Do You Believe In Your Asset Allocation?

Posted on February 7, 2011 // 15 Comments
asset allocation image from wikipedia

Mark Cuban recently had a post on his blog called Wall Street’s new lie to Main Street – Asset Allocation. In it, he quotes a recent newspaper article that presents this model asset allocation:

15% in an S&P 500 index fund
5% in a small-capitalization value fund
20% in a diversified international stock fund
5% in an emerging markets international fund
5% in Real Estate Investment Trusts
10% in stocks with a history of paying competitive and increasing dividends
10% in a diversified portfolio of convertible securities
5% in a U.S. Treasury inflation-indexed bonds and notes
15% in an international bond fund with traditional fixed coupon bonds
5% in an international bond fund for inflation-indexed bonds
5% in cash equivalents.

To which he translates as:

I want you to invest 5pct in cash and the rest in 10 different funds about which you know absolutely nothing. I want you to make this investment knowing that even if there were 128 hours in a day and you had a year long vacation, you could not possibly begin to understand all of these products. In fact, I don’t understand them either, but because I know it sounds good and everyone is making the same kind of recommendations, we all can pretend we are smart and going to make a lot of money. Until we don’t

Now, I don’t rely on Cuban for investing advice, but I do think he has a point. Over the past couple of years, I have to come value simplicity and also belief in investing. Now, I think asset allocation is important. To me, asset allocation is owning different assets that (1) all have good prospects for long-term returns above inflation, and (2) don’t necessarily move in the same direction. This allows you to reduce volatility when one things zigs while the other zags.

However, this also means you have to own said assets both when they are up and down. If the only reason you own something is because it’s in some financial newspaper article, then you’ll just sell it when the same newspaper starts touting the next new thing. This will likely lead to worse returns than just holding cash. You should only invest in asset classes that you understand and have strong reasons to hold in both good times and bad.

Here are the asset classes that I have strong beliefs in. This is of course my own personal opinion, but I’ll try to share my reasoning as well.
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Filed Under: Investing //

Target Retirement Funds Increasing International Exposure

Posted on February 2, 2011 // 10 Comments

The January 2010 issue of SmartMoney magazine had a nice little article Target-Date Funds Retool — Again about how those all-in-one Target Retirement funds that nearly all 401k plans have now are almost all increasing the percentage of stocks that are international. They all say this not performance-chasing, but at the very least it’s sentiment-chasing. People just aren’t all that confident in an predominantly-US portfolio anymore. I like the quote “Were you wrong before, or are you wrong now?”.

In any case, the online version left out my favorite part of the handy graphic, so I scanned it in here:

Vanguard announced back in October that it was also following the herd and increasing international exposure for its funds, and a quick look on the Vanguard Target 2025 fund shows the international holding at 20.8% as of 12/31/10. Seems like they are rolling out the change gradually.

I’m always on the fence on these funds. If having one fund keeps people from jumping from one fund to another, these funds can be a net positive. I like simplicity. But you have to watch out for high costs because that will eat away at your return. On the other hand, you can construct your own retirement portfolio out of just a few funds now, and not have to watch these guys follow each other around. Even the Vanguard Target 2025 fund only has 3 funds inside of it.

Filed Under: Investing, Retirement //

Where I Keep My Emergency Fund Cash – January 2011

Posted on January 18, 2011 // 30 Comments

The results of my Emergency Fund survey are in, and appears that there are a lot of big savers out there! 28% of respondents had cash reserves of over 12 months of expenses, and 24% of you had the more-often recommended 4-6 months of expenses.

With such sizable cash reserves, where you do guys put it all? I figured I’d share my stash-the-cash choices, which may not be perfectly optimal but I’m open to talking about it. The size of the circles are proportional to how much of my money I keep in each respective account.

With interest rates so low across the board and still dropping it seams, it’s been hard to get really excited about many new options. But remember, it can be better to be earning 2% with low inflation than 5% interest in a high inflation environment. Every basis point helps.

Rewards Checking Accounts

You’ve likely heard of these by now. Usually through local credit unions, these checking accounts pay a higher interest rate if you jump through some hoops each month. However, if you make a mistake you’ll forfeit virtually all your interest for that month, so it can be tricky. More coverage here.

