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Investing Advice Inspired by Jack Bogle
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Febreze
Joined: 06 Mar 2010
Posts: 143
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 Posted: Thu Mar 11, 2010 10:36 am Post subject: 70% Cash/ 20% Foreign Stock/ 10% US REIT |
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I have been reading through several threads and while I like the idea of the Permanent Portfolio, I dislike the idea of gold at all.
Penfed offers pretty high rate CDs. Currently 3.75% for a 7 year. I recall about 1 to 2 years ago they were 5%. The problem with keeping most of your money in "cash" is that the dollar could devalue. Some people argue that CCFs are good to protect against this, but I don't like CCFs either.
I am trying to come up with a system that lets me keep most of my money in cash for safety reasons, but allows the portfolio to respond to US currency problems and also allows it to keep up with inflation.
20% Foreign Stock Index fund adds both currency diversification and the theoretical ability to keep up with inflation.
10% US REIT allows the ability to keep up with inflation of renting apartments because I do not own a home. I realize that there is no direct correlation between REITs and apartment rental prices, however if we experience 1 or 2 more brief housing booms over the next 30 years, then rental prices may increase beyond my CD interest rates ability to pay them. There is also the diversification factor here.
The purpose of this portfolio would be to sit on it forever and rebalance every year or two. I've seen reports that rebalancing may or may not be good too often.
I am thinking:
70% Penfed CDs (until I hit $100k then it's time to diversify because the $250k limit will revert back to $100k soon I think - then perhaps I-Bonds or Muni Bonds held to maturity)
10% VWO
10% VEU
10% VNQ
I think there's one author in this forum who posts a similar type of 30-70 portfolio with high volatility stock indexes making up the entire low-portion of stocks but he uses small cap US stocks I believe.
I am VERY much against bonds and bond funds. There is way too much interest rate risk for my taste. I only mention muni bonds above because once I start expanding outside of my measly Roth IRA, then I will appreciate tax-free gains, and if I hold individual munis to maturity, there is no interest rate risk. I-Bonds have no interest rate risk.
I will not buy TIPS because the inflation portion does not come until the TIPS until maturity. That does me no good when I am trying to live off the interest and inflation rises high. If TIPS adjusted their quarterly payout to be like that of I-Bonds that changes based on inflation, then I would consider TIPS. |
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neverknow
Joined: 05 Jun 2009
Posts: 1695
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| Posted: Thu Mar 11, 2010 10:53 am Post subject: Re: 70% Cash/ 20% Foreign Stock/ 10% US REIT |
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| Febreze wrote: |
I think there's one author in this forum who posts a similar type of 30-70 portfolio with high volatility stock indexes making up the entire low-portion of stocks but he uses small cap US stocks I believe.
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I am structured in this bar bell approach, also. Very low risk, and very high risk - also, a similar proportional target. The debate would then come in defining what is low risk, and what is high risk ... but in your choosing International to target US Dollar risk, you are approaching this as I am. My higher risk assets target where I perceive to be the risk (inflation) -- but not your choices (or US small cap). I also do not like bond funds, and have my fixed income in laddered CD's.
For me, this is comfortable. Enough at risk, to participate - so little proportionally at risk ... it could pretty much go to zero and be okay.
neverknow |
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KyleAAA
Joined: 01 Jul 2009
Posts: 1309
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| Posted: Thu Mar 11, 2010 10:56 am Post subject: |
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If you're going to go 70% cash, I'd racket up the risk on the rest of the portfolio a bit.
Say
10% small-value
10% REITS
10% small-cap international (small-value if you can get it, with EM exposure)
Your overall portfolio won't be too insanely volatile. |
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Febreze
Joined: 06 Mar 2010
Posts: 143
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| Posted: Thu Mar 11, 2010 11:03 am Post subject: |
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| KyleAAA wrote: | If you're going to go 70% cash, I'd racket up the risk on the rest of the portfolio a bit.
Say
10% small-value
10% REITS
10% small-cap international (small-value if you can get it, with EM exposure)
Your overall portfolio won't be too insanely volatile. |
Very good point on the Small-Cap international versus VEU. I will consider that.
