The past year was one of the best of my investing career. And likely yours too. No complaints. But beware complacency.
The Dow Jones Industrial Average returned around 28% including dividends for 2017.
My very conservative and diversified retirement portfolio couldn’t match the Dow’s return. But it did well enough not only to keep our retirement on track, but to free up some spending money and cover a few more bad years down the road if needed.
Every single one of my holdings had a positive return for the year. Most were in double digits. One did even better than that….
My core portfolio holdings have not changed since last year. The allocations are slightly different, due to different growth rates. But it’s still a familiar picture of low-cost Vanguard funds:
|Fund||Symbol(s)||Expense Ratio||% of Portfolio||2017 Return|
|Vanguard Wellesley Income||VWINX/VWIAX||0.22%/0.15%||37.0%||10.26%|
|Vanguard LifeStrategy Moderate Growth||VSMGX||0.14%||18.9%||15.04%|
|Vanguard FTSE Social Index Fund||VFTSX||0.20%||12.1%||24.11%|
|Vanguard Total International Stock Index||VGTSX/VTIAX/VXUS||0.18%/0.11%||7.3%||27.55%|
|Vanguard Inflation-Protected Securities||VIPSX/VAIPX||0.20%/0.10%||4.2%||2.91%|
|Vanguard Intermediate-Term Treasury||VFITX/VFIUX||0.20%/0.10%||3.5%||1.67%|
|SPDR Gold Shares||GLD||0.40%||4.1%||13%|
(Note: Multiple symbols are for Investor/Admiral/ETF shares. Portfolio percentages are as of 1/1/2018. Annual returns are for my shares -- generally the less-expensive Admiral or ETF shares. Overall return is not a weighted average of individual returns, because holdings changed slightly during the year, but is close.)
My portfolio is currently allocated 45% in stocks, 38% in bonds, 10% in gold and digital currencies, and 7% in cash.
Of the stocks, 31% is international. (Taking into account the actual reported international holdings in all of my funds, not just in those funds labeled “International.”) After substantial trimming this year, that international position is back in my comfort range.
The cash/gold/currency position is admittedly high, due mostly to the explosive growth of digital currencies. I’m in the process of trimming those back. But, given the aging bull market, and ever-present dangers in the new year, I like having extra liquidity on hand.
Why don’t I try to get higher returns from my cash by transferring money between even more online accounts? The answer is here: Financial Simplicity: What is Your Time Worth?
At this point, I don’t need aggressive growth to maintain our lifestyle. But I do need to preserve our assets.
Activity for the Past Year
Early in the year I made a small IRA contribution, purchasing more Vanguard LifeStrategy Moderate Growth (VSMGX). It’s one of my go-to balanced funds. By sometime in my 60’s I expect to finish consolidating all of our holdings into one or more of Vanguard’s balanced offerings, plus some annuities.
In keeping with tradition, I managed to completely eliminate one of my holdings this year. (In years past I eliminated all of my expensive actively managed holdings, and most of my specialty funds.) This year I liquidated the balance of the Vanguard Total International Stock Index (VXUS) in a taxable account, after checking that we would remain securely in the first two tax brackets and pay no capital gains tax.
When it’s necessary to make a decision about the timing of a sale for retirement income, I often fall back on my “principle of least regret.” If I sell now and the market goes up, I still own plenty of stocks, so I’ll be fine and will still catch much of the upswing. And if I sell now and the market goes down, I will be relieved, to have a bigger cash cushion.
Earlier in the year I made a preliminary sale of that same VXUS and some of my SPDR Gold Shares (GLD) to raise cash. We went through that money a little quicker than expected, and the market continued to deliver large returns, so we harvested again at the end of the year.
More than 80% of our holdings remain at Vanguard. I’d prefer to diversify management companies, but don’t think it’s worth the cost in money or complexity. The wisdom of choosing Vanguard was reinforced again this year as the company continued to reduce its already extremely low expense ratios:
The majority of my Vanguard funds cut their expenses by from one to several hundredths of a percent. It was a nice gift from Vanguard that might get lost in the shuffle of a boom year for the market, but will pay off over the long term. It will be especially appreciated during the inevitable next down market!
Finally, yes, I owned some Bitcoin and digital currencies and did obscenely well with them. My technical background and financial security provided the opportunity. I did this more as a hedge or insurance policy at first, but it turned into a speculation. And it paid off. But I don’t think that speculation or digital currencies have any role in the average retirement portfolio, so I’m not going to talk further about them here.
Investment Portfolio Returns
It was a very good year for investors. In the 13 years I’ve been keeping detailed records, my portfolio return this past year was second only to 2009 — the recovery from the Great Recession.
My overall investment return for 2017 was 20.1%. That compares to 15.0% for the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) — a more reasonable benchmark for my balanced portfolio than the all-stock Dow. Of course, both my portfolio and that Vanguard fund returned far less than the Dow’s 28% last year, due to the lower returns of a significant bond allocation. But those bonds also reduce volatility, promoting good sleep at night!
Without the performance kick from digital currencies, my portfolio would have returned about 13.6% last year. And that’s from a very conservative portfolio stuffed with blue-chip stocks, bonds, and cash. I would be ecstatic about double-digit returns in any year, and have no problems with that number!
The “star” performers in my portfolio last year, other than the almost-embarrassing digital currencies, were any funds holding stocks. International stocks, in particular, which lagged for years, are finally seeing their day in the sun, with our Vanguard Total International Stock Index (VTIAX) returning over 27%.
Does that mean you should rush out to load up on stocks, especially international? Of course not. By most measures, stocks are expensive now. The important factor is diversification. If you are diversified, you will always have gains to harvest, when needed.
The geometric mean of my returns going back for the 13 years I’ve closely tracked them now is at 6.9%. That’s a good average for a conservative portfolio in these times, including the 2008-2009 Great Recession.
My wife and I are in a strong position as we head into our 60’s and the Social Security years. Thanks to 2017’s investment performance, another small inheritance, and modest earnings from this blog, our net worth increased again this past year, despite high travel expenses. It was another good year for us. But retirement can be a long game….
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