Money Magazine Portfolios

Back in the 90s, Money Magazine ran financial "makeover" type articles every month, looking at a family's investments, debt, etc. and recommending changes. It was usually interesting stuff. They stopped doing that, and I dropped my subscription to the magazine. In the last year or so (I think) they've started doing it again. In the February 2007 issue, they featured a large makeover article looking at fourl famlies in different situations and recommended investment portfolios. You can complete these portfolios with mutual funds from Vanguard, ETFs, etc.

1. First, a young couple just starting out in investing. This is a relatively simple portfolio; note the lack of bonds. The couple can use their emergency cash savings as a substitute for bonds.

2. A 57 year old woman who got started late and needs to catch up. Note that this is a riskier portfolio (more international, more small cap, some mid cap as opposed to just a bunch of large cap) BUT there's more diversification and a bond portion to help lower the overall risk in the portfolio.

3. A couple in their mid to late 30s who have come into a $100k inheritance. They have some retirement savings, but not a lot. Most of their equity is tied up in their house. Money calls this a conservative growth portolio; note diversification is similar to the aggressive growth portfolio, but the percentage allocations are slightly different. At this stage of their lives, I'd make this a bit more aggressive (more international, maybe) but this certainly works.


4. Finally, a "mostly retired" couple in their early 60s. They've got $1.1 million saved up, and want to make it last as long as possible. They have calculated they need to withdraw 3% a year to fund their lifestyle (will you be able to live on $33k in retirement?). The retired husband has taken up the "hobby" of managing the money and doing some online trading. This "retiree portfolio" is less aggressive, though still well diversified. Also, note that 3% is set aside for the husband to play with and that some real estate (an REIT) has been added to add dividend income to the portfolio (the REIT helps save on taxes, too).


These are pretty good portfolios; I'm glad to see Money didn't go overboard with creating complex portfolios.

15 Years of Sector Performance

Sector performance of the Dow Jones Total Market Index, ranked highest to lowest, for 1992 through 2006.

The January Effect

Now here's a market forecast legend that isn't just useful - you can actually understand it. There are no lengthy equations involving economic variables, and the whole thing actually makes sense.

A lot of analysts track the January effect, whether formally or informally. Standard and Poors 500 sector strategist Sam Stovall has tracked sectors since 1990 (uh oh, that "tracked it during a huge bull market" thing) and discussed the January Effect in a Chicago Tribune article recently.

The idea is this:

1. As the market, or more specifically the S&P 500, goes in January, so it goes for the rest of the year. This is correct about 85% of the time.

2. The market sectors that perform best in January should perform the best for the rest of the year. In theory, if you buy the 3 strongest sectors in January, then buy them and hold them for 12 months, you will on average beat the S&P 500. The sectors will give you about 15.4%, while the S&P 500 will give you about 10.2%.

So what performed the best in January 2007?

1. Materials (XLB): 4.3%
2. Healthcare (XLV): 3%
3. Telecommunications (VOX): 3%

I've chosen sector ETFs from a particular vendor; you could use different ETFs or sector mutual funds.

What are analysts thinking about these sectors? Materials company profits will only go up 7.3% for the year, after 42% growth for 4q 2006. Of these 3, analysts only recommend overweight in health care.

Health care would seem the obvious long term play, but I also like materials as a long term play, especially the new international materials ETF I've mentioned before (though there's no performance data on that ETF yet).

I think this is worth tracking each year.

Consumer Reports All-Index Portfolio

Do you put a lot of stock in Consumer Reports? Many people do, and for good reason - they tend to offer reasonable, well-researched advice. I happened to run across a May 2006 edition of a Consumer Reports newsletter about investing. They had a cover article on an all-index portfolio. It was a reasonable, though slightly conservative, portfolio. I thought I'd post the ideas here.

They posted several investment alternatives for each step; I'll just post the Vanguard option. Note that ETFs are available for each option as well.

