New York |
October 07, 2008 in Portfolio Ideas | Permalink | Comments (2) | TrackBack (0)
October 04, 2008 in Portfolio Ideas | Permalink | Comments (10) | TrackBack (0)
I've been haunted by the statistic I quoted from Rick DeBruhl in my last blog post that the average 50-something year old American has only $57,000 in her 401K (including IRA, I suppose). I've experimented with Hugh Chou's excellent calculator for accumulating a tax-deferred corpus and then dispensing it gradually, as required by the IRS, at age 70. The assumptions I made were that realizing how inadequate her savings would she would thereafter put $750 each and every month into the 401K or IRA, and it would earn, by choosing wisely, 7% per year until age 70 and then 6% thereafter.
$750/ month is $9000 per year but it compounds better if it's done monthly and it also becomes a routine like paying the mortgage or rent. Also 7% per year before retirement and 6% afterwards are conservative goals which can likely be met.
If she does this simple program, she will have $333,766 at age 70. Using the IRS required minimum withdrawal at age 70 (do it in 1/12's monthly!), it would start paying out at about $2000 per month or about 24,000 per year. By age 80 it is paying $37,407 per year or a bit over $3000 per month and at age 90 $54,962 or nearly $5,600 per month. There is also a column which shows the purchasing power results after an assumed 3% annual increase in inflation, the average since 1946. Add on $1000-2000 per month in Social Security payouts, and one could live a modest existence.
We can experiment and see how much we'd need to put in to make the payouts even larger, but I'd recommend leaving the annual earnings increases fairly low in order to be realistic. If you find this was a helpful exercise which can change your future, think about making a small donation to Hugh Chou at his site. Here is the calculator I used: http://www.hughchou.org/calc/irawith.cgi
Bear in mind that I am an amateur myself, but this "is" something you can do at home.
(Click on the tiny image to enlarge to original size.)
June 18, 2008 in Portfolio Ideas | Permalink | Comments (0) | TrackBack (0)
Both words, taxes and planning--all of the words really--connote "totally boring" compared to the excitement of huge capital gains. But there comes a time.... Part One Assume that you are at a point in life, retired or otherwise unemployed, willingly or not (disabled), and you begin to live off your assets. If you are retired willingly then you will have figured out what you have (in dollars) to live on and can see a way to earn the dividends and interest on those assets that you need to live in on. You will have, won't you? If not, you are living in a fantasy world. Be sure you included income taxes in that figuring. Unless you want to work part time at Wal Mart or daytrade eminis, be sure you can really live off your assets for twenty to twenty-five years. If not, you are merely taking a short term fantasy vacation from working for a living which will come to and end when the reality of your wasting assets versus the expected years of your survival becomes evident. If you are 35 or 45 years old and do this, you can reasonably expect to recover after you "get real", that is, after you realize you were completely wrong. Otherwise and especially over 55 years old, you struck out. In that case, get a copy of George Ure's "
How to Live on $10,000 a year (or less!)." http://peoplenomics.com/bookstore.htm#10k It can be done, but this also requires a life committment. These are extremely serious issues.
Part Two
If indeed you have enough dollar assets to live on without major life-changing down shifts in life style, taxes and planning are still very important. In the US it is common for people to have assets which are tax-deferred (IRAs or 401Ks, etc) and assets which are after tax: bank accounts, brokerage or mutual fund accounts, etc. The closer these assets divide into equal parts of tax deferred and after tax sources, the better off you are for planning.
On US tax-deferred accounts you really owe income tax on every dollar in the fund regardless of your age, and at 70 years old you have to take out an increasing amount each year so that the government gets its complete share before you die. Think about that for a while. Once you are withdrawing, willingly or not, I hope it is clear that capital gains in tax-deferred accounts make no sense at all. Capital gains taxes are, until 2010, as low as 5-15% in the US for long term gains, and short term gains are taxed at normal income tax rates. So why try to make long term capital gains in a tax deferred account in retirement when everything will be taxed at ordinary income tax rates? Is that crystal clear? It is riskier and less certain (redundant?) to get long term gains than to get interest or dividends, and the extra risk for capital gains in a tax-deferred account is punished by full taxation.