One nationally-open example is DanversBank, which offers their Free Rewards Checking currently paying 3.01% APY on balances up to $25,000, provided you satisfy the following each month:

* perform at least 12 debit card transactions (excluding ATMs);
* receive their monthly statement electronically;
* access Online Banking, and
* sign up for direct deposit or receive a recurring ACH transfer

To find a local rewards checking account limited to your area, check out DepositAccounts and use the filters. Sadly, my local account recently dropped their rate significantly.

Long-Term CDs – Ally Bank

If you have a large cushion, it’s quite possible (if you’re lucky) to not have to touch it for years or more. Therefore, I think it’s okay to put some of it in safe investments but slightly less liquid.

With the Ally Bank certificates of deposit, you can still access your money as long as you pay a early withdrawal penalty of 60 days interest. That’s significantly less than at other banks. I have a 5-year CD paying 3% APY, but the current rate for new deposits is 1.60% APY for a 5-year CD (as of 10/25/13).

Rates change constantly, but let’s assume you have a certificate of deposit from any bank paying 2.39% APY with an early withdrawal penalty of the last 60 days of interest. (2.39% APY ~= 2.26% rate compounded daily.) Here’s how your actual annualized interest rate would fluctuate given your holding period.

After just 6 months, you’ll already be earning 1.58%, more than a comparable 12-month CD. If you somehow had to withdraw after 1 year, you’d still have earned 1.99% APY. Basically, after just 6 months I have nothing to lose and a lot to gain, so I keep a sizable chunk here.

Savings Bonds

I have some older Series I Savings Bonds, but they aren’t a very good buy right now. The total rate consists of a fixed rate and a variable rate that adjusts with inflation every 6 months. If you bought a bond now, you’d get a 0% fixed rate and only 0.74% from inflation. However, my older bonds have higher fixed rates, and according to my TreasuryDirect statement they are earning 1.74%, 2.25%, and 2.75% right now. The annual purchase limit is now $5,000 in paper I-bonds and $5,000 in online I-bonds per Social Security Number. I’ll keep them for a while, as I like the tax deferral benefits and inflation may come back to bite us.

Online Savings Accounts

Rewards checking account and savings bonds have deposit limits, and you only want to lock up a certain amount in longer-term CDs, so the rest goes into the now-popular online savings account. There are a lot of players out there now, but many of them are packed together with very similar features and interest rates.

Right now the rest of my cash is over at SmartyPig.com, an FDIC-Insured bank account that lets you save for specific goals like an online piggy bank. However, they’ve added so much flexibility that you can pretty much use them like any other savings account. Their rate has dropped recently from 1.75% APY to 1.35% APY for balances up to $50,000. This is still amongst the top rates, but I’ll be watching them closely.

Alternatively, Everbank has their Yield Pledge Money Market paying 1.10% APY for the first 6 months for new accounts. This rate is higher than any 6-month certificates of deposit currently available, while still being available for withdrawals at any time. The rate is guaranteed stay in the top 5% of competitive accounts. Evantage Bank has their Mega Money Market account paying 1.75% APY for balances up to $35k. Most other banks are clustered around the 1% to 1.2% mark.

So… where’s your cash?

Filed Under: Banking, Investing //

What Is Your Portfolio’s Current Asset Allocation?

Posted on January 7, 2011 // 11 Comments

If you haven’t been keeping close track of it, your portfolio’s asset allocation may have shifted significantly over the past year. Your relative mix of assets like stocks, bonds, or real estate has a great impact on the volatility and expected future return of your portfolio.

Morningstar has a bunch of helpful tools for managing your investment portfolio, but many of them require a paid membership. However, one handy trick is that anyone can use many of these premium features for free at the T. Rowe Price website by signing up for a free account with nothing but an e-mail address.

Portfolio Manager
This tool lets you enter all your portfolio holdings, which it then stores for you and allows you to track it with automatically updated prices. You can either track all your future transactions as you go, or just input your updated holdings every few months like I do.

