What makes a successful investor? Is it getting double-digit returns? Beating a certain stock index? Outperforming the market for years, and making millions? Or is it just growing and protecting your wealth well enough to achieve your lifetime goals?
If you came here looking for sophisticated investing strategies from a self-assured financial wizard, you’ll probably be disappointed. But, if you want to hear from a financially conservative guy who is careful with his hard-earned money, transparent about his actual investment performance, and open about the reality of early retirement living, then you may find some wisdom.
As I’ve confessed before, I don’t have a strict retirement withdrawal strategy. In the long run, I plan to annuitize enough of our assets that, along with Social Security, we will lock in a guaranteed income floor to cover our essential living expenses. But I suspect that move is a decade off. Meanwhile, we live off interest, dividends, growth, and some part-time work, all with an eye to preserving assets in early retirement. It’s a dynamic process, not a static plan. So, right now, rather than offer an ideal solution to the retirement income problem, the best I can do is report on our progress….
In late 2012, I disclosed my investment portfolio. The response was so positive that I vowed to keep writing on the topic. Early in 2014, I posted an update on my portfolio. That post has been one of the most popular on this site. So here is an update on the state of my portfolio for 2015. Below I’ll review my holdings, outline my asset allocation, and discuss the investment moves I made during the past year. Finally, I’ll reveal my portfolio’s overall performance, and discuss the implications for me, and for you.
Before we start, let me get a few of the usual caveats out of the way:
I’m not recommending specific investments here, much less an entire portfolio.
Portions of my portfolio stretch back almost two decades and aren’t exactly how I’d build one today. For example, I would not use any actively managed funds if starting from scratch.
Even though my portfolio hasn’t changed much in recent years, I can’t promise that I won’t change it in the future, or that I’ll necessarily post my changes to this blog in any kind of timely manner.
That said, let’s look at the numbers for the past year….
Those who understand my investing philosophy shouldn’t be surprised to hear that my portfolio has changed very little since my last article on the topic. The allocations are a bit different, because I’m processing a modest inheritance, and I sold completely out of one long-held actively managed fund, moving the proceeds to existing, lower-cost funds. But, otherwise, it’s a familiar picture:
|Fund||Symbol(s)||Expense Ratio||% of Portfolio||2014 Return|
|Vanguard Wellesley Income||VWINX/VWIAX||0.25%/0.18%||35.4%||8.15%|
|Vanguard LifeStrategy Moderate Growth||VSMGX||0.16%||14.5%||7.07%|
|Vanguard Total International Stock Index||VGTSX/VTIAX/VXUS||0.22%/0.14%||8.3%||-4.17%|
|Vanguard Total Stock Market Index||VTSMX/VTSAX/VTI||0.17%/0.05%||7.0%||12.56%|
|Vanguard Inflation-Protected Securities||VIPSX/VAIPX||0.20%/0.10%||4.4%||3.97%|
|Vanguard Intermediate-Term Treasury||VFITX/VFIUX||0.20%/0.10%||3.7%||4.42%|
|Vanguard Short-Term Investment-Grade||VFSTX/VFSUX||0.20%/0.10%||3.5%||1.76%|
|Third Avenue Real Estate Value||TVRVX/TAREX||1.30%/1.05%||5.5%||13.12%|
|SPDR Gold Shares||GLD||0.40%||5.6%||-2.23%|
Overall, our current asset allocation is similar to last year, though our stock allocation has drifted lower, from about 49% in early 2014 to 42% now, while bonds have remained nearly the same, just a percent higher at 40%.
Last year I wrote “if and when I need to raise cash for living expenses this year, I’ll most likely be selling stocks.” And I did some of that, early in the year. Those moves, coupled with the arrival of the aforementioned inheritance in cash, drove down my stock allocation.
If there was a theme for the year, it was positioning ourselves a bit more conservatively, in the face of an aging bull market. My rebalancing moves, described below, plus the appearance of the inheritance late in the year, left us heavy in cash and bonds. That hurt performance. But, when analyzing investment moves, I often use the principle of least regret: If the market zooms up from here, our allocation to stocks will increase soon enough. And if the market craters, I’ll be feeling smart and safe for having harvested some gains nearer the top.
An Aside on Gold
I don’t write much about gold (GLD) because, even though I’ve held it for many years, I don’t necessarily think it’s right for most people. Gold did very well for me in the 2000’s, so I have some sentimental attachment, but I don’t expect those conditions to repeat any time soon.
