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Presenting: The ETF Monkey Vanguard Core Portfolio

Summary This article is the “wrapper” that packages my first three articles for Seeking Alpha. We will build and track the ETF Monkey Vanguard Core Portfolio. The complete methodology used to build the portfolio will be outlined, as well as statistics outlining its contents, diversification, and weighted expense ratio. Lastly, I will share details on how to use a cool, free tool to track the portfolio such that you can try it yourself, if interested. In summary, all modesty aside, this is the article that you will want to share with any friends who are interested in trying out ETF investing for the first time. This article is intended as the “wrapper” for the package containing my first three articles for Seeking Alpha. The title of each article led off with the words “Building The Core With Vanguard.” The reasons I selected Vanguard for my first efforts are enumerated in this article from my personal blog. The first article in the series featured domestic stocks, and introduced readers to the very first ETF ever offered by Vanguard, the Vanguard Total Stock Market ETF (NYSEARCA: VTI ). The second featured domestic bonds, and discussed the Vanguard Total Bond Market ETF (NYSEARCA: BND ). The third and final article in the series moved to foreign stocks, and highlighted the Vanguard FTSE All-World ex-US ETF (NYSEARCA: VEU ). Beautiful Simplicity What we will now do is build and track a simple portfolio using just these three ETFs. At first glance, this might seem overly simplistic. After all, there are many ways we could enhance the portfolio, perhaps adding in some REITs, some targeted exposure to a particular country, or the like. I plan to talk about such ideas in future articles. But, for the purpose of this beginning series, the key takeaway will be that simple can also be beautiful . Remember, no less than investing luminaries John C. Bogle and Warren Buffett have featured this concept. Bogle built his career on preaching the advantages of simple index investing, as compared to active management with its accompanying expenses. And Buffett, in his 2013 Shareholder Letter , famously wrote: What I advise here is essentially identical to certain instructions I’ve laid out in my will… My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund . (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers. (Bold highlight mine, for emphasis) And please, don’t confuse the simplicity of holding 3 ETFs with some lack of comprehensiveness or diversification . Here are just a few numbers to consider: Between VTI and VEU , coverage of some 6,316 equities (3,824 in VTI and 2,492 in VEU) as of the latest published statistics, with measurable weightings in at least 46 countries . In BND , 7,364 bonds covering the range of governmental to corporate. In total, then, a combined 13,680 financial instruments. Building Your Portfolio The next question, then, is what relative place, or weighting, should each ETF hold in your portfolio? As you will no doubt quickly surmise, there is no single answer to that question. A whole host of factors can come into play, including one’s age, tolerance for risk, and the like. Where could you look for some help with your decision? One guideline that has commonly been featured over the years is that your stock allocation percentage should equal 100 minus your age . In other words, if you are 30 years of age, 70% of your portfolio should be in stocks, with the remaining 30% in bonds and other “safe” assets. If you are 70 years of age, that ratio should be flipped, such that you only maintain 30% of your portfolio in stocks. However: 1) If you take the time to do any contemporary reading on that generalization, you will find that it has fallen out of favor, in part because (happily) average life expectancy has increased. 2) Of that percentage in stocks, what portion should be domestic and what portion foreign? Wouldn’t it be nice if there were sources to which we could turn to examine precise allocations developed by professional portfolio managers? As it turns out, there are. Many investment houses maintain what are called Target-Date Funds . These are professionally-maintained portfolios designed to steer you towards a projected retirement date. Typically, they use a “fund of funds” approach; investing in various targeted funds they offer per a designed weighting. Since this series of articles has been featuring Vanguard, I decided to turn to them to help us construct our portfolio. Vanguard offers several different such target-date funds, but here are links to four, for any who would like to review them: Vanguard Target Retirement 2025 Fund (MUTF: VTTVX ) Vanguard Target Retirement 2035 Fund (MUTF: VTTHX ) Vanguard Target Retirement 2045 Fund (MUTF: VTIVX ) Vanguard Target Retirement 2055 Fund (MUTF: VFFVX ) Working from the allocations Vanguard uses, and adjusted to reflect the fact that our portfolio only contains 3 ETFs, the following table offers some suggested weightings across four different age groups: Suggested Portfolio Weightings Age 25 35 45 55 Vanguard VTI 55.5% 58.5% 55.5% 45.5% Vanguard VEU 34.5% 31.5% 27.0% 22.0% Vanguard BND 10.0% 10.0% 17.5% 32.5% TOTAL 100.0% 100.0% 100.0% 100.0% Here are a couple of interesting things that I noticed from Vanguard’s model portfolios: Between the ages of 25 and 35, the overall allocation of stocks vs. bonds is actually the