Portfolio X-Ray
Once you enter your holdings, simply look for the Portfolio X-Ray tab and you’ll have a complete breakdown of the true asset allocation of your overall portfolio. Does your “small cap” fund really own a bunch of mid-caps and large-cap funds? X-Ray will reveal your true exposure to stock style (i.e. Small/Mid/Large, Growth/Blend/Value), geographical regions (i.e. Japan, US) , stock sectors (i.e. Telecom, Energy), average expense ratio, and more.

If you’d rather have a quick peek without needing to register at all – but also without the ability to save your portfolio – try the Morningstar Instant X-Ray tool.

If you already have a target asset allocation in mind, now might be a good time to to rebalance your assets back towards that target. Rebalancing is a way to maintain the risk/reward balance that you have chosen for your investments, and also forces you to buy temporarily under-performing assets and sell over-performing assets (buy low, sell high). If you are looking for a bit more guidance, here are my favorite posts on investing.

Filed Under: Investing, Retirement, Tools & Calculators // Tagged:

TradeKing “New Year, New Broker” $50 Sign-up Bonus

Posted on January 7, 2011 // 4 Comments

Online discount broker TradeKing has brought back their on-again, off-again $50 sign-up bonus for new accounts. You must open with at least $2,500 and make one trade within 30 days. TradeKing offers $4.95 trades with no minimum balance requirement or inactivity fees. I’ve been happy with them, they are a good basic broker for ETFs and dollar-cost-averaging. Offer expires 1/31/11.

This can also be a good time to switch away from your current broker if you’re unhappy. If you transfer an account of $2,500 value or greater over to TradeKing, they will also refund up to $150 in account transfer fees charged by your old broker.

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Filed Under: Deals & Offers, Investing //

2010 Investment Returns by Asset Class

Posted on January 2, 2011 // Leave a Comment

Vanguard has the year-to-date returns up to 12/31/2010 for all of their mutual funds available right now, so I made a table with all of the funds and asset classes that I like to track for my records. These are almost all passively-managed funds, so they should track their respective indexes closely. 2010 ended up being a relatively good year for most investors, as nearly all the major stock and bond indexes ended up in positive territory. I’ve listed the mutual fund versions for simplicity, even though there is usually an ETF equivalent with similar returns.

Fund Ticker Asset Class 2010 Total Return
Stocks
VFINX S&P 500 14.91%
VTSMX US Total Market 17.09%
VISVX US Small Cap Value 24.82%
VGSIX US Real Estate (REIT) 28.30%
VFWIX International Total Market 11.69%
VGTSX International Total Market 11.12%
VFSVX International Small Cap 17.09%
VEIEX Emerging Markets 18.86%
Bonds
VFISX Short-Term Treasury 2.64%
VIPSX Inflation-Protected Bonds 6.17%
VBMFX Total Bond Market Index 6.42%

As a reminder that being this year’s best performing asset class is no guarantee of for future years, here’s the Callan Periodic Table of Investments that shows the relative performance of 8 major asset classes over the last 20 years. You can find the most recent one below (click to view PDF), which covers 1990 to 2009. (No update to include 2010 yet.) You can find previous versions here.

As you can see, the top performing asset classes is nearly impossible to predict, so holding multiple, low-correlation asset classes and rebalancing can be beneficial.

Filed Under: Investing, Treasury Bills and Bonds //

2010 Year-End Financial Goal Progress Update

Posted on January 1, 2011 // 31 Comments

As 2010 draws to a close and the champagne is all gone, here’s an update on the status of our personal financial goals. I’ve been on the fence for a while about whether to continue our detailed net worth updates, and I’ve decided to reclaim some privacy and stop doing them in the previous format. Instead, I’d like to keep tracking our progress but in a opaque manner where I think everyone can still calculate their own and compare with us if desired. I’m not sure exactly how to do this, but here is a rough outline.

Credit Card & Consumer Debt

I think the first part of any healthy financial status should be to outline and pay off any consumer loans. We do use credit cards, but we pay our balances in full each month. We don’t have any auto loans or other forms of consumer debt.

I used to take money from credit cards at 0% APR and place it into online savings accounts, bank CDs, or savings bonds that earned 4-5% interest, and keeping the difference as profit while taking minimal risk. (By this I meant that the risk was dependent on my own actions.) I could have also used such 0% loans instead of other debt like student loans. However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”.