Is Small-Value US stocks more volatile than Emerging Markets? It certainly loses some of the currency diversification. Perhaps I would do:
10% Emerging Markets
10% Small Cap International
5% US REIT
5% US Small Cap |
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ddb
Joined: 26 Feb 2007
Posts: 4386
Location: Manhattan
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| Posted: Thu Mar 11, 2010 12:05 pm Post subject: Re: 70% Cash/ 20% Foreign Stock/ 10% US REIT |
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| Febreze wrote: | I am thinking:
70% Penfed CDs (until I hit $100k then it's time to diversify because the $250k limit will revert back to $100k soon I think - then perhaps I-Bonds or Muni Bonds held to maturity)
10% VWO
10% VEU
10% VNQ
I think there's one author in this forum who posts a similar type of 30-70 portfolio with high volatility stock indexes making up the entire low-portion of stocks but he uses small cap US stocks I believe. |
I think your general strategy is fine, and would work well for the long-term. The CD portion is obviously very tax inefficient - will they all be held in a tax-deferred account?
Your "risky" portion is not at all my style - I like the heavy foreign weighting but would personally try to introduce a lot more volatility. Also, you have overlap and unnecessary expenses by paring VEU with VWO - could cut costs a lot by using VEA (Vanguard EAFE Index ETF) and VWO, and adjusting weights accordingly.
I'm also not a big fan of REITs, and I do like CCF. My equity portion of my portfolio is entirely small value (roughly equal split foreign and US), with a sprinkling of CCF. My "safe" bucket is entirely in TIPS.
Remember, though, that my crystal ball is as worthless as yours, so I'm sure your allocation is just as likely to deliver a certain level of risk-adjusted returns as is mine.
- DDB
_________________
"I know that your friends are my friends and, uh... I've thought about that. You can have 'em" - PB |
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Jacobkg
Joined: 23 May 2009
Posts: 206
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| Posted: Thu Mar 11, 2010 12:11 pm Post subject: |
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I notice from a previous post that you are retired. It would help me to know more about what you are looking for from your portfolio.
Do you currently have enough to safely fund your retirement (rule of thumb is that 4% is a safe withdrawal rate)?
Are you looking more for preservation of (real) wealth or for growth?
What percentage of your portfolio is in tax-deferred vs. taxable accounts? |
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caklim00
Joined: 26 May 2008
Posts: 1172
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| Posted: Thu Mar 11, 2010 12:18 pm Post subject: |
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| Febreze wrote: |
Is Small-Value US stocks more volatile than Emerging Markets? It certainly loses some of the currency diversification. |
Probaly depends on how small/valuey you go and also the concentration of the fund.
VBR - probably not quite as volatile
RZV - probably more volatile
I personally use VBR and will likely use DFFVX (which is smaller) when I get access to it soon. I know ddb must be very happy with recent performance on RZV as it kicked butt this past year.
| Febreze wrote: |
Perhaps I would do:
10% Emerging Markets
10% Small Cap International
5% US REIT
5% US Small Cap |
I'm assuming this is all going into taxable. If so, substitute small value for the REITs. REITs are horribly tax in-efficient. Emerging Markets and Small Cap International should both be tax efficient.
Unfortunately there are no tax efficient SCV Emeriging Markets and Developed Ex-US fund. I use DLS/DGS, but hold in tax advantaged and its debatable whether these are even scv funds. |
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moneyman11
Joined: 19 Feb 2008
Posts: 360
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| Posted: Thu Mar 11, 2010 12:42 pm Post subject: Re: 70% Cash/ 20% Foreign Stock/ 10% US REIT |
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| Febreze wrote: |
I will not buy TIPS because the inflation portion does not come until the TIPS until maturity. That does me no good when I am trying to live off the interest and inflation rises high. If TIPS adjusted their quarterly payout to be like that of I-Bonds that changes based on inflation, then I would consider TIPS. |
Is there perhaps a misunderstanding of TIPS interest payments here that is keeping you away from them?