Step 1: Select A or B for 60% to 70% of your portfolio.
A. A broad market fund for 70% of your portfolio (Vanguard Total Stock Market Index)
B. Pick one S&P 500 fund for 50% or 60% of your portfolio (Vanguard S&P 500 Index) AND
Add 1 to 3 of these for 10% to 20% of your portfolio:
1. A midcap blend index (Vanguard midcap Iidex fund) - S&P Midcap 400)
2. A smallcap blend index (Vanguard smallcap index fund - Russell 2000)
3. A smallcap growth index (Vanguard smallcap growth index fund - Russell 2000 growth)
4. A smallcap value index (Vanguard smallcap value index fund - Russell 2000 value)
5. A foreign largecap blend (Vanguard Developed Markets fund or Vanguard Total International fund)

Step 2: Add 1 of these for 30% of your portfolio: A bond market index (Vanguard Total Bond Market or AGG ETF) or Vanguard Intermediate Term bond fund.

It's a little conservative for younger investors, but that probably wasn't the target of the article. Note that this portfolio doesn't allocate a lot to the international portion. If you like, you could simply take some percentage off the bond portion and add it to the "Step 1 - B" part of the portfolio.

Where To Put the Low Risk Part of Your Portfolio?

I've got a little over 13% of my total portfolio in bonds; to be honest, I've only got that much because everyone's conventional wisdom seems to be that part of your portfolio needs to be more conservative than equities, and should therefore be in bonds. I originally invested in a Vanguard Long Term bond fund and then later in total-bond-market ETF (AGG).

I did not put a lot of research into the bond side of my portfolio; lately I've wondered if it wouldn't be simpler just to put this part of the portfolio in cash. So I decided to check it out.

	2001	2002	2003	2004	2005	2006
Vanguard Prime Money Market	6.29%	4.17%	0.9%	1.11%	3.01%	4.88%
Vanguard GNMA	7.9%	9.7%	2.5%%	4.1%	3.3%	4.3%
Vanguard Long Term Bond Market	8.2%	14.4%	5.5%	8.4%	5.3%	2.7%
Vanguard Total Bond Market	8.4%	8.3%	4.0%	4.2%	2.4%	4.3%
AGG				3.99%	2.16%	4.13
TIP				8.27%	2.49%	0.28

Conclusions?

Cash is great, but as a part of your investment portfolio it's going to have a ceiling. That ceiling is probably somewhere around 6%, and you're only going to get that near the bottom of a market - exactly the point where your cash fund will lag bond funds.

The idea behind TIP funds is great; they help you negate the effects of inflation. But keep in mind that they are adjusted twice a year; the adjustment that helps you beat inflation will happen 6 months AFTER you're hit with the inflation. My original choice, the Vanguard Long Term Bond Market fund, looks pretty good here. It should - the long term bonds should in theory always give better yields than the short term funds.

A total bond market fund seems like a great idea, but as you can see a total market fund can lag a long term bond fund in some years. BUT - either a total market fund or a long term bond fund is going to have a higher ceiling than a money market cash fund. It can pay to do your research on total bond funds; a check of Morningstar reviews shows that the index used to create the AGG ETF is a much smaller index than the one Vanguard uses to create their total bond market fund. That could imply that you could get higher highs (but perhaps lower lows?) with a total bond market fund.

Bond funds are even easier to invest in now. There are now iShares bond ETFs and Vanguard bond ETFs.

Middleton Updates ETF Portfolio

Tim Middleton has updated his ETF portfolio for 2007. I think he generally has some good ideas; he also keeps an all-ETF portfolio.

While I don't strictly follow Middleton's portfolio, he sort of follows the same general principle I do. Set up the core of your portfolio (whatever you think that should be) and then add pieces to that. For instance, Middleton often keeps around 25% of his portfolio in large cap U.S. stocks and somewhere between 15% and 20% in foreign stocks, then gooses that by putting 5% to 10% of the portfolio in other sectors like tech or real estate.

He's cutting part of the S&P 500 portion of his portfolio (SPY) and moving it into a newish FTSE RAFI US 1000 index from Powershares (PRF). This is an index based on technicals rather than cap weight, as the S&P 500 is.

He's also trimming the portion invested in the Russell 2000 (IWM) and real estate (ICF). Makes sense; those 2 sectors have been on a huge roll for the last 3 years and therefore those 2 portions of his portfolio have gotten far too large. He's moving some of that into international stocks (EFA).

Interesting stuff and again, a good strategy. Set up the core of the portfolio, and add pieces to that.

The Giant 5: A 5 Sector Strategy

Here is a Yahoo Finance/Investor's Business Daily article on an interesting portfolio idea. Mike Willis, founder of Giant 5 Funds , has supposedly 17 years of equity market experience (so that's 2 recessions and one of if not the longest bull market in history). He has a portfolio that spreads investments among 5 pieces: Bonds, energy, capital markets, raw materials, and real estate. According to him, these are "the things you need to have no matter what happens to the market."

