Ben Stein spelled out an ETF portfolio in a post on Yahoo Finance.
iShares MSCI EAFE (EFA) 15% (25% for longer term investors)
iShares Emerging Market (EEM) 10%
Vanguard Total Stock Market (VTI) 30% (he mentions a similar Fidelity fund, FSTMX)
iShares Cohen & Steers Realty (ICF) 10%
iShares Small Cap Russell 2000 (IWN) 10%
Cash 15%
I realize it only adds to 100% if EFA is weighted to 25%. Also IWN is the ticker for Small Cap Value. The paragraph about this fund never says the word value but IWN is the ticker given as opposed to IWM which the entire Russell 2000. You can decide for yourself what he meant.
This is neither the worst portfolio nor the best. For folks that do no want to devote much time to their investments (which is the vast majority of people) but still do it themselves, this gives a good chance for success, for people that save properly.
The portfolio misses a couple of very big things and forgoes the chance for narrow theme investing. One of the big things this misses is yield. ICF is the highest yielding component at 3.92%, IWN (if that is what he means) yields 2.22% and the yields go down from there.
I think anyone wanting to go this simple should take the time to explore what the portfolio lacks (all portfolios lack something) and think about what can go wrong, 10% in emerging markets is a lot, and Mr. Stein says as much. I also think a small weight in some sort of commodity something or other is appropriate.
I found this story, via Seeking Alpha, about frontier market investing. The article gives a fairly balanced view so there is not much conclusion to draw. I think this is an important segment to invest in but I believe that it requires an above average tolerance for stock market volatility.
I have disclosed owning the Vietnam Opportunity Fund (VTOPF or VOF.L) personally and for a handful of clients in an article for TSCM last April. Very often this just does its own thing. It has had a huge run of late and while I am convinced I can see $20 at some point (I bought in at $2.48, it closed Friday at $4.15 and at one point I was down 15% in it) I would not be surprised if it traded with a $2 handle several more times.
If you are going to venture in to this type of country, for you maybe it is Egypt or Pakistan or somewhere else, you have to have unyielding conviction in the theme. You also have to realize that 20% could easily come out of that market in no time at all without any real warning.
The accounts that I bought this for started with a 1-1.5% weight. With that starting point the fund could go to zero with no real consequence on the portfolio. The lift given though to the overall portfolio for people that own it is, for now anyway, 67 basis points which is a lot given that it is coming from just one holding. As an FYI VTOPF is not included in the generic Yahoo portfolio that I have cited before because only four clients own it and so it is not a representative holding.
That only four people have the fund should be a tell for how much respect I have for the potential volatility. This is magnified even more so with Iceland. I first wrote about Iceland as an investment destination almost two years ago. Iceland has been a wild ride during the last two years in both directions. I have not exposed any client money to Iceland despite my favorable disposition; I actually talked one client out of investing there.
There is an S&P Index to cover frontier markets (link out here to a PDF from S&P and scroll down). At some point someone will ETF this index or one similar.
The point is that there is no hurry; Ghana will still be a frontier market three years from now. I believe in frontier investing but in very small proportion and even still it is not right for most folks. Whether you should invest in one of these or not requires some introspection. Even a holding with a 1% portfolio weight that cuts in half is a big emotional speed bump for a lot of people.
If you can really think about, say, Estonia for five years and know that you can ride real ups and downs without angst that triggers a bail out at the wrong time then you probably can make room for one of these. Now you just need to decide which one.
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7 comments:
Roger,
Thanks for alerting us to Ben Stein's latest post. He seems to direct his writing toward the large group of baby boomers who have done little or no retirement planning. As the spokesman for the National Retirement Planning Coalition, that seems to make sense.
I did read the original article and Ben did indeed state that he recommended small cap VALUE. Here is the quote: "I might suggest about 10 percent in the IWN, the small-cap-value version of the Russell 2000 Index of smaller companies ".
Most baby boomers could do a lot worse than to follow Ben's fairly simple "invest it and forget it" approach. You may not beat the market but you won't be eating dog food in retirement.
thank you for the IWN clarification
Roger,
As you stated, this simple portfolio is low on yield.
In earlier articles Ben has stated that a large slug of DVY would provide high dividend large cap stock market exposure which is very good for retirees. In fact, Ben wrote (Yahoo Finance Jan 9, 2006) about a two ETF portfolio of 50:50 DVY and RWR that yields about 3.5% and was backtested for 30 years of a 4% withdrawal. Very few people would be comfortable with a portfolio of just these two ETFs but it does address the yield issue.
re Egypt. If you look at the performance of each country's market in 2006 you will notice that the worst 4 performing markets came out of the middle east. all with drops larger than 20% (some considerably more).
Egypt is not one of the four. There is a WHOLE LOTTA money slushing around in the middle east thanks to the incredible rise in oil. This has caused a bubble and burst in equities and now is causing an amazing rise in real-estate.
For various reasons, things have played out in the oil countries plus Jordan and Lebanon (up till the last war in Lebanon last year).
Sooner or later, some of this money is going to find its way into Egypt. At which time, a repeat of the scenario-- a bubble, followed by a burst -- will play out.
be careful playing those markets.
being careful is exactly the point, you are correct.
Hey Roger. Read your posts daily and enjoy your work. Some thing has been bothering me and I can't seemed to get a good answer for is that there seems to be significant tracking error on USO eft vs. spot crude. Not sure if you have notice this or not but do you have any insight into this?
A few thoughts on the Stein portfolio: I think this general approach makes the most sense for investors who don't have the time or inclination to study the markets. A person who holds a wide variety of equity indexes, uses low cost vehicles, and rebalances every year or two will probably outperform the vast majority of active manages, especially when you account for expenses. I think this portfolio can be improved with a few minor changes.
1. I would add more small and mid caps to this mix - including small cap growth. 10% small cap isn't enough for long term investors.
2. International seems too light at 25% imo. I would shoot for 40%-50%.
3. What is the purpose of 15% cash? Sure, you should have a cash savings account, but I really don't consider cash to be an investment or part of a retirement portfolio.
Of course this equity portfolio should be balanced with fixed income (bonds) depending on the investors time horizon and tolerance for risk.
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