best to answer them. Disclosure: I am not a registered investment advisor or broker/dealer. Readers are cautioned that the material contained herein should be used solely for informational purposes, and are encouraged to consult with their financial and/or tax advisor respecting the applicability of this information to their personal circumstances. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.

The V20 Portfolio #27: When To Rebalance

The V20 portfolio is an actively managed portfolio that seeks to achieve an annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read the last update here . Note: Current allocation and planned transactions are only available to premium subscribers . After a volatile week, the V20 Portfolio declined by 3.2% while the SPDR S&P 500 ETF (NYSEARCA: SPY ) declined by 1.2%. The underperformance can once again be attributed to the largest holding, Conn’s (NASDAQ: CONN ). When To “Average Down” Recently our cash balance has grown as a percentage of the overall portfolio, which can be primarily attributed to the decline in portfolio value as opposed to strategic shifts in allocation. As mentioned earlier, the biggest laggard is Conn’s. You may recall that the V20 Portfolio will continue to purchase shares of a company if fundamentals have not deteriorated, even if price has dropped. In 2016, we did exactly that. Conn’s position would have been 42% smaller had we not made any purchases in 2016. But as share price has continued to drop since the last transaction, I have not yet made any additional purchases for Conn’s, which is a part of the reason why cash allocation has swelled to one of the highest levels since the portfolio’s inception. Why did I make that decision? The truth is that I’ve been looking for the opportunity to “pull the trigger” so to speak. This relates to my rebalancing philosophy. There are many ways to rebalance, but I break them down to systematic and discretionary. The former style follows a predetermined method (e.g. once every quarter according to some specification). As you probably guessed already, the V20 Portfolio’s rebalancing method is discretionary. I believe that too many factors are shifting to warrant a systematic method. However, discretion does not imply randomness. The V20 Portfolio seeks to allocate more capital to stocks with the highest expected rate of return while accounting for the possibility of permanent capital loss . I believe that the smallest position in the portfolio right now, Dex Media, actually has the highest expected return; but due to the high risk of shareholders being wiped out in the restructuring deal, it is not prudent to allocate a significant amount of capital to the stock, no matter the expected return. Bringing the discussion back to the topic of rebalancing; a position essentially shifts between “no exposure” to “too much exposure” at any given time. However, there is no specific number associated with these two groups. Let’s suppose that the ideal allocation is 10% for a certain stock. Should you rebalance when it falls to 9.99%? Or what if it rises to 11%? There is no good answer. However, if we examine the extremes, the answer can become clearer. Using the same example, I don’t think anyone will disagree that rebalancing would be appropriate if the allocation falls to 1%, assuming no changes in fundamentals. There are also short-term considerations. While the focus should be long-term, short-term fluctuations are very real. Each time you place a trade, you are implying that prices shouldn’t go lower, or else you would have waited. This implication exists even if your investment horizon is long-term . There are numerous factors that could lead to sustained mispricing. For Conn’s, the general macro picture for retail has been soft and the credit division’s results may not improve for a while. Both of these factors could put more pressure on the stock, providing better opportunities to accumulate shares. In conclusion, there is no “perfect” time to rebalance. I believe that Conn’s current allocation remains large enough to capture the stock’s significant upside. The allocation could be larger, it could be smaller. However, one thing is certain: if shares continue to fall in the future, there is no doubt that more capital would be allocated to the position. Performance Since Inception Click to enlarge Disclosure: I am/we are long CONN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

The ETF Monkey Vanguard Core Portfolio: 2016 Q1 Update

This article is an update to the following articles: On July 1, 2015, I wrote an article for Seeking Alpha introducing The ETF Monkey Vanguard Core Portfolio . On January 4, 2016, I wrote the 2015 year-end update for the portfolio. On February 11, 2016, following the severe market decline during the first part of 2016, I wrote a follow-up article that detailed a rebalancing transaction that I executed to bring the portfolio back in line with my target weightings. In this article, I will report on the performance of the portfolio for the quarter ended March 31, 2016. Evaluating the Portfolio: Q1 2016 Here is the corresponding Google Finance page for the portfolio as of the market’s close on 3/31/16. Have a look, and then I will offer a few comments. Click to enlarge First, as a reference point, the S&P 500 index closed at 2,043.94 on December 31, 2015 and 2,059.74 on March 31, 2016, for a gain of .77% for the period. Second, the portfolio received dividends totaling $208.56 during this period, bringing the cash balance in the portfolio to $251.53. This came from the 3 ETFs as follows: Vanguard Total Stock Market ETF ( VTI) – $132.00 Vanguard FTSE All-World ex-US ETF ( VEU) – $45.88 Vanguard Total Bond Market ETF ( BND) – $30.68 So how did the portfolio perform? All told, not too badly. The closing value of the portfolio was $49,076.43 as of March 31 vs. $48,348.37 on December 31, for a gain of 1.51%. Therefore, the portfolio outperformed the S&P 500 by .74% over this period. Let’s break down the performance, and reasons, by asset class. Domestic Stocks – During the period, VTI grew from $27,120.60 to 28,825.50, an increase of $1,704.90. Subtracting the $1,382.85 added from the February 11 rebalancing leaves us with a net gain of $322.05. Add in the $132.00 of dividends and VTI gained $454.05 on a base of $27,120.60, a gain of 1.67%. This is a slight outperformance when compared to the S&P 500 index. Foreign Stocks – During the period, VEU grew from $12,588.90 to 13,376.50, an increase of $787.70. However. removing the $761.40 added in the rebalancing transaction leaves us with a net gain of only $26.30. Add in the $45.88 of dividends and VEU gained $72.18 on a base of $12,588.90, a gain of .57%. As compared to the U.S. market, this reflects the continued underperformance of foreign markets. Bonds – During the period, the value of BND declined from $8,076.00 to $6,623.20. However, if we add back the $1,648.20 used in the rebalancing transaction, BND actually increased in value by $195.40. Add in the $30.68 of dividends received and BND gained $226.08 on a base of $8076.00, a fairly stunning increase of 2.80%. This reflected a firming of bond prices as the signs of economic malaise during Q1 appeared to lead the market to conclude that interest rates would remain low for a longer period of time than previously anticipated, including the likelihood of the Fed having to modify it’s goal of raising rates as often in 2016. No Transactions or Rebalancing This Period Here’s how the portfolio stood in terms of its asset allocations at 3/31/16. Click to enlarge As can be seen, due to my February 11 rebalancing and the strong performance of the domestic stock market through March 31, domestic stocks are a little overweight and bonds are underweight. As noted in my rebalancing article, I did this on purpose. I am going to monitor this as time moves forward. My preference will be to increase the bond weighting by using dividends that I will receive moving forward. However, if the weightings get severely out of line, I may have to effect another rebalancing transaction. Summary and Conclusion The portfolio did very well during the quarter, outperforming the S&P 500, my chosen benchmark, by approximately 3/4 of a percentage point. Sadly, it is still down a little over 3% from its inception date of June 30, 2015. As can be seem from the graphic, weakness in foreign stocks is the main culprit, as these entered a very weak period almost immediately following the establishment of the portfolio. Still, it is my belief that a disciplined allocation to foreign stocks will prove beneficial over the long term. Disclosure: I am not a registered investment advisor or broker/dealer. Readers are cautioned that the material contained herein should be used solely for informational purposes, and are encouraged to consult with their financial and/or tax advisor respecting the applicability of this information to their personal circumstances. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.