madsinger monthly report (October 2013)

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madsinger monthly report (October 2013)

Post by madsinger »

Here is a big fat collection of portfolios, with their October 2013 returns, 2013 YTD return, and annualized returns since 1999, 2003, 2008 and 2010 (14 years 10 months, 10 years 10 months, 5 years 10 months, 3 years 10 months). I broke them into four categories, roughly corresponding to 100/0, 80/20, 60/40, 40/60 stock/bond portfolios, sorted by 10 year Total Return. The 3 fund is 50/30/20 Total Stock/Total Int'l/Total Bond. The s&d is 10 each of VFINX, VIVAX, NAESX, VISVX, VGSIX, 25 VGTSX, 5 VINEX, 20 VBMFX. The coffeehouse is a 60/40 described at The Coffeehouse Investor. The Newsletter portfolios are from a newsletter following Vanguard funds. William Bernstein's "Sheltered Sam" is an all stock portfolio which is 20% VFINX, 25% VIVAX, 5% NAESX, 15% VISVX, 10% VGSIX, 3% VGPMX, 5% each VEURX, VPACX, VEIEX, and 7% VTRIX. The madsinger portfolio is my real-world portfolio, roughly 59/5/3/33 stock/REIT/PM/bond.

-Brad.

Code: Select all

                                    CAGR     CAGR    CAGR    CAGR
                   Oct      YTD     since    since   since   since
                   2013     2013    2010     2008    2003    1999
Hot Hands          2.47%   34.63%   16.70%   2.38%   12.57%  12.35%
Sheltered Sam      4.13%   20.34%   13.01%   4.55%   10.49%   7.40%
VFINX              4.58%   25.14%   14.82%   5.32%    8.66%   4.25%
                  
Newsletter G       3.24%   27.60%   13.84%   5.42%   10.73%   9.43%
Newsletter G-IND   4.00%   24.70%   14.77%   5.26%   10.29%   6.08%
s&d                3.36%   16.26%   11.32%   5.11%   10.02%   7.50%
3 fund             3.39%   16.94%   10.72%   4.53%    9.18%   5.63%
LS G               3.32%   17.36%   11.34%   3.72%    8.37%   4.90%

Code: Select all

Newsletter CG      3.07%   24.20%   13.02%   5.55%    9.72%   7.70%
Wellington         2.78%   15.70%   11.17%   6.26%    9.00%   7.30%
coffeehouse        2.86%   12.70%   10.69%   6.15%    8.82%   7.17%
STAR               2.91%   14.53%   10.51%   5.57%    8.42%   6.61%
LS MG              2.69%   12.54%    9.76%   4.09%    7.54%   5.10%
                   
Newsletter Inc     2.86%   15.10%   11.15%   5.78%    7.48%   5.42%
Wellesley          2.10%    7.47%    9.88%   7.21%    7.34%   6.91%
LS CG              2.03%    7.82%    7.75%   3.96%    6.37%   4.97%
                  
madsinger          2.86%   14.59%   10.51%   4.94%      
Last edited by madsinger on Mon Dec 02, 2013 3:21 pm, edited 1 time in total.
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Re: madsinger monthly report (October 2013)

Post by investor »

Thanks Brad,

Wellington still looking good, even with those nasty bonds

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Re: madsinger monthly report (October 2013)

Post by Mrxyz »

Thanks for the report.

But, please teach the ignorant me........

a) If madsinger knows the returns then why does he create his own portfolio? Especially if he knows ______ fund already has an established x% return.
b) More importantly, for me, who has 3 fund portfolio.........looking at the list what do I do next??? Do I look at CAGR since 1999 and consider that long enough and realize that oops the 3 fund is nice but __________(fill in the blank) is better and switch??? Or is CAGR since 1999 not long enough? Then, what is long enough? Hot hands portfolio on searching this forum is supposed to be partly due to market timing but then what about Coffeehouse or Slice and dice?
All these questions are likely due to my ignorance but I am ready to learn!

As usual, thanks!!!!
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Re: madsinger monthly report (October 2013)

Post by madsinger »

Mrxyz wrote:Thanks for the report.