There is no separate category for international funds. "We don't keep international as a separate category. Stocks are stocks no matter where they are," he said.

He has a mutual fund you can track, FIVEX. Here's the deal, 20% in each:

Bonds: He recommends Morgan Stanley Insured California Municipal Securities (ICS). This is a closed end fund (trades like a stock) yielding 4.2%

Energy: He recommends the iShares Global Energy ETF, IXC.

Basic Materials: He recommends the iShares Dow Jones U.S. Basic Materials ETF, IYM. I think a better choice might be a newer ETF, the iShares Global Basic Materials ETF, MXI. It's new this year and doesn't have years of data to back it up like IYM does. However, it offers global exposure (only 24% U.S. content), less exposure to chemical companies and more exposure to real basic materials companies like mining companies.

Equities: He divides this into pieces. The iShares S&P Europe 350 Index (IEV), iShares Russell 1000 Index (IWD) and then the 3rd piece is iShares Russell Midcap Growth Index (IWP) plus iShares Russel Midcap Value Index (IWS).

Real estate: The Streettracks Dow Jones Wilshire REIT (RWR) and the usual ICF plus VNQ. Morningstar likes RWR because it has the broadest exposure. I'm not aware that it has any international exposure; there are ETFs that cover international real estate, but I'm not sure anyone knows if they're worth investing in yet.

So the portfolio is:

20% ICS
20% IXC
20% IYM (though I think I'll track MXI)
6.67% IEV
6.67% IWD
3.33% IWP
3.33% IWS
20% RWR

1 Decision ETF Portfolio Update

I did a little research into Appel's ETF book; he DOES actually talk about 2 portfolios. He spends much of his book talking about a U.S. only portfolio; his main point is that emerging markets are much too volatile for investment. Of course, emerging markets are only a small part of international investment opportunity. In the last chapter or so of his book, he then abruptly changes course and talks about an ETF portfolio that includes international investment (though not emerging market investment).

His most rounded portfolio consists of 4 parts and requires research each month. The parts are:

1. 25% bonds (AGG)

2. 25% EFA (international, SPY (S&P 500) or cash. If SPY performance lags EFA by 15% or more, invest in EFA. Other wise, SPY UNLESS certain interest rate conditions are met. Then this 25% goes into cash.

3. Invest 25% in large caps (Russell 1000) or small caps (Russel 2000). In general, you use the one that outperformed the year before - his stats say this makes you right 70% of the time. You also do not use the straight index; you use the value or growth version of the index. If you see a) sharply rising commodity prices, b) a strong dollar, and c) accelerating economic growth, you choose the value version of the index. Otherwise, you choose the growth version of the index.

4. The last 25% goes into a real estate ETF, preferably ICF.

. As you can see, this isn't simple. Some of the calculations for step 2 are pretty interesting. I think a simpler portfolio might be composed of the AGG bond index, EFA for international exposure, IWB for the Russell 1000 (stick with large caps and ignore the value vs. growth question) and ICF for the REIT portion.

Dividend Income

I've been meaning to add some information on dividend ETFs, and this Motley Fool article reminded me of that. I wasn't sure where to put it, but I'll simply add an "Income" group to the sectors page. I'll track the big iShares Dow Jones Select Divident (DVY), a couple of Vanguard dividend ETFs, and the State Street SPDR Dividend ETF (SDY). Maybe even a Powershares International dividend ETF if I'm in a good mood.

They're populated by big-cap relatively safe stocks. The interesting thing is, China is opening up to international banks; bank stocks make up a significant chunk of these dividend ETFs.

Emerging Market ETF (EEM) Distribution

Ever wonder what emerging markets are? Do you think South Korea is a developed market? Everyone talks about the big 4 (BRIC): Brazil, Russia, India, and China. This summary for the EEM ETF is pretty interesting.

South Korea = 16.47%
Taiwan = 10.72%
Brazil = 10.25%
Russia = 9.91%
China = 9.81%
South Africa = 9.16%
Mexico = 7.64%
India = 5.49%
Other = 20.55%

The 1 Decision Portfolio

Dr. Marvin Appel has written a book called Investing with Exchange-Traded Funds Made Easy. I originally saw a reference to a "1 Decision ETF Portfolio" discussed in his book in a Yahoo article back in August, but the link disappeared. I've recently seen references here and here to his "1 Decision ETF Portolio." The idea is that the only decision you make each year is re-balancing the portfolio.

