2008 Investment Portfolio Review: Numbers and Lessons

Vacation is over, bring on 2009! Time for a quick look back. Instead of accounting for all my various cashflows, I decided to first review how the individual mutual funds in my investment portfolio did during 2008. (Data taken from Morningstar.) Here are the numbers along with the breakdown by asset class:

 
Holding % Asset Class 2008 Total Return
34% Broad US Stock Market -37%
VTSMX – Vanguard Total Stock Market Index Fund
8.9% US Small-Cap Value -32.1%
VISVX – Vanguard Small Cap Value Index Fund
8.5% Real Estate (REITs) -37.1%
VGSIX – Vanguard REIT Index Fund
25.5% Broad International Developed -41.4%
FSIIX – Fidelity Spartan International Index Fund*
8.5% International Emerging Markets -52.8%
VEIEX – Vanguard Emerging Markets Stock Index Fund
3.8% Bonds – Short-Term +6.7%
VFISX – Vanguard Short-Term Treasury Fund
11.3% Bonds – Inflation-Indexed -2.9%
VIPSX – Vanguard Inflation-Protected Securities Fund
Total Portfolio Weighted Return -33.2%
 

Just about every asset class related to equities was in the toilet, especially emerging markets. The bonds held their ground overall. I had a relatively aggressive mix of 85% stocks and 15% bonds, with an overall weighted return of -33.2%.

As a reference, the total return of the Vanguard S&P 500 Index Fund (VFINX) was -37% while the Vanguard Total Bond Market Index Fund (VBMFX) was up 5.1%. The Vanguard Target Retirement 2045 Fund (what I used to own) had a 34.6% drop.

Did I hold too much in stocks? I don’t think so. I’m only 30 years old right now, and if I’m lucky I’ll have potentially another 55 years in the market.

On the other hand, I do think that some retirees and near-retirees held too much stocks. “You need at least 60% in stocks at all time?” *Cringe*. Take the Vanguard Target Retirement Income Fund (VTINX), which is an all-in-one fund with an “asset allocation strategy designed for investors currently in retirement.” For 2008 it dropped only 10.9% with an asset allocation of 5% cash, 30% stocks, and 65% bonds. This is probably more appropriate for people in the withdrawal stage – something to sleep well with!

So, I am stuck trying to resolve two somewhat conflicting feelings. The volatility didn’t really worry me that much this year, and am happy to take some risk right now. But I also know that I don’t want to take risk later. I may need to shift my asset allocation towards more bonds faster than 1% per year, especially if I am going to retire early.

Comments

  1. Wow! This really shows how bad 2008 was for investors.

  2. Nice review. My portfolio was down about the same. Actually, our asset allocations are fairly similar, although due to my age I have a little more in bonds. The key is to stick to your asset allocation in good times and bad. If you sell in a falling market, then you have to question your asset allocation from the start. Study after study shows that investor behavior in good markets and bad account for much of the gains and losses of a portfoliol

  3. Why did you use the Morningstar data? It isn’t an accurate portfolio return because it didn’t take into account the time you purchased any of the assets.

  4. There are sometimes when you should be completely out of the market and in cash.

    Only own stocks when they go up.

  5. How can you say you were not too much in stocks? You’re going to tell me “you can’t time the market”.. etc.. etc.

    I got news for you though. You can’t time the market, but you can use judgment about when risk is getting too high. Complacency was at an all time high (eg. bond spreads vs. treasuries were at an all time low, volatility index near all time low at an all-time high). These are signs the end is near. I read them. Many others read them. I still got burned a bit, but not nearly as badly. I haven’t totaled it, but I estimate about -8 to -10%. My stocks got hammered, but my physical gold, my treasuries, and my cash are all laughing.

    You followed conventional wisdom (hold for the long term because you’re young) and got creamed. If you had simply pulled out into cash you’d have to invest for much less time, or be much less successful to get where you need to be. You need a 50% gain just to get back to break even. Think that’ll happen soon? Took 10 years to break even if you held going into the depression. Welcome back.

    Sometimes I wish you’d admit (for the sake of your readers) that you had the wrong allocation.

  6. I know you’re a fan of Hussman. You may want to check out his post this week, it has an interesting way of using portfolio duration for bond and equity assets to come up with a broad asset allocation that considers current relative valuation.

    http://www.hussmanfunds.com/wmc/wmc090105.htm

  7. I want to say I disagree with ABC who is obviously just ranting and afraid to post his name. I follow several finance/investing blogs, and I appreciate Jonathan’s openness about his investing. Many people boast of how they saw things the world missed but they won’t tell you what they invested in. They keep everything a mystery.