But, please teach the ignorant me........

a) If madsinger knows the returns then why does he create his own portfolio? Especially if he knows ______ fund already has an established x% return.
b) More importantly, for me, who has 3 fund portfolio.........looking at the list what do I do next??? Do I look at CAGR since 1999 and consider that long enough and realize that oops the 3 fund is nice but __________(fill in the blank) is better and switch??? Or is CAGR since 1999 not long enough? Then, what is long enough? Hot hands portfolio on searching this forum is supposed to be partly due to market timing but then what about Coffeehouse or Slice and dice?
All these questions are likely due to my ignorance but I am ready to learn!

As usual, thanks!!!!
Hello Mrxyz,

Well...I certainly don't know the returns AHEAD of time! If I did, I'd invest in only the "winning" portfolio! The purpose of these monthly posts is to establish a handful of portfolios and watch them "real time" going forward. Lots of people look at past data, and then claim a particular portfolio is "the best". All of these portfolios were chosen about 8 years ago, and I've been tracking them monthly ever since.

As for the madsinger portfolio...that is my real portfolio. The main "features" of it are: a slice and diced "stock" portfolio with a tilt towards "small" and "value". REITS and PM are Vanguard's REIT fund and Precious Metals funds at 5% and 3%. The bond portion is basically all in Short Term Bond Index or my Stable Value fund in my 401-k plan. These are all things that I have chosen for very specific reasons, and I believe that this portfolio is a good reflection of my ability, willingness and need to take risk. I am happy with it.

Now, today, it looks pretty weak against most of the other portfolios...but two years ago, this portfolio had the highest "5 year return" of all of the portfolios listed. The reasons were easy to see: back then, REIT and PM had done very well...outperforming most "stock" portfolios. At that time, Bonds had done rather poorly (2008 stuff...), and the 100% short term allocation of my bonds held up very well.

Jump ahead a couple of years...REITS and PM have lagged...2010 and 2011 Bond returns of long/intermediates outperformed short, and suddenly madsinger doesn't look so good. I'm still happy with what I hold and why I hold it.

If a 3-fund portfolio matches your willingness, need and ability to take risk, then there is nothing wrong with it. There is no guarantee that any portfolio listed above will outperform any other going forward. Coffeehouse and Slice and Dice are portfolios that choose to lean towards "value" and "small" portions of the market. These areas have historically done well, but there is no guarantee that they will in the future.

Hot Hands is not really a "portfolio", but rather a single fund held for a year. It has had some very strong years (resulting in some very gawdy performance numbers), but can also lag the market by a lot in off years. I put this one there for amusement, but certainly not as a recommended portfolio plan.

These are very general comments to your questions. If you have further questions, I'd be happy to comment on them!

-Brad.
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Re: madsinger monthly report (October 2013)

Post by White Coat Investor »

Great year for the Weiner meister.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: madsinger monthly report (October 2013)

Post by Mrxyz »

Hi again,

madsinger - Thanks for your earlier reply. And hope you do not mind me asking a few more questions.

But I am still confused and also perhaps just do not know enough. I am trying to figure out if I need anything other than 3 fund portfolio. I have read quite a lot but perhaps do not understand all that I need to understand. In other words, do I need to make my portfolio more slice and dice than the 3 fund portfolio? Am I missing out on the returns over the next 15- 20 years till retirement by not doing so?

1. Even though past performance does not guarantee future returns but we do look and analyse at those returns ( yearly and longer term) including madsinger's regular postings. It is (I presume) because these portfolios have withstood the test of time that we know they are worth recommending.

So HOW DOES a boglehead decide to go for anything other than 3 fund portfolio.

Is it purely personal bias/decision? Is it predicting the future? Is it tilting based on, say the last 10 years or 20 years or longer data?
And what is an adequate time frame to use for looking at past performance?

