There's been a quote from Ron Lieber (not pictured here) in a NY Times article making the rounds that I think is very constructive.He says: Index (mostly). Save a ton. Reallocate infrequently.
So this got me to thinking a little bit about constructing a portfolio with ETFs that while I think is far from lazy does not require stock picking, country picking or selecting style. The mix for the most part includes newer funds or funds that don't seem to get a lot of attention. No percentages as we think this is a no-no for the blog.
Domestic Large Cap
Claymore Ocean Tomo Patent ETF (OTP) TTM it beat SPX by 7% with a touch higher yield
Developed Foreign Large Cap
PowerShares DWA Developed Market Technical Leaders (PIZ) It beat EFA by 7% since inception which appears to be in January
Domestic Small Cap
First Trust Small Cap Core AlphaDEX (FYX) TTM lagged IWM by 3%
Developed Foreign Small Cap
iShares MSCI EAFE Small Cap (SCZ) about even with IWM since inception in December
Emerging Market Large Cap
WT Emerging Market High Yield (DEM) beaten EEM by roughly 5% since inception in July
Emerging Market Small Cap
SPDR S&P Emerging Market Small Cap (EWX) this fund just listed so no performance info
Domestic REIT
Vanguard REIT ETF (VNQ) has had a slightly better TTM than iShares REIT Fund (IYR)
Foreign REIT
iShares Global Real Estate Ex-US (IFGL) it has lagged the much larger RWX since inception
Broad-Based Commodity
Rogers Intl Commodity ETN (RJI) beat DJP by roughly 5% since October
Currency
PowerShares Dollar Bearish Fund (UDN) US dollar hedge without picking a country
Intermediate Treasury
SPDR Intermediate Term Treasury ETF (ITE) actually looks inferior to the seemingly similar but much larger iShares 7-10 year (IEF)
High Yield Debt
SPDR High Yield Bond ETF (JNK) stands up very well versus PHB and HUG since its very recent inception
Inflation Bonds
SPDR Barclays Capital TIPS ETF (IPE) the lesser know product
Emerging Market Fixed Income
iShares Emerging Market Bond Fund (EMB) one fund in a category of two
I'm sure there are a couple of segments I forgot (I chose not to include mid-cap but there are quite few choices for domestic, a few for foreign developed but I don't think any for emerging).
The mix seems like it has too much going on to be lazy but if any proponents of lazy portfolios want to weigh in please do.
Lately there has been a theme going around (both here and elsewhere) about whether US markets will provide enough returns for financial plans to work. Depending on how something like the list above was implemented I think it could go a long way toward mitigating the consequence of 6% average annual returns in the US but probably not do much for people looking to reduce volatility.
That point makes for a good side tangent that if you do allocate more to developed, emerging and frontier you may increase your volatility longer term. It might be what you need to do depending on where you are in relation to your number...just something to keep in mind.
A generic mix like this provides the 30,000 foot exposure but I think giving up sector and country selection, although these things can be difficult to get right, puts the portfolio at a disadvantage in my opinion. Underweighting financials for the last year or so versus domestic indexes and underweighting Japan versus foreign indexes for the last 18 years were not that impossible to do but should have added value for anyone who did it.
The intellectual debate over this is always interesting. The comments from readers saying stock picking and sector picking in not ideal for most people is valid, my comments saying it is not as black box as some would have you believe are also valid and there can never be one right answer only what is right for you.
8 comments:
John Bogle is quoted today as saying he hasn't changed his allocations since 1999. He has 65% bonds and 35% stocks. What do you suppose he knows about investing?
http://biz.yahoo.com/ap/080520/of_mutual_interest.html?.v=2&printer=1
Fred, Leaving aside that he is in his late 70's and wealthy that might contribute to his allocation I would add that despite his stay course don't trade beliefs he has been very astute with market calls. he said to buy stocks at the right time in 2002 and last summer he said on cnbc that if he were a trader he'd be selling stocks.