    Thanks Jon for putting yourself out there even if we all don’t agree on everything.

  8. Timing the market is all but impossible. Historically speaking stocks looked overvalued since 1995 & had you bailed then you would have missed out on some decent gains. With a proper risk adjusted portfolio allocation consisting of low cost index funds makes the most sense of the average investor. My own portfolio which I have 10 years on you is 100% stocks in this set up I mentioned above. Am I worried about my portfolio, not at all. I know that I am not being soaked with high fees and I will pretty much return what the market returns. Now, I have sold things when it seemed like the price was getting ridiculous because it is true, you never go broke taking profits and as the stock market is full of regrets I would rather regret taking a profit and not capturing the full return then to have to take a real loss. Keep saving and investing and someday there will be another boom. Good luck, like the site.

  9. I’m guessing ABC has lost more money due to his trading fees after chasing funds. It is funny how he is criticizing Jon for long term investing after Mr Buffet has shown the world what that can accomplish. So lets say it will take 10 years to break even. So during that 10 years Jon keeps contributing $15,000 are so a year like he has been. So after 10 years, he has broke even on his current investments and gained a whole lot on his future investments during that time while only being 40 years old. Then the market goes up further for the next 15 years. So ABC hordes his cash for 10 years and inflation kicks in while earning no interest. While Jon has been making a profit the whole time.

  10. I too have to disagree with ABC. I think Jonathan has a strategically balanced mix and some regularlly spaced purchases now rather than later would be wise. Patience and long-term goals should be an investor’s primary focus, not immediate gratification or get-rich-quick, market-timing schemes.

  11. I think if you look at the technical papers on risk/reward and allocation return, you really dont get much more bang for your buck over 80/20 stock/bond than even all stock. If anything, this “downturn” has shown a lot of the old wisdon to be faulty. If you actually look at your asset growth over the years, most of it has been from just savings alone, regardless of what return you got!

    While you can’t 100% time the market, the law of averages says excess market gains will be followed by below average gains. Its the simple math rule of what makes an “average” an average.

    There is a VERY intersting article and approach on harvesting the excesses when it is an excess and riding out markets dips if you google “income harvesting zachary parker spwfe”. The paper won the 2007 Financial Frontiers award. The approach is simple and elegant. While it focusing on retirement lump sum withdrawals, how he structures harvesting excess returns can be applied at any age. I have no ties to him or the approach but found it by browsing the Journal of Financial Planning last year.

  12. agreed with Ron

  13. Hmmm agree with Carson and Ron. The point is Jonathan is investing for the long term. Pulling back into cash *would* have been timing the market!!

  14. Steven A Carpenter says:

    I agree that Jonathan should be commended for putting himself and his investment performance out there. Many professionals would be envious for “only” a drop of 30% this year past. Bonds were a smart play for you and prove out the fact that asset allocation is the most critical element to long-term performance.

    The reality is that we all could use a little more help than we currently get from traditional sources. That’s why I started Cake Financial- as a way to automatically track your investment and retirement account performance. Cake also calculates your risk level and benchmarks your returns against all thr major benchmarks. I think you will find it valuable.

    Good luck this year, everyone.

  15. Banditfist says:

    I agree with ABC.
    Buy-and-hold is no longer valid. People reallocate their portfolios….Jonathan could have moved more to bonds while maintaining exposure to stocks.
    Buy-and-hold is something that the investment companies push because it is for THEIR profit.

  16. You know how to make a small fortune in the stock market. Start out with a large fortune. Encouraging people to market time is sure way to have them experience real losses. I’m not saying be dumb about you investments as I have sold some investments in anticipation or just knowledge of what is coming down the line but I think the average investor will get hurt trying to market time. Sometimes the trends do not work out like you like, or the trade goes the opposite way or your early or late in your trade and you get smacked! I recently bought a stock to trade and I was early and the stock went even lower and I will use it as a tax gain offset but since the stock went down to a low is is up 200%. I was early, had I timed better I would be up 200% and looked like a genius even though it would’ve been luck. My analysis was correct but my timing wasn’t. Just an example and thought I’d share my pain.

