Tag Archives: seeking

2 Vanguard ETFs For Growth Investing In Retirement

Summary Investing in the retirement phase of your life cycle often requires a different mindset towards generating income. Those investors who want to still pursue a modest degree of growth in their portfolio may want to step outside of the traditional value-focused strategies. Retired investors that choose to supplement their existing portfolio with growth themes should be aware that doing so may come with a higher risk of price volatility. Investing in the retirement phase of your life cycle often requires a different mindset towards generating income or positioning in a more conservative manner. While there is nothing wrong with those pursuits, it may not appeal to those who are more comfortable taking risks or don’t rely heavily on spendable income from their retirement accounts. In my experience, there is no such thing as a “one size fits all” approach to investing. Rather your portfolio should align with your individual risk tolerance, investment objectives, and time horizon. Those factors will play an important role in designing a strategy to meet or exceed your expectations over the long haul. Those investors who want to still pursue a modest degree of growth in their portfolio may want to step outside of the traditional value-focused strategies that lean towards high income generation . This may also provide a unique dynamic that fosters surplus capital appreciation during favorable market trends. Fortunately, there are two Vanguard ETFs that offer attractive characteristics for achieving this endeavor. Mega Cap Growth The Vanguard Mega Cap Growth ETF (NYSEARCA: MGK ) is a low-cost option for those that want to access 150 of the largest growth-oriented stocks in the United States. Top holdings in MGK are companies such as Apple Inc (NASDAQ: AAPL ), Google Inc (NASDAQ: GOOG ) and Facebook Inc (NASDAQ: FB ). Not surprisingly, the technology sector makes up 25% of this index, while consumer discretionary stocks add another 23%. What you won’t find much of are utility, energy, and telecommunication companies. The stocks in MGK are some of the biggest and savviest companies on earth. Their successful business models have allowed them to stand out and thrive, which in turn is reflected in their overall market share. They will likely continue to focus on expanding or refining their products and services rather than returning capital to shareholders in the form of dividends. A fund such as MGK is going to be driven by more cyclical trends in high growth areas rather than a balanced sector dispersion such as you would find in a benchmark like the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). Nevertheless, this ETF has the potential for outperformance during strong bull markets and may offer the opportunity to overweight your portfolio towards consumer-driven themes. In addition, it’s ultra-low expense ratio of just 0.11% annually makes it a very affordable investment vehicle to own. Dividend Growth Dividend growth is another area of the market that is often overlooked by retirees . That is because the associated yields of these companies are typically lower than other areas of the equity income universe. Yet despite this facet, companies that have consistently declared year-over-year increases in their dividends have stable cash flow and resources to support growth in other areas. The Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) is a core holding in both of our flagship growth and income portfolios . This fund is based on the NASDAQ Dividend Achievers Index, which identifies large-cap companies with a consistent track record of growing dividend payments. VIG currently has an underlying portfolio of 180 stocks with top holdings in Microsoft Corp (NASDAQ: MSFT ) and Johnson & Johnson Inc (NYSE: JNJ ). Consumer staples and industrial companies are two sectors in this ETF that each represent a substantial 21% of the index. This ETF currently has a yield of 2.44% and sports a rock bottom expense ratio of 0.10%. The combination of broad diversification amongst a group of high quality stocks with favorable fundamental attributes make VIG a solid candidate for growth seekers. The Bottom Line Retired investors that choose to supplement their existing portfolio with growth themes should be aware that doing so may come with a higher risk of price volatility. That means position size and asset allocation should be carefully evaluated to ensure you don’t become overly focused on one area of the market. Keeping a balanced portfolio structure in other assets exhibiting lower volatility or non-correlated returns will help mitigate these risks and ensure you reach your long-term goals.

