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asset allocation

Qualified/Retirement

Reallocating Future 401(k) Contributions From 50% Cash

by Evan

Almost exactly 1 year ago I decided to change the allocations of my new capital contributed to my 401(k) from a balanced mix of funds to 50% cash to build up a stock pile of money to deploy when, not if, a correction occurred.   In addition, I took 10% out of equities and put it in cash as well.  The move had been on my mind for a while and when I saw another blogger’s post about some very real statistics regarding then CAPE/PE10 levels I decided to act.   I laid out the exact risk/reward,

The risk is clear – the market keeps RIPPING upwards and I miss out on most of that growth (I still have some future contributions going to equities and I only took some off the table), however, the other side of the coin is pretty clear also that there is a pull back and I’ll have some cash to invest.

The problem with getting out of the market is knowing when to get back in, so I am going to give my self a point to start deploying cash…after a 5% correction (from this point – so the S&P would be at 2,318 or so). If it does not occur by year’s end I will reevaluate the strategy.

After a year I decided to change where the future contributions are invested.  I am going to leave the small amount of cash I have squirreled away for the correction that eventually has to happen (at least I think it does).

Why am I Changing my Allocation?

Despite the CAPE ratio being even higher than it was last year when I made the decision, the broad market keeps going up as well! So it got me to thinking about the gains I have missed out trying to time the market.  Those gains will continue to compound throughout the next few decades before I am even allowed to touch this account.  Worse yet, the cash I have put to the side has not even made a dent in the overall allocation of the portfolio since the market keeps climbing while the cash does not.

As such, I decided that it is time to reevaluate and put future contributions back to work.  At some point, I’ll absolutely put the cash to work if/when there is a pull back, but until then I’ll just let it sit there.

My New Allocation for Current 401(k) Contributions

My 401(k) is terrible.  I have limited fund choices with high fees. I get a pretty decent match, so as they say, it is what it is! I have already made the decision that I am not going to reallocate the current balance, rather, I am going to try and shift the portfolio to my desired asset allocation via new contributions.  As such, the first step in this process is to determine my current allocation since this can provide some indication of if future contributions in certain funds should be heavier.

Current 401(k) Allocation

I have always liked Morningstar’s instant X-Ray tool to evaluate a simple portfolio.

Actually, I am pretty comfortable with the asset allocation break down (~84% stocks, 9% Bonds and 7% Cash). 84% equities may seem high, but I can’t/won’t touch this account for a few decades.  Secondly, if we were to take a look at my entire financial world my asset allocation would probably be a little less equity heavy as compared to looking at just this account.  Specifically, I have a pretty healthy emergency cash account, as well as very safe and stable permanent whole life policies that I look at as my bond alternative.

However, when we look a little deeper at the holdings themselves the 84% of the account starts to look a little different than I would like.  As stated earlier, I am going to leave the funds I already have invested, and instead use new money to get myself to a point where I am comfortable for a few more years.

Reallocating New Contributions

First, the easiest decision is to reduce my cash allocation from 50% to 10% – which has a .94% expense ratio somehow!  Similarly, I am going to keep my bonds at 10% total as well (5% World Oppenheimer International Bond Fund and 5% Oppenheimer Global Strategic Income Fund).  With the rest of 80% for new contributions I am going to split them as follows:

  • 20% Oppenheimer Value Fund
  • 20% – Oppenheimer Mid Cap Value
  • 30% – American Funds Growth Fund
  • 10% – Oppenheimer Global Opportunities Fund

Reallocating and Rebalancing your Qualified Accounts

Reallocation and balancing of your 401(k) or other qualified account is a great exercise that most people ignore.  Sometimes this is for the better, and sometimes it can sorely hurt the participant.  I think this recent reallocation of will take me another year or so, when I can come back and rebalance the account.  The only thing that I could see changing in the near term would be if we finally get a correction and I can deploy the cash into it (but that would only be adding an additional 5 to 7% of assets into play at this point).

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Investments

What is Rebalancing an Investment Account? Actually Rebalancing my 401(k)

by Evan

It has been almost a year since I rebalanced and Reallocated my 401(k), so it is about time to take a look at the account.

What is Rebalancing?

According to investopedia rebalancing is,

The process of realigning the weightings of one’s portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation

One could rebalance based on specific funds or based on total allocation (i.e. stocks to bonds).  Like everything in personal finance there are no set rules or standards.  Notwithstanding, FINRA recommends at least a yearly review of your 401(k),

As market performance alters the values of your asset classes, you may find that your asset allocation no longer provides the balance of growth and return that you want. In that case, you may want to consider adjusting your holdings and rebalancing your portfolio.

