December 2008 Investment Portfolio Update

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I’ve been trying to re-balance my portfolio using my recent 401k contributions, but I ran into some speed bumps, so here is a brief interim update.

9/08 Portfolio Breakdown
Retirement Portfolio Actual Target
Asset Class / Fund % %
Broad US Stock Market 27.7% 34%
VTSMX – Vanguard Total Stock Market Index Fund
DISFX – Diversified Stock Index Institutional Fund*
FSEMX – Fidelity Spartan Extended Market Index Fund*
US Small-Cap Value 9% 8.9%
VISVX – Vanguard Small Cap Value Index Fund
Real Estate (REITs) 8.5% 8.5%
VGSIX – Vanguard REIT Index Fund
Broad International Developed 25.8% 25.5%
FSIIX – Fidelity Spartan International Index Fund*
International Emerging Markets 7.1% 8.5%
VEIEX – Vanguard Emerging Markets Stock Index Fund
Bonds – Short-Term 4.6% 3.8%
VFISX – Vanguard Short-Term Treasury Fund
Bonds – Inflation-Indexed 12.7% 11.3%
VIPSX – Vanguard Inflation-Protected Securities Fund
Cash 4.7% 0%
FDRXX – Fidelity Cash Reserves
Total Portfolio Value $95,678

* denotes 401(k) holding given limited investment options

Contribution Details
For 2008, we have finally both contributed the annual maximum of $15,500 each towards our respective 401ks. We have not made any 2008 IRA contributions, but we did make 2007 contributions in April 2008. We will likely do our 2008 contributions in April 2009 deadline.

YTD Performance
The 2008 year-to-date time-weighted performance of our personal portfolio is now -42.5% as of 12/8/08.

For reference, the Vanguard S&P 500 Fund has returned -36.69% YTD, their FTSE All World Ex-US fund has returned –47.98% YTD, and their Total Bond Index fund is +2.20% YTD as of 12/8/08. The Vanguard Target 2045 Fund has returned -35.79 YTD, primarily due to a small international allocation.

Investment Changes
In my wife’s 401k plan, a few new investment options were added, including the Fidelity Extended Market fund (FSEMX). This is a nice complement to their in-house S&P 500 index fund. If you take 75% S&P 500 and 25% Wilshire 4500 Completion Index, you pretty much get the Total US Market, so we have moved our investments to that and sold off the bit that we had in the actively-managed Dodge & Cox fund. Nothing else in that 401k is terribly appetizing.

We have used our new contributions to bring us back towards our asset allocation target, with a 85% stocks/15% bonds split. This means I have been buying more International, REIT, and Small Cap. I have also been swapping funds around to make things “fit” better, due to the limitations of spreading money across different accounts.

You’ll notice that I am really below-target in my US allocation, and have $4,500 in cash. This is because the fund minimum for the Fidelity Spartan Total US index fund is $10,000 (in my 401k). In early 2009, I hope to add enough money to reach the minimum. I could buy ETFs instead or another more expensive Fidelity fund as a tracker, but not sure if I want to pay the roundtrip commissions given that it will be less than a month. Currently on the fence.

You can view all my previous portfolio snapshots here.

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  1. I’m puzzled… Why are you focused on avoiding paying for a roundtrip comission when according to the networth report you are down 80,000$ this year?

  2. Very nice portfolio, well built with good foundations and international exposure.

  3. I’m in the same position of managing minimum balances between vanguard and fidelity. My problem is that my Roth contributions aren’t sufficient to meet all of my minimums.

  4. Nice allocation indeed. I am a bit riskier in my 401k allocation than this and so far I can see this with a -45.00% drop YTD, as of 12/09. I still have to do the stock/bond split balance myself (one of these days :).

    However, I contributed fully to my 401k and 2 Roth IRAs this year and I’m wondering if there is anything else that I can do in this department.

    Initially, I wanted to punt on the IRA contribution as well until April 09 but I think this is a pretty low market these days so I just put a bunch of cash in the Vanguard 2045 fund.

  5. No offense, but with a diversified portfolio, -42.5% is not good. An errosion of almost half of your retirement account in one year is proof that buying and holding these funds is not always the smartest idea. I agree with you that in most cases you should buy and hold. But it seems that anytime there is a crash (lately it’s been every 5-10 years) you are going to get burned. Take a look at the performance of the DJI for the past 10 years and it is -2.44%. If you factor in dividends, at about 2% yield, you are breaking even and losing money due to inflation.

  6. Buy and hold is meant for the long term, not just 5-10 years. Even though he plans on early retirement, the writer still has 15 years until his goal. Once he gets closer to his retirement age he may want to consider leveraging his portfolio with cash and/or annuities. If these type of market conditions occur within five years of retirement then he would be out of luck.