A TIP with a 2% coupon pays 2% of the inflation adjusted principal value each year (in semi-annual payments). So your interest payout is being adjusted based on inflation. |
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Febreze
Joined: 06 Mar 2010
Posts: 143
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| Posted: Thu Mar 11, 2010 6:34 pm Post subject: Re: 70% Cash/ 20% Foreign Stock/ 10% US REIT |
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| moneyman11 wrote: |
A TIP with a 2% coupon pays 2% of the inflation adjusted principal value each year (in semi-annual payments). So your interest payout is being adjusted based on inflation. |
I was not aware of this. I believed I only saw the inflation adjustment upon maturity.
So the principal continues to appreciate based on inflation, and then the 2% is the fixed portion? And since the principal is constantly getting larger, my 2% is constantly getting larger too? |
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moneyman11
Joined: 19 Feb 2008
Posts: 360
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| Posted: Thu Mar 11, 2010 6:43 pm Post subject: Re: 70% Cash/ 20% Foreign Stock/ 10% US REIT |
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| Febreze wrote: | | moneyman11 wrote: |
A TIP with a 2% coupon pays 2% of the inflation adjusted principal value each year (in semi-annual payments). So your interest payout is being adjusted based on inflation. |
I was not aware of this. I believed I only saw the inflation adjustment upon maturity.
So the principal continues to appreciate based on inflation, and then the 2% is the fixed portion? And since the principal is constantly getting larger, my 2% is constantly getting larger too? |
You got it.
To illustrate:
You buy a $1000 TIP at auction with a 2% coupon.
In year one, there is no inflation, you get $20 in interest.
In year two, there is 5% inflation. The principal value of your TIP increases to $1050, so its 2% coupon now pays $21 in interest.
Note that unlike I Bonds however, if the TIP is held in a taxable account, you must pay tax on the gain in principal as well as the interest each year. |
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Valuethinker
Joined: 11 May 2007
Posts: 12890
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| Posted: Fri Mar 12, 2010 5:36 am Post subject: |
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| Febreze wrote: | | KyleAAA wrote: | If you're going to go 70% cash, I'd racket up the risk on the rest of the portfolio a bit.
Say
10% small-value
10% REITS
10% small-cap international (small-value if you can get it, with EM exposure)
Your overall portfolio won't be too insanely volatile. |
Very good point on the Small-Cap international versus VEU. I will consider that.
Is Small-Value US stocks more volatile than Emerging Markets? It certainly loses some of the currency diversification. Perhaps I would do:
10% Emerging Markets
10% Small Cap International
5% US REIT
5% US Small Cap |
OK but your tracking error is huge.
You could easily rerun the early 90s, where REITs go nowhere, small cap go nowhere, EM could have their own bust (Mexico- 1994) and halve, and by the way developed country large cap went up 30%.
The Larry Swedroe portfolio is something like 80% muni bonds (individually selected for low credit risk) and 20% international small value (CFA).
However Larry has 'enough' money if he only has to rely on the bonds. The equities just buy him diversification.
So this strategy works for you if you are OK with the 70%. ie that is enough money to sustain your consumption at the desired level until you die.
If you are just trying to 'beat the market' there's not much in it. You'd be better of with 50% ST bonds (or CDs as appropriate) and 50% equities (total market index).
You should also consider the risk of a very strong dollar. One thing about currency markets, is that they tend to do the opposite of conventional wisdom. Remember the dollar and pound traded at parity in 1985. |
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ddb
Joined: 26 Feb 2007
Posts: 4386
Location: Manhattan
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| Posted: Fri Mar 12, 2010 10:05 am Post subject: |
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| Valuethinker wrote: | | However Larry has 'enough' money if he only has to rely on the bonds. The equities just buy him diversification. |
Well, shouldn't that be the goal for all of us? i.e. don't invest in risky assets what you can't afford to lose. I don't currently have enough money invested in fixed income to sustain a lifetime income if I lose my job tomorrow, but I'm targeting a sufficient fixed income level at my desired retirement so that the stock money is all supplemental, and will not contribute to my required living expenses.