Assets grow at different rates—which means that your portfolio might end up out of line with the allocation you have chosen. For example, some assets might recently have grown at a much faster rate. To compensate, you might reallocate some of the value of fast-growing assets into assets with slower recent growth, which may now be poised to pick up steam while recent high-performers slow down. Otherwise, you might end up with a portfolio that carries more risk and provides a smaller long-term return than you intended.

Although there’s no official timeline that determines when you should rebalance your portfolio, you may want to consider whether you need to rebalance once a year as part of an annual review of your 401(k) plan.

Rebalacing my 401(k)

About a year ago I came up with the following allocation:

  • RGACX Amer Funds Growth Fund R3 20%
  • OPSIX Oppenheimer Global Strategic Inc A 10% 
  • OPGIX Oppenheimer Glob Opp A 20% 
  • CGRWX Oppenheimer Value A 20% 
  • QVSCX Oppenheimer Sm & Mid Cap Val A 30%

Since the funds offered by my 401(k) are still terrible I am going to keep investing in the same funds, but the balance over time has shifted to:

  • Amer Funds Growth Fund R3 – 31.1%
  • Oppenheimer Global Strategic Inc A – 5.1%
  • Oppenheimer Glob Opp A – 17.7%
  • Oppenheimer Value A – 22.0%
  • Oppenheimer Sm & Mid Cap Val A – 23.9%

If you are wondering why it doesn’t exactly add up to 100% is because when I rebalanced and reallocated last year my 401(k) Administrator didn’t sell out of positions completely leaving me with fractional shares.  Not sure why it occurred but didn’t really bother to research it either.

It seems that the Amer Funds Growth Fund has become nearly one third of my portfolio and that is unnecessary and just not something I am comfortable with.  I originally thought it occurred due to the 22% growth rate vs how the rest of my funds have done.

401k Rebalance

However, that doesn’t seem to be the case:

All funds 401k rebalance

I tried to dig a bit to figure out what has occurred in terms of how it grew so quickly since all the funds grew around the same amount.  I failed, but not going to worry about it too much.  Instead, I am going to rebalance to the allocation I had previously set up.

  • RGACX Amer Funds Growth Fund R3 20%
  • OPSIX Oppenheimer Global Strategic Inc A 10%
  • OPGIX Oppenheimer Glob Opp A 20%
  • CGRWX Oppenheimer Value A 20%
  • QVSCX Oppenheimer Sm & Mid Cap Val A 30%

The whole thing is pretty frustrating since all the fees on these funds are at around 1%!

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Dividend Investment Portfolio

April 2012 Update of My Dividend Investment Portfolio Watch List

by Evan

Every 60 days or so I like to update the watch list for my Dividend Investment Portfolio and since my last update was in February 2012  I figured it was about time.  These posts are to provide myself with a “watch list” for stocks to buy based on a snap shot in time of the stocks’ metrics (in this post it is 4/4/12).  The goal with my dividend investment portfolio is to be an income stream one day.  This project is not a 3 month or 6 month project, but rather a 10 year one.

My dividend portfolio is made up of 2 parts:

  • Three ETFs that cost nothing to buy through my broker Fidelity and
  • Timed purchases of “the watch list” which is created using metrics to determine if a stock is undervalued

The starting point for the watch list is the dividend champion list.  When I first started this account I primarily used the dividend aristocrat list, until I learned that there are other dividend lists besides the dividend aristocrats that follow my goals and objective.  The main difference between the dividend aristocrat list and the dividend champion list is that to be a member of the former a company doesn’t need to be found on the S&P index.

Part 1: Income ETFs in my Dividend Investment Portfolio

This is the boring part that is on auto-drive so I have some broader exposure to market sectors.  I buy one share of 3 ETFs each month (remember: cost is not an issue as these are free in Fidelity):

  1. DVY – The investment seeks to replicate, net of expenses, the Dow Jones Select Dividend index…The index is comprised of 100 of the highest dividend-yielding securities (excluding real estate investment trusts) in the Dow Jones U.S. index.
  2. IDV – The investment seeks to replicate, net of expenses, the Dow Jones EPAC Select Dividend index…The index consists of 100 of the highest dividend-yielding securities (excluding REITs) in the Dow Jones World Developed-Ex. U.S. index. The fund is non-diversified.
  3. IYR – The investment seeks to replicate, net of expenses, the Dow Jones U.S. Real Estate index…The index measures the performance of the real estate sector of the U.S. equity market. It includes companies in the following industries: real estate holding and development and real estate investment trusts. The fund is non-diversified.

I have not and will continue not to reinvest the dividends in these ETFs.  Instead I use the income produced to purchase additional shares of those stocks that make up Part II.