    I plan on having a diversified portfolio both in allocation and strategies. I will have a mix of index fund, managed funds and personal stock picks (this being my smallest allocation). As I get closer to retirement, I will add money to annuities, both fixed and variable, that guarantee income (Allianz and Prudential both offer great options). This would add a self-created ‘pension’ to my portfolio and help me sleep a little better at night. Hopefully I can follow through with this plan as I am currently twenty four and my risk tolerance is through the roof.

  7. I kind of agree with Jeff. From everything I’ve read in my short period of time (I’m 24) as an investor (buy & hold), it’s said that Diversification will minimize your losses, but -42.5% is quite high, higher than the YTD of the Vanguard S&P 500 at -36.69%.

    My hunch is that most novice investors who aren’t keen of diversifying their portfolio would stick to the S&P 500 index fund because it’s the basic way to go, and if that was the case, they’d beat your well diversified portfolio by far, and add that the fees for any S&P 500 index fund are extremely low whereas when you include specialty funds you risk losing more and also pay more in fees; a novice investor would assume better returns.

    Of course, in bull markets, they’d leave some gains on the table, question is how much and is it worth the risk and stress of spending time diversifying your portfolio to the extreme that you have.

    Just seems that even a well diversified portfolio doesn’t provide a warm blanket in cold times like these.

    Please educate me if I am totally off, it’s just that as a young investor, I begin to question the fundementals of investing when I have yet to see those fundementals pay off because I’ve only been exposed to bad times in the market.

  8. As an example and to reinforce how diversification benefits a portfolio, can some of you post returns from YTD and then from maybe 4-5 years ago when there were big gains, just to see how much a diversified portfolio beat the S&P 500 in good & bad markets?

  9. Jeff, those numbers are true as of this date, but wait a year and see what happens. When the market has rebounded, it has done so quickly. A year from now, 10 year numbers could look a bit more favorable.

    I would think it is not unusual to be in this position after the second worst stock market crash in history…

    That said, if you have a better alternative, it would be interesting to hear it. “Safe” investments wouldn’t have had a better return over that period and market timing is a fool’s game. Without the benefit of a crystal ball, the evidence still points to a long-term diversified buy and hold strategy.

  10. the problem in investing in emerging market is that many of those company cook their books. if you think “creative accounting” only happen here in the usa, you will be in for a rude supprise when the chickens come home to roost.

  11. Obviously, now is a better time to be investing than earlier this year, but besides the Spartan fund which has a minimum investment…why aren’t you practicing a little more dollar cost averaging throughout the year? It seems like you are just dropping in chunks all at once, or with your Roth for example, just in April.
    Just curious as to your reasons for not doing a more steady monthly investment. ($5000/12 = $416, or $15,500/12 = $1,291)
    Or, maybe you have an explanation somewhere and I just missed it?

  12. One should be very careful to base investment decisions on one year of investment history.

    One thing that helped juice international returns over the last few years was the weakening dollar. One thing that hurt international returns this year was the stronger dollar.

    Buy & Hold will not solve all your problems. I could name 187 strategies that beat me over the last few years, including investing under my mattress.

    The only question you should ask is – what is proven to be better over long periods of time? If you research that in depth and consider all the options, you’ll find that the answer is… not much.

  13. Of course, if you are willing to save a ton of money, you won’t have to take any risk and you could invest in things like inflation-protected bonds which guarantee you a steady return over inflation every year.

    Otherwise, increased expected reward requires taking increased risk.

  14. When you hear “Buy and Hold” you have to consider who the advice comes from. It’s often people with a vested interest in keeping your dollars nearby.

    If you’re down 42%, you’re looking at 6 or 7 years at generous long-term assumptions of around 8% per year. Who here really believes we’ll see 8% up into the future?

    We’re seeing a secular change in time preference and risk tolerance, not to mention consumer sentiment. Japan’s market is seriously negative over a period of 20 years now, if I remember the chart correctly. They’ve had a permanent (or at least semi-permanent) change in investor behavior, leading to declining asset values for two decades. We could easily see the same here.

    7 years to get back to break-even is depressing. What if we go down -further- next year? I think the prudent move is probably to get out now because future moves are a gamble. If we’re truly going back to 8% per year growth, then missing out on the start of that is a small price to pay to avoid the potential of dropping -another- 40%.

  15. It’s amazing how short-sited some of the comments are. I hear “this time is different” ALL THE TIME. It’s not different.

    People who think they can wait on the sideline until the market recovers and then jump back in are KIDDING THEMSELVES. When (not if) the market recovery happens, it will be fast and furious and a lot of people are going to be on the sideline missing out. TIMING THE MARKET DOES NOT WORK.

