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ETFs 20% allocation blocks only? (max 5 allocations) January 4, 2011

Filed under: Invest — ilcourtilcourt @ 23:05
Freak wrote:Hello Desperatekid and choozm

Desperatekid wrote:Thanks Freak for your replies. If I’m not wrong, you seem to be valuing fees, taxes and expenses much more over the importance of diversification. Is that really a good strategy over long term? Your recommendations only point towards the main broad indexes of Europe and US so far.
choozm wrote:Summary of your post:
Over the long term, mkt coverage of 100% vs 85% vs 60% return similarly, so given the choice, you would go for the solution with the lower cost of investing. In the case of Europe equity, though EUN mkt coverage (60%) is smaller than EFA (85%), its cost of investing is lower thus attractive to you. Am I correct to say so?

Back to Desperatekid’s question: Is that really a good strategy over long term? Is it because of efficient market hypothesis?

Why broad base and not value/growth
First of all, a broad base index is more diversified than value/growth/dividend index. Although there are research showed that value outperformed growth, the value premium is not very stable and reliable. For US stocks, the post tax value premium can be zero over 25 years. For European stocks, my own studies found that value premium seemed to be very stable and positive over time for UK and France stocks. However, value premium is almost zero for Switzerland stocks. For Germany, the value premium over 30 years was positive. However, all the value premium occurred in the last 10 years. Is Germany value premium a one time thing?

Personally, I find value vs growth a very interesting topic. However, more research is needed. Currently, I would rather stick to broad base index rather than overweight value. Note that the moment we invest in value ETF, we have a more concentrated portfolio rather than more diversified portfolio.

What about midcap/small cap?
I love to include midcap and small cap stocks. That why I favour VTI rather than SPY or IVV.

Why Dow Jones Stoxx 50 index rather than MSCI Europe?
Infinity is about 0.5% more expensive than EUN. For EUN (top 60%) and Infinity to give the same return, the bottom (85%-60%)/85%=30% of the stock in MSCI Europe has to outperform the top 70% by 0.5%/((85%-60%)/85%) = 1.7%.

Taking data from “stock for the long run”, from 1926 to 1997, US small cap stocks outperformed S&P 500 by a debatable 1.5%. It is debatable because the main bulk of the extra return occurred in 1975 to 1983. Hence, it maybe a one time thing.

If we assume the (bottom 30% return = top 70% return), then EUN outperforms Infinity.

If we assume the (bottom 30% return = top 70% return + 1.5%), then EUN outperforms Infinity.

If we assume the (bottom 30% return = top 70% return + 1.7%), then both EUN and infinity have comparable return.

By the way, the bottom 30% of the stocks in MSCI Europe is not even small cap stocks yet. They are only mid cap stocks. Hence, for EUN and Infinity have the same return, the European mid cap premium must be higher than the debatable US small cap premium. In this case, I rather use EUN.

Why US and Europe rather than the rest of the world
It is not (US + Europe) VS the rest of the world. In a portfolio, we can replace the US unit trusts and European unit trusts with ETF. For “the rest of the world” unit trusts, there are more things to consider.

First of all, due to ETF portfolio constraint (see below), it is very difficult to use single country ETF, eg Korea. For more detail, see below under “ETF portfolio constraint”. This means we must go for regional EM ETF. For example, global EM and Far East exclude Japan ETF. Note that India is not part of Far East.

Since EM Asia make up 50% of EM Global, an investor who invests in both Asia exclude Japan and EM Global has high exposure to EM Asia. I notice there is greater acceptance of indexing today (at least @ sgforum) as compared to the old FSM days. Even for emerging market, we are talking about indexing.

We need to consider
1) (EM Global + SG + HK) VS (EM Europe + EM America + Asia exclude Japan)
2) Do we want to exchange Aberdeen Pacific Equity for iShare Far East Exclude Japan ETF or Emerging Market VIPERs?

I usually talk about US and Europe is simply because the condition is simpler.
Discard our US unit trusts and replace with VTI.
Discard our European unit trusts and replace with EUN.
It is one to one exchange. The discussion is more that fund level rather than portfolio level.

For “the rest of the world”, we have more things to consider. An ETF investor does not mean he has to invest in ETF only. He can have a portfolio of ETF and unit trusts.

ETF portfolio constraint
Assume an investor makes 4 trades per year for ETF listed in US. If he invests 5% in Korea (using rebalance by new cash), he roughly has 1 Korean ETF trade every 5 years. It is very difficult to maintain the asset allocation of the portfolio at such a low trading frequency. Most of the time, the allocation will be either too low or too high. Hence, we can only use ETF for funds with big allocation in our asset allocation (eg 20%).