I don’t hold gold as an “investment” that I expect to grow, or produce income, or even necessarily keep pace with inflation. Rather, I hold it as “panic insurance.” When there are steep sell-offs in the market, gold often moves up. For example, gold had a bad year overall in 2014, losing more than 2%. But, between October 3 and October 16, when the Dow dropped almost 1,000 points (losing more than 5%), gold spiked upwards by 4%. That’s low correlation in action, and it’s hard to find in today’s world.
Should I ever need to raise cash during a global crisis, gold is an asset that will likely be highly valued. When times are good, gold will probably underperform. But that’s why I hold asset classes like stocks, bonds, and cash. Perhaps there are superior ways to hedge, in theory, but gold is dead simple and I value that.
Activity Last Year
2014 was a typical slow year in my investment accounts. In essence, I made only four trades, though a few of these were split into multiple transactions. The most important moves were to generate cash for living expenses, and exchange some more aggressive positions for more conservative ones — rebalancing in the face of strong stock market performance.
I started the year knowing that we would probably receive a modest inheritance at some point. That inevitably influenced my investment decisions. This money wouldn’t materially change our financial picture — we would just hold it as cash to cover a few years of living expenses. But the timing and exact amount where in question, until the lawyers had finished their work. That meant I still needed to tap some cash for living expenses early in the year, while maintaining a cushion in case the inheritance did not materialize as expected. It also meant I risked ending the year with a lot of poor-performing cash on hand. But I decided that too much cash was a better problem than too little.
Given all that, here is what I did and why I did it:
- Sold about 10% of our taxable Vanguard LifeStrategy Moderate Growth (VSMGX) holding, after strong gains over the past year. (Concern over the rising market prompted me to sell in the short-term gain window: a small blunder, for which I’ll pay taxes.)
- Bought a little more than 1% of our total portfolio in SPDR Gold Shares (GLD), as it had come down considerably, and I was not excited about putting our excess cash into possibly overvalued stocks or bonds.
- Exchanged a little over 1% of our total portfolio from Vanguard Total International Stock Index (VTIAX) and Vanguard Total Stock Market Index (VTSAX) into Vanguard Wellesley Income (VWIAX), in the name of rebalancing.
- Exchanged all of our T. Rowe Price New Era (PRNEX), about 4% of our total portfolio, into Vanguard Wellesley Income (VWINX). PRNEX is a relatively expensive, actively managed natural resources fund that I’ve held for years. But I’ve become increasingly pessimistic about actively managed funds in general, and the energy sector in particular. And in our 15% tax bracket there will be no long-term capital gains tax.
So, let me talk about overall investment returns. This is always an interesting exercise, but not always that useful in the context of a single calendar year. When it comes to retirement, short-term returns don’t matter much: It’s how your portfolio performs over the decades that really counts. Nevertheless, I do compute my overall investment return every year.
Again this past year, my conservative portfolio lagged behind other benchmarks. My portfolio returned about 5.1% in 2014, compared to 9.9% for the Dow Jones Industrial Average (including dividends) and 7.1% for the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) — a more reasonable benchmark for my balanced portfolio than the all-stock Dow.
What hurt this year? Notably the allocations to cash and international. As mentioned previously, external events led me to hold more cash than usual, and cash earns next to nothing these days. Then my international stocks had a bad year, ending with a more than 4% loss. Thanks to diversification and strong returns elsewhere, my portfolio eked out a positive return for the year. But it’s not one I’ll be bragging about at parties.
Yet, I’ve watched essentially this same portfolio of mine for almost a decade, including around the punishing 2008/2009 downturn, and I’m comfortable with how it performs. The geometric mean (which reflects the impact of sequence of returns) of my 10-year returns is 6.4%. When I input that kind of return, along with our other variables, into a high-fidelity retirement calculator, the results generally show us maintaining our lifestyle well into our 90’s and most likely much further.
So back to the question that started this post: What makes a successful investor? It’s great to outperform the market or some index in a given year. But long-term returns are much more important. I’d love to beat the market again, as my bond-heavy portfolio did during much of the 2000’s. But I know the odds are against that in the long run. Instead, I may have to settle for simply meeting our lifetime goals. And, since I’m content with my life, that will be good enough!