  17. Nice review, Jonathan.

    Have you thoughts about buying gold/silver and/or invest in distressed properties and rent them out? It seems that the recession will continue in the foreseeable future. In the end, we might see massive inflation and devaluation of US currency.

    geekmba

  18. @Banditfist

    Your sentiment about buy and hold being dead sounds strikingly similar to how market strategists in 1999-2000 proclaimed that “old valuation techniques” were also dead in regards to the “New Economy” of internet stocks.

    Second, how exactly do investment companies benefit from buy and hold? Sounds like you drank too much of the day-trading/speculating kool-aid from Wall St.

  19. I wouldnt view “timing the market” as ONLY meaning you have to pick the peaks and GET OUT. I view it as taking money off the table when you know you are winning. Dow is now at levels it hit in 2003 and 1998. What did buy and hold and dollar cost averaging buy us for 10 yrs? If you harvest your gains when they are above average (say over 8% or so) then plow them back in when the inevitable “correction” or bear market occurs, you are better off in the long run. That is not timing to me but using the law of averages to your advantage. We all love to think that the stock market is like Lake Wobeggon students: all above average!

    The press hates that and we hate that because it means being patient for years, but it pays off. Bogle wants you to buy and hold cuz they get x% (expense ratio) per year regardless. Brokerages want day trading for tranactions costs. Its the middle ground of taking profit, waiting and plowing back that makes sense to me now.

    Believe me, I have drunk the buy and hold Koolaid and have to wait 4-5 years after each time these implosions arrive to reach a new net worth high. I can’t wait any longer. Harvesting the gains along the way is the way for me now….

  20. I think ABC is a bit over the top but he and Banditfist do make a point that buy & hold is great when the market is stable but can be treacherous when it’s not. Although I agree with Rich in that Banditfist is off the mark in saying that buy & hold is what the investment companies want – it’s exactly what they don’t want, they want trades, trades, and more trades since that’s how most of them make money.

    From my own personal perspective, I got nervous back in August 2007 that all of my couple years of retirement savings were going to get washed away and pulled nearly half of my retirement money at the time “out” of the market (into a stable value fund). I did this because I wanted to make sure I had a little nest egg for my retirement funds regardless of what the market did. I accepted the fact that I might lose out on some earnings on my principal. To make sure I still “felt” what was going on in the market, I did keep my contributions going into the market (along with the other half of that principal). Yeah, I got luchy in my timing but I was also honest about my risk.

    I think the point here is that Jonathan and his wife are both working at high-paying jobs so they can suffer a market downturn better than some of us. So his strategy and allocation works for him but it doesn’t work for all of us, even those of us that are in his same age bracket and general place in life (like me). I’m an advocate that your investment strategy should fit your own personal agenda, income, and situation.

  21. I have a lot to learn about investing, asset allocation and portfolio rebalancing. The year was a harsh lesson on being overvalued on stock, but I’d rather learn now when I’m young. I think a lot of young investors like Jonathan are rethinking their strategies, in that respect the downturn has been positive. Thanks for showing us your investments and being open about your losses.

  22. rubin pham says:

    you have some heavy loss in the stock market here.
    this make me wonder if stock is still a good long term investment.
    for us stock, the decline of the american empire is tere to stay.
    for emerging market stock, india and china, i will not trust 90% of these company’s accounting standards.

  23. Buy & Hold is far from perfect. The question is, what are you confident in that is better? Look back at all the magazines and newspapers from a year ago. Which ones predicted 2008? Now take this tiny group, and ask yourself, will they be able to predict the next great move?

  24. There are people out there who are successful at predicting market moves. Great traders such as Jesse Livermore, Nicholas Darvas, and William O’Neil have always been out of the market during bear markets.

    Always look to the best of their profession and try to mimic their ways – ala Michael Jordan and Tiger Woods.

    People make the market sound like it is a random ride on a rollercoaster. Listen to the tape – the market speaks to you.

  25. ericblair says:

    I’m usually a buy-and-holder, but did pull most of my IRA money out of stock funds last year about a half hour after the SEC banned short selling on financial stocks. I put the money in govvie bond funds and missed a lot of the subsequent losses. I didn’t do it because I could predict that big losses were coming soon: I did it because the powers that be were screwing with the system itself and that was Bad.

    I’m an engineer, and so I’m happy enough to usually let a well-designed system do its thing and not micromanage it (Buy-and-hold). However, when the guys in white coats come by and start shorting out the sensors and jamming screwdrivers in the valves to make the system do what it wasn’t designed to do, that’s time to pack it in and leave.

