Early Retirement Portfolio Asset Allocation Update – October 2014

Here’s an update on my investment portfolio holdings for Q3 2014. This includes tax-deferred accounts like 401(k)s and taxable brokerage holdings, but excludes things like physical property and cash reserves (emergency fund). The purpose of this portfolio is to create enough income to cover all of our household expenses.

Target Asset Allocation

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I try to pick asset classes that will provide long-term returns above inflation, regular income via dividends and interest, and finally offer some historical tendencies to balance each other out. I don’t hold commodities futures or gold as they don’t provide any income and I don’t believe they’ll outpace inflation significantly. In addition, I am not confident in them enough to know that I will hold them through an extended period of underperformance (don’t buy what you don’t understand).

Our current ratio is about 70% stocks and 30% bonds within our investment strategy of buy, hold, and rebalance. With a self-directed portfolio of low-cost index funds and low turnover, we minimize management fees, commissions, and taxes.

Actual Asset Allocation and Holdings

1410_portfolio_aa

Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard High-Yield Tax-Exempt Fund (VWAHX, VWALX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Notable Changes

Last quarter, I had sold my PIMCO Total Return fund holdings. Well, that was lucky on my part with all the recent Bill Gross drama. I decided to sell my stable value fund holdings too as I needed rebalance into more TIPS bonds and I was now able to buy TIPS inside my employee retirement plan using the Schwab PCRA brokerage window. All of our tax-deferred space is now taken up with TIPS and REITs, so the rest of my bonds are tax-exempt munis and savings bonds.

Otherwise, not much new, I rebalanced with new money and reinvested dividends. By this, I mean I don’t automatically reinvest dividends into the same mutual fund or ETF that generated them. Instead, they accumulate for bit and then I reinvest them in whatever asset class has been lagging recently. This also makes fewer tax lots for my taxable accounts.

That’s it for portfolio holdings. In a separate update post, I will update the amount of income that I am deriving from this portfolio.

Comparing Three Major Levers You Can Pull On Your Retirement Portfolio

One of the most popular posts on the Vanguard blog is My one piece of investing advice by Andy Clarke. Let’s start with the following baseline scenario:

  • Investor begins working at 25, but starts saving at age 35.
  • 12% savings rate
  • Moderate asset allocation (50% stocks and 50% bonds)
  • Salary starts at $30,000 but increases with age

Now, imagine there are three “levers” that you could pull in order to try and increase your final savings balance at retirement – asset allocation, savings rate, or time horizon. In each case, everything else in the scenario stays the same.

threedoors3

Which single option do you think has the most impact? Taken from the blog post, the results below are based the median balance found after running Monte Carlo computer simulations based on historical returns.

threedoorsresults

I would look past the absolute values and instead focus on the relative effect of each option. In case you haven’t figured it out, the one piece of investing advice is “save more”. The easiest lever to pull is a more aggressive asset allocation because it doesn’t require the pain of spending less and saving more (though you get more stomach-churning bumps and less reliable results). But here we see that saving just 3% more was equally powerful. If you pulled all three levers, your final balance would have more than doubled!

Investment Robo-Advisor Comparison Chart

Automated portfolio management is the new hotness. In the coming years, I see a continued expansion of players followed by a lot of mergers and acquisitions. ETF.com analyst Elisabeth Kashner has finished her series on robo-advisors with a final comparison of the current field – The Best Robo Advisor … For You . The entire series is interesting for those that care about such things, but here is the final summary chart:

robochart

You may (or may not) be surprised by what she actually picks for her son’s starter portfolio.