same. However, in the allocation for a 25-year old, the stock portion is weighted an additional 3% in favor of international equities, reflecting Vanguard’s apparent belief in the higher growth prospects these offer to a young person with a longer investment horizon. This offers some philosophical “food for thought” as you determine your own comfort level with foreign stocks. Despite what is often characterized as a horrible current environment for bonds, Vanguard maintains a substantial 32.5% weighting in these instruments for an individual in the 55-age group and what I would describe as a consequential weighting of 17.5% even for someone 45 years of age. This reinforces a related point I made in my Seeking Alpha article featuring BND. The ETF Monkey Vanguard Core Portfolio From the above four, I have selected the portfolio designed for someone in their mid-40s as the one that I will build and track. Below is the composition of the Vanguard Target Retirement 2035 Fund that we will work from. The actual allocations we will use are those shown in the column marked 45 (the approximate current age of an individual planning to retire 20 years from now) in the Suggested Portfolio Weightings table above. With that background, have a look at the picture below, and then I’ll offer some comments about the portfolio. (click to enlarge) I decided to base the portfolio on an initial investment of $50,000. With a portfolio of this size, we will receive some decent dividends along the way. I will track these and reinvest them as I see fit, along with possibly rebalancing the portfolio from time to time. I may also make adjustments to the weightings as the Vanguard Target Retirement 2035 Fund on which it is based adjusts over time. In the upper-left-hand corner, you see the target purchases required to establish our desired allocations. On the right, you will see the actual number of shares, and prices, that I was able to obtain based on the closing prices of the 3 ETFs on June 30, 2015. I decided to buy shares in increments of no less than 5 (i.e. the 105 for BND), so my actual allocations are just slightly off from the target. I also wind up with $24.65 in cash moving forward. To make this exercise as realistic as possible, as a Fidelity Brokerage client, I reflected the actual commissions that I would have to pay to obtain the shares. As we move forward, I have purposely “handicapped” myself in that I will have to take into consideration what commissions will cost as I ponder any further incremental investment or rebalancing transactions. I did that intentionally because this is a challenge you will likely face as well when making decisions. I also calculated the weighted expense ratio for the overall portfolio by multiplying the expense ratio for each ETF by its allocation in the portfolio and then summing. You will note that, given our allocation, our overall expense ratio is just a hair under .08%. Not bad. I plan to use the S&P 500 – simply because it is a diversified, commonly accepted, and easily tracked index – to evaluate the overall performance of our portfolio. The closing price of the S&P 500 index on June 30, 2015, was 2,063.11 . Lastly, for some historical context, as time moves forward, on the day this portfolio was established, a long-running drama between Greece, the International Monetary Fund (IMF) and the European Union reached a crisis point, with Greece announcing that it would default on a 1.5 billion euro debt repayment to the IMF. The S&P 500 index closed on 6/30 a mere 4.22 points higher than it began the year, and international indexes (as measured by the price of VEU) had dropped approximately 6.5% from their highs earlier in the year. It will be interesting to watch how this drama affects our portfolio, and what decisions I may make as a result. If Seeking Alpha will accept them, I hope to provide brief articles updating the progress of the portfolio, perhaps on a quarterly basis. I may also use my blog for more minor updates, such as alerts featuring reinvestment of dividends and/or rebalancing. Google Finance One last tip before I leave you. If you are looking for a free source that can help you build and track your portfolio, have a look at Google Finance. I have an account there as ETF Monkey, and so I built my core portfolio there. Have a look: (click to enlarge) If you look closely, you will see the four transactions I entered to build the portfolio. First, I used the “Cash – Deposit/Withdraw” functionality to “deposit” $50,000 in cash to the account. Next, once I knew the closing June 30, 2015, price, I entered 3 “purchases” of ETFs, including the $7.95 commission for each transaction. Note that, in the above picture, you are looking at the “Transactions” view. If you switched to the “Overview” view, you would see my positions, as well as a cash balance of $24.65, exactly matching what is shown in my Excel sheet above. In other words, the tool automatically subtracts your purchases from the cash balance you established. It will also keep track of all dividends we receive in the future as well as any further transactions I decide to initiate. If you want to get a little practice, feel free to try it out by duplicating what I have done. Then, you will feel more comfortable using the tool to track an actual portfolio you either have or establish in the future. Happy investing! Disclosure: I am/we are long BND, VEU, VTI. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.