    I plan to dollar-cost-average my IRA money back into a more normal stock/bond mix when the craziness is over with. No more shoving money into various businesses to goose the system and prevent the reasonable valuations of the various pieces of the economy. (Yes, we may need to do some of it to stave off chaos, but Vegas is more fun if you like to gamble.) I’ll start back in when things get boring again, and a 1% change in the market is news, and hopefully another magazine announces the Death of Equities.

  26. Steven A Carpenter says:

    Jonathan-

    You are absolutely correct that pundits and publications consistently get the markets wrong. Last week, I did an analysis of all the top investing magazines’ picks for 2008. Nearly all of the publications underperformed the market.

    But I wouldn’t use that as a reason not to be invested in equities. The reality is that 1) no one can market time and 2) the majority of gains/losses happen at small time periods in the market ascension and decline. If you are not in the markets during those upward swings, you will miss out.

    Here are the magazine picks and analysis for 2008, for those interested.

    Magazine Return

    Kiplinger’s (With Shorting Bonds) 188.51
    Kiplinger’s Without Shorting Bonds (31.72)
    BusinessWeek (34.87)
    Dow Jones (35.80)
    Forbes Recession Beaters (38.20)
    S&P (40.60)
    NASDAQ (42.30)
    Fortune (44.48)
    Forbes Gurus (46.46)
    Smart Money (76.52)

    http://blog.cakefinancial.com/2008/12/29/cake-report-how-did-investing-magazine-picks-fair-in-2008/

    http://blog.cakefinancial.com/2008/12/30/cake-report-investing-magazine-2008-picks-part-ii/

  27. This information was very helpful. Looks like funds are pretty much way down for 2008 all the way around. Thanks for sharing this valuable info!

  28. The volatility of the market should be no surprise. I’m not sure why there was so much panic and despair over the huge drop this year since it happened just happened a few years ago (the S&P cut in half from 2000-2002), maybe a lot more average joes are in the market now, so it affected more people than in 2002. The real concern shouldn’t be what the market has done in the past year, but what it hasn’t done over the last 12 years, which is what is making me wonder why I’m taking the risk. In November 1996 the Vanguard Total Stock Market Index (Jonathan’s largest portfolio allocation) was $18. In November 2008, it was $18. Looking at it optimistically, you could say at least someone didn’t lose money in those 12 years but, since most people dollar cost average in one way or another, they paid more than $18 for the majority of shares purchased in this fund over those 12 years.

  29. I include tax liens as part of my fixed income portfolio they have varied maturities, and by Iowa law they pay 2% per month. It really helps when things go south to have some of them.

  30. Steven A Carpenter says:

    @Strick-

    I think this is a great comment. There are indeed more “average Americans” than ever invested in the markets these days- a total of 50MM households, up from the early 2000′s. The majority of these households- 30MM- are mainly invested in their defined benefit plans thru their employer.

    What your comments invokes to me is that perhaps the S&P 500 is not the best way to play the broad market anymore. The market cap weighted index overvalues large companies and more and more companies derive a signficant portion of returns from foreign markets and currency fluctuations. Maybe its time to look at the Russell 2000 for a better way to take advantage of US equities.

    In any way, last year was miserable all the way around with very few places to hide in the world.

  31. You think he’s got big losses in the mkt he bought a house a year ago in SF! The second-third worse %-wise losing housing market in the USA to PHX/Vegas.

    I really think this is a classic example of how *not* to manage money. Buying houses in the most over priced areas and loading up on stocks in the most overpriced market only mean one thing:

    What goes up must come back down.

    November and December were day trading opportunities of a lifetime if you know how to even remote trade (some options included). I made more in those two months with my huge cash position it wasn’t funny. Buy and hold? No way. Actively manage and trade and if you don’t like a trade, don’t make it and park some cash in other rec’s on this site like the 600 in interest you’ll make with 50k just in 2 months in WT!

    Key is to actively manage. Period. I’m sure the guy on this site just figures he’ll keep pouring his hard-earned $$$$ from the day job into the mortgage and market and eventually build up a nest egg. That will work but the effort and rate of return is hideious and undesirable.

  32. Thanks for sharing. I think it’s been a pretty rough year for everyone and ended up very discouraged from the stock market.