Schwab Personal Choice Retirement Account (PCRA) Review – 401k Brokerage Window

Tax-advantaged 401k and 403b plans can help you save for retirement, but did you know that you’re probably paying for all the costs of this “employee benefit”? 76% of large employers have workers pick up all the costs of 401(k) administration, according to a recent Forbes article Creative Ways to Cut Your 401(k) Fees. The tab is often quietly paid via high-fee mutual funds (which in turn kick back money to the administrator). The article also focuses on brokerage windows, an “escape hatch” that allows employees to move their funds into a self-directed account with a many more investment options. Their availability is growing:

forbeswindow

What is the catch? These self-directed plans have their own set of fees, notably annual maintenance fees and transaction fees. While regular 401(k) plan options may be limited and more expensive on a percentage basis, they usually don’t charge transaction fees each time you buy or sell. For this reason, brokerage windows tend to work better people with larger account balances. With bigger trade sizes, a flat commission is only a small percentage of the total amount involved.

We recently gained access to Schwab’s brokerage window, called the Personal Choice Retirement Account (PCRA). The mechanics were pretty simple. After completing a special application, you could sell a portion (or all) of your existing investments and transfer them into a “Schwab PCRA” bucket. That money then shows up into your linked account at Schwab.com, where you do all your trades.

Commission Schedule and Available Mutual Fund List. Here is the PCRA fee schedule and PCRA mutual fund availability list that was provided to me by Schwab. (I am assuming these documents are the same across all PCRA plans, but I could be wrong. As I’ll explain shortly, just because something is listed does not mean it is available to everyone.)

The commission schedule is pretty similar to what is available in their standard brokerage account. $8.95 ETF and stock trades, $0 trades for Schwab ETFs. No commission on their No-Transaction-Fee mutual fund list (funds have to pay to be on the list), otherwise $50 to buy and $0 to sell. Schwab PCRA does not charge any annual account or maintenance fees, but your Retirement Plan Service Provider may charge account maintenance fees or some form of “recordkeeping fees”. In our case, there is a $50 annual account fee.

The mutual fund list is quite extensive. Let’s say I was trying to buy the Vanguard REIT ETF (VNQ). I searched and found two results:

pcra3

The big caveat in my particular case: ETF and stock trades were not allowed at all. I still tried to make a purchase but got this message:

pcra1

From the fee schedule, I assume that some PCRA plans will offer this feature. But in my case, I had to be satisfied with buying the Vanguard REIT mutual fund (VGSIX) and paying $50 per buy trade. The good news is that I was able to buy Admiral Shares (VGSLX) which has the same expense ratio (0.10%) as the ETF version ($10,000 minimum).

pcra2

Should I use my brokerage window? According to this Money article, just 5.6% of 401(k) investors opt for a brokerage window even with it is offered. The Schwab PCRA has worked out well for me as an alternative to my standard 401k investment options, but only because a few things aligned:

  • My balance was big enough. Paying $50 a year and $50 per trade is only worth it when your balance is big. Let’s say my balance is $100,000. $50 is only 0.05% of $100,000. If I am saving over 0.05% in expense ratios every single year in exchange, that is a great deal. But $50 is a full 1% of a $5,000 balance.
  • There was a better option in the brokerage account. For example, the S&P 500 index fund in my 401k standard menu charges 0.30% annually, while I can access a Schwab S&P 500 index fund at only 0.09% annually. In my case, I wanted cheap access to the REIT asset class which I didn’t have otherwise. Only about 25% of 401k plans offer access to an REIT fund.
  • I don’t trade too frequently. $50 a pop adds up, so I intend to accumulate money in the normal account, and then transfer over a chunk of money once a year to my Schwab PCRA. This way my bi-weekly contributions are invested for free, and I limit my $50 Schwab trades to once or twice a year.

What Are The Real-World Benefits of Automated Tax Loss Harvesting?

scheduledTax-loss harvesting (TLH) is a technique used to minimize taxes on your taxable investments by “harvesting” capital losses during market declines. With DIY investors, losses are usually only harvested once a year. But with an computer as your portfolio manager, you could attempt to harvest losses continually on a monthly or even daily basis.

Wealthfront, Betterment, and FutureAdvisor all tout the benefits of their automated tax-loss harvesting services, each claiming that their service could increase your returns somewhere between 1% and 3% a year on average. Those are impressive numbers, and most importantly a much bigger number than the fees they charge. Great deal?