Think this all through again very carefully: for US tax-deferred accounts during voluntary (any age) or involuntary (over 70 years old or disabled) draw downs, capital gains, except for short term trading, make no sense, and you should be going for income from interest (bonds, etc.) and dividends. If you are the extremely rare person who can trade short term for tremendous gains, you are a rare exception. People who fall into that category will almost all have made so much money already in life that they don't have to do it during retirement! Your odds of learning to do it for the first time in retirement are similar to your odds of winning the PowerBall Lottery. I know people who are trying to beat those odds, and I wish them luck.
You really should not care about the total account balance of a tax-deferred account when you are in draw down phase. Seriously! What you need to do is insure that you have the best (the most reliable and hopefully high) income stream from the account. You are a joint owner of the account with the US IRS. You want to be sure that you don't pay the IRS stupid taxes, only taxes on income you are drawing down. At age 70 you have to take out nearly 4% per year or face further tax penalties for "failure to share with the IRS". Check out Hugh Chou's free calculator http://www.hughchou.org/calc/mdib.cgi for the realties. 1/"Divisor" is the percent of the total account which must be taken out each year to avoid further tax penalties of 50%. At age 71, 1/26.5 = 3.77%. So you need to earn at least 3.77% of your total tax-deferred account per year to avoid a partial liquidation of the asset base (total amount). You cannot assume you will make capital gains greater than that each and every year, and you would have to sell (take the capital gains) on take out. Get it? At age 80 you will have to take out 1/18.7 = 5.35% per year. Consider that. At the moment Vanguard's long term (20 year) US Treasury bond fund is paying 4.68% and their best money market fund is paying 2.21%. Panic!
There are several very important and normally totally misunderstood facts that may help. One is, as I have alluded to, is that the total value of our tax-deferred account isn't as important as the income it generates. If interest rates go up (see below) the value of longer term bond fund or funds goes down, but the income will stay the same or rise because of the higher interest rate. This is key. So we would get the same or maybe even higher interest income even though the total account balance goes down. If the total account balance goes down we have to remove less, according to the IRS formula, but the higher interest rate will make it last longer. (Look at the age 71 versus age 80 withdrawal rates as above.)
The second very important fact (or very strong probability) is that long term interest rates "will" be going up. Long term rates are very close to the lowest they have been for the last 28 years. Twenty eight years is about as long as interest rates decline, based on the past 200 years in the US and Europe. So rates will be going up. This means that when bond funds, or you, have to reinvest in new bonds as the older ones mature or come due and are cashed in, the new rates for bonds will be higher, not lower. This removes one of the worst features of bond investing, namely "reinvestment risk". Your income will be higher, not lower.
Both of these facts, and mandatory US taxes on tax-deferred accounts, explain why you should concentrate on income at this time and forget capital gains in tax-deferred accounts during withdrawals. Concentrate on the cash flow, not the total account balance. These are NOT conclusions that come easily or intuitively for most of us, unless we have been bond traders or fund managers. Think it through several times.
Part Three
I can hear your thoughts clearly. "But what about inflation??????" Depending upon whom you believe and your personal spending patterns, US consumer price inflation now is somewhere between 3% and 8% for the past year. "So I can earn 5% on my tax-deferred accounts and come out short after inflation?" Good question, and the answer is clearly "YES".
This is where the after tax asset base--bank savings accounts, brokerage and mutual fund accounts, etc. come in. You do NOT want capital gains in your tax-deferred accounts that you have to share fully with the IRS. But you do want them in your after tax accounts where capital gains can be taxed as low as 5-15% (until 2010) compared to up to 38% for interest and some dividends. For a retired person the best of all worlds is to make long term capital gains beating inflation (after tax) and add to your income-generating funds with the after tax gains. Whether the gains are from gold or commodities or stocks or commercial real estate, they are likely to beat inflation after taxes--historically they have--and you can put the gains into tax-exempt US municipal funds or other tax-favored funds. So you can add value to your income sources and increase your income during retirement or other voluntary or involuntary drawdowns.
