It was another dull year for my investment portfolio. Until last week. In all of 2015, I made a single investing move. Then came the first week of 2016: Questions swirled around highly respected financial firms. I did some long-overdue portfolio pruning. And the Dow, adding drama, dropped more than 1,000 points.
When the smoke cleared at the end of the week, I had executed a half-dozen transactions — eliminating two long-held positions and distributing the money among existing accounts. And I had increased my cash stockpile substantially. It wasn’t the perfect strategy, because I don’t have the perfect portfolio. But it will be good enough to keep our retirement on track.
What follows is a report from the trenches of a real-world, do-it-yourself retirement
: my specific investment moves, my current portfolio, and my sobering annual returns….
My portfolio has changed a bit since last year. I simplified it by selling out of two positions. And the allocations are slightly different, for reasons I’ll explain below. But it’s still a familiar picture of low-cost Vanguard funds, a picture that gets simpler and cheaper every year:
|Fund||Symbol(s)||Expense Ratio||% of Portfolio||2015 Return|
|Vanguard Wellesley Income||VWINX/VWIAX||0.25%/0.18%||37.5%||1.35%|
|Vanguard LifeStrategy Moderate Growth||VSMGX||0.16%||14.7%||-0.57%|
|Vanguard Total International Stock Index||VGTSX/VTIAX/VXUS||0.22%/0.14%||10.9%||-4.26%|
|Vanguard FTSE Social Index Fund||VFTSX||0.25%||9.9%||1.17%|
|Vanguard Inflation-Protected Securities||VIPSX/VAIPX||0.20%/0.10%||4.7%||-1.69%|
|Vanguard Intermediate-Term Treasury||VFITX/VFIUX||0.20%/0.10%||4.1%||1.61%|
|SPDR Gold Shares||GLD||0.40%||5.3%||-11.78%|
(Note: Multiple symbols are for Investor/Admiral/ETF shares. Portfolio percentages are as of 1/8/2016. Annual returns are for my shares — generally the less-expensive Admiral or ETF shares. Overall return is not a weighted average of individual returns, because holdings changed slightly during the year, but is close.)
My portfolio is currently allocated 44% in stocks, 37% in bonds, 5% in gold, and 13% in cash.
Of the stocks, 39% is international. That international position is at the high end of my comfort range. I might rebalance it later this year, if foreign markets get their overdue day in the sun.
The cash position is also higher than I would wish, due to selling out of a short-term bond position, explained below. But, given the state of the financial world right now, it may be just as well to have an extra year or two of living expenses on hand.
Activity for the Past Year
Early last year we took a modest step to better align our investments with our values. We exchanged our position in Vanguard Total Stock Market Index Fund (VTSAX) for the Vanguard FTSE Social Index Fund (VFTSX). The details are in my post on socially responsible investing.
The wisdom of choosing Vanguard was reinforced later in the year when the company reduced the already extremely low (in the realm of social investing) expense ratio from 0.27% to 0.25%.
Our new social fund has more of a growth tilt than our previous total market fund, so it will perform a bit differently over time. But, this past year, that worked to our advantage, with VFTSX returning 1.17% versus only 0.39% for VTSAX.
Other than that one move, I didn’t touch our portfolio in 2015. Then, the New Year hit…
Dropping Third Avenue
I have owned Third Avenue Real Estate Value Fund (TAREX) for nearly 15 years. It’s an actively managed fund, overseen by the firm of legendary long-term value investor Marty Whitman. Returns were good — 9.77% over the past 15 years. But the 1.09% expense ratio and the active management made the investment an outlier in my portfolio. It doesn’t fit in with my current philosophy, and I’ve been looking for the right time to fold it into my other holdings.
Then, at the end of the year, Third Avenue’s risky, junk bond Focused Credit Fund imploded in embarrassing fashion, with management changes ensuing. In theory, those events shouldn’t impact Third Avenue’s Real Estate Value Fund, whose respected management was intact. But then Morningstar downgraded Third Avenue Management company. That was enough drama for my retirement savings. I sold TAREX at the start of the new year, after checking that our 15% tax bracket would accommodate the long-term capital gains with no taxes due.
And so, my final experiment in expensive active management has ended. What to do with the extra cash? With the market volatile, I had no intention of changing our stock allocation. I considered buying a low-cost real estate index fund, to preserve our exposure to real estate. But I decided we no longer had that luxury.
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My plan for the later stages of our retirement has always been to simplify our investments into just a few easily-managed, broad-market funds. So I split the proceeds from TAREX between our existing domestic and international stock holdings: Vanguard FTSE Social Index and Total International Stock Index.
But that left another nagging issue: As I’ve pursued my strategy of portfolio simplification, our wealth has become increasingly concentrated at Vanguard. More than 80% of our net worth is now with that one company. This bothers me a little, though not a lot.
Of course that wealth isn’t invested in Vanguard. They are simply holding securities in my name. I would put the odds of serious fraud or breakdown at Vanguard about equal to those for the U.S. Treasury. But anything can happen. And I’ve learned to watch out for single points of failure. If I needed a reminder, an obscure lawsuit has appeared on the horizon, calling into question Vanguard’s tax obligations.
So I decided to “divest” myself, slightly, from Vanguard, by moving my small holding in their Short-Term Investment-Grade bond fund (VFSTX) to cash. That fund returned just 1.03% in 2015, so it wasn’t doing much more for us than a savings account or bank CD would. And it was on my list for liquidation in a few years anyway. I just accelerated that decision. The downside: It leaves us with more cash on hand than I would choose.
Investment Portfolio Returns
It was a rough year for investors, the worst since the Great Recession in 2008.
My investing mentor Dick Young’s protégé observed, “If your stock portfolio was down in 2015, you should view it as a badge of honor. High-quality businesses with durable competitive advantages and admirable dividend records had an off year. That’s no reason to abandon a winning strategy.”
My overall investment return for 2015 was -0.64%. That compares to about 0.1% for the Dow Jones Industrial Average (including dividends) and -0.57% for the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) — a more reasonable benchmark for my balanced portfolio than the all-stock Dow.
Bottom line, our money went nowhere for a year. Good old Vanguard Wellesley Income, the cornerstone of our portfolio, did eke out a gain, as did our Vanguard FTSE Social Index Fund. Treasuries and cash added a little more. Everything else lost ground. Gold was the worst, but I hold gold more as an insurance policy than an investment.
The geometric mean of my 11-year returns is now at 5.8%. That’s a respectable average for a conservative portfolio in these times. And if we see those returns going forward, we will be OK. But if that average slips lower, we could be tightening our belts down the road….
Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com. His first book is Retiring Sooner.