I can’t predict the future, but 2018 was bad for the markets, and 2019 could be worse. If you’re a seasoned investor, you’ve seen this before.
The Dow Jones Industrial Average was in positive territory much of the year, but ended with a blowout. It lost about 3.6%, counting dividends, for 2018.
If you’re new to the game, it’s a good time to check your risk tolerance, and possibly add to your portfolio at cheaper prices.
If you’re a retiree living off assets, caution is advised. I’ve been in a defensive posture for years. Most of my investing life I’ve held a roughly 50/50 stock/bond asset allocation. And, I usually hold several years worth of cash, plus conservative investments like gold, balanced funds, and government bonds.
But, my very conservative and diversified retirement portfolio did slightly worse than the Dow this past year. Every single one of my holdings, save one plus cash, had a loss.
Am I worried? Read on for my annual portfolio performance report….
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||2018 Return|
|Vanguard Wellesley Income||VWINX/VWIAX||0.22%/0.15%||34.7%||-2.49%|
|Vanguard LifeStrategy Moderate Growth||VSMGX||0.13%||19.9%||-4.91%|
|Vanguard FTSE Social Index Fund||VFTSX||0.18%||13.4%||-3.45%|
|Vanguard Total International Stock Index||VGTSX/VTIAX/VXUS||0.17%/0.11%/0.11%||7.2%||-14.43%|
|Vanguard Inflation-Protected Securities||VIPSX/VAIPX||0.20%/0.10%||4.7%||-1.39%|
|Vanguard Intermediate-Term Treasury||VFITX/VFIUX||0.20%/0.10%||4.0%||1.10%|
|SPDR Gold Shares||GLD||0.40%||4.7%||-1.54%|
(Note: Multiple symbols are for Investor/Admiral/ETF shares. Portfolio percentages are as of 12/31/2018. 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.)
Overall, my portfolio is currently allocated 45% in stocks, 38% in bonds, 6% in gold and digital currencies, and 11% in cash.
Of the stocks, 30% is international. (Taking into account the actual reported international holdings in all of my funds, not just in those funds labeled “International.”) I’ve been comfortable with a relatively large allocation to international as a diversification away from the U.S.’s potential long-term economic woes including debt. But I paid a price for it this year.
Though it has been my tradition, I was not able 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.) But at least I avoided adding any complexity or financial chores to my life with any new positions.
This year, given the aging bull market, I wanted to ensure enough liquidity on hand for living expenses and buying opportunities. I sold a large position in the early fall, to build up my cash.
In the presence of rising interest rates, I finally made the effort to get higher returns from my cash via a Schwab Money Market Fund. (Details are in Getting Higher Returns on Your Cash.) Though I made those changes too late in the year to impact my cash return much, we’ll appreciate the higher income in years to come.
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.
The position I sold from to replenish our cash reserves this fall was our Wellesley Income (VWINX/VWIAX) in a taxable account. I first checked that we would remain securely in the first two tax brackets and pay no capital gains tax.
Though I have written in favor of Wellesley in my article on balanced funds, and still own a substantial position, I’ve grown disenchanted with the managers’ attempts to actively outguess the market. I liquidated about 15% of our position.
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:
A couple of my Vanguard funds cut their expenses yet again: VSMGX by 0.01% and VFTSX by 0.02%. Additionally, Vanguard is about to add low-cost Admiral shares of their FTSE Social Index Fund.
These are nice bonuses from Vanguard that might get lost in the shuffle of an up market, but will appear much more important in lean years. Research and common sense continue to demonstrate that expenses are one of the most important investing variables over which you have control.
My Bitcoin and digital currency position ended much lower than last year, due to their explosive growth, and subsequent crash. I trimmed back very early in the year, in time to take substantial profits.
I do not recommend this act of “catching a falling knife.” Only the most seasoned investors, who can also afford to lose it all, should even consider it. 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.
This was the one time in my investing career (after about 20 years of experience) that I made a “killing.” Even at that, I only made half of what I could have, had I timed my moves perfectly. And, if I had repeated past mistakes, I could have easily lost it all.