Elisabeth Kashner of ETF.com takes a closer look at those claims. Here is my summary of the noted concerns:

  • Tax-loss harvesting defers your taxes by lowering your cost basis. This means that you’ll have to pay more taxes later when you eventually sell (unless you die or donate it). Data presented by certain robo-advisors do not take this into account, and continue to avoid the subject even when confronted about it directly.
  • Most of the claims rely on theoretical backtested data, not the results of actual client portfolios. This is somewhat understandable as many of them are new, but we find that when real-world results are being published, those excess return numbers have so far been under 1% annualized.
  • More than one of them cherry-picked the period from 2000 to 2013 for their analysis, which has the ideal sequence of returns – big losses first (so you can harvest something) and then big gains afterward (so you can compound your tax-deferred money). If you choose other time periods the numbers can come out significantly less rosy.
  • Most of the analyses assume that the investor is in the highest tax bracket (35% or higher), which maximizes the tax benefit. However, many investors in these services could be in the 15% income tax bracket or even 0% capital gains tax bracket. That will also lower the actual tax benefit of TLH.

Read the article comments as well. There, finance author Rick Ferri adds:

I agree the benefit of TLH isn’t 1%, but it isn’t 0.09% either. The answer is someplace in the middle – and it is investor specific.

I think this quote from the author sums things up well:

My point was not that there is never any value to TLH. It’s that predicting this value is fraught, because there are many variables. Given this variability, I find it questionable that the robo advisors’s marketing materials present best-case scenarios, sometimes without accounting for the terminal capital gains liability caused by the lowered basis.

Essentially, temper your expectations as the numbers being marketed at you are based on best-case scenarios. It is impossible to know the true benefit of tax-loss harvesting ahead of time, but quite possibly less than 1% annualized. This still leaves the possibility for the benefits of automated TLH to outweigh the cost, but it is nowhere near a certainty.

Harry Markowitz Personal Investment Portfolio and Strategy

As mentioned in my Acorns app review, Harry Markowitz won the Nobel Prize in Economics for his pioneering work in Modern Portfolio Theory, which says that a rational investor should pick an “efficient” portfolio that uses a mix of assets to maximize the expected portfolio return for a given level of risk. You can read all about the Harry Markowitz Model on his Wikipedia page.

Implementation of this mathematical theory has produced many “mean-variance optimized” portfolios containing upwards of 10 different asset classes. Basically these are backtested from historical performance numbers. One of the more complex examples is the 7Twelve Balanced Portfolio shown here:

7twelve_pie

But what did Harry Markowitz actually hold in his own personal portfolio? What was his investment strategy?

Consider this story from Jonathan Zweig in an NYT article about emotions and investing:

Mr. Markowitz was then working at the RAND Corporation and trying to figure out how to allocate his retirement account. He knew what he should do: “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.” (That’s efficient-market talk for draining as much risk as possible out of his portfolio.)

But, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.

Next, read this Chicago Tribune interview by Gail MarksJarvis:

Early in his career, he did not take the risks some investment advisers suggest for young investors to maximize returns. Rather, he saved regularly and put half his money into stocks and half into bonds to grow while controlling risks. When he thought he had accumulated too much in either category, he stopped putting money there for a while and directed savings to the neglected group. [...]

“I never sold anything,” he said. If stocks were increasing in value, he would let that portion grow for a while, but eventually he would stop stock purchases and beef up the bonds. The idea: The bonds would insulate him from the downturns that crush stocks from time to time without clear warning. [...]

“Say you were 65, and invested $1 million, with 60 percent in stocks and 40 percent in bonds,” he said. “It became $800,000 [during the financial crisis], and you are not happy, but you lived to invest another day.”

I happen to think Markowitz’s actions overall were quite rational and even wise. We could all learn some lessons from his personal strategies.