This is obviously, I hope you see, not a miraculous way to make ten million dollars out of a thousand! It is a way to manage what you have saved and invested efficiently to maximize income and minimize taxes. The ten million or one million or half million dollars is what you need to make "before" you retire, in tax-deferred and in after tax accounts. There are two phases at least in an investment life: "making it grow" and "managing withdrawals". The younger you are when you recognize this, the better off your life will be at every stage. No investment magician can create wealth for you if you haven't done what only you can do. The two main things you need to do are to hate debt and to save. Always. There is no other legal way to begin to increase and maximize your assets.
Postscript: I wrote this article yesterday. This morning I saw an article by Rick DeBruhl at AZCentral.com http://www.azcentral.com/arizonarepublic/business/articles/0615biz-debruhl0616.html He learned last week at a National Press Foundation meeting in Washington DC that the average tax-deferred 401K account of Americans from 50-59 years of age is $57,000. At 5% interest that will get you $2850 per year. Oh my!
June 16, 2008 in Portfolio Ideas | Permalink | Comments (2) | TrackBack (0)
Closed End Funds in the Current Market
US stocks have headed down from SPX 1440, the 80 week moving average, and the 2CS reading in the 70's. I was shaving off stocks into that expected event, and raised some cash. At little more than 2% in a currently dubious currency, cash truly is trash, especially if you can find any reasonable alternatives.
Being retired and living off my assets, **every** investment has to pass two tests for me. The most important test is that it pay a dividend of 4% or better, tax-adjusted. So if a tax-free municipal bond or fund pays 3% and my overall US Federal tax is, say, 30% at the margin, then 3% /.7 = 4.29% and it passes. So I am always looking for good investments that have capital gains potential but which pay me to wait for the capital gains. This was why I bought four US, and one Canadian oil/gas, trusts last year for the major tax-deferred account. They are now paying monthly income at an 8-15% annual rate on original purchase price, and they really didn't make me wait very long.
I gradually began looking at closed end US funds. They are like ETF's in a sense, but are NOT indexes. They are managed, and they include all sorts of asset classes. When interest rates are low, US closed end funds have issued preferred shares or simply borrowed money short term to increase their leverage and their returns. I bought a few state-specific closed end municipal tax-free bond funds last year and two foreign sovereign bond funds which were and are paying 6.5-9%. But I didn't really have a feel for the power of these funds until I happened upon Steven Selengut's website http://www.sancoservices.com/brainwashingbook.htm and then his book: "The Brainwashing of the American Investor".
Normally I am turned off by and ignore people with book titles like that, but fortunately I didn't. Selengut is a money manager in South Carolina, and he has helped me to another quantum leap in my thinking and the practice of investing in retirement. I do disagree with one of his basic ideas, namely that you should never buy a mutual fund. HIs concept, as I understand it and agree with, is that mutual funds add to investing another big layer of expense at my expense, and that they are issuing new shares all the time which is diluitive to net asset value. In the case of many funds and fund managers I would have to agree. They are taking 1-2% of your assets each year and getting rich at your expense for very little or no value added to indexing. And many mutual fund managers become very, very wealthy with a lot of talk but little value-added justification. Even Hussman! :)
But I spend a good bit of money for subscriptions and data and a lot of time finding funds which are run longer term by good people who either charge extremely little and/or who really deliver the goods. I own some Vanguard funds, as you know, especially municipals and Wellesley Income and the Energy and the Mining funds, which do an excellent job AND charge me tiny expenses. Then there are SGENX and LSBDX and PRWCX and RPSIX and PCRIX and a few others who keep delivering excess value in what they do within tolerable volatility bounds. But there is a lot of truth in Selengut's charge. The mutual fund folks want to keep you locked up, and they don't want you to trade. They problem is that THEY decide what is "excessive trading", not you or I. In my heart of hearts I really would like to buy and hold the ideal portfolio forever through thick and thin. I work at it, And I want to do it. But there are times when you have to make changes, for a host of reasons. Maybe you need extra money for a crisis or a special reward event, or because it's suddenly obvious that XXXXX fund is about to go down the tubes. I have had phone calls and paper work with apparent high school dropouts running "excess trading" desks at major mutual funds that caused me never to buy their funds again. Hey! It's my money, not yours!
