Chart: Investment Returns Vary, Even Over The Long Run

Posted on August 28, 2013 // 34 Comments

Updated and revised 2013. You often hear that stock investing is a sure thing over the “long run”. But as this chart from the NY Times and Crestmont Research shows, there is still a lot of variability involved. The matrix below visually displays the annualized returns for the S&P 500 for every starting and ending year from 1920 to 2010, adjusted for inflation, taxes, and transaction costs.


(click to enlarge)

Your actual returns depend a lot upon when you start, and also when you finally withdraw:

After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.

“Market returns are more volatile than most people realize,” Mr. Easterling said, “even over periods as long as 20 years.”

Some further observations:
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Filed Under: Investing, Retirement //

Betterment Bond Portfolio Asset Allocation Changes 2013

Posted on August 26, 2013 // 7 Comments

Online investment manager Betterment.com recently announced an upcoming change to their portfolio asset allocation, specifically their bond portion. Here’s a visual example of the ETF changes:


(click to enlarge)

I have mixed feelings about this change…

This is a fundamental shift in philosophy and it smells like performance chasing. The original allocation of 100% Treasury bonds (50% Nominal, 50% Inflation-Linked) likely came from David Swensen, as he is the Yale Endowment manager that supported the idea that you should own only the highest-quality bonds and take your risk on the stock side where your interests are aligned with the corporations. (With bonds, corporations and governments are trying to look as safe as possible even if they aren’t. This way, they pay lower interest rates.)

Now, suddenly they want to shift to a “broad global exposure” type of portfolio with lower credit quality and higher risk. Why now? Why was 100% US fine for 3 years but no longer? Perhaps because Treasuries and TIPS in general haven’t been doing that great recently? Perhaps because Emerging Markets bonds have had very high returns during that same period?

Still, it is following general industry movements. Vanguard has also added international bonds to their lineup of Target Retirement Funds. Many more international bond funds are available from many other providers. It appears that the costs for investing in international developed and emerging market bonds have dropped low enough that they can be indexed efficiently. I’m personally not convinced it is necessary and don’t own any international bonds myself, but I can understand the diversification argument.

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Filed Under: Deals & Offers, Investing //

LendingClub and Prosper vs. High Yield Junk Bonds

Posted on August 21, 2013 // 6 Comments

Yesterday, I posted a 9-month update on my $10,000 P2P lending portfolio with loans from Prosper and LendingClub. Every so often it is pointed out that lending unsecured money directly to random people at high interest is not very safe, and you could just invest in junk bonds from shakier companies instead.

“Junk” bonds, also known as High Yield bonds, are bonds from companies which have earned a credit rating from one of the major rating agencies that is worse than the “investment-grade” tier. Perhaps the company already has a lot of debt, or its balance sheet is otherwise worrisome. Bonds from some pretty big and well-known companies have been rated junk from time to time.

This is not a detailed analysis and not even technically an apples-to-apples comparison, but I ran some quick numbers to satisfy my own curiosity. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) is the largest high yield US corporate bond ETF, with over $15 billion in assets and an expense ratio of 0.50%. Here’s a chart of the credit rating breakdown of the portfolio, taken from their latest Q2 2013 factsheet.

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Filed Under: Investing //

LendingClub vs. Prosper Loan Performance Comparison, 9-Month Update

Posted on August 20, 2013 // 6 Comments

I invested $10,000 into person-to-person loans in November 2012, split evenly between LendingClub and Prosper. It’s been a little over 9 months since then, so I wanted to give a detailed update in addition to my brief monthly updates. The primary goal of this portfolio is to earn a target return of 8-10% net of defaults, but I also wanted to see if there were significant differences between the two competitors Prosper and LendingClub.

I’m also considering liquidating both portfolios after 12 months have passed. I’m getting a little bored with the experiment, and having to sell the loans would also allow me to compare the ease of selling either company’s loans on the secondary market.

Portfolio Credit Quality Comparison

I wanted to keep these portfolios comparable in terms of risk level, while still trying to maximize overall return net of defaults. Peter Renton of LendAcademy made this helpful chart comparing estimated defaults rates with their respective credit grades. Since each company has their own proprietary credit grading formula, they don’t match up perfectly.

Here’s my portfolio breakdown:

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Filed Under: Investing, Monthly Updates //

New 401k Plan Fee Disclosures Completely Worthless?

Posted on August 19, 2013 // 15 Comments

I’ve written about how recent fee disclosure requirements for 401(k) retirement plans have brought a spotlight on bad 401k plans and their potentially embarrassed plan sponsors.