  • Rely on saving, not risk-taking. Markowitz understood the pain of losing your hard-earned money in a down market. Young investors are often told to go 100% stock or close to that, but he was 50/50 and stuck with it.
  • Don’t worry about fine-tuning to achieve the perfect portfolio, as it’s all based on the past anyway. Nobody knows what will actually be the “efficient” portfolio for the next 20, 30, 40 years. As long as you have your bases covered, keep it simple. Warren Buffett also recommends simplicity for his wife’s trust and even though he would do a 90% stocks and 10% bonds split, you likely don’t have the ability to lose 40% of your portfolio and go… ah well I’ll just live on the remaining $100 million.
  • Tweak, but don’t panic. Buy and hold is one strategy that will work “well enough”. However, if you feel like you must, you can do like Markowitz and make some tweaks now and then… just don’t do anything extreme that could catastrophically damage your portfolio.

Regular savings plus a simple 50/50 or 60/40 portfolio plus no panic selling will do quite well over a long period of time. That’s a solid game plan, even for mathematical geniuses.

ShareBuilder Promotion Codes: Free Stock Trades (Updated 2014)

Added another new code. Here are some promotion codes for ShareBuilder, a discount brokerage now owned by Capital One. Real-time trades are now $6.95 and automated trades are $4. They give out codes for various promotions, and like coupon codes they often work in your account even if you weren’t given the code directly. Sometimes they don’t though, so have reasonable expectations.

Don’t have an account yet? Get a up to a $600 opening bonus depending on your initial deposit size, and then add the promo codes below afterward. You can often double-dip on codes if you have both a individual account and joint account. Custodial accounts for kids are also available.

How To Use
To enter the codes into your account, log in and go to the Accounts tab > Overview > Profile & Settings > Enter Promotion tab shown below.

In the marked box, enter a code. If it works, you should see a confirmation that says something like:

Thank you for referring ShareBuilder to your friends! Your 2 real-time trades have been credited to your account and are available to use immediately.

Most recently updated codes

  • SWEEP2014 (1 free real-time trade, hat tip to reader Hog)
  • PLACETRADE14 (1 free real-time trade)

Codes added within the last year or so (possible success)

BDAY14Y (hat tip reader Sean)
SWEEP600 (1 free real-time trade)
BDAY14AU (1 free automatic investment)
3AIP
3AIP*GEJZOH

[Read more...]

WiseBanyan Review: Free Portfolio Management Experiences & Screenshots

wblogoEarlier this year I wrote about WiseBanyan.com, an online portfolio advisory service similar to Betterment and Wealthfront. WiseBanyan charges no advisory fees, no trading commissions, and have no minimum opening deposit. They will design, buy, hold, and rebalance a basket of low-cost ETFs for free, and all you are left with are the ETF expense ratios which you’d have to pay anyway.

Thanks in part to your interest as readers, I was able to get off their waitlist and open an account with $10,000 of my own money in March 2014. (Current wait is reportedly less than a month.) Here is my review as an actual user for roughly 6 months.

Application process. The account opening process was similar to other discount brokers and online portfolio managers. You must provide your personal information including Social Security number, net worth, income, investing experience, etc. No credit check. They do check identity, so they may ask for supporting documents if you just moved or something.

There is then a risk questionnaire. The questions can seem mundane but take it seriously, as the 10 answers you provide will directly determine the portfolio asset allocation that they choose for you. There will be no follow-up surveys, e-mails, or phone calls. Here is a screenshot and example question:

wisebanyan1

Side notes: As a start-up, there are temporary restrictions. They currently do not accept joint, trust, or custodial accounts. They do not accept IRA or 401k rollovers at this time. They also do not accept inbound brokerage account transfers.

Funding. You can fund your deposit electronically, using your bank routing and account number. (They only accept bank wires as an alternative, no paper checks.) The money gets sucked from your bank and the portfolio is bought immediately when they get the money.