Model Portfolio Update: Beating The Market By 14% Year To Date

My defensive value model portfolio is ahead of the market by just under 14% so far this year. The reasons are: 1) a sensible strategy and 2) some luck. To be honest, the FTSE 100 and FTSE All-Share are not providing much in the way of competition at the moment, because both of them have fallen in value this year. However, I can’t be blamed for that; all I can do is focus on the model portfolio’s goals, which are: High yield – A higher dividend yield than the FTSE All-Share at all times High growth – Higher total return that the FTSE All-Share over any 5-year period Low risk – Lower risk than the FTSE All-Share over any 5-year period The chart below shows the performance from inception of the model portfolio and its FTSE All-Share benchmark, the Aberdeen UK Tracker Trust . Both the model portfolio and the All-Share tracker are virtual portfolios which started with £50,000 in March 2011. They both reinvest all dividends and take account of broker fees and bid/ask spreads. I have basically all of my family’s long-term savings invested in the same stocks as the model portfolio. Ahead on a total return basis Clearly, the All-Share portfolio has not done well lately. At the start of October, it was down 3.7% relative to its value in January. In contrast, the model portfolio gained 10% in the same period, producing a relative outperformance of 13.7% year to date. The gap between the two portfolios is now £13,370, which is 27% of their original value. In annualised terms, the All-Share portfolio has generated a return of 5.9% per year (including dividends), while the model portfolio has returned 10.3%. One of my goals for the model portfolio is to beat the market’s total return by 3% per year, and that goal is still firmly on track. Ahead on dividend yield and (probably) dividend growth Another of the model portfolio’s goals is to have a high dividend yield at all times. This goal has always been met since 2011, and the portfolio’s current yield is 4.2%, which compares well with the All-Share tracker’s yield of 3.7%. Dividend growth has been relatively good too. The All-Share tracker has paid out the full 2015 dividend already (of £2,384), while the model portfolio’s cumulative dividend is ahead so far (at £2,650) and still has three months of dividends to go. I fully expect its total dividend to far surpass the All-Share’s by the end of 2015. Success with Cranswick ends a bad run In terms of individual investments, 2015 has been a bit of an up and down year. Although I realise that a sensible investor must expect some individual investments to perform badly, I was somewhat peeved after a string of underperforming holdings during the first half of the year. As you may know, I sell one holding every other month and replace it the following month. The idea is to repeatedly replace the “weakest” holding in the portfolio with a stock that has a better combination of defensiveness and/or value. Following that approach, I sold ICAP ( OTCPK:IAPLY ) in February for an annualised return of 15%, which, while not spectacular, was more than satisfactory. But after that, things took a turn for the worse. In April, I sold Balfour Beatty ( OTC:BAFBF , OTCQX:BAFYY ) – after three years of profit warnings – for an annualised return of 2.6%, which is obviously below par. After that came the sale of Serco ( OTCPK:SECCY ) in June, which was my worst investment to date and returned a loss of 50%. Next up was August and the sale of RSA ( OTCPK:RSNAY ), which returned a just-about-acceptable 6% per year. Even that result was largely down to luck and a well-timed exit during a brief share price peak, thanks to the now withdrawn Zurich takeover bid. However, such doom and gloom ended with October’s sale of Cranswick ( OTC:CRWCY ), which you may have read about last week. It produced a record result for the model portfolio, returning 135% in just under three years, for an annual return of 35.3%. And so it continues to be true that some you win, and some you lose. The lesson here is that it is a portfolio’s overall result that matters, and not the performance of any one investment. A couple of winners drive performance In addition to Cranswick, there have been a couple of really standout holdings this year whose performance has been, quite frankly, bordering on the ridiculous. The first outstanding performer is JD Sport , which is up by about 90% from the start of the year. The second is Telecom Plus ( OTC:TLPLY ) (trading as The Utility Warehouse ), which is up by about 50% from where I bought it in May. After these impressive results, the share prices of both companies have reached levels that I would no longer consider attractive. In fact, I am more likely to trim their positions back a bit if their share prices keep going up as they have done recently. Wide diversification helps reduce risk The model portfolio is a defensive value portfolio, so risk reduction is as important to me as performance. My main weapon in the war on risk is diversification, diversification and yet more diversification. I mention diversification three times not just for effect (although it’s partly that), but also because there are three dimensions to the portfolio’s diversification strategy: Company diversification – The portfolio holds 30 companies, with no more than 6% in any one holding. This protects it from problems in any one company. Industry diversification – The portfolio holds no more than three companies in any one FTSE Sector. This protects it from problems in any one industry. Geographic diversification – The portfolio generates no more than 50% of its revenues from the UK. This helps to protect it against problems in the UK economy. One additional line of defence against risk is the portfolio’s focus on defensive sectors . My rule of thumb (which it currently meets) is that the portfolio should always be at least 50% invested in defensive sectors. This focus on defensive sectors helps me to reduce the impact of economic and industry cycles on the portfolio’s capital value and dividend output. Expectations for the future Currently, the FTSE 100 (and therefore, the FTSE All-Share) is attractively valued, relative to both its own historical norms and the current valuations of international indices such as the S&P 500. The fact that the FTSE 100 has recently had a dividend yield of over 4% is a clear indication of this, although the CAPE ratio is my preferred measure of value. With these low valuations, I think above average returns are likely from here on out, which means more than 7% a year or thereabouts. Of course, that expectation is a long-term expectation, measured over the next five or ten years rather than the next five or ten months. The model portfolio’s goal over that period will be the same as it always is: To beat whatever income and growth the market produces, with less risk.

Why Indexing Works [New Research]

It’s no secret that I think most investors should index. To be more precise, I’d call most “investors” savers. And if you’re treating your portfolio as if it’s your savings, then your financial goals are pretty simple: 1) outpace inflation and 2) reduce the risk of permanent loss. You don’t need to “beat the market” or just maximize returns. The best way to achieve these two goals is to implement a diversified, low fee and tax efficient portfolio. Given all that, indexing is the obvious way to achieve this given its inherent diversification, low fees and tax efficiencies. Of course, there are lots of ways to index and I personally prefer a countercyclical indexing approach (as opposed to a more traditional procyclical indexing approach), but that’s not what this is about. This post is just highlighting a nice new paper that was released yesterday further discussing why indexing works: “We develop a simple stock selection model to explain why active equity managers tend to underperform a benchmark index. We motivate our model with the empirical observation that the best performing stocks in a broad market index perform much better than the other stocks in the index. While randomly selecting a subset of securities from the index increases the chance of outperforming the index, it also increases the chance of underperforming the index, with the frequency of underperformance being larger than the frequency of overperformance. The relative likelihood of underperformance by investors choosing active management likely is much more important than the loss to those same investors of the higher fees for active management relative to passive index investing. Thus, the stakes for finding the best active managers may be larger than previously assumed.” [ Why Indexing Works ] This is consistent with something I posted not too long ago . One of the problems with stock picking is that the gains tend to be highly skewed. Your top performers produce most of the returns. The distribution is very uneven. So, it’s not like you’re just trying to pick the stocks that outperform the average. In order to create consistent market beating returns you basically have to know which stocks will be in the 20% of the outliers. Add on taxes and fees and you’re climbing a huge uphill battle. Anyway, go have a read. It’s a pretty good one and it even makes a slight case for stock picking in case you’re looking for it… Share this article with a colleague