Feeling Unfulfilled By The Volatility Tease?

Summary Futures touched backwardation a couple times this week. Investors should realize their risk/reward before jumping head first into the shallow end of the pool. Markets appear to be normalizing mid-week. Feeling unfulfilled by the volatility tease? You’re not alone. Monday was the big headline this week with the market going gaga for Greece. By mid-week volatility ETPs had given up some of their gains but remained elevated. In this ultra-low volatility environment investors forget that the historical mean for the VIX is around 17. By simply reverting to the mean, the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) managed to gain an impressive 40%+ at its peak on Tuesday. However, the pundits were out on Monday already saying to short volatility. I would just question the insight behind such as suggestion. Had you waited until Tuesday, you would have had a better opportunity. These types of one day scenarios are really a volatility trader’s best friend. The markets knew this was coming and still overacted. Economic data out of the U.S. continues to be good and if you have followed my past articles, I have always recommended looking to economics to guide your VIX trading. I continue to seek events that cause over 5-10% backwardation as the optimal risk vs. reward scenario. With that being said I did sell a couple UVXY calls on Tuesday. However, I really wanted this to turn into something more but it appears the market has other plans. Every tick the market took higher really just made me more angry. Can we please just get a good freak out already? In this article I will review the basics of UVXY and go over what I am watching for during the next few months. UVXY (click to enlarge) VIX futures did dip into slight backwardation during the week. (click to enlarge) If you are unfamiliar with volatility products, UVXY will gain premium when futures are in backwardation similar to how the ProShares Short VIX Short-Term Futures ETF (NYSEARCA: SVXY ) benefits from contango. For more information on these two terms, click here . UVXY invests in front and second month VIX futures contracts and will rise when futures rise. Ultimately it will lose value over time, which is why my strategy is to wait for a spike and then enter into short positions through options. It had been just shy of five months since backwardation presented itself. Outlook What this spike in volatility should have showed volatility investors is that market complacency is beginning to wear off. Monday was nothing more than a trigger happy reaction to news that had already been expected to happen. Given the positive economic data, I fully expect liftoff of rates in the September Fed meeting. Any slowdown in growth that coincides with rising rates could trigger another knee jerk reaction from the market. Even though we are in the expansion phase of the business cycle, in my opinion this market will tread water and possibly move slightly higher. If you look at the S&P action this year gains have been minimal and so has volatility. This has been despite record margin debt and record share buybacks from companies. Even more concerning to me is that some of these buybacks are built on margin! Companies will eventually have to repay that debt. What will be left to support earnings growth? Earnings growth is the bedrock of stock market appreciation. We will see an increase in EPS from buybacks but the higher stock prices go, the less effective buybacks become. It has been very quiet on the political front for a long time. Certainly there are angry countries out there preparing to go to war or not pay their debts? Although these things are poor for humanity they make for good volatility investment opportunities. Conclusion It was refreshing to finally have a down day in the market and see UVXY spike. However, traders should not instantly jump on these types of scenarios but rather let it play out a little to make sure you are making the right decision. I am looking forward to a much more volatile end of the year. October is the best month for volatility when looking at seasonality. You have the Feds on deck in September. Too bad the government isn’t shutting down this year. That sure was fun and profitable. Eventually the market will have several tragedies coincide with one another and it will make for a more profitable opportunity to short volatility. Those that entered trades this week, best of luck and remember to manage your risk. I am still at 80% in cash just waiting for a better opportunity in the VIX futures market. My retirement portfolio is performing well with my Citi (NYSE: C ) recommendation but suffered from my Micron (NASDAQ: MU ) purchase before earnings. I was able to cut losses after earnings but my performance for the year resembles that of the S&P 500. Sometimes you just need to be able to look back and realize you made mistakes and move on. Going all in on a little spike in volatility may be profitable a couple times but it will eventually come to bite you. Patience is key, especially in this market environment. I understand that you have to take what you can get, but always remember that capital preservation is your number one priority. Best of luck to you in the coming months! I look forward to getting back to volatility analysis. For free real time updates you can follow me here on Seeking Alpha and on Twitter. Often times during these events I only have time to write an Instablog, due to editing times. If you aren’t a real time follower it will not notify you of Instablog posts. Disclosure: I am/we are short UVXY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Only a couple calls short on UVXY

