current portfolio, utilities?

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james7777
Posts: 19
Joined: Fri Dec 18, 2015 8:29 pm

current portfolio, utilities?

Post by james7777 » Thu Jan 10, 2019 2:29 pm

hello everyone, Im 59 and just set up my new portfolio based upon backtesting. my goal is a good total return while minimising drawdown. here is my simple 4 fund portfolio:

45% VOO
45% BND
5% VPU
5% VGLT

I choose the VGLT and VPU (utilities) becouse in many backtests over the past 12 years this above allocation had more gains and less drawdown/max loss years VS a 50% BND and 50% VOO/VTI allocation. this new allocation was after losing money on a 100% VTI allocation along with trading/daytrading. Ive wised up!.

2 questions:

1) what do you think of my allocation?
2) whats your opinion of utilities in the portfolio as I have done here? Ive never heard utilities discussed here. ( utilities increase dividends in the portfolio)

THANKS!

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David Jay
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Location: Michigan

Re: current portfolio, utilities?

Post by David Jay » Thu Jan 10, 2019 2:49 pm

At BH we tend to downplay backtesting without conceptual underpinnings. Naive backtesting can be extremely sensitive to the selected start and end dates. There needs to be an underlying cause-effect relationship to be valid (much like the statistics field where "correlation is not causation").

There are a lot of discussions around here regarding factors like Momentum, Value, Size, etc. I'd be interested to hear what concept leads you to select utilities as a major component of a long term portfolio.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Topic Author
james7777
Posts: 19
Joined: Fri Dec 18, 2015 8:29 pm

Re: current portfolio, utilities?

Post by james7777 » Thu Jan 10, 2019 3:14 pm

david, I choose utilities due to increasing dividends and in my backtesting with 10% utilities 45% VOO and 45% BND it had greater total return after 2009 BUT increased downturn in bad times. with 10% VGLT 45% VOO and 45% BND the crash of 2008 was far better than 50% BND and 50% VOO....BUT the 10% VGLT underperformed total returns past 2010 VS 10% VPU and 45% VOO 45% BND.

when I used 5%VPU, 5% VGLT, 45% VOO and 45% BND it outperformed a 50% BND and 50% VOO in total returns AND max drawdown/worst years. (2007 onward) my original plan was 50% VTI/VOO and 50% BND.

the VGLT is for protection in stock crashes and VPU seems to increase total returns although VPU/XLU crashed along with stocks in 2008. adding VPU and VGLT increases diversification.

bloom2708
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Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: current portfolio, utilities?

Post by bloom2708 » Thu Jan 10, 2019 3:20 pm

5% of things doesn't move the needle much on return.

The way to test is to pick this allocation. Wait 10 years. Do not waver during the rough patches. Then back test again.

It is a tough way to test back tested portfolios.

The smart "buy the haystack" approach would be to make the 10% Total International. This is 18% of your stock allocation (55%). Close enough to 20% International to be in the game.

That suddenly looks like the 3 fund portfolio. :wink:

Will it do "better" than your 5% slices proposed? Not sure. Is the 55% stocks/45% bonds return "good enough" for you to meet your goals? Whatever the market provides? That is the question.
"A Stoic believes they don’t control the world around them, only how they respond--and that they must always respond with courage, temperance, wisdom, and justice." --Daily Stoic

Topic Author
james7777
Posts: 19
Joined: Fri Dec 18, 2015 8:29 pm

Re: current portfolio, utilities?

Post by james7777 » Thu Jan 10, 2019 3:40 pm

bloom, I dont bother with international anything becouse all the worlds markets arelinked and follow one another more or less.

I choose a 50% bonds 50% stocks for a sane return/risk allocation at my age. that combo seems perfect to me. its not about how much money you make but about how much you dont lose IMO. and none of us can predict future market moves, been there done that for the past 4 years!.. I want a portfolio that will work in any environment.

wolf359
Posts: 1513
Joined: Sun Mar 15, 2015 8:47 am

Re: current portfolio, utilities?

Post by wolf359 » Thu Jan 10, 2019 4:05 pm

james7777 wrote:
Thu Jan 10, 2019 2:29 pm
hello everyone, Im 59 and just set up my new portfolio based upon backtesting. my goal is a good total return while minimising drawdown. here is my simple 4 fund portfolio:

45% VOO
45% BND
5% VPU
5% VGLT

I choose the VGLT and VPU (utilities) becouse in many backtests over the past 12 years this above allocation had more gains and less drawdown/max loss years VS a 50% BND and 50% VOO/VTI allocation. this new allocation was after losing money on a 100% VTI allocation along with trading/daytrading. Ive wised up!.

2 questions:

1) what do you think of my allocation?
2) whats your opinion of utilities in the portfolio as I have done here? Ive never heard utilities discussed here. ( utilities increase dividends in the portfolio)

THANKS!
Some thoughts:

You may want to open up BND and read what it holds. It is already comprised of about 60-65% government Treasuries or bonds. Your 45%/5% BND/VGLT is somewhat redundant. All this does is tilt BND a little bit more towards Treasuries. Why not 50% BND just for simplicity?