- DDB
_________________
"I know that your friends are my friends and, uh... I've thought about that. You can have 'em" - PB |
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Febreze
Joined: 06 Mar 2010
Posts: 143
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| Posted: Fri Mar 12, 2010 10:34 am Post subject: |
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| Valuethinker wrote: |
You should also consider the risk of a very strong dollar. One thing about currency markets, is that they tend to do the opposite of conventional wisdom. Remember the dollar and pound traded at parity in 1985. |
In this sample portfolio, wouldn't a strong dollar be great because it is 70% US Dollars? |
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neverknow
Joined: 05 Jun 2009
Posts: 1695
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| Posted: Fri Mar 12, 2010 10:49 am Post subject: |
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| Febreze wrote: | | Valuethinker wrote: |
You should also consider the risk of a very strong dollar. One thing about currency markets, is that they tend to do the opposite of conventional wisdom. Remember the dollar and pound traded at parity in 1985. |
In this sample portfolio, wouldn't a strong dollar be great because it is 70% US Dollars? |
This is my approach to the US Dollar. Holding actual US Dollars. In particular, in todays liquidity driven markets, there have been spells where it seemed absolutely every asset class was trading higher in tandem, except the US Dollar. So what is the best diversifier? It seems to me, it has to be holding actual US Dollars. A CD ladder in my allocation, accomplishes this.
Thank you, Valuethinker. You are so very good at reminding us all of history. And reminding us how the past, only gives us speculations about the future - it does not tell us the future.
For whatever it is worth, I also am not a fan of REITs. But I understand the connection to the Permanent Portfolio and real tangible assets, versus say, the Gold, in the Permanent Portfolio. For myself, I chose Vanguard Energy to fill this role in my portfolio. This planet has close to 7 Billion people on it, these days, and it is my thinking - that energy for all of human endeavors is key. This fund, last I looked, also held BHP, a major Australian based miner. The only thing that would make this choice more perfect in my eyes, is if it had exposure to feeding all 7 Billion people. But alas, there is no perfect investment.
neverknow |
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Febreze
Joined: 06 Mar 2010
Posts: 143
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| Posted: Sat Mar 13, 2010 12:51 am Post subject: |
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| neverknow wrote: | | For myself, I chose Vanguard Energy to fill this role in my portfolio. This planet has close to 7 Billion people on it, these days, and it is my thinking - that energy for all of human endeavors is key. |
Can you explain this further? Those 7 Billion people also need food. Why not consumer staples? All 7 Billion people will get sick. Why not Health Care fund?
Why is Energy a better bet going forward? All the talk I hear on TV is how the HealthCare companies are making too much profits. Perhaps we should all hold 100% HealthCare funds. If Energy has a greater profit margin then Healthcare then perhaps we need Energy Reform. |
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fishndoc
Joined: 11 Apr 2007
Posts: 1157
Location: Kennesaw, GA
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| Posted: Sat Mar 13, 2010 1:57 am Post subject: |
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Febrezewrote:
| Quote: | | I am VERY much against bonds and bond funds |
You do realize that your 70% Pen Fed CDs are bonds?
Perhaps spending some time going through the Boglehead recommeded readings would help you refine your investment plans.
Asking for advise is of course worthwhile, but you will get as many different recommendations as you get replies. In the end, if you are going to choose a plan you can stick with, you have to work it out for yourself.
_________________
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle |
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Valuethinker
Joined: 11 May 2007
Posts: 12890
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| Posted: Sat Mar 13, 2010 7:19 am Post subject: |
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| Febreze wrote: | | Valuethinker wrote: |
You should also consider the risk of a very strong dollar. One thing about currency markets, is that they tend to do the opposite of conventional wisdom. Remember the dollar and pound traded at parity in 1985. |
In this sample portfolio, wouldn't a strong dollar be great because it is 70% US Dollars? |
I was thinking tracking error.
If you were 30% equities, global index fund, you would be c 14% US equities, and another 3-4% (I would guess) countries who 'track' the USD to an extent.