It's 50% equities (S%P 500, REITs, and small-cap value) and 50% income (investment grade bonds and cash). This portfolio is supposed to make over 10% each year, yet still be safer (i.e. more stable) than a complete equity portfolio. All set up like this:

20 percent S&P 500
20 percent REITs
10 percent small-cap value
20 percent investment-grade bonds
30 percent cash (90-day U.S. Treasury bills)

Several things jump out at me. First, WOW is that a high percentage of cash. Second, where's the international portion? Third, 50% in income investments is a lot unless you're at least in your mid 40s, and I'd say it's lot unless you're in your mid 50s.

But here's the kicker: This is NOT the same "1 Decision" portfolio I saw in the article in August! I wrote down the portfolio and the link, the link just doesn't work anymore. Here's the portfolio and the associated ETF:

25% bond index (AGG)
25% real estate index (ICF)
25% international index (EFA)
25% domestic stock (right now a Russel 1000 value index, IWD)

The one decision you make each year is what that 25% domestic stock portion can be. You're supposed to pick what is performing best: S&P 500, Russell 1000 Value or Growth, or Russell 2000 Value or Growth (so it's large cap vs. large and medium cap vs. small cap). That's a big decision to make! If you guess right, this portfolio is supposed to get 15%/year. You probably wouldn't do too bad sticking with either S&P 500 or Russell 1000 - either Value or Growth, depending on what type of investor you are.

Now THAT is a portfolio worth tracking. A little more aggressive (less percentage in income-type investments) and a portion in international stocks (though no emerging markets).

My guess is that, though the articles don't mention it, his book has several "1 Decision Portfiolos."

2007 Predictions

I enjoy tracking investment predictions for the coming year to see which analysts have a clue and which don't. The Chicago Tribune on 12/17/2006 had an article in which they asked several analysts how to invest $10k for 2007. I'll leave the names out, but use their titles.

Chief Market Strategist for Stifel, Nicolaus and Co. in St. Louis: The market rally will continue, taking the DJIA to 13k in the first quarter before a 10% or more correction in late spring and summer. Invest $10k in Coventry Healthcare, Inc.

Chief Investment Strategist for Standard and Poor's Corp: Historically, the 3rd year of a presidency has produced an average gain of 18%. His choices are the Consumer Discretionary SPDR or Coach Inc. In Industrials, the Industrial Select SPDR or L3 Communications. In technology, the Technology Select SPDR or Western Digital Corp.

Founder, The No Load Investor: Stock valuations remain reasonable despite the recent run-up. Divide the $10k between T. Rowe Price New Era fund, a natural resources fund that is 'pseudo-commodity', and the Powershares FTSE RAFI US 1000 ETF.

President, Garzarelli Research, Inc: Invest $2500 each into Nasdaq 100 Trust, iShares MCSI Emerging Market, iShares Russell 2000 Index, and Merrill Lynch and Co.

Investment Director with Hinsdale Associates: We're playing a defensive game. Divide the money between bonds and the stocks of Anheuser Busch, Bristol-Meyers Squibb, and American States Water Co.

Managing Director for Investment Strategy, Raymond James and Associates: Invest it all in ETFs, esp water, aerospace/defense, financials, and technology. E.g. Powershares Water Resources, Powershares Aerospace and Defense, Vanguard Financials ETF, and Technology Select SPDR.

Chief Market Strategist, A. G. Edwards and Sons: The economy is already slowing, corporate earnings will slow, the overall market will be reasonable, Fed will lower interest rates in the spring. Stick with larger cap quality growth companies.

Director of small-cap stock research for Prudential Securities: Small caps may be overextended. Lean toward large cap growth, especially technology and healthcare.

Managing Director of Morningstar: Cards are lining up for large-cap growth. Put $10k into Primecap Odyssey Groth Fund

The Permanent Portfolio

What's a permanent portfolio? It's one you wouldn't have to change. None of this cycling between large cap and small cap stocks. No need to pick sectors. No need to worry about the percentage of your portfolio in international stocks.