For the above reason, ETFs like mid cap, small cap, Korea, Japan, HK, EM Europe, EM America etc are generally not suitable unless one invest 20% of the portfolio in just one of them. For these region, we still need to use unit trusts.


8 Lazy ETF Portfolios December 23, 2010

Filed under: Invest — ilcourtilcourt @ 13:37

I’m a firm believer that investing doesn’t have to be complicated and that it doesn’t have to require a great deal of ongoing effort. In that vein, I’m always drawn to “lazy portfolios.” The following are ETF renditions of some of the most popular lazy portfolios.Most of them could be done just as well using regular Vanguard index funds. The ETF versions simply allow you to implement the portfolios at your brokerage firm of choice, and perhaps reduce costs and taxes somewhat.

1. Allan Roth’s Second Grader Portfolio

  • 60% Vanguard Total Stock Market ETF (VTI)
  • 30% Vanguard FTSE All-World Ex-U.S. ETF (VEU)
  • 10% Vanguard Total Bond Market ETF (BND)

The asset allocation between the funds is clearly intended for a younger, more aggressive investor. But Roth’s idea of keeping it simple applies to everyone. Even for investors close to (or in) retirement, these three ETFs should get the job done.

2. David Swenson’s Ivy League Portfolio

  • 30% Vanguard Total Stock Market ETF (VTI)
  • 5% Vanguard Emerging Mkts ETF (VWO)
  • 15% Vanguard Europe Pacific ETF (VEA)
  • 20% Vanguard REIT ETF (VNQ)
  • 15% Vanguard Intermediate-Term Government Bond ETF (VGIT)
  • 15%  (TIP)

David Swenson, the Chief Investment Officer at Yale University, recommends the above portfolio (a 70/30 stock/bond allocation) in his Unconventional Success. He is a big proponent of equity-oriented allocations for investors with long time horizons.

3. Rick Ferri’s Core Four Portfolio

  • 36% Vanguard Total Stock Market ETF (VTI)
  • 18% Vanguard FTSE All-World Ex-U.S. ETF (VEU)
  • 6% Vanguard REIT ETF (VNQ)
  • 40% Vanguard Total Bond Market ETF (BND)

You only need a few asset classes in your portfolio, and after that there are diminishing returns. The mutual funds you choose to represent those asset classes should be the lowest cost funds you can buy.” –Rick Ferri, CFA on the Bogleheads Forum

4. Bill Schultheis’ Coffeehouse Portfolio

  • 10% Vanguard S&P 500 Index ETF (VOO)
  • 10% Vanguard Value ETF (VTV)
  • 10% Vanguard Small-Cap ETF (VB)
  • 10% Vanguard Small-Cap Value ETF (VBR)
  • 10% Vanguard FTSE All-World Ex-U.S. ETF (VEU)
  • 10% Vanguard REIT ETF (VNQ)
  • 40% Vanguard Total Bond Market ETF (BND)

The title of Bill’s book, “The New Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get on with Your Life” is spot on. The above portfolio is intended to be rebalanced once per year and otherwise left alone. Sounds good to me.

5. Larry Swedroe’s Big Rocks Portfolio

  • 9% Vanguard S&P 500 Index ETF (VOO)
  • 9% Vanguard Value ETF (VTV)
  • 9% Vanguard Small-Cap ETF (VB)
  • 9% Vanguard Small-Cap Value ETF (VBR)
  • 6% Vanguard REIT ETF (VNQ)
  • 3% Vanguard FTSE All-World Ex-U.S. ETF (VEU)
  • 6% SPDR S&P International Dividend (DWX)
  • 3% Vanguard FTSE AW ex-US Sm-Cap ETF (VSS)
  • 3% WisdomTree International SmallCap Div (DLS)
  • 3% Vanguard Emerging Mkts ETF (VWO)
  • 40% Vanguard Short-Term Bond ETF (BSV)

You’ll note that Swedroe’s portfolio is significantly tilted toward small-cap and value equities (with the reasoning that their higher risk levels should bring higher expected returns). It’s more funds than I’d personally like, but Swedroe makes a valid point that if you’re only rebalancing annually, the additional effort required by having a few more funds in your portfolio is pretty minor.

6. Harry Browne’s Permanent Portfolio

  • 25% Vanguard S&P 500 Index ETF (VOO)
  • 25% Vanguard Long-Term Government Bond ETF (VGLT)
  • 25% Cash (i.e., money market funds)
  • 25% SPDR Gold Trust ETF (GLD)

The idea behind Browne’s Permanent Portfolio is that the four asset classes have sufficiently low correlation that the portfolio should be able to put up modest gains each year under just about any circumstance imaginable.