2.
madsinger wrote:
If a 3-fund portfolio matches your willingness, need and ability to take risk, then there is nothing wrong with it. There is no guarantee that any portfolio listed above will outperform any other going forward. Coffeehouse and Slice and Dice are portfolios that choose to lean towards "value" and "small" portions of the market. These areas have historically done well, but there is no guarantee that they will in the future.
-Brad.
The above is great advice, but how do I apply it?? "My willingness, need and ability to take risk" - Not sure how to establish this properly, BUT even if I do have say 8/10 willingness, 5/10 need and 8/10 ability to take risk.....then would it allow me to pick from ____, _____ and ______ lazy portfolios?
Or say my numbers are 10/10 for all of the three features - does that mean I should use the (say) Coffeehouse portfolio??
Surely, not all lazy portfolios are appropriate for everyone, but then what decides which ones are?

All portfolios are born equal, some are more equal than others!

I hope my questions make sense! Perhaps, I just not need to worry about it and stick to my 3 fund portfolio simply BECAUSE I do not understand what to do next (if at all).
Thanks for reading.
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Re: madsinger monthly report (October 2013)

Post by madsinger »

Hello mrxyz,

I'll give you "my" philosophy on investing. This is not an absolute, it is just my opinion after years of studying and observing.

The first decision to make is asset allocation...how to divide your assets among the major investment classes. Even what constitutes "major investment classes" is up for debate. I'll state that many people consider that there are three major investment classes: stocks, bonds, cash. I don't consider "cash" an investment class, however, I do believe strongly in having "cash" as an emergency fund. If you have no emergency fund, then you must start there and build this up. So, this simplifies the problem to allocating between stocks and bonds.

Authors (and Bogleheads) Larry Swedroe and William Bernstein influenced my next thinking here. (and others disagree). Bonds are the "safe" money...slow growth, low risk, and stocks are the "risky" money...higher risk, higher potential for growth (and loss). So my bonds tend to be short term bonds...relatively low risk of loss, relative low growth potential. So, the big asset allocation question is "how much to put in risk (stocks) for growth, and how much to put in safe (bonds) investments?"

To answer this question, Larry Swedroe suggests figuring out your "ability, willingness, and need" to take risk. What does this mean?

"Need" to take risk basically asks...do you need to take risk? If you have $3 million, and can live on $60,000 per year (2% of assets), perhaps you do not need to take any risk at all. Put your money if safe bonds, withdraw 2% per year, and be done with it. However, if you have $50,000, and will be retiring in 25 years, you may need to "take risk" in order to grow your assets. There is no "right" or "wrong" number here, you just have to decide what your goals are.

"Ability" to take risk means...can I weather a downturn in my risky assets? If you are 25 years old, have 40+ years of earnings from your ability to earn money in front of you, you are "able" to take on risk...you will not be wiped out from a big downturn. However, if you're 65 years old, have retired, and don't have any expectations of significant future earnings, your ability to take risk is much lower.

"Willingness" to take risk is a very personal decision. Some people feel that if they see their investments have dropped 5%, they will be devastated, and will bail out of their plan. Other people can look at a 30% drop in their investments, and say...I knew this could happen, I was ready for the chance, and I am confident in my plan to stay with it. The first person has a low willingness to take risk, the latter, and high willingness to rake risk.

The upshot is, you should not take any more risk than the "lowest" of these three things. Unfortunately, there isn't really any "formula" that tells you how to divide your assets along these three factors. In general, if you're young with years a earnings ahead (ability), are not yet wealthy (need), and are comfortable with market ups-and-downs, you can be invested fairly heavily in stocks (perhaps 90%/10% stocks/bonds...maybe 80/20?) There is a "rule of thumb" that says "hold your age in bonds". If you're 25 years old, hold 75/25. If you 60, hold 40/60. This tries to look at the "ability" side, but doesn't give any weight to need or willingness.

As I suggestion, I would recommend starting "lower than you think" in stocks, and see how you feel during a large downturn. If you're okay with it, perhaps you can bump it up. If you feel queasy, perhaps this was too much risk.