Enter closed end funds. They don't care if you trade in and out of their funds ten times a day. They probably would like the increase in volume and liquidity. In case anyone from Vanguard reads this, "Don't worry. You guys will always have my vote for what you do best: very low costs and in highly specialized areas like municipals and special sector and income funds." But for money otherwise at the 2% money market margin, thanks to Chairman Bernanke, closed end funds, which you may not want to own forever, can increase your returns dramatically, and you can get out or in at any time of the day you want with no black stars on the management company's report card.
Selengut is teaching me that there are closed end funds in every asset sector which pay higher than normal yields and with long term gains. His approach is to look for quality: you don't necessarily want the highest yield as you may be buying junk. But you want something better than the average intermediate term bond fund, currently at 3.5-4% at best. He also teaches, mainly in regard to stocks but also in closed end funds, that you only buy funds that are down off their highs of the year, and if you get a really good gain, you cut it back and look for another or for multiple other down-on-their-luck funds. When I first read this I kept saying to myself, "OK, Steve, great idea, but where's the list of good funds?" But then it came to me that he is a money manager, so if I want his list he is going to have to manage my assets. I might do that at some point as he is younger than I am. But I'm still in the saddle for now.
If you have the time and interest you can use ETFConnect.com, Morningstar.com, and FinanceYahoo.com to develop some closed end fund ideas yourself for little or no cost. I will mention some funds that I buy, but I am NOT an investment advisor so these will just be "diary entries". Do read Steve's website and if he is your kind of person, buy his book. The book ranges a bit, and he's taking about his true love in the markets with some passion, but it is an eye opener compared to the usual investment junk advice that we retail peons usually get.
One gem I found on my own and bought today is Eaton Vance
Tax Advantaged Global Dividend Opportunities Fund (ETO). This fund is heavily weighted to global inflation beneficiaries which pay decent dividends. Here is a list of recently reported holdings: http://eatonvance.com/mutual_funds/monthlyholdings.php?fund=ETO They are paying a monthly dividend at an annual rate of ~6.5% and are selling at a 10% discount to NAV on conservative 21% leverage. One thing Selengut preaches is that nearly all enterprises at all levels of business use some borrowed money to increase returns, and if done moderately and creatively it's good thing. 6.5% sure beats 2% in a money market fund right now, barring capital losses of course.May I say once again that I am not an investment advisor, and I do not manage money except that of my family. This is my diary which may or may not be of interest to others. I have no connection with Selengut except as a reader, and no connection with the investment world except as a private investor
May 22, 2008 in Portfolio Ideas | Permalink | Comments (3) | TrackBack (0)
May 15, 2008 in Portfolio Ideas | Permalink | Comments (2) | TrackBack (0)
Putting it all together, we might do best under such a scenario by putting some of our investment money into the currently most hated of all assets: US dollar short term cash or money market assets. I'm not making any radical changes, just adjustments and profit taking in inflation favored investments. I have had 20% of assets in inflation hedges and have 20% in "deflation" hedges(fixed annuity and cash). Half of the inflation assets are in gold which won't be touched, but I have been and am cutting back on the other half. I think natural gas is a long term bullish story so I might cut back only a bit there if at all. Gold and other mining stocks will get another cut and so will energy stocks apart from the gas income trusts. I will also cut back a bit on "generic" stocks and longer term bond funds.