Part II: April 2012 Update of the Stock Part of my Dividend Investment Portfolio

  1. They have to actually be on the Dividend Champion list – Updated monthly
  2. The stock has to have a Price to Earning that is lower than their industry average
  3. Their Operating Margin has to be in line with the particular stock’s industry average
  4. Dividend Yield should be between 2 and 5%
  5. Price to Book Value Should be Reasonable (under 3)

Two quick notes:

  • I don’t take the restrictions too seriously.  For example, if a stock is right at the cusp or even a little bit above/below a metric I will let it fly.
  • The Yield and P/B change monthly after I have narrowed down from the P/E and OpMargin just so I have a healthy watch list.

Some quick definitions

  • Dividend Champions are those dividend paying American companies that have increased their dividend for the past 25 years.  Unlike the Dividend Aristocrat list they do not have to be part of the S&P500.
  • P/E is Price is “a valuation ratio of a company’s current share price compared to its per-share Earnings.”
  • Operating margin is “a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.”
  • Dividend Yield a “Financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated by dividing Annual Dividends per Share by Price Per Share”
  • Price to book is a ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.

Dividend Champion Price to Earnings by Stock’s Industry

The first Stocks I their eliminated were those whose Price to Earnings Ratios were out of line with their industry average

Dividend Champion Operating Margin by Stock’s Industry

Next I eliminated those stocks whose operating margin was not better than its peers in the industry (or only marginally better).

Dividend Champion Dividend Yield

While I am not ‘chasing yields’ I am attempting to create a dividend portfolio, so the next elimination step was to remove any stocks with a dividend yield of less than 2% or more than 5%.  As stated, this is a moving target depending on how many stocks I have left to choose from.

Dividend Aristocrat Price to Book

Lastly, I was looking for those stocks whose price to book value is low as to further evidence that it is undervalued.

Remaining Dividend Aristocrats to Build Part II of My Dividend Investment Portfolio

The remaining stocks that I will be investing for the next couple months are:

  • Aflac
  • Bemis
  • Chubb
  • ConEd
  • Dover Corp
  • Eagle Financial Services
  • Hormel Food
  • Illinois Tool Works
  • Medtronic
  • Middlesex Water Co
  • National Fuel Gas
  • Proctor & Gamble
  • Sonoco Products
  • Target
  • Vectren
  • Walgreen
  • Wal-Mart

I will continue my $300 – $500 lots at or near short term dips in the stock which I keep an eyes on using my Google Docs as my Investment Tool.

I spend a lot of time on these portfolio updates, but I am not providing investment advice rather I want to hear what EVERYONE thinks about it!

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Investments

No Investment Strategy Will Perfectly Align with Your Goals

by Evan

I read two recent articles from Registered Rep Magazine that reminded me that regardless of how well you plan, and strategize there is no perfect investment strategy.  It doesn’t matter if your investment goal is to mitigate taxes, or if the goal is to invest in all indexes because over time they “have” to beat the actively managed fund there will be examples that will interrupt any perfect planning.  It may be a bit too serious for this type of article but as the old adage goes:

We Plan and God Laughs

Three Common Strategies to Mitigate Taxes That Don’t Always Work

The first article titled, Tax Mitigation Using ETFs and Mutual Funds, provides three common techniques that most investors look for when investing in their perfect ETF or Mutual fund as it relates to minimizing taxes:

  1. Low Turnover
  2. ETFs (as opposed to Mutual Funds)

Within each of these strategies the article provides examples that are the anomalies.

Low Turnover to Minimize Taxes

Consider Franklin Rising Dividends (FRDPX), which has a tiny annual portfolio turnover rate of 6 percent, and Janus Contrarian (JSVAX), with a turnover of 104 percent. Both funds are top performers in the large blend category. During the past 10 years ending in May, Franklin returned 6.1 percent annually, outdoing 97 percent of competitors, while Janus returned 5.9 percent, according to Morningstar. But Janus was much more tax-efficient. After taxes, Janus returned 5.5 percent, compared to 4.8 percent for Franklin.

The reason was that this anomaly occurred was because of the different goals of the funds.  Specifically, Franklin was interested in Dividend Paying stocks, providing for taxes for its owners.

Index ETFs vs. Index Mutual Fund

These can be more tax-efficient than mutual funds, but it doesn’t always work out that way. Compare Vanguard 500 Index (VFINX), an S&P 500 index mutual fund, with two similar ETFs, iShares S&P 500 (IVV) and SPDR S&P 500 (SPY). During the past decade, the Vanguard fund returned 2.54 percent annually, lagging iShares, which returned 2.60 percent, and SPDR, with a return of 2.57 percent. But the Vanguard mutual fund was the most tax-efficient. After taxes, Vanguard returned 2.18 percent, compared to 2.12 percent for iShares and 2.04 percent for SPDR.