This one decision (stock/bond split) will have the biggest impact on your returns and your potential for downturns. If you look at the chart at the top of this post, the 80/20 portfolios tend to have 10 year returns in the 8-11% range, 60/40 in the 7-10% range, 40/60 in the 6-8% range. Looked at another way, here are all of the portfolios, showing their 10 year, 10 month annualized returns, and their return in 2008. I've sorted them both ways so you can look at it:

Code: Select all

                    CAGR                 
                    since                  
                    2003      2008      
Hot Hands          12.57%   -47.86%     
Newsletter G       10.73%   -38.40%    
Sheltered Sam      10.49%   -37.91%     
Newsletter G-IND   10.29%   -40.30%    
s&d                10.02%   -30.16%     
Newsletter CG       9.72%   -33.60%    
3 fund              9.18%   -30.74%  
Wellington          9.00%   -22.30%     
coffeehouse         8.82%   -20.21%    
VFINX               8.66%   -37.02%  
STAR                8.42%   -25.10%
LS G                8.37%   -34.39%
LS MG               7.54%   -26.50%      
Newsletter Inc      7.48%   -24.10%      
Wellesley           7.34%    -9.84%      
LS CG               6.37%   -19.52%    

Code: Select all

                    CAGR   
                    since   
                    2003      2008
Wellesley           7.34%    -9.84%
LS CG               6.37%   -19.52%
coffeehouse         8.82%   -20.21%
Wellington          9.00%   -22.30%
Newsletter Inc      7.48%   -24.10%
STAR                8.42%   -25.10%
LS MG               7.54%   -26.50%
s&d                10.02%   -30.16%
3 fund              9.18%   -30.74%
Newsletter CG       9.72%   -33.60%
LS G                8.37%   -34.39%
VFINX               8.66%   -37.02%
Sheltered Sam      10.49%   -37.91%
Newsletter G       10.73%   -38.40%
Newsletter G-IND   10.29%   -40.30%
Hot Hands          12.57%   -47.86%
Basically, over the past 10 years the portfolios that gained the most, lost the most in 2008 (a bad year for stocks). This is a somewhat expected result, but not a guaranteed result. It is possible we could get 3 or 4 "2008s" in the next 10 years, and if that happened, then perhaps the lowest risk portfolios will be the highest returning as well. Nobody knows, but we all take our guesses.

So, what does all this mean? Well, if you somehow can determine your ability, need, and willingness to take risk, and can somehow turn this into a stock/bond allocation, you've done most of the work. For example, if you decide that you're a 60/40 investor, you could buy two funds: 60% in "stocks", something like "Total Stock market" and 40% in "bonds", perhaps "Total Bond Market" (of, if you're like me and choose to go "safer" in your bonds "Short Term Bond Index") and be done. Check it once a year, rebalance it to get it back to your Asset Allocation plan, and live happily the other 364 days of the year.

If you want to start tinkering...well...here we go....

(see next post).

-Brad.
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Re: madsinger monthly report (October 2013)

Post by madsinger »

Hmmm...I was going to start writing a bunch more, but I'm not sure if you're interested. If you are really interested in dividing up your portfolio, I think I would rather direct you to my favorite book ever on investing: William Bernstein's "The Four Pillars of Investing". This is a great book that will do a much better job of explaining this than I could. Similarly, I would recommend Larry Swedroe's "he Only Guide to a Winning Investment Strategy You'll Ever Need". These two books, which are very consistent with their advice, shaped my investment philosophy more than most.

If you have specific questions for me, please ask away.

-Brad.
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Re: madsinger monthly report (October 2013)

Post by Mrxyz »

First of all THANKS -- it seems that someone explaining the concepts again, makes it more understandable. And sir, you have done an excellent job. Thanks once again!
Okay, that is a lot of nice information for me to digest and of course, need to read more (somehow - with lots of reading piled up at work too).
But this is the type of posting which really helps me (and perhaps others too) as the wiki kind of stops and does not clearly explain what path to take (if any) after you reach reduce bad debt, Efund, max tax advantaged stuff, and then 3 fund portfolio (which is for me clearly better than target portfolio).
And you have explained it very well indeed!
If you have anything else to share please go ahead and write.