I do think that bond or "income funds" like LSBDX/LSBRX (Loomis Sayles Bond) and RPSIX (T Rowe Price Spectrum Income) have the smarts to keep the income flowing without taking a hit. I think I've got it right, and in response to Ed Fiedler's remark about eating ground glass, I'll quote Peter Cook's proud saying in Good Evening (in New York, with Dudley Moore): "I have learned so well from my mistakes that I can repeat them exactly!"
April 28, 2008 in Portfolio Ideas | Permalink | Comments (2) | TrackBack (0)
March 17, 2008 in Portfolio Ideas | Permalink | Comments (2) | TrackBack (0)
March 01, 2008 in Portfolio Ideas | Permalink | Comments (1) | TrackBack (0)
see chart). Also we know that, when adjusted for inflation and US dollar depreciation over the past five years, the US generic stock-centric universe at large has actually lost money. I want to point out that Hussman's approach to income vehicles in his other fund, Hussman Strategic Total Return (HSTRX), which I own and have discussed, is pleasantly different in its returns.
February 25, 2008 in Portfolio Ideas | Permalink | Comments (4) | TrackBack (0)
February 24, 2008 in Portfolio Ideas | Permalink | Comments (0) | TrackBack (0)
February 10, 2008 in Portfolio Ideas | Permalink | Comments (0) | TrackBack (0)
Morningstar.com is a good place for basic looks at most US mutual funds, and ETFconnect.com does the same for ETF's, ETN's, and managed closed end funds. If you use a search engine you will turn up a great many other information sources.
January 27, 2008 in Portfolio Ideas | Permalink | Comments (1) | TrackBack (0)
January 20, 2008 in Portfolio Ideas | Permalink | Comments (0) | TrackBack (0)
VWINX is Vanguard's Wellesley Income Fund, one of the earliest of the stock and bond balanced funds, about 30-35% in stocks and the rest in bonds, mostly corporate bonds of an intermediate maturity as a rule. VWINX currently pays 4.31% as a cash dividend plus capital gains and charges only 0.25% per year. VWIAX with a $100,000 purchase minimum pays 4.41% cash dividends plus capital gains and charges only 0.15% per year and is managed by legendary Wellington Capital. Look how it sailed through from 1999 to 2003. Being a value investor VWINX did worse in 1999 than in 2002! Steady, safe, simple, long term record.
RPSIX is T R Price's Spectrum Income Fund which is a mix of several Price Funds chosen by its managers to meet its goal of a steady, safe income producer. It's relative lack of volatility beats even VWINX as it has half or less the percentage of stocks, usually 18% or less and a wider (and therefore shorter) exposure to bond maturities. You pay for low volatility with a lower payoff, but RPSIX is currently paying 4.65% annualized cash dividend on a monthly basis plus capital gains.
BERIX is Berwyn Income Fund whch is similar to VWINX long term in overall yield. In contrast to VWINX, BERIX is tilted more toward small and mid caps in stocks and to preferred stocks and higher yield corporate bonds, when justified, as opposed to VWINX's solid mega-caps and high grade corporate bonds. Berwyn had cut back on high yield corporate bonds this year which served them well. BERIX is yielding 4.70% and charges 0.73%.
Last of the "oldies" is the king of the managed bond funds, LSBDX, also available in smaller minimums as LSBRX. You can see that VWINX, BERIX, and LSBDX tracked one another pretty closely until mid 2002. LSBDX took off as they are a "go anywhere" bond fund and so were into foreign sovereign bonds "early and often". The management has won the Morningstar Bond manager award of the year many times, beaten out this year only by Bill Gross. But LSBDX's returns are far greater every year. So for the excess yield, this is where I have been. If Dan Fuss and Kathleen Gaffney, there since the start in 1991, retire or leave I'll have second thoughts. They each also have a major part of their own wealth in the fund. This fund is currently yielding 6.16% and charges 0.67%. As you will see on the five year fund chart, LSBDX is beginning to slow down as they have trimmed their sails this year wisely and ahead of the credit crunch this past summer. They did very well in Canadian Treasuries this year, and I expect that if the recession truly develops this year, they will have been cutting back more to US Treasuries and outperform less than usual. Given their history and method I trust them to "get it right" unless at some point they do not.
