One-Stop Shopping

The events of the past two years got me well off topic from my previous goal of optimal retirement portfolio construction. My greatest wish had been to construct a set-and-forget portolio that would withstand any kind of market and provide decent returns both for accumulation before retirement and during retirement. A second desirable consideration was that it be simple and require very little work. I have frequent requests to revisit this important issue.

 

Last year we learned, or re-learned, that in systemic crisis markets everything becomes corellated, and almost all asset classes move as one, and that is because a lot of leveraged and/or panicked  players simply have to sell everything in a hurry. 

 

But that was then. I don't know, or know of, anyone who always understands what's going to happen in the markets or the economy in the future. But here is an interesting fact. Vanguard's Wellington Fund (VWELX) started in 1929 (oooops!), and Wellington has an annualized total return (all dividends re-invested and no taxes paid) of 8.11% since 1929. Imagine what that return must be from the 1932 low. Through many wars and social upheavals, depressions and manias, and bear and bull markets, 8.11% annualized.

 

Wellington has about 65% stocks (~10% foreign) and 35% bonds and sister fund Wellesley Income (VWINX) about 35% stocks and 65% bonds. VWINX has returned 10.14% annualized  since mid 1970. A very good case can be made for one or the other of these two funds as one-stop-shopping choices for long term tax-deferred retirement accounts: up to age 45-50 going with Wellington and then  switching to Wellesley. Uncomplicated.

 

On the chart from my data base start date of September 1, 1988, I also show Bill Gross's PIMCO Total Return Bond Fund (PTTRX) along with the others. If you had equal amounts of PTTRX and Wellington Fund, your return would have been almost the same as Wellesley VWINX for the same period. So Wellesley is the laziest and least complicated way to go. Both bond and stock markets have been in bull markets for much of the last 21 years (bonds for sure), and we can't know whether this will work for the next 21 years. But we never do know in advance. Things seem dreadful now but no one really knows how it will turn out over time.

 

 

Another factor is inflation. There was inflation from the late 1960's through 1981 and again from 1999 to 2008, and stock returns were still quite respectable. VWELX and VWINX are good stock pickers and they included inflation stocks, and foreign stocks, and do so now. But one might want to consider an additional inflation hedge. Energy stocks have been a far better hedge than precious metals stocks. So if you buy VWELX or VWINX, depending on age, you might want to add 5% in VGENX. So you could have only two mutual funds and relax and forget it all.

 

It depends upon your personal investment skills which may or may not be able to improve on this, the amount of time you have or want to have to manage your investments, and your ability to ignore events if you have a one-stop-shopping portfolio. So think about who and what you really are and what you really want  to do. There is only one right way, and that is a way you can live with and actually perform being who and what you are. Some self knowledge and honesty is required here. And consider whether you really want to be day trading when you're 70 or 90 years old.

 

If you had put $10,000 into Wellington in 1929(!), re-invested all the dividends, and paid no taxes--not possible of course except for a long term trust--you would have $6,430,189.84 today. That's the purpose of long term investing, and it gives new and deeper meaning to the phrase that "time is money".

 

I am a Vanguard client but have no other connection of any kind to them. You could do this with other long existent mutual fund companies. These are my ideas and not recommendations.

 

 

Comments

[Heath Rux]

Thanks Tom.

Another way to play a set and forget portfolio is to construct your own index portfolio that encompasses a value and size tilt. For example:
40 year old investor:
60% stock- 40% Bond

Stock Allocation:
US Large
US Small Value
International Large Value
International Small Cap

Bond Allocation:
Divide equally between intermediate term treasuries and TIP's

[Tom Drake]

There are 100's of possibilities. I wanted to start with perhasp the simplest one that really works and has worked for a long time.

[Heath Rux]

Tom- My apologies if this question is redundant. Can you kindly advise your opinion on the Merk Absolute Return Currency Fund (MABFX) or the Merk Hard Currency (MERKX)? Thanks

[Tom Drake]

I get questions all the time about Permanent Portfolio Fund. It was started by Harry Browne and friends based on his principals as they evolved. Since Browne has become an icon again recently and various people are making their fame piggybacking some of his ideas, there is a lot of misinformation out there. Browne came into his prime during the hyperinflation of the late 1960's and 1970's. So naturally he believed that inflation assets had to be prominently included in a diversified portfolio. But inflationary assets went into a 27 year bear market in 1980/81. And Permanent Portfolio went with them.

My total return mutual fund data base goes back to September 1988, and Permanent Portfolio has under performed for that whole period. It has even underperformed Vanguard's GNMA fund and junk bond fund which are little more than hyped-up money market funds.

If you think we will have inflation for the rest of your life, then bet on Permanent Portfolio Fund. Otherwise look at funds that have performed well in both non-inflation and inflation.

Even if you do think inflation is forever, you'd do better owning a lot of gold. I do.

http://screencast.com/t/1CTyjoUN1

[Tom Drake]

HS,

If you live in the US, most of your assets are valued in US dollars. So you couldn't possibly own too much of unleveraged MERKX or MAEFX to hedge your currency risk. In normal times the long/short fund might make some sense.

If you don't want to deal with worrying about economics, pick a fund that has done well in various market environments and will probably outdo inflation over time. Like Wellesley.