Utilities are a defensive bet. Most if not all of the holding are already in VOO. Similarly, all this does is tilt VOO a little more towards utilities.

5% isn't really enough of a holding to make a performance difference to your portfolio (either positive or negative). Therefore, it should neither help you nor hurt you to go with this allocation. I'd simplify and skip them, but feel free to ignore that advice if it helps you stick to your allocation.

If you backtested only over the past 12 years, keep in mind that this was a very specific period that is unlikely to repeat in the same way. Interest rates and inflation were unusually low. The Fed responded to an unprecedented near-collapse of the financial system by dropping to what were effectively negative interest rates, and holding them low for very long periods of time. We just came out of a 10 year bull market. The government actually took ownership of some of the largest companies for a few years (that was unthinkable prior to the crisis.) Interest rates were so low that investors were chasing yields, which helped boost utilities for a while.

The key point is that you weren't following your previous plan. Whatever your new plan is, write it down in an investor policy statement. Write down your why, to help remind you in the heat of the moment how you got to your plan (and talk yourself out of changing it on the fly.) You shouldn't change your plan just because it was losing money in the short term. You're supposed to be investing for the long-term, which is 10 years or more. Stocks will fluctuate, and need to be held at least 5-10 years or more. Selling before the end of a reasonable holding period simply locks in your losses. Avoiding this type of unproductive investor behavior will be much more significant to your performance than your specific asset allocation.
Last edited by wolf359 on Thu Jan 10, 2019 4:09 pm, edited 2 times in total.

bloom2708
Posts: 5501
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: current portfolio, utilities?

Post by bloom2708 » Thu Jan 10, 2019 4:07 pm

james7777 wrote:
Thu Jan 10, 2019 3:40 pm
bloom, I dont bother with international anything becouse all the worlds markets arelinked and follow one another more or less.

I choose a 50% bonds 50% stocks for a sane return/risk allocation at my age. that combo seems perfect to me. its not about how much money you make but about how much you dont lose IMO. and none of us can predict future market moves, been there done that for the past 4 years!.. I want a portfolio that will work in any environment.
Sounds good report back in 10 years with the new back testing results. :wink:

Why not just Total US + Total US Bond? That sounds like where you want to be. The other little bolt ons may underperform or help a little. Back testing won't tell you anything about forward results. Good luck!
"A Stoic believes they don’t control the world around them, only how they respond--and that they must always respond with courage, temperance, wisdom, and justice." --Daily Stoic

venkman
Posts: 822
Joined: Tue Mar 14, 2017 10:33 pm

Re: current portfolio, utilities?

Post by venkman » Thu Jan 10, 2019 11:16 pm

It probably won't make much difference in return either way; but I say if 5% in utilities helps you sleep better at night, do it.

Valuethinker
Posts: 37254
Joined: Fri May 11, 2007 11:07 am

Re: current portfolio, utilities?

Post by Valuethinker » Fri Jan 11, 2019 4:07 am

james7777 wrote:
Thu Jan 10, 2019 2:29 pm
hello everyone, Im 59 and just set up my new portfolio based upon backtesting. my goal is a good total return while minimising drawdown. here is my simple 4 fund portfolio:

45% VOO
45% BND
5% VPU
5% VGLT

I choose the VGLT and VPU (utilities) becouse in many backtests over the past 12 years this above allocation had more gains and less drawdown/max loss years VS a 50% BND and 50% VOO/VTI allocation. this new allocation was after losing money on a 100% VTI allocation along with trading/daytrading. Ive wised up!.

2 questions:

1) what do you think of my allocation?
2) whats your opinion of utilities in the portfolio as I have done here? Ive never heard utilities discussed here. ( utilities increase dividends in the portfolio)

THANKS!
You have added to your interest rate sensitivity with 2 funds: LT Treasuries and Utilities.

I don't think there is a big case for doing this. However 5% will neither help nor hinder you much. You are right to think that US utility stocks tend to be defensive & interest rate sensitive.

*If* we repeat 1994 (sharp upward spike in interest rates) then those funds will underperform. Because of mortgage extension under rising rates, US Agency securities (about 25% of Vanguard TBM?) will also underperform.

Otherwise it's not likely to make too much difference.

There are "low volatility" ETFs out there, which weight heavily towards consumer staples, utilities etc. There's quite a lot of evidence the low vol strategy has, historically, given a superior risk-reward tradeoff. It is an open question whether that will persist given how well known that result now is and how many funds are pursuing it.

https://investor.vanguard.com/etf/profi ... folio/vfmv

(amazed not to find Microsoft in that portfolio list).

I hold "value" index funds to be defensive. So far (last 10 years) that has basically led to underperformance. Didn't help in 2008-09 either (did spectacularly well 2000-03 during the dot com bear market, but I was not pursuing those strategies ;-)).

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