So 60% of your money would follow the dollar up, whereas in the equity portfolio above, not so. |
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neverknow
Joined: 05 Jun 2009
Posts: 1695
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| Posted: Sat Mar 13, 2010 7:56 am Post subject: |
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| Febreze wrote: | | neverknow wrote: | | For myself, I chose Vanguard Energy to fill this role in my portfolio. This planet has close to 7 Billion people on it, these days, and it is my thinking - that energy for all of human endeavors is key. |
Can you explain this further? Those 7 Billion people also need food. Why not consumer staples? All 7 Billion people will get sick. Why not Health Care fund?
Why is Energy a better bet going forward? All the talk I hear on TV is how the HealthCare companies are making too much profits. Perhaps we should all hold 100% HealthCare funds. If Energy has a greater profit margin then Healthcare then perhaps we need Energy Reform. |
Most of what I hear on TV is 20 second sound bytes, selling fear.
My choices probably have more to do with me, and my understanding of the world, then anything else - so interpret it as nothing else then that. Some internet person's opinion.
In the 70's, as I came to adulthood, world over population was trumpeted as a huge problem, a kin to todays global warming. We were warned that if we didn't manage this issue, the world would have 5 Billion people by the year 2000. It now has 7 Billion. If people were a stock, the TV media would be declaring people a bubble.
I don't invest in REIT's because I feel my home is enough real estate exposure for me. It is mining, agriculture, and energy that is the real assets, that are to me akin to Gold in the Permanent Portfolio. I use Vanguard for both - VGPMX & VGENX - about 1/3 to 2/3's - so you could say, I come down on the side of "black gold (oil)" versus the shiny or industrial metals. I am highly aware these are boom & bust industries, as I live in a Natural Resources state and saw the oil bust, up front and personal in the 80's.
I do invest in consumer staples (the etf XLP) and utilities (the etf XLU). People have to eat, as you point out. And utilities is because that is where my household is most sensitive to cost of living. This allocation would fill the role of equities, in the Permanent Portfolio. Not the Real Assets part.
Investing in Health Care probably makes sense in the same way that investing in energy or utilities does, but I have such great distaste for this industry - I couldn't allocate capital to it, unless forced too at gun point (same is true for banks).
100% Health Care? I am not sure what you are getting at. My target in equities is 30% - same as what you are suggesting. The other 70% is in laddered CD's.
One side of our family are farmers, in Great Britain (we live in the US). Brussel Spouts and Kale with contracts to one of the national grocery chains. Personally, I don't like either vegetable - but no matter. Agriculture is also a boom & bust industry. I do not know of any clear way to invest in it.
While a whole lot of folks are really into this emerging market story, there are a whole lot of reasons - it is not the investment for me.
It is clear to me, that by not being anymore diversified then I am, undoubtedly - something is going to make someone a whole lot of money, and I will not participate. This is not unlike watching the price of Gold go up, and not owning any. Those other investments are just not for me.
This is what I decided was best for my household - given the entire picture of our assets and liabilities ... our goals, time horizon, need for risk.
I very much appreciate Valuethinkers knowledge of history. I believe some of his fortunes are tied to the UK Pound, and ours are as well, as 2/3's of our income is in UK Pounds, while we spend nearly entirely in US Dollars.
For whatever that is worth - just a random person's opinion.
neverknow |
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Febreze
Joined: 06 Mar 2010
Posts: 143
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| Posted: Sat Mar 13, 2010 1:22 pm Post subject: |
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| fishndoc wrote: | Febrezewrote:
| Quote: | | I am VERY much against bonds and bond funds |
You do realize that your 70% Pen Fed CDs are bonds?
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Perhaps I should have clarified.
The CD is a fixed stable asset. If I buy a bond that matures in 5 years, and I need to sell it in 3 years, I might be forced to sell it at a 50% loss if interest rates rise. If I have to sell the CD early, I am guaranteed my original principle at any time.
The PenFed CD is 3.5% for 5 years and is 100% insured. You cannot buy a AAA rated 5 year bond at 3.5%. A 5 year Treasury is currently yielding 2.4%. The PenFed CD offers equal risk at a 46% higher return over the 5 year treasury. |
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