Retirement Portfolio

As far as financial freedom goes, there are a number of ways to fund your living expenses without working. Pensions, Social Security, stocks, bonds, real estate, and so on. For us, I have boiled down “financial freedom” to be two things:

Part 1: Accumulate 25 times annual (non-housing) expenses

Part 2: Own my house / Pay off mortgage

I think it’s important to note that these two parts don’t necessarily have a number attached to them. Minimizing expenses are just as important as increasing portfolio size, as well as minimizing the amount of house that you “need”. More detail can be found in this post entitled A Quick & Dirty Plan To Reach Financial Freedom.

For Part 1, the basic idea is to assume that a portfolio can return 4% annually with adjustments for inflation. So if you have $1,000,000, that would create $40,000 a year. The exact implementation of this is more complicated, as there are several ways to help avoid portfolio depletion like annuities and adjusting your withdrawals during market downturns. Most folks won’t need a million dollars, though, if they have already paid off their house. For example, if your non-housing expense are only $1,000 per month, then you’d only need 12 x 25 = $300,000.

Back in July I was 33% of the way to reaching this goal. We are now 40% of the way. At this pace, we could finish Part 1 in less than 10 years, but we will likely scale back our income when we have kids. We’ll have to keep a close eye on those expenses as well.

Housing & Mortgage

Owning a house isn’t for everyone, but I think that if you are geographically stable, it can be a great way to become financially independent. Once you pay off the house, then your housing “expense” is mostly taken care of. (There is still maintenance and property taxes.)

We have owned our house for about 3 years now, having taken out a 30-year fixed rate mortgage initially with a 20% downpayment. Since I want to retire before I’m 50, I need to speed things up. Over the past year, we have made additional payments toward principal, as well as lowered the interest rate to 4.75%. These prepayments have been irregular lump-sum amounts, although I agree an automated plan is easier to maintain. The outstanding loan principal is now 67% of the purchase price. If we were to continue the original minimum-required payments, our home would be now be paid off in 21 years. This is good, as we can support that payment on one income.

Filed Under: Goals, Investing, Real Estate, Retirement //

MIT’s Real-time Inflation Calculator

Posted on December 16, 2010 // 11 Comments

A lot of people are worrying about inflation or deflation in the future. The most widely used definition of inflation is the Consumer Price Index, which is published monthly by the Bureau of Labor Statistics and is based on a basket of consumer goods using price surveys from cities around the country. This takes a while, so the CPI for December would be published in mid-January.

Professors Roberto Rigobon and Alberto Cavallo at the MIT Sloan School of Management started the Billion Prices Project which, directly pulls data from online retailers from around the world. In the US, the software is tracking 550,000 items from 53 retailers. The best part – since it’s all automated, the numbers are updated daily! The goal is to predict the CPI before they even announce it. You can see from the charts below that the two track reasonably well together.

Daily BPP Index vs. CPI

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Annual Inflation (over last 365 days)

If they start to vary widely, which one should be considered inaccurate? Via the NY Times.

Filed Under: Investing, Tools & Calculators //

Sharebuilder New Account $50 Bonus

Posted on December 10, 2010 // 13 Comments

I just noticed that discount stock brokerage Sharebuilder is offering a $50 cash bonus as long as you open a new account with $50 by December 31st with promotion code 50WS10. (The code is also mentioned on the promo page.) It doesn’t appear that you even need to make a trade. Fine print:

** You must open a new account with ShareBuilder and deposit $50 or more to be eligible for this promotion. Initial deposit must be completed by 12/31/2010. ShareBuilder will deposit a $50 bonus approximately 4-6 weeks after your first $50 deposit. The $50 bonus offer is available for Individual, Joint and Custodial accounts only. Offer not valid for IRAs or ESAs. The $50 bonus from ShareBuilder is not available for withdrawal for 90 days after it is awarded to your account. This offer is not valid with any other offers and is non-transferrable. Limit one ShareBuilder account bonus per unique customer or custodial beneficiary. […] Offer expires 12/31/2010.

If you open it quickly, you should be able to take combine this with these several promotional codes worth over a hundred dollars in free trades, both real-time and automatic. Automatic trades differ from the real-time market/limit trades that most brokerages offer, as they are market orders that only execute in batches once a week on Tuesdays. In most cases, this is best suited for people regularly investing a constant amount (i.e. $50 a month) into ETFs or widely-traded stocks. The commissions start at $4 for each automatic trade, and $9.95 for a real-time trade.