But after reading the fee disclosure on my wife’s own 401(k) plan, I must say that I’m now thinking that maybe nothing really happened at all. Check out what mine says under “Potential General Administrative Fees and Expenses”:

Administrative Fee – Per Account When applicable, other general administrative fees for plan services (e.g., legal, accounting, auditing, recordkeeping) may from time to time be deducted as a fixed dollar amount from your account. The actual amount deducted from your account, as well as a description of the services to which the fees relate will be reported on your quarterly benefit statements.

Translation: We might charge you some fees. We might not. Helpful, eh?

There’s more:

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Filed Under: Investing, Retirement //

GMO July 2013 7-Year Asset Class Forecast

Posted on August 16, 2013 // 4 Comments

It may qualify as market noise, but I admit to looking at the GMO 7-Year Asset Class Forecasts whenever they come out once a quarter (or more often now?). You can read it and other market commentary from Jeremy Grantham (whose opinions I respect) for free by registering on their website. The most recent one was released a few days ago:


Source: GMO.com (click to enlarge)

Most of the time, I just like looking at these forecasts because they reinforce the idea that I should rebalance and buy whatever has been underperforming lately. Right now, that’s Emerging Market stocks. I also see some logic in buying some Timber REITs as part of my REIT exposure, as I don’t believe Timber REITs are included in the Vanguard REIT ETF (VNQ). Invest in tree farms!

I don’t like the “High Quality US Stocks” category because it doesn’t explicitly state what those are. How else will we know if the prediction was right?

Filed Under: Investing //

Vanguard Balanced Fund: The Benefit of Balancing Stocks and Bonds

Posted on August 12, 2013 // 14 Comments

An important tenet of portfolio construction is diversifying between stocks and bonds. While poking around on Morningstar, I stumbled across a quick real-world example of how this works.

Let’s say you had $10,000 back on January 1st, 1993. Now, let’s see how that money would have grown over time until today (August 9, 2013) depending on what you invested it in. That’s means holding over a 20-year period – that’s 20 years of bubbles, crashes, euphoria, fear, and a constant flow of bold predictions and catchy newspaper headlines.

1. Vanguard Total Stock Market Index Fund, Investor Shares (VTSMX).

Let’s say you invested in this huge, popular index fund that passively tracks the entire US stock market. (See What’s Inside the Vanguard Total Stock Market Index Fund?) From afar, you may be happy with this chart. But having lived through it, I can say that it was quite a wild ride. People tend to remember the highest value of their portfolio. Your money would have grown to $37,000, only to fall all the way back to $23,000 in the Tech Bubble Crash (a 38% drop). Later, your $46,000 would have dropped 50% all the way to $23,000 during the Housing Bubble Crash. So between 2003 and 2009, your money would have gone nowhere even as inflation rose. Many people went to cash. But if you stuck it out, today you’d be sitting on a balance of $58,621.

2. Vanguard Total Bond Market Index Fund, Investor Shares (VBMFX)
Now, what if you invested in this fund that tracks the overall US bond market?

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Filed Under: Investing, Retirement //

$30,000 Beat-the-Benchmark Experiment Update – August 2013

Posted on August 6, 2013 // 7 Comments

Here’s the August 2013 update for my Beat the Market Experiment, a series of three portfolios started on November 1st, 2012:

  1. $10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.
  2. $10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 P2P Consumer Lending Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment class of person-to-person loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.

As requested, I updated the scale to zoom in on the comparison chart. You can view it the old way here.

Summary. Values are as of August 1, 2013. 9 months into this experiment, the passive benchmark portfolio remains the leader and if anything is widening the gap. My neglected speculative portfolio has been more volatile and also consistently behind the benchmark in this bull market. As for the P2P portfolio, it is starting to look like LendingClub may perform better than Prosper. Although my Prosper portfolio is earning slightly higher average interest, it also has significantly more late loans which has more than offset the higher interest. I’m slightly above 8% annualized return for LendingClub currently using my metrics, slightly below 7% for Prosper.

$10,000 Benchmark Portfolio. I put $10,000 into index funds at TD Ameritrade due to their 100 commission-free ETF program that includes free trades on the most popular low-cost, index ETFs from Vanguard and iShares. Also no minimum balance requirement, no maintenance fees, no annual fees. The portfolio was based loosely on a David Swensen model portfolio. Screenshot, click to enlarge:

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Filed Under: Investing, Monthly Updates //

Shareholder Yield: Better Stock Screening Metric Than Dividend Yield?