The reasoning, according to RegisteredRep, was that Mutual Funds are able to book losses (sell losing stocks) and ETFs aren’t.  I am not sure I entirely understand this reasoning – if anyone has insight I would be appreciative.

Investing in Vanguard Index Funds vs. Vanguard Active Funds

I don’t have any Vanguard accounts so I was shocked to learn that Vanguard even had active funds, nevertheless, that some of those active funds beat the index funds.

I couldn’t believe these stats:

Of Vanguard’s 21 active equity funds with 10-year tracks records, 15 have outperformed their benchmarks. Top performers include Vanguard Global Equity (VHGEX), Vanguard Prime Cap (VPMCX), and Vanguard Windsor II(VWNFX).

  •  Consider Vanguard Capital Opportunity (VHCOX), a large growth fund. During the 10 years ending in April, the fund returned 6.2 percent annually, outpacing Vanguard Growth Index (VIGRX) by 3 percentage points. 
  • Vanguard International Growth (VWIGX) returned 6.7 percent, compared to 5.3 percent for Vanguard Developed Markets Index (VDMIX).
  • By many such measures the actively managed Vanguard Equity Income (VEIPX), a large value fund, is superior to its passive equivalent, Vanguard Value Index (VIVAX). The active fund returned 4.8 percent annually over 10 years, compared to a return of 3 percent for the index portfolio.

The article titled, “At Vangaurd, Active Beats Passive – Frequently” has additional examples.

Regardless of Your Investment Plan Anomalies Exist

The point? There is nothing that always works when it comes to investing.

 

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Investments

Why Investment Services or Subscriptions Probably Don’t Make Sense to Purchase

by Evan

I have a friend of a friend who works for a hedge fund and whenever I have a few drinks with him I try to understand what he does.  From what I can gather he has created an algorithm that tells him when to buy and sell stocks, derivatives and currencies on a large scale.  He makes an amazing living by anyone’s standards working for a hedge fund.  So, when I receive an e-mail advertising a new service I was confused and felt a little bit annoyed. Note: the reason I don’t name/link the company is out of respect for the co-founder who seems like a professional guy.

==WHY XYZ IS A GREAT DEAL AT $19/MONTH===========
1. XYZ Saves You Time

To make smart investment decisions, investors need to do hours of research. They need to dig deep to the extent that they understand the underlying value and quality of the companies they’re investing in. Otherwise, they end up investing without a compass.

This is a recipe for disaster, because without a compass, they end up selling undervalued stocks and worse, buying overvalued stocks.

XYZ provides you with that compass. It applies a value investing approach so you can instantly view the value and quality of the stocks you’re investing in. And, it does it fast.  XYZ does 2 hours worth of analysis in the time it takes to load your page.

2. XYZ Helps You Outperform the Market

Over the past 3, 5 and 10 years, stocks with a XYZ Grade of 90 and above have averaged around a 23-25% return annually.

With a modest portfolio of $5000, XYZ can help you achieve an annual return of over 20%. You’ll make over $1000 at a cost of $228 (Professional Plan).

And, that’s not even including the discount…!

Number 1, alone, may be a GREAT reason to look into the service, and I think they should have stopped there.  Providing a starting place for people’s research is valuable.  Is it $20/month valuable? Probably, if the person isn’t a straight index investor.

It is Reason Number 2 that gets me going.

If Someone is Beating the Market by That Kind of Percentage They Don’t Need your $20/Month

Let’s ignore whether the e-mail meets the numerous levels of scrutiny that this type of investment should meet (i.e. past results are not indicative of future performance and other legal language), but please, re-read that heading again.  and one more time.

If there is a company that is returning 23 to 25% annually they don’t need your $240.  They just don’t. What they need is to put their money where their mouth is and show the algorithm results to a hedge fund or investment firm and start making real money.

I refuse to believe that there is a couple of great guys that are altruistic and want to help you, help yourself.  Rather, what I think is happening is they created an algorithm that back dates amazing and can’t move it forward to the next step because either they can’t stomach it or it isn’t that great.  I think it is analogous to those who sold shovels and pans to those moving west during the gold rush – if those people really believed there were riches in “them hills” they would have kept all their tools and captured that fortune.  They didn’t because they knew there was more money in selling to those that want to take the risk…and I think that is what is happening here.

Have you ever subscribed to one of these services? Did you actually make any money? is this type of service just the 2.0 version of the subscription services of the past?

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