I didn’t track this closely, but according to their site the initial deposit takes between 4-5 business days total (3-4 business days for funds transfer, account verification, and ETF purchases, plus one day for data upload). That sounds about right. Future deposits will take 1-2 business days to process.

Fractional shares. WiseBanyan uses FolioFN as their broker-dealer (separate company that hold your assets in the background) which means they can use their ability to keep track of fractional shares. Most discount brokers and other online portfolio managers require you to own whole shares, so you’ll often have something like $57 sitting in cash.

Recall that WiseBanyan has no required minimum deposit or portfolio balance. If you really did open account with $100, they will actually buy less than one share of several low-cost diversified ETFs and you’ll own tiny, tiny portions of thousands of companies with no idle cash. With a normal discount brokerage, that might not even buy you one share of anything (VTI is over $100 a share on its own).

Portfolio asset allocation. I was assigned a portfolio risk score of 7.7, which corresponded to a stocks/bond ratio of 70%/30%.

wisebanyan4

Here is the target asset allocation that I was assigned:

wisebanyan2

All portfolios are constructed using the following seven ETFs:

  • Vanguard Total Stock Market ETF (VTI)
  • Vanguard FTSE Developed Markets ETF (VEA)
  • Vanguard FTSE Emerging Markets ETF (VWO)
  • iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
  • Vanguard Intermediate-Term Government Bond ETF (VGIT)
  • Vanguard REIT ETF (VNQ)
  • iShares TIPS Bond ETF (TIP)

My opinion is that the ETF allocations from all “robo-advisors” are at least 80% the same, and with the remaining 20% you can’t really tell who’s going to win performance-wise anyway. They are all backtested using some form of Mean-Variance Optimization (MVO) and Modern Portfolio Theory (MPT).

While not exactly what I would have chosen for myself, I personally think the portfolio above is fine. The ETFs have low costs and come from large, respected providers in Vanguard and iShares. All of the major asset classes are covered. There are no commodities futures or natural resource ETFs, which some experts think are useful and other experts think are useless. Note that REITs are considered to be in the bond category.

Website user interface. It feels very “Web 2.0″ which means it is clean and functional, but won’t win any design awards. The site is not mobile-responsive (they say they are working on it). Here is a screenshot from my personal account:

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Smartphone app. There is no smartphone app (also working on it). Considering their young client base, my suggestion is that even a really simple one that just pulls up your updated account balance and positions would be nice. It doesn’t have to include all the functionality of the website. We like to be able to check the balance at any time of day!

Statements and ongoing communication. You might be afraid that with a free service, your information is going to be sold or you’re at least going to be bombarded with e-mail newsletters with some sort of upsell opportunity. Actually, I hardly get any ongoing e-mails from WiseBanyan at all. I did get one e-mail and one tweet from their CEO and co-founder, Herbert Moore (must be a small company!). I also can’t find anything in their privacy policy about them selling your information.

Electronic statements are free, but paper statements will cost $10 each or $150 a year their fee schedule. To view your online statement, you actually have to log into the broker-dealer site at FolioClient.com with a separate username and password. It is a bit clunky and another work in progress.

Customer service. I have not had a need to contact them, but I did anyway for the purposes of this review. Calling their customer service phone number at 646-593-8361 during their stated hours of 9am – 7pm EST reached an individual’s voicemail box. I didn’t leave a message. An email sent to support@wisebanyan.com was answered courteously in two hours by “Vicki” whom I suspect was the co-founder Vicki Zhou.

Future concerns? According to this ETF.com interview, the average client is 34 years old and opens with a $4,000 deposit, much younger and of more modest means than those of their competitors. WiseBanyan is running off venture capital while it grows assets, so it will be interesting to see if it can make it with a bunch of smaller accounts while others target Silicon Valley millionaires. They plan on making money with add-on premium features like tax-loss harvesting or selling covered calls.

