Archives for November 2011

(Update: Betterment has a new promo for a $100 bonus with $10,000 investment held for at least 60 days. This is a bigger bonus with bigger requirement than the previous $25 bonus for a $250 investment. In case you wanted to know, my $1,000 experimental Betterment portfolio has been fully converted to the new asset allocation already, and is currently worth $964.)

Betterment.com is an investment service that started up last year, where simplicity and ease of use is the focus. Back in May, I opened an account for myself and wrote a review of Betterment. Right now if you open an account with at least $250, you will get a $25 bonus.

My primary gripe at the time was their asset allocation for stocks. (I actually liked the simply bond allocation.) However, I recently received an e-mail that they are making some changes in September. Before:

• 20% Vanguard Total Stock Market ETF (VTI)
• 20% iShares S&P 500 Value Index ETF (IVE)
• 20% iShares S&P 1000 Value Index ETF (IWD)
• 15% iShares Russell 2000 Value Index ETF (IWN)
• 15% iShares Russell Midcap Value Index ETF (IWS)
• 10% SPDR Dow Jones Industrial Average ETF (DIA)

After:

• 25% Vanguard Total Stock Market (VTI)
• 25% iShares S&P 500 Value (IVE)
• 25% Vanguard Europe Pacific (VEA)
• 10% Vanguard Emerging Markets (VWO)
• 8% iShares Russell Midcap Value (IWS)
• 7% iShares Russell 2000 Value (IWN)

The major change is that they are adding international stock exposure, which is nice since about 55% of the world’s publicly traded market value is outside the US. They have landed on a conservative 35%/65% international/US split. You may also notice that they got rid of the Dow Jones ETF, which I complained about as well since the Dow Jones is simply not a very good index. The iShares S&P 1000 Value Index ETF is gone as well, most likely because it had so many overlapping holdings with the S&P 500 Value index.

How will the change occur? From the same e-mail:

Starting in September, your account will automatically begin transitioning to the new portfolio, and will be phased in over a period of two months to take advantage of average pricing over time.

Such a change to their portfolio and the subsequent buying/selling will unfortunately mean some extra tax bills for investors, but this is how it goes with internet startups. In the long-term, I feel the changes make Betterment a better product.

I’ve gotten a few questions about the Dogs of The Dow, which is a stock-picking strategy that involves buying equal amounts of the 10 highest-yielding stocks from 30 companies in the Dow Jones Industrial Average. At the beginning of each year, you adjust the portfolio to again to hold only the top 10 highest-yielding stocks from the previous year, selling the rest.

This strategy had its 15-minutes of fame in the 1990s, but somehow keeps popping up now and again. At the site DogsOfTheDow.com, you’ll see a rather biased presentation of this strategy. I mean, look at the very first sentence of the site, after all the ads (emphasis mine):

Looking for a simple way to select high dividend yield Dow stocks for your investment portfolio? Try Dogs of the Dow. Read on and you will discover a technique that would have given you a 17.7% average annual return since 1973! That’s not bad, especially considering that the Dow Jones Industrial Average overall return was 11.9% during that same period (As reported in U.S. News & World Report, July 8, 1996)

Umm… yes, in 1996 this strategy was found to have excellent results looking backwards (known as data mining). That was fifteen years ago! You’d think the stats would have been updated a bit since then. I wonder why it hasn’t? Perhaps it’s because the Dogs of the Dow strategy has since lagged the Dow itself over the last 15 years. Check out this MarketWatch article by Mark Hulbert:

The strategy took the investment world by storm in the early and mid-1990s, on the strength of both its simplicity and excellent long-term track record — at least when back-tested. A funny thing happened on the way to the bank, however: In real time since then, the strategy has failed to keep up with a simple index fund. For example, the strategy has beaten the Dow itself in just 5 of the last 15 calendar years. And those five winning years have not come close to making up for the losses incurred in the 10 losing years.

As with many such simplistic strategies, as soon as it is pointed out, the market adjusts and the outperformance disappears. So while I’m still intrigued by the idea of living off of dividend income, I see nothing special about the Dogs of the Dow.