    But shouldn’t you buy when everyone things things are bad? I’ve made boatloads of money the past month with AAPL, AMZN, and INTC. I think these are GREAT companies which are near 52 wk lows. I wouldn’t mind keeping them long term, but with all the volatility in the market i’ve been able to take advantage of huge swings.

    I guess it’s a bit risky.. don’t know where the bottom is.

  33. Rather than to second guess or criticize Jonathan’s approach, we must admit that buy and hold, up to this point, has been the best wasy for most people to invest in the market. It has been shown to generate good returns in US markets over the past 90 years or so. But the fatal mistake that I believe Jonathan and others make is that they assume that the future will be like the past without any critical though as to WHY the past was like it was. Rather than assume that it will also be true in the future, a better question to ask is, why was buy and hold good to investors for the past 90 yeras? Some critical analysis as to why the last 90 years were such a successful time for the markets is necessary.

    I absolutely *do not* think the next 90 will be anywhere as good for investors as the past. There were some unique circumstances for the US since the 20th century began that has benefited it (in particular the growth post WW2 and excessive supplies of cheap energy/oil to enable this growth) that grew us unto the most wealthy country in the world. So naturally investors in that country would do well to never have sold their stocks… aka buy and hold.

    Question is, will that be true in the future? If not, then buy and hold might not be the right way to go for the next 90 years, and 80% stock allocations may need to be reevaluated. Perhaps we should look towards how investors did in other countries stock markets that did not experience never ending growth.

  34. I’m probably a little late to post a follow-up to this thread.. anyway:

    Don’t get me wrong guys, I truly appreciate Jon posting his laundry (clean or dirty) here for all to read. That’s why I still come back. Fact is, I disagree with a lot of his moves, and I try to keep him honest in what little way I can. I think it’s reckless to promote buy/hold investing.

    To my mind it’s much better to form a thesis and invest accordingly. When the conditions change such that your thesis doesn’t hold water, roll out of those positions. Hopefully you have another thesis to explain life after the changes and can invest again accordingly.

    Worms turn for all companies eventually. This year it turned for virtually all companies at the same time. The worm will turn on Treasuries soon. I’ll be getting out shortly as my thesis there has almost run its course. In fact, conditions already changed on my treasury position… I was in three years ago and foresaw dropping yields. I did not foresee the -unprecedented- drop in yields until late this summer, and luckily the new thesis dictated that I stay in.

    My gold thesis was similar, bought 1.5 years ago. Gold has come down from its $1k highs, but that’s mostly due to USD rising. I didn’t predict that. I thought the bailouts starting with Bear last year would trash the dollar, but deflation has shown dollar trashers who’s boss.

    Anyway, my strategy is “buy what you know”, or at least think you know. I’ve been wrong, but I’ve also been right. Continually reevaluate your thesis, and modify as experience requires.

    FAR less reckless than “buy and hope”.. err.. hold.

    PS: Carson, I’m not exactly sure how “Carson” tells us any more about you than “ABC” does about me. We’re all anonymous here.

  35. So much of the investing philosophy one pursues (buy and hold or play the market swings etc) depends on one’s ability to digest volatility. Appetite for risk should be gauged realistically before starting to invest. In the end it really does not matter if you made your money by saving in the bank or by investing in stock market as long as you meet YOUR expectations rather than beating the market and other such norms. If you can live your lifestyle without having to worry about how your money is working for you, then I guess one has achieved a good balance.

    For me ability to think on one’s feet when crisis such as this financial one arrives is far more superior to the ability to score one off the dart thrown in the wild about markets tanking. In the long run, this counts more.

  36. I agree that it’s difficult to time the market, but I don’t consider paying attention to HUMONGOUS red flags as equal to timing the market. Some people defend that “most didn’t know about the crisis”. I say many people knew and continued to play along either because they’re part of the rig or because of naive greed or laziness. I mean, didn’t you think it was a bit odd when illiterate immigrants, who work as maids, were applying for $800k mortgages without any documentation? What about all the fraud in housing going on and being documented by several blogs? What about the P/E and Yields screaming at you that something was about to give? There’s a huge difference between timing the market and ignoring basic alarming facts. For instance, there are some people still investing in REITs since last year, non stop. Can’t you see that commercial real estate will blow next? Or is that timing the market, too? I even believe that this crisis was by design, since most workers are stuck in 401(k), easy prey. The stock market is rigged, as you can see by stories like Madoff. If you just buy and hold, you’ll be fleeced again.

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