Posted on July 21, 2013 // 4 Comments

I’ve read a few books about dividend investing and remain interested in the idea, although I’m not confident enough (yet?) to allocate my portfolio that way. Portfolio manager and writer Mebane Faber has a short book called Shareholder Yield: A Better Approach to Dividend Investing that offers another tweak on dividend investing strategy.

The book starts with an overview of history and academic research. First, a little over half the total return of the US stock market since 1871 is due to dividends. The smaller half is price appreciation, which when people talk about the S&P 500 index is all price appreciation. Second, stocks with higher dividends have had a higher historical return than stocks with little or no dividends.

So dividends are good, but they aren’t the entire picture. There are five ways for management to deploy the free cash flow generated by the company:

  1. Invest in existing operations,
  2. Acquire other businesses,
  3. Pay down debt,
  4. Repurchase stock (reducing outstanding shares), and
  5. Distribute cash to shareholders.

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Filed Under: Book Reviews, Investing //

Should I Still Contribute to a Bad 401(k) Plan?

Posted on July 15, 2013 // 24 Comments

Along with other factors, new fee disclosure requirements for 401(k) plans have brought a lot of attention recently on “bad” 401(k) plans. These are plans with little or no employer match, higher-than-average fees, and/or limited investment choices.

I’ve gotten a few questions from readers who wonder if they should stop contributed to their subpar plans completely? As with most things, the answer depends. But here are some factors that I’d consider first.

Can You Save Better Elsewhere?
Depending on your situation, it may be better to put money away in other tax-advantaged vehicles like a Traditional or Roth IRA instead of your 401k/403b/similar plan. If you plan on socking away $5,000 a year, that is under the IRA annual contribution limits. Alternatively, if you have self-employment income you can look into a SEP-IRA, SIMPLE IRA, or Self-Employed 401k plan where you can choose the custodian.

Bad 401(k) Now, Awesome Rollover IRA Later?
According to the Bureau of Labor Statistics, the median employee tenure is less than 5 years. Even workers in “management, professional, and related occupations” had median tenures of 5.5 years. In other words, these days people don’t stay in their jobs very long. (Of course, some people may stay in their jobs for 30 years.)

When you switch jobs, you’re free from the bonds of your crappy 401k plan and can roll it over to a new provider with low fees and great investment options. Very few plans are so bad that you wouldn’t endure five years of mediocrity in exchange for 20-50+ years of precious tax advantages.

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Filed Under: Investing, Retirement //

$30,000 Beat-the-Benchmark Experiment Update – July 2013

Posted on July 1, 2013 // 2 Comments

Here’s the July 2013 update for my Beat the Market Experiment, a series of three portfolios started on November 1st, 2012:

  1. $10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.
  2. $10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 P2P Consumer Lending Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment class of person-to-person loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.
1307_btmsummary

Summary. Values are as of July 1, 2013. 8 months into this experiment, the passive benchmark portfolio remains the leader despite a slight drop this month. The speculative portfolio has definitely been more volatile and is back to lagging again. As for the P2P portfolio, it is starting to look like LendingClub may perform better than Prosper. Prosper simply has more late loans in the pipeline, although I’m still hopeful for solid overall returns.

$10,000 Benchmark Portfolio. I put $10,000 into index funds at TD Ameritrade due to their 100 commission-free ETF program that includes free trades on the most popular low-cost, index ETFs from Vanguard and iShares. The portfolio was based loosely on a David Swensen model portfolio. Screenshot, click to enlarge:

[Read more…]

Filed Under: Investing, Monthly Updates //

Investment Returns By Asset Class: Mid-2013 Update

Posted on June 30, 2013 // 5 Comments

We’ve reach the midway point of 2013, and here are the returns of the major asset classes as benchmarked by passive mutual funds and ETFs. Return data was taken after market close at the end of June 2013. I’m still tweaking the format, in the hopes of making it easier to understand. Below is a chart of the all the trailing total returns for year-to-date, trailing 1-year, and trailing 10-year periods.

Market Commentary

The big news recently is the Fed talking about possibly tapering off its quantitative easing. Since that drove interest rates up, bond prices fell. I think this was a good reminder that we are in abnormal times, with the super-low interest rates being artificially depressed and that one day we will revert back to the mean. Even though my bond holdings fell as well, I’m fine with that if that’s a result of a healthy stock market and it means higher interest rate payouts in the future.

Stocks prices have pulled back a bit recently, but are still well above levels from a year ago. If you bought and held since 2009, you’re still happy. Gold has dropped nearly 30% since the beginning of the year. I just don’t understand gold prices, which is why I don’t own it. I can see a place for it as a diversifier, but it just seems too volatile and speculative to be considered “real money”.

The details:

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Filed Under: Investing, Monthly Updates //
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