7. William Bernstein’s No Brainer Portfolio

  • 25% Vanguard S&P 500 Index ETF (VOO)
  • 25% Vanguard Small-Cap ETF (VB)
  • 25% Vanguard FTSE All-World Ex-U.S. ETF (VEU)
  • 25% Vanguard Total Bond Market ETF (BND)

Bernstein, author of The Four Pillars of Investing, suggests the above portfolio for investors with a long time horizon. Note that it’s very similar to the first portfolio mentioned above (Roth’s Second Grader Portfolio), but with a much heavier allocation toward small-cap domestic stocks.

8. Harry Markowitz’s “Father of Modern Portfolio Theory” Portfolio

  • 50% Vanguard Total World Stock ETF (VT)
  • 50% Vanguard Total Bond Market ETF (BND)

Harry Markowitz–Nobel Prize winner and originator of Modern Portfolio Theory–when asked about his personal portfolio once replied, “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier…Instead, I split my contributions 50/50 between bonds and equities.” The above portfolio is a somewhat tongue-in-cheek implementation of Markowitz’s approach.

via 8 Lazy ETF Portfolios.


Are Stocks Really Doomed? – CBS August 31, 2010

Filed under: Invest — ilcourtilcourt @ 07:59

The September issue of The Atlantic Magazine has an article called The Great Stock Myth. The writer makes the pitch that stock returns may never reach previous years’ levels. What I find most amusing about such articles, which I read only because they provide a never-ending supply of fodder for my blog, is that they always seem to appear after periods of poor equity performance.

via Are Stocks Really Doomed? – CBS


How to Hedge Both Inflation and Deflation (MoneyWatch Wise Investing) August 25, 2010

Filed under: Invest — ilcourtilcourt @ 22:56

Before we do, let’s look at another way to address the issue of inflation: building a laddered portfolio. This involves buying a roughly equal amount of bonds that mature in each of the next 10 years, and then replacing the maturing bond with a new 10-year bond. You would have a portfolio with an average maturity of five years that would balance/diversify the risks of deflation (when reinvestment risk shows up) and inflation (when term risk rears its ugly head).

If rates have fallen when the first bond matures, the other nine bonds would still be earning above-market rates (though you would have to invest the proceeds at lower market rates). On the other hand, if rates rise,  you’ll be able to invest the proceeds at the now higher rates when the first bond matures.

Another benefit of a ladder is that after the initial period your portfolio will have the risk of a five-year bond but will have earned the average of the yields on the 10-year bond.


With TIPS, you win either way. If inflation shows up, the return of your bonds keeps pace. With deflation, they do at least as well as in inflation because TIPS mature at par (though to be fair, nominal bonds would have performed better).

For example, a 10-year TIPS with a yield of 1 percent at par with inflation of 3 percent per year yields a nominal return of 4 percent a year and a real return of 1 percent. However, with deflation of 3 percent a year, the nominal return is still 1 percent a year, but the real return (the only return that matters) is 4 percent. You also have an added bonus in deflation, since for taxable accounts taxes on due on the nominal return

via How to Hedge Both Inflation and Deflation (MoneyWatch Wise Investing


The Matrix, but with money: the world of high-speed trading August 7, 2010

Filed under: Invest — ilcourtilcourt @ 13:11

Would you bet your money against H.A.L.?

At the time that Donefer and I spoke last week, BATS was the third largest equity market in the world, behind the NYSE and NASDAQ, and it has been all-electronic since it began life in 2005. There has never been a floor that a CNBC camera crew could report from, so it’s essentially invisible to the general public. The NYSE and a few other exchanges keep hanging on to their trading floors “mainly for branding purposes,” Donefer told me.

via The Matrix, but with money: the world of high-speed trading. – Suggested Portfolios February 21, 2010

Filed under: Invest — ilcourtilcourt @ 10:59

Suggested Portfolios

Last update: February 8th, 2010

In our recommendations to investors, we are increasingly emphasizing exchange-traded funds (ETFs) over conventional mutual funds because of their lower costs and greater tax efficiency.

via – Suggested Portfolios.


Followup: Three Simple, Successful Portfolios – February 11, 2010

Filed under: Invest — ilcourtilcourt @ 11:03

In January, Kiplinger’s asked three experts to recommend simple mutual fund portfolios based primarily on low-cost index funds. We promised we’d update the portfolios at the six-month point, and true to our word, here are the results. Our simple portfolios fared from not bad to great.

via Three Simple, Successful Portfolios –