Bottom line. WiseBanyan is fully functional and delivers on its promise of free automated portfolio management. However, it is not a finished product and you’ll have to pardon their dust. It is a lean startup and it feels that way; your e-mails and calls may be answered by the CEO and/or co-founder. You may like that or you may prefer more polish, but remember that polish costs money. They are aggressively priced (at zero, ahem) and unique in that they are targeting all investors including the young and those with smaller balances. You could open with $100 and set up an auto-transfer of $10 a week and get a diversified portfolio set up with no commissions and no management fees. Where else can you do that?

Early WiseBanyan clients can invite others, so here is my referral link which will allow you to skip the waitlist. I believe that I can earn credits towards free tax-loss harvesting if enough people sign up via my link.

Why Didn’t Technology Create a 4-Hour Workday?

Technology is supposed to make our lives easier over time, but what is the reality? We may not spend all day hunting and gathering anymore, but we still work similar hours to our great-grandparents. From the paper A Century of Work and Leisure [pdf] published in the American Economic Journal:

We find that hours of work for prime age individuals are essentially unchanged, with the rise in women’s hours fully compensating for the decline in men’s hours. [...] Overall, per capita leisure and average annual lifetime leisure increased by only four or five hours per week during the last 100 years.

The following video by CGP Grey called Humans Need Not Apply methodically describes how robotic automation will soon make an additional chunk of people unemployable.

Horses aren’t unemployed now because they got lazy as a species, they’re unemployable. There’s little work a horse can do that do that pays for its housing and hay. And many bright, perfectly capable humans will find themselves the new horse: unemployable through no fault of their own.

If robots are doing all the work, shouldn’t that mean that the workers should be able to get by working less? Some people thought so. The famous economist John Maynard Keynes wrote in 1930 that “by 2030 he expected a system of almost total “technological unemployment” in which we’d need to work as few as 15 hours a week, and that mostly just to avoid losing our minds from all the leisure.”

That is taken from the Vice.com article Who Stole the 4-Hour Workday? (warning: other parts of this site may be considered NSFW), which discusses how the dream of a shortened workweek fell apart:

A new American dream has gradually replaced the old one. Instead of leisure, or thrift, consumption has become a patriotic duty. Corporations can justify anything—from environmental destruction to prison construction—for the sake of inventing more work to do. A liberal arts education, originally meant to prepare people to use their free time wisely, has been repackaged as an expensive and inefficient job-training program. We have stopped imagining, as Keynes thought it so reasonable to do, that our grandchildren might have it easier than ourselves. We hope that they’ll have jobs, maybe even jobs that they like.

The new dream of overwork has taken hold with remarkable tenacity. Hardly anyone talks about expecting or even deserving shorter workdays anymore; the best we can hope for is the perfect job, one that also happens to be our passion. In the dogged, lonely pursuit of it, we don’t bother organizing with our co-workers. We’re made to think so badly of ourselves as to assume that if we had more free time, we’d squander it.

The Vice.com article focuses on the idea that workers should organize and fight for their share of the benefits.

Instead, we see that the benefits of any technological advancement or increase in productivity has predominantly gone to the owning class (business owners, content owners, and corporate executives) as opposed to the working class. A thick, NYT bestselling economics book posits that when the rate of return on capital is greater than the rate of economic growth, the result is wealth inequality.

I certainly don’t know how this will play out. Will robots cause mass unemployment? Will we all have 20-hour workweeks with no pay cut? In the meantime, as an individual its seems wise to keep converting my excess work energy into ownership of assets. If all you do is work, get paid, and spend it all, then you may be stuck in the rat race indefinitely. A way out is to save a portion and buy some assets. Businesses, real estate, shares of common stocks. Or start your own business and/or create some assets.

How Reliable Is The Income Stream From Dividend Stocks?

If you’re trying to achieve early retirement, that means you have less time for compound interest and more time living off your investments. As a result, many early retirement investors like to own income-oriented investments like rental properties or dividend stocks. People used to own bonds and also be happy with that income when the interest rates were well above the inflation rate, but right now that is not the case.