I don’t think that speculation has any role in the average retirement portfolio. At the moment I retain only a very small position in digital currencies and wouldn’t be surprised if it goes to $0 over time. I’ve already made my money.
Finally, after extensive research online and on the ground, I pulled the trigger on a small land deal. It’s a modest diversifier out of the stock market, and an asset we can enjoy for recreation whether or not we ever build on it. We took our time, did our homework, and waited for a screaming good deal. We’re already seeing prices in the neighborhood 50% higher than what we paid per acre. As long as we are patient, it’s highly unlikely that we’ll lose money on this asset.
With hindsight, we are all better investors. Looking back, I wish I’d done more rebalancing out of stocks this fall. I can see now that I was a little overweighted.
But I’m on record against rebalancing in general. Unless I’m more than 5% over my target allocation (and I wasn’t), I try to ignore the market’s swings. I think the expense and potential for bad market timing of explicit rebalancing outweigh the benefits in most cases.
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 some now and the market goes up, I’ll be fine and will still catch much of the upswing, because I always own stocks. And if I sell now and the market goes down, I will be relieved, to have a bigger cash cushion.
The latter turned out to be the case this year. I had begun to harvest in late September before the first significant drop on October 9, and made another sale just after. No regrets about those decisions.
If I had my entire financial life to do over, I might choose a dividend investing or rental property strategy. Getting a steady stream of income at this stage of life would provide peace of mind, at the cost of more active management. (I never did like working on houses.)
But I’m sticking with my mostly passive index portfolio and reporting on the outcome for my readers here. It’s done well by me over nearly a decade in retirement and before….
Investment Portfolio Returns
There’s no denying, this was a lousy year for investors. Over the 14 years I’ve been keeping detailed records, only my 26% loss in 2008 was greater.
My overall investment return for 2018 was -5.8%. That compares to -4.9% for the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) — a more reasonable benchmark for my balanced portfolio than the all-stock Dow. Surprisingly, both my portfolio and that Vanguard fund did worse than the Dow’s -3.6% last year. The relatively poorer performance was likely due to international exposure and a bad year for bonds.
But back in 2017 I enjoyed rare double-digit returns. The “star” performers in my portfolio then, other than the almost-embarrassing digital currencies, were international stocks, which had lagged for years.
This year they lost big again. So it’s payback time. To be a successful stock market investor you must stomach such swings, and take the long view.
The geometric mean of my returns going back for the 14 years I’ve closely tracked them now is at 5.9%. That’s a decent average for a conservative portfolio in these times, including the 2008-2009 Great Recession.
My wife and I remain in a strong position as we head into our 60’s and the Social Security years, thanks to past savings and investment performance, small inheritances, and modest earnings from this blog.
However, due to higher spending plus the stock market swoon, our net worth fell by nearly 10% this past year, second only to 2008.
It’s a clear warning signal. So we’ll be tightening our belts in 2019, cutting back on some travel expenses and other luxuries. The economic conditions of the past decade may be changing, and retirement can be a long game….
We don’t need aggressive growth to maintain our lifestyle. But we do need to preserve our assets. Yes, I have a conservative asset allocation. But I need equities too, volatile as they may be, to ensure against future inflation. I have no choice but to live with the market’s ups and downs at this stage of my retirement.
Sometime in the next decade, annuities may provide a better solution for us. But their relatively low interest rates and the long time frames involved, have kept me from taking the plunge here in my 50’s.
And how about you? Should you react to any of the news by buying, selling, or changing your asset allocation? Unless your tolerance for risk has changed, probably not. In my opinion, the important factor is diversification. Staying diversified over long periods with minimal portfolio turnover has been the best strategy for me.
How did your portfolio fare in 2018?
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Note: Before commenting, please understand that I am not a financial advisor and cannot give personal financial advice or discuss investments that I’m not familiar with. My portfolio is only my portfolio. I’m not recommending it for anyone else. Also, if you disagree with my actions or have a different strategy, fine. Civil comments that demonstrate an understanding of my points are welcome. Others will be deleted.
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