Filed Under: Deals & Offers, Investing //

Vanguard Total International Stock Index Fund Now Has Admiral Shares

Posted on December 9, 2010 // 4 Comments

If you own shares of the Vanguard Total International Stock Index mutual fund, you may be interested to know that Vanguard recently announced that Admiral shares of the fund now available to those with balances of $10,000 or more. Here are their respective pages:

Vanguard Total International Stock Index Fund Investor Shares (VGTSX)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)

Admirals shares are a separate share class in addition to the standard Investor shares. While owning the same underlying investments, they take advantage of the cost savings of larger accounts and thus have lower annual expense ratios. Back in October, Vanguard reduced the minimum amount required to qualify for Admiral Shares on most of their index funds from $100,000 to $10,000.

Vanguard Total International Stock Index Investor shares have an annual expense ratio of 0.32%, while the Admiral shares are at 0.20%. That’s a difference of only $12 annually per $10,000 invested, but with compounding over time that can become significant. If you qualify, Vanguard says they will convert you automatically sometime “early next year”, but you can do so manually right now with a few clicks. Here’s a step-by-step guide [pdf], so why not?

After the conversion, you will remain invested in the same Vanguard fund. We’ll transfer your account options and cost-basis information to your new Admiral Shares automatically. When the change is complete, we’ll send you a confirmation of the transaction. We’ll also send you a separate confirmation for any account options that we carried over to your new Admiral Shares.

Also worth mentioning again is the fact that the Total International Stock Index Fund itself is making some changes soon. Its benchmark index will switch to the MSCI All Country World ex USA Investable Market Index, which differs from the previous index by adding exposure to Canada and Israel, as well as adding a ~13% allocation to small-cap international companies.

The combination of the benchmark change and this new Admiral shares option, in my opinion, makes the holdings more comprehensive and even cheaper than my current holdings of the Vanguard FTSE All-World ex-US ETF (VEU). I’m going to direct all my new investments into VGTSX/VTIAX. I’m not selling my existing shares of VEU right away though, as I already have some capital gains. I suppose that’s a good thing.

Filed Under: Investing //

Chart: The S&P 500 Stock Index Priced In Terms Of Gold

Posted on November 11, 2010 // 25 Comments

I don’t know what if anything this chart tells me, but for some reason I was compelled to post it here for posterity. Below is the S&P 500 index priced in terms of ounces of gold, from 1971-2010. Via BusinessInsider.

It has become popular to refer to gold as “real money” these days (and thus mock paper currencies like the dollar and euro). I don’t know about that. As a non-correlated asset to own as a certain percentage of your portfolio (and rebalance regularly), then maybe. But as a way of pricing things, gold values are way too volatile, and while the price of gold does relate to the falling dollar, it also relates strongly with speculation and fear.

I also feel that the newly found ease of buying gold in a brokerage account via an ETF like GLD has helped the price skyrocket. Click, click, and now you own gold. If you haven’t heard, gold ATM machines are coming here as well. Hmm.

In any case, if you do think of gold as money, then according to this chart the S&P 500 is at a reasonable historical price.

Filed Under: Investing //

New: Vanguard International Real Estate Fund & ETF

Posted on November 8, 2010 // 4 Comments

On November 1st, Vanguard announced the initial trading of their new international real estate index fund, both in mutual fund and ETF share form:

Per their release, the fund invests in real estate investment trusts (REITs) and real estate operating companies (REOCs) in non-U.S. developed and emerging markets. The benchmark index is the S&P Global ex-U.S. Property Index, which includes 425 international real estate securities from 35 developed and emerging markets. Vanguard will assess a 0.25% fee on both purchases and redemptions for mutual fund shares (none for ETF).

I am glad to see a lower-cost option for international real estate investment, although I’m not really familiar with REOCs and how they differ structurally from REITs. I would assume these are best placed in a tax-sheltered account. I need to do more research, but am considering replacing part of my Real Estate portion (currently all US REITs) of my target asset allocation to this fund.

Filed Under: Investing //
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