So a good question is – How reliable is the income stream from dividend stocks? Joseph G. Paul of the AllianceBerstein blog tried to address this issues a couple different ways. First, he pointed out the dividend income from the S&P 500 went up in 39 out of the last 46 years. When it did drop, the largest single year drop was 20% from 2008 to 2009.

Now imagine that own the S&P 500 index or a High Divided Yield index (top 1/3 of S&P 500 by dividend yield) and simply spend the dividend income every year, but don’t sell any shares. 10 years later, would you have the same amount of money that you started with? (That’s what would happen with a 10-year bond.) Here are the results:

abdividends

In fact, in 87% of 10-year periods that we surveyed, investors in equities got their money back receiving, on average, more than twice as much (Display) from a $100 investment. The high-dividend-yield portfolio was even more stable than the market as a whole, only failing to recover the initial investment in one out of 38 10-year periods.

The AB article makes a case for the suitability of a diversified basket of dividend stocks for long-term investors that want to spend the income every year without selling shares, with the warning that they also need the ability to ignore share price fluctuations and avoid selling in a down market.

On the other hand, financial author William Bernstein wrote in his book The Ages of the Investor that you can only treat 50% of your dividend income as absolutely reliable. His reasoning, at least as quoted from the book:

If you counted on your stock holdings to see you through retirement, you’re likely to be seriously disappointed. Yet, there is a small part of the equity portfolio that can be considered in the funding of retirement: the “safe dividend flow” from stock holdings. Although the value of stocks can fluctuate wildly, their stream of income is much more stable. At no point in the history of the U.S.stock market has its real dividend stream fallen by more than half, even during the Great Depression. During the most recent financial crisis, for example, although stock prices fell by more than 50%, dividends also dropped, but by only 23% from their peak, and only temporarily.

Horizon Motif Review: Commission-Free, No Advisory Fee, Index ETF Portfolios

motiflogoMotif Investing is a discount brokerage with a twist: you can buy a basket of up to 30 different stocks or ETFs and the entire basket costs just $9.95 a trade. When I first heard of this company, I thought it would be a cool way to build your own custom ETF. It could be dividend income stocks, your own balanced fund of stocks and bonds, whatever. You can start with as little as $250 and they use fractional shares so all your money is invested.

But you could also make a diversified portfolio of low-cost index funds. Motif went one step further and introduced their own Horizon motifs, which come with zero trade commissions as well as no management fees. There are 9 different Horizon Motifs – you pick one of three time horizons (1 year, 5 year, or 15 year) and one of three risk levels (conservative, moderate, or aggressive). Consisting mostly of Vanguard and iShares ETFs, here is the asset allocation for their 15-year, aggressive portfolio:

  • 27% US Stocks (VTI)
  • 17% International Stocks (VXUS)
  • 8% US Real Estate (VNQ)
  • 5% Commodities (GSG)
  • 27% International Total Bond (BNDX)
  • 16% US Total Bond (BND)

Overall, the asset allocation portfolios are pretty similar to those offered by other brokerage firms, mutual fund companies, and “robo-advisor” online portfolio managers. I would note that compared to their competitors’ asset allocation models, Horizon Motifs as a whole have a slightly greater allocation to bonds. Usually an “aggressive” long-term portfolio has 70% to 90% in stocks, while Motif has roughly 60%. Their 15-Yr Conservative is ~50% stocks and their 15-Yr Moderate is ~40% stocks. You can adjust the relative percentages of the ETFs inside the Motif, but that will change it to a custom Motif and thus trades will cost $9.95. (I tried.)

I have an Motif Investing account, and here is confirmation that the trade commission is zero and an illustration of how fractional shares work (click to enlarge):

horizon_small

Horizon Motifs can be a great way for beginner investors to get started without getting eating alive by fees. The impact of zero commissions is greatest when your portfolio size is small. For example, paying $10 commission on a $250 monthly deposit is an instant 4% drop in your balance. Through this whitepaper, I found that the Motif is rebalanced based on tolerance bands linked to time and percentage variations. Rebalancing would be free as well since it is usually just charged as one trade.