    Also, the stock market is a LEADING economic indicator, meaning the market will turn around before the recession or depression ends. That’s the way it works.

    Jonathan, ignore the doom and gloom and keep doing what you’re doing. Asset allocation based upon your time horizon are the only things you need to worry about.

  16. Johnathan, I’m curious as to your opinions on IRA conversions while account values are down and taxes are low.

  17. Maury, don’t fall into the trap of believing that markets always rebound quickly just because that is what happened after 2001. If you want to mention stock market crashes, do your homework. For instance, let’s talk about the Great Depression, since this market is very similiar. It took the stock market about 25 years to break even from the highs of the market in September of 1929 to December of 1954.

    I consider 25 years a long time. People should not fall under false senses of security (ie, house prices always go up or stock prices always go up). From the market’s relatively small experience, that has been the case. However, past results do not guarantee future performance. I don’t have to worry about this because I am young, but a lot of people are going to get burned because of advice that you should always buy and hold. The people who are going to get hurt the most are people who are within 10-15 years of retirement. They better hope for some huge gains.

  18. Wow, I’m also impressed at how easy is to scare people out. Am I the only one that is investing happily (but carefully) these days? I personally think it’s a very good time to buy right now. Even if the market goes down another 40% it will eventually come back to the level that was in 2007 and more by the time I retire. Who here didn’t wish last year to buy at this year’s prices?

    Remember, the money you invest is money you don’t need now anyway.

  19. Given his young age, the performance of Jonathan’s current portfolio (i.e. past investments) is fairly irrelevant compared to his future portfolio’s performance (what he buys starting now). He will be a net buyer not a net seller for a long time to come in the stock market.

    So no need to fret about whether the market may keep dropping right now, what he should be concerned about is whether the market will continue to grow in the long term. Can he or we all expect 8% growth going forward? Likely no, but will it stay flat for the next decades? I rather doubt it. But if that happens we are all in trouble – no retirement for us…

  20. Wow, -42.5%? And to think that there’s still much more downturn to come. Do you know how many decades it’s going to take just to break even? Many investors think that 42% can be erased in a matter of a few years. Hmm let’s see, if you’re 30 years old, and the market probably will take another 20 years just to break even 42% loss…you do the math. This without considering more downturns in the economy until then. I’m all cash since 2007 and I’m not moving until the dust settles.

  21. Hi,

    Have you considered High Yield Bonds with Vanguard. Those are the most beaten down and are giving a dividend of 11%, there is still interest rate risk of going upto 13% or bankrupcy or something, but still while it is going on you make the dividend. I think both High Quality Corporate Bonds and High Yield Bonds will be doing very well next year.

    Thinking of the spreads between the Treasuries and corporate bonds I think it would be good to go into corporate bonds or muni bonds.

  22. As Jeff pointed out many posts back, the average investor does not find themselves ahead after the last ten years.
    I understand that when speaking long term we mean more than 10 years. However, for those new to investing (10years or less) this period has been very painful and has created a serious crisis of confidence in the promise of markets.

    The fact is that we feel like sheep that were led to slaughter through our reliance on “experts” in charge of the companies we invested in. Coupled with profound ignorance/malfeasance/corruption of our governmental watchdogs (elected and unelected), there is little for the young/new investor to believe in.

    Furthermore, one has to recognize that there are many who played by the rules and invested wisely over the long term only to find that the end point of their “term” was in the wrong time period.

    Small comfort about the long term.

  23. Since October 2007, I am down on many of my investments. We’d all rather see our investments go up each year, but the fact that many are down is not all bad. To borrow advice from William Bernstein from “The Four Pillars of Investing”, I keep a larger cash reserve (double what I normally would), and have been using part of that reserve to make additional purchases. Here’s an example. On the equity side, my portfolio is split 50/50 between US & International, and another 50/50 between Large/Small Caps, and further split 50/50 between Value and Blend (not growth). In my small caps are split again and include an allocation to a micro cap blend. I wanted to add a nice micro cap value fund, which I did find and purchase at $12.50 per share in Aug 2008 (after it had fallen since its Oct 2007 high). I bought additional shares in Mar 2009 at $4.02 per share. My basis is just under $7.50 per share. If the market tanks again, I will buy more and continue to lower my basis. I do this with all my investments and without Bill Bernstein’s advice, would not have considered doing this.

    As a Buy and Hold investor, I really believe that the market will recover. It may take several years before we hit the same peak we had in Oct 2007, but it will happen. If you don’t believe this, then you are not an investor but rather a speculator and there’s the difference. Market crashes are an opportunity for investors who have a long horizon. If you don’t then you really should take a closer at your risk profile as you are invariably equity heavy when you should not be.

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