There were a couple of comments yesterday that sort of woke me up in the middle of the night (overreacting to the obvious, maybe, but nonetheless...).
All investing means timing, to a degree. Choice of when to enter/exit is no less timing than the trader who enters and exits daily/weekly. I think our clinging to a false distinction between 'investing' and 'trading' may blind us to some hard realities.
"Round trip to nowhere" is actually a significant loss when inflation is included. Even if it is a trip back to zero, from a trader's perspective, what matters is how far you manage to travel from home during the journey. If the goal is to enter 'at home' and exit when you are 'far from home' (=returns), it shouldn't matter which way from home you go.
If it is round trip to nowhere, then we ought to embrace the symmetry. Going up is balanced by going down. (Obviously not true for all stocks, or over any particular period - the 6-7% p.a. positive slope - before inflation -should not be ignored.)
But it seems that the "ambidextrous" investor has a distinct advantage. Pretty much all of the discussion (save the occasional references to the inverse indices) is focused on beating the benchmarks ON ONE SIDE ONLY. And apologias/justifications are applied as soothing balms ("I'm not down as far as the S&P").
If we accept "down" is also a likely direction seen in any period evaluated, at what point does it make sense to accept that more value may come from finding profitable down market strategies (including shorts, puts, pairs trading, inverse indices etc) than from further tweaking the portfolio to "minimize" losses in down periods.
I think some of the distinction re: hedging USD and US corporate exposure is beginning to think in those terms, and the foreign ETFs are at least helpful in that sense. But wouldn't the smart money be indifferent to "up" and "down" and just be focused on "return over time"? If that return results from being short overbought markets (heck, we salivate over crossing the 200DMA from the south - why not from the north??), so be it.
Man, if you throw the erosion of the dollar into the mix, and the looming decimation of buying power from inflation tuning the portfolio construction to minimize losses starts to feel like "faith-based investing".
Too much "rant", as anon said. Sorry.
Rick
rick wow
one must assume that the fact we are still in the midst of the roundtrip to nowhere impacts our thoughts.
even if 6-7% in the US turns out to be correct, capitalism will still work in the world and "normal" returns will be available for people willing to seek them out.
Also the extent to which do-it-yourselfers must learn more than they now know (actually this applies to everyone) is simple a call for resourcefulness/ingenuity.
Maybe rose-colored but how I view it.
I think I have captured much of what you are trying to do with one fund I recently bought, RYFOX, alternative asset allocation fund.
Roger, I'm detecting a note of cautious bullishness in your article and replies. I'm also not seeing as much hugely, economy-ending, bad news coming out on the financial news channels or presses. It's more just a lot of bankers and real estate agents losing the potential for future fees.
Anon 7:20. My personal favorite "absolute return" fund is PRPFX, mentioned on this blog numerous times by numerous commenters; PRPFX describes itself as a fund for all markets. A quick look at Yahoo shows data for RYFOX only from mid-March. Is RYFOX a new fund? Did you compare it to PRPFX? Thanks, JCarr
PRPFX is a favorite of mine also and have owned it several years. Here are the areas RYFOX covers.
Absolute Returns Seeks positive returns regardless of market conditions
Commodities Seeks to provide exposure to tangible assets, such as oil, metals and agricultural
products that may offer broader portfolio diversification
Currency Arbitrage Seeks to establish opposing positions in the currency markets to take
advantage of price discrepancies
Global Macro Seeks to profit—regardless of direction—from changes in currencies, commodity
prices and market volatility
Managed Futures Seeks to profit from price trends and movements—regardless of direction—in
the financial and commodities futures market
Real Estate Seeks to provide capital appreciation by investing in companies that are
involved in the real estate industry
Currently, it is almost 50% in Managed futures. although RYFOX is only since March, the funds it holds a have been around longer. Here is a Rydex link:
http://tinyurl.com/6h6l6x
Post a Comment