PAAIX and HSTRX are income funds I have not mentioned before. If you invested through Vanguard and some other fund companies (perhaps Schwab?) which clear trades through Pershing, you can buy many of the PIMCO institution grade of funds for a minimum of $25,000 instead of $5,000,000. The "retail" versions are the same but with higher annual costs, supposedly to compensate for the extra cost of many smaller investor's traffic instead of fewer but much larger accounts. Rob Arnott does at PAAIX what the T R Price team does with RPSIX. He picks and actively changes which of many PIMCO managed funds are represented in PAAIX. Current trailing 12 month yield on PAAIX is 7.66% with a 0.86% cost, and with PASDX (retail) 7.09% and 1.46% cost. PAAIX/PASDX are more volatile than the others but may be worth the diversification for some. I am looking at it for possible purchase since I can get in for $25,000 through Vanguard and Pershing.
Last, but not necessarily least is, John Hussman's HSTRX. It is an eclectic income fund based upon the idea of beating inflation, at least judging by its holdings. Mostly they are fairly short but variable maturity TIPS (Treasury inflation-protected notes), a few high dividend stocks, and 10 to 20% in gold stocks. Both the TIPS and gold stocks are traded, with trading for the golds based on gold stock relative strength compared to gold bullion and other undisclosed factors I am sure.
HSTRX had a modest record from inception until the past 24 months since when it has taken off in relative terms. I told you earlier that short term records of three or five years really do not test the mettle or long term abilities of managers, and Hussman may certainly have merely been lucky to ride both TIPS and gold bull market spurts of the past two years. He has shown great skill in his long/short mid cap stock fund (HSGFX) using very conservative principles, and he is still relatively young for a successful independent manager. So I feel I may be seeing in Hussman someone like Dan Fuss and Kathleen Gaffney were in their approach before they really hit pay dirt in 2002. I would like to see how he does when gold pulls back and/or TIPS do if a deeper recession occurs than most people expect. Since I own gold I do not need Hussman to give me the exposure, but as I get older I may need to simplify further and allow others to do more of my work for me.
Start simple, get a few basic facts and some history, use your head, narrow it down, simplify further.
January 06, 2008 in Portfolio Ideas | Permalink | Comments (0) | TrackBack (0)
November 04, 2007 in Portfolio Ideas | Permalink | Comments (1) | TrackBack (0)
October 11, 2007 in Portfolio Ideas | Permalink | Comments (1) | TrackBack (0)
October 07, 2007 in Portfolio Ideas | Permalink | Comments (0) | TrackBack (0)
September 09, 2007 in Portfolio Ideas | Permalink | Comments (3) | TrackBack (0)
The mutual fund hedging program with Hussman Strategic Growth Fund (HSGFX) and Prudent Bear Fund (BEARX) was undertaken this year partly because of my suspicion we'd get a larger pullback and also because of the need to reposition assets in several IRA retirement funds nearing mandatory RMD's, as explained in the annuity article below. My six weeks of a planned summer vacation absence played a role as well. The maximum draw down for all invested funds was 1.78% from the market close on July 19 to the market close on August 15. Between the same two closes the Dow 30 was down 6.9% and the SP 500 was down 8.15%. The current US Treasury Bond was up 1.86% in the same time frame. As I said last time, I was nearly 50% in cash (Vanguard Prime money market fund) as well. This past week I sold one half of the HSGFX and BEARX hedging funds on Tuesday's close and the other half on Wednesday. At the same time I sold some of the funds which had been hedged, which came out to approximately 50% of the dollar value of the hedging funds. This accomplished several things. I took the profits on HSGFX and BEARX since the market appeared to be getting grossly oversold, and I wanted to redeploy the money tied up in those funds in a manner that I decided will work better for income generation for the RMD era of the IRA's I've mentioned and some others. After researching long term returns and agonizing over them, I sold all of the Dodge & Cox Fund (DODBX). It's a fine fund and has served