My portfolio summary is;

AA is 60/40 with my age of 47 yr.
Need to take risk - yes, my net worth is around $900,000 and climbing, with around at least $80,000 per year in savings. I think, if I had $2M portfolio, I would not be taking more risk.
Ability to take risk - yes, I can weather downturns due to higher income and other resources beyond E fund. I guess this is easy to say but tough to actually endure. A 25 to 30% downturn can be definitely tolerated well.
Willingness to take risk - from all my reading, the only path is to stay the course. And I/we plan to do so.

More details of my portfolio -

Tax filing status – married filing jointly
Tax rate = 35% Federal and 6.45% State
Age 47 yrs
AA – 60% Stock, 40% Bond

Total portfolio – mid six figures (100%)

Taxable Stock 37%
His IRA Stock 9%
Bonds 20%
Her IRA Stock 13%
Bonds 21%

Total stock = 59%
Total Bonds = 41%

Emergency fund=55G - all as I bonds, will buy 20G/year until I reach 100 G.
529 = 90G
Bank = 45G- partly to be used for home repairs, rest will give 18G to 529 in January.
Mortgage = 140 G over 4 years at 1.99%

Going forward –

Projected annual contributions will be;

Taxable contributions
80G (or maybe more) divided equally in US total stock and US total bond markets using 3 fund lazy portfolio.

His IRA contributions
His employee contribution 403b 17.5G
His employer contribution 403b 17.5G
His employee contribution 457b 17.5G

No new contributions for her IRA as she will not work.

Backdoor Roth
5.5 G x 2 = 11G/year


Kids 529 contributions –
18G /total 3 kids

Again, thanks for your time and effort in writing a detailed post with explanations. I appreciate it.
Last edited by Mrxyz on Sat Nov 23, 2013 10:21 pm, edited 1 time in total.
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Re: madsinger monthly report (October 2013)

Post by rotorhead »

madsinger, thank you very much for this post; and for your most comprehensive reply to mxyrz's questions. Serves as a very good refresher to all of us as we contemplate our own personal considerations.
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Re: madsinger monthly report (October 2013)

Post by madsinger »

rotorhead wrote:madsinger, thank you very much for this post; and for your most comprehensive reply to mxyrz's questions. Serves as a very good refresher to all of us as we contemplate our own personal considerations.
Thank you, rotorhead!
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Re: madsinger monthly report (October 2013)

Post by madsinger »

Hello Mrxyz,

Your last post shows me that you look like you understand this perfectly well! You're obviously saving a huge amount, your allocation looks like it is right in line with your ability, need and willingness to take risk, and your emergency fund is well funded and safe. Congratulations.

I don't think I can really offer any more advice. If you keep doing what you're doing, I think you'll be in great shape. If you choose to start tweaking things, remember to keep your stock/bond allocation where you want it, keep your "bets" inline with prudent investing, and keep your costs low.

And finally, you will have truly succeeded financially when you are comfortable, and can stop thinking about this stuff too much!

Best wishes,
Brad.
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Re: madsinger monthly report (October 2013)

Post by Mrxyz »

madsinger wrote:Hello Mrxyz,

Your last post shows me that you look like you understand this perfectly well! You're obviously saving a huge amount, your allocation looks like it is right in line with your ability, need and willingness to take risk, and your emergency fund is well funded and safe. Congratulations.

I don't think I can really offer any more advice. If you keep doing what you're doing, I think you'll be in great shape. If you choose to start tweaking things, remember to keep your stock/bond allocation where you want it, keep your "bets" inline with prudent investing, and keep your costs low.

And finally, you will have truly succeeded financially when you are comfortable, and can stop thinking about this stuff too much!

Best wishes,
Brad.
Thanks Brad,

Yes, I am trying to keep the stock/bond allocation in place with good advice from YDNAL, Kevin M and Mr. Larimore along with others who have explained how to use new money to buy more stocks/bonds instead of 'rebalancing- buy selling one to buy something else'. Also, recently learnt about Backdoor Roth so that will make a difference in the long run also.
Will be quite some time before I can stop thinking about this stuff.
I feel very comfortable with the 3 fund AA as it is so simple but when the monthly reports clearly show other AA to be better, one starts to think!!
Thanks for the teaching.
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