It's kind of a defensive portfolio. Timothy Middleton wrote an article about a mutual fund called Permanent Portfolio, started in 1982. Here's what the portfolio is invested in. There are some interesting ideas here. Note that in good times, this mix doesn't usually do as well. But in bad times, it's not nearly as bad.

20% gold

5% silver

10% Swiss denominated assets like government bonds

15% in U.S. and foreign real estate and natural resources

15% in U.S. growth stocks (e.g. S&P 500 or Russell 1000)

35% in U.S. Treasuries and high growth corporate bonds

Ticker	Name of fund	1999	2000	2001	2002	2003	2004	2005	06Q3
PRPFX	Total Return	1.2	5.9	3.8	14.4	20.5	12.0	7.6	11.2

Compare that to some results on the indexes page.

Starting a simple portfolio

Ben Stein (did you know he was an economist?) often writes relatively simply but good articles about investing like this one. He likes simple strategies, and he likes variable annuities.

His idea is this. Your main investment should be a broad based index like the S&P 500 or the Vanguard Total Market index (see the indexes page) or the Russell 1000 (see the sectors page) or the Russell 3000, which is a very broad index, though not quite a total market index.

That index should be the majority of your portolio - never less than half. Then, you simply add small pieces of more specific or more risky index - say, 5% or 10%. Stein suggests 10% in 1) EFA, the Europe, Far East, and Australia developed market index to catch international market performance, 2) EEM, the emerging market index, to catch hot undeveloped countries like China, Russia, Brazil, and India, and 3) a Russell 2000 value fund to as to capture small cap stocks.

This makes a lot of sense. Here's a table showing how this would have performed over the last few years. It's smart enough that I may add it to the portfolios page.

Note: Personally, I might drop EEM to 5% and up EFA to 15% or even 20%. 25% might be my max to have invested in international stocks.

Ticker	Name__________	2001	2002	2003	2004	2005	2006
SPY	70% S&P 500 Spyder	-11.81	-21.54	28.17	10.7	4.83	15.85
EFA	10% Ishares MCSI EFA		-15.41	39.8	18.96	13.33	25.81
EEM	10% Ishares Emerging Markets				24.63	32.62	31.44
IWN	10% Russell 2000 Value	13.62	-11.92	45.96	22.11	4.36	23.48
	Total Return				14.06	8.41	19.17

etfguide.com Strategic Balance ETF Portfolio

The October 8th, 2006 Chicago Tribune had a short article on the proliferation of ETFs. This is true - between Barclay's, Vanguard, Powershares, Rydex, and now Wisdomtree, we're going to be buried in ETFs. This will make them all impossible to track (which is why I just track popular/large/important ones.

However, the article also quoted a man from etfguide.com on several things. It also gave details on his Strategic Balance Portfolio, which you'd normally have to pay to see. Here it is:

29% VTI - Vanguard total stock market ETF
21% EFA - Ishares Europe, Australia and Far East ETF
17% VNQ - Vanguard REIT ETF
15% cash
13% AGG - total bond market ETF
5% GLD - StreetTracks gold ETF

This is similar to a couple of other ETF portfolios you'll see here on my site. The differences? First, the cash. You could just set aside 6 months of living expenses and leave this part of the portfolio out if you want. Second? The gold. Another instance where someone took what was popular and performed well the past few years and added it to a portfolio. It's not a BAD idea. It's just a popular idea. The same could apply to the REIT portion of the portfolio. Most investment analysts would tell you this is too much REIT for an individual portfolio. Would it hurt you? Probably not. Is it popular to add lots of REIT to a portfolio because of REIT performance over the last 4 or 5 years? Sure is.

How much will you need to save for retirement?

I saw this article discussing how much you'll need to save for retirement a while ago. It's one of the most useful articles I've seen in a LONG time. I've always just set a goal of "millions" but this is a realistic article that you can use to figure out how much you should try to save. The details can get involved, but as a bonus there are good charts.

In a nutshell, here's the process:

Start saving 12% of your income at age 30.

Pay off your debt (house, car, etc.) by the time you retire.

Assuming a 5% rate of return (nice to see an assumption on the low side) you should have 12 times your pre-retirement salary saved up when you retire.

You can withdraw 5% of these savings per year after retirement; this should give you 60% of your pre-retirement income.

Social Security should give you another 20% of your pre-retirement income. So even if Social Security goes away, you still have 60% of your pre-retirement income.

Voila. You've got 80% of your pre-retirement income.