me well, but having three or four separate balanced funds (stocks and bonds) in the same portfolios was inefficient. Also T R Price Capital Appreciation (PRWCX) has a better long term return (18 years) with nearly identical low volatility. Despite having 30-40% in cash and bonds, DODBX also only yields 2.6% compared to PRWCX at 2.15%. I'm redeploying some of the liquidated funds into other types of income funds as I'll get to below. I also sold several smaller holdings in real estate and real estate income, which have had a lousy year, and a few specialty sector funds. With the freed up funds I added to Wellesley Income (VWIAX/VWINX) and will be gradually buying the following income or bond funds: LSBDX, RPSIX, PRRIX, PTTRX, and VFIJX/VFIIX). Wellesley Income managed by Wellington Management goes back to 1970 and has a real return with dividends reinvested of 10.62% compounded annually and 10.18% compounded annually since 1988 when my data base starts. It does this with very prudent selection of solid dividend-paying blue chips (including some foreign stocks) and excellent bond selection. Just seeing it on the chart tells you it is low volatility, and it's currently returning 4.45% cash dividends. You know my thoughts on PRWCX, on FAIRX, and on First Eagle Global (SGENX) which Jean-Marie Eveilllard has come back to run. The bond and other income funds include the low cost plan vanilla Vanguard GNMA fund (VFIJX/VFIIX) which Daniel Wiener describes as a money market fund on steroids. GNMA's tend to be somewhat defensive in that their top drawer mortgages tend not to get refinanced when mortgage rates increase which reduces volatility or effective duration. Since 1994 it has compounded at 6.24% and currently pays 5.37% on the $100,000 minimum VFIJX or 5.27% on lower minimum VFIIX. PRRIX is PIMCO's inflation protected TIPS fund which has compounded at 7.74% since my data on it start in April 1999. PTTRX is Bill Gross's flagship total return intermediate term bond fund which has returned 6.83% since 1994, currently 5.01%. These four funds reflect the US bond market but are all fairly low volatility funds for various reasons I've hinted at. RPSIX is a T R Price low volatility fund of Price funds with a long history. It also has about 20% in large blue chips, so it is somewhat like Wellesley but even more conservative. Since 1994 it has compounded at 7.23%, currently paying 4.66%. The last income fund is Loomis Sayles Bond Fund (LSBDX/LSBRX). This is a rarity in that it is a fairly low volatility high yield fund which can and does invest in every sector and many countries. Fuss and Gaffney who are the primary managers have most of their own wealth in this fund. If they ever leave, so will I. There is some risk here, but the record back to its first day in 1991 is solid. It has compounded at 11.15% since 1991, 10.56% since 1994 and currently pays 6.14%.These income funds cover the whole gamut of the bond market except munis which of course have no place in a tax-sheltered IRA. LSBDX and RPSIX are hybrids which tend to have both the chart shape of bonds and of equities in that high yield corporates and foreign bonds tend to trade with the economy while pure bonds may trade opposite. So there is some purposeful cross-matching in the funds selection to reduce interest rate volatility somewhat. Since VWINX and RPSIX have both a bond and a stock component, if I separated out their bond and stock components. The new portfolio (when it's done) will have ~36.4% in stocks, ~56.4% in bonds, and ~7.2% in money market funds. This is close to the usual advice for retirement fund composition. The bond components are to generate the income and the stock components to neutralize inflation, and hopefully the withdrawals, over time. The new funds have averaged ~7.12% since 1999 which is slightly less than VWINX. I only have full data for FAIRX from August 25, 2000 which was just before the Labor Day top of the SP500, but FAIRX, SGENX, and PRWCX have compounded average returns of 15.37 over a troubling chasm from 2000 to 2007 when Vanguard SP500 Index Fund total return was 0.99% per year! These returns should beat the annuity and give some inflation protection, but the future is unknown and the past doesn't predict the future, as they say.
August 18, 2007 in Portfolio Ideas | Permalink | Comments (1) | TrackBack (0)
Recent Comments