I don’t know anywhere else you can buy a basket of 6 low-cost ETFs for $250 with no commission and have every dollar split into fractional shares so that you are always fully invested and have it rebalanced for you regularly for free. Once you start investing larger amounts down the road, then you can switch to something more customized if desired.

To answer a reader question, Motif is a “real” brokerage firm with the usual $500,000 of SIPC insurance and uses Apex as their clearing firm (same as TradeKing, Betterment, OptionsHouse). They also offer two-factor authentication for security.

Motif Investing does have some new customer promos, but some won’t apply if you only make free trades. You can get a $150 cash bonus if you deposit $2,000 and make 5 trades at $9.95 each. They also have a $150 IRA promotion if you transfer over $5,000 in assets.

Covestor Core Portfolios Review: Free Managed ETF Portfolio

covlogoLow-cost index ETF portfolio are everywhere these days! Covestor is a site that usually charges you a fee to manage your portfolio to follow various active managers, with fees ranging up to 2% per year (split Covestor/manager 50/50). However, they recently introduced their Covestor Core Portfolios, which consist of passive ETFs from providers such as Vanguard and Blackrock iShares. These have no management fees, so you’ll just pay the expense ratios of the underlying ETFs plus any trading commissions. Total trading commissions are estimated at $20 annually (investments held at Interactive Brokers, average trade runs about $1, no markup charged). There is a $25,000 minimum investment required.

The three initial portfolios are the Covestor Core Moderate (40% stocks, 60% bonds), Core Balanced (60% stocks, 40% bonds) and Core Growth (80% stocks, 20% bonds). Periodic rebalancing will be done to maintain risk-return profile. Unfortunately, you can’t see the exact portfolio asset allocations without having an account (why not??), but you can try and tease most of the info out of what they give you. Let’s take the top 5 holdings of Core Growth:

  • 34.7% Total US Stock (VTI)
  • 21.4% Emerging Markets Stock (VWO)
  • 19.2% Developed International Stock (VEA)
  • 7.2% Total US Bond (AGG)
  • 5.1% US REIT (VNQ)

The top 4 stock ETFs add up to 80.4%, which must be all the stock ETFs that they use. Broken down in terms of stock asset allocation only, that is 43% Total US, 27% Emerging Markets, 24% Developed International, and 6% REITs.

Let’s take the Top 5 holdings of Core Moderate:

  • 31.8% Total US Bond (AGG)
  • 29.7% Total US Stock (VTI)
  • 10.1% Treasury Inflation-Protected Securities TIPS (TIP)
  • 9.2% Commodities (DJP)
  • 5.6% Emerging Markets Stock (VWO)

Total US Bonds and TIPS only add up to 41.9%, but there are supposed to be 60% bonds, so I’m a bit confused. My guess is that their commodities futures ETN (DJP) is considered fixed income? Usually commodities futures are considered equity-like or an alternate asset class. I suppose they are collateralized by T-Bills, but still even added in, that’s only 51.1%. Still confused.

What about competitors? At a $25,000 portfolio balance, Betterment would charge $62.50 a year and Wealthfront would charge $37.50 a year (first $10k free). At a $250k portfolio balance, Betterment would charge $375 a year and Wealthfront would charge $600 a year (first $10k free). Vanguard Personal Advisor Services has a $100,000 minimum, but includes regular interaction with a CFP and costs 0.3% a year (a $250k portfolio would cost $750 a year). All include any trading commissions in their fees.

All in all, the lack of transparency and also lack of the asset allocations making sense don’t have me very interested in Covestor Core Portfolios, but it is definitely part of an accelerating movement towards having low-cost index funds as your primary investment holding. Remember, with a little learning you can easily DIY all this for “free” as well and maintain full control over your investments.

More: Barron’s (their asset allocation percentages are wrong, they assume the Top 5 holdings are the entire portfolio), ETF.com