June AAII Asset Allocation Survey: Cash Levels Continue To Rise

Stock and stock fund allocations declined but remain above their historical average for the 27th month in a row. Bond, bond fund and cash allocations only showed minor changes this month. Of alternative investments held by members, real estate is represented the most. The June AAII Asset Allocation Survey reveals that individual investors increased their cash allocations for the third consecutive month. The rise in cash levels occurred as equity allocations fell to their lowest level since January. Stock and stock fund allocations declined 0.5 percentage points to 67.2%. June tied January for having the smallest allocation to equities in 2015. Nonetheless, stock and stock fund allocations remained above their historical average of 60% for the 27th consecutive month. Bond and bond fund allocations were unchanged at 15.5%. Technically bond fund allocations declined and bond allocations rose, but the changes were very minor. June was the second consecutive month with fixed-income allocations below their historical average of 16.0%. Cash allocations edged up 0.5%, to 17.3%. This third consecutive monthly increase kept cash allocations at their highest level since October 2014 (18.7%). The increase was not large enough to keep cash allocations from being below their historical average of 24% for the 43rd consecutive month, however. The rising level of cash corresponds with trends we’ve been seeing in our weekly Sentiment Survey. Neutral sentiment has been at an unusually high level for 12 consecutive weeks. Neutral sentiment’s record streak of consecutive weekly readings at or above 45% for 10 consecutive weeks lasted through much of last month. At the same time, many individual investors continue to be frustrated by the ongoing low-interest-rate environment. June’s special question asked AAII members if any portion of their portfolio is allocated to alternative investments (something we do not track in our monthly survey). Almost half of all respondents (49%) said no, they do not hold any alternative investments. Some said they have no interest in owning them, while others suggested they needed to learn more about these types of investments before deciding to allocate to them. A small group of members asked us to define what counts as an alternative investment. Slightly more than a third (35%) said they own alternative investments. Many described their allocations to “alts” as accounting for 10% or less of their total portfolio. Real estate was most common, with 15% of all respondents saying they had exposure to it either through real estate investment trusts (REITs) or via a direct ownership. One member has ownership in a vineyard. Here is a sampling of the responses: “I do not and will not consider ‘alternative investments.'” “No, because I do not have enough information about ‘alternative investments’ for evaluation.” “Not much…I tried silver, gold, stamps, and convertible bonds; no returns are as good as stocks.” “Yes, about 8% to 10% of my portfolio is in ‘alternative investments.'” Note: A spreadsheet error led to incorrect data being sent out in last month’s press release. The correct numbers for May’s Asset Allocation Survey were as follows: stocks and stock funds: 67.7% (down 0.2 percentage points), bonds and bond funds: 15.5% (down 0.7 percentage points) and cash: 16.9% (up 1.0%). June AAII Asset Allocation Survey results: Stocks and Stock Funds: 67.2%, down 0. 5 percentage points Bonds and Bond Funds: 15.5%, unchanged Cash: 17.3%, up 0.5 percentage points June AAII Asset Allocation Survey details: Stock Funds: 33.5%, down 1.1 percentage points Stocks: 33.6%, up 0.6 percentage points Bond Funds: 11.8%, down 0.1 percentage points Bonds: 3.8%, up 0.1 percentage points Historical Averages: Stocks/Stock Funds: 60% Bonds/Bond Funds: 16% Cash: 24% *The numbers are rounded and may not add up to 100%. The AAII Asset Allocation Survey has been conducted monthly since November 1987 and asks AAII members what percentage of their portfolios are allocated to stocks, stock funds, bonds, bond funds and cash. The survey and its results are available online here . Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.