Tom

[Recoba]

My two cents on owning gold;
Gold is fundamentally a different asset class than stocks/bonds (duh!). With stocks/bonds you typically make the most money always being long and earning risk premia - Since you typically always want to be long, getting flat in a bear market is like psychologically being short.
However gold is the opposite. You typically do NOT want to own gold since long term it does horrible. For me, owning gold is like psychologically going short stocks/bonds. It is a trade, and as long as its making money Ill keep it. But I view it only as a wealth preservation mechanism, and as soon as inflation expectations overshoot (maybe 3-7 years from now) gold will probably be overpriced.
Tom had a great chart which showed long term returns of stocks/bonds/bills, cash and gold which made this point abundantly clear.
With that chart in mind, Im not sure how a portfolio which is 50% in the worst two asset classes would do well.

[Joe]

Recoba~

I agree gold is a much-hyped investment that works way worse than stocks both in terms of risk and return. As with all asset classes, timing is everything. But if you want to take a buy and hold approach, then choose stocks over gold for sure.
Joe

[Joe]

Tom,

I wanted to thank you for the great collection of links on your blog. Over time, I checked them all out and found them very helpful. Recently, I looked at Carl Futia’s blog. There are two recent posts about success in trading financial markets that made me think a lot. The posts are actually adaptations from a different trader’s thoughts. The essence is: a) Mechanical aspects of trading like set ups, stop losses etc. are only one part of the picture and being in tune with the markets is the equally important and b) the market rewards the painful move which is opposite to the position taken by the masses, which always choose the easy move. I must say I agree with them very much. It is very hard to describe in words. Trading by gut feeling is financial suicide, but being in tune with your feelings and discerning the “easy trade” that the masses choose and which will go the other way subsequently from the “hard” one helps me a lot. At the bottom everybody is bearish and at the top bullish. Taking the opposite position requires standing out and going against the grain. It’s the trade less chosen. I can also feel it inside of me that either I want to take the opposite trade or ask myself: why now? - I don’t know, does that make sense what I’m saying?

Joe

[mOOrso]

Thanks Tom. Appreciate your comments re Vanguard and its funds. I have an account there as you might recall and am approaching the vaunted retirement years (!). So your insight and comments are like gold to me man.

[Tom Drake]

Thanks all, and keep giving me your ideas which are appreciated.

The old saying is you you don't buy gold to get rich but to stay rich. All that means is that gold is somewhat like bank savings deposits used to be from the 19th century until the 1960's: a safe way to save purchasing power.

The post 60's world wants us to spend rather than save and has made saving cash a dumb thing to do since the dollar we save goes down over time, and the government keeps the interest rates down just in case we didn't get the hint to spend.

The first time I went to Europe in the early 60's as a poor student, I lived well with my bride for three months on $1000 I had saved from part time jobs for four years, including air fare. Then I got 4-5 Swiss francs and German marks for a dollar.

To buy any gold you have to ignore the nutcase goldbugs. But I have always (since the 1960's) believed that gold and silver have a place, and I have always owned them.

Theoretically, and actually as in the case of Vanguard Wellington and Wellesley, you shouldn't need to own gold to beat inflation. But a little bit of gold (3-12%) leverages your odds in an inflationary era which we have been in since 1999-2001.

Joe, I agree that Futia is special. Great tools he uses and great insights. A well-trained and effective mind.

Also do read Howard Hill's blog. He has also literally been there and done "that" on Wall Street, and he is sharing his experience with us and others, a rare gift. In my experience he is completely truthful in what he says. If there is any hype in his writing it's because the events themselves were hype.

And do check out M00rs0's website http://tidallyspeaking.blogspot.com/ Larry is a cyberfriend from coastal Maine with a much better mathematical mind than I have (like Futia and Hill as well). He has put together a much more useful model on the short term tidal cycle than mine, although I will stubbornly use my own! :))

Also do read Bill Luby and the rest of the Blogs list. They are there all because I like and read them all and for no other reason.

[Jim Pitinii]

Hi Tom

I don't think it falls right away. It could go more or less sideways until early 2010.

Then a 25% plus collapse.

[Adam Rupert]

Hey Tom, I Crunched some numbers and here is a good surogate for VWINX using etfs's: 30% each to VIG, BIV and GLD, here are the results from the spreadsheet:

Annualized Parameters
Annualized Mean Rtn Volatility Annual Rtn
VWINX -2.2% 8.5% -3.9%
VIG -9.9% 16.4% -13.3%
GLD 17.1% 20.8% 17.7%
BIV 7.0% 8.0% 7.2%
Portfoliio 5.0% 8.6% 4.3%

As you can see the same volatility over three years data but a 7.2 % greater return. Hard to match a 39 year history though so your point is well made.

Using your ideas my favorite portfolio a mix of CEF and ETF's is:

GGN 30% IRR 30% EDV 20% (or BIV if you think we are free of deflation that leads to a strong dollar) and GIM 20% Great correlations with that mix, add a 15% reballance rule to each and compounded returns ahead! Thanks for all you do Tom. Adam sends

[Joe]

My guess is that people will get spooked easily again in this current, onsetting market correction. So long as that's the case the bull market will continue to climb the wall of worries. Will be very interesting to see where the 2cs goes from here.

Joe