This is my first article on Seeking Alpha, and my hope is that many will find it thought provoking. I do plan on updating every quarter so the progress can be followed. My goal was to come up with a retirement portfolio that the average investor (like myself) can build and monitor on his own without much work. The goal was to find a way to get consistent annual returns (at least on paper). The index approach is too hard for me get excited about, and as a result this portfolio idea was born. The portfolio outlined is my actual real life portfolio, using a portion of my retirement funds. I have also determined that I need an annual return of 6% to meet my retirement goals. The portfolio was assembled during the past week, and will be rebalanced quarterly beginning 3/15/13. Dividends will be automatically reinvested. I will also compare it to an S&P 500 ETF along the way to see if it can keep up.
The Portfolio's Allocation Strategy: Equally weight the 10 sectors of the market (finance, energy, health, industrials, etc.) along with a bond allocation. The stock/bond allocation is a personal choice based upon age and risk tolerance. I will start with $3,000 invested in each sector, $8,000 in bonds, and $3,800 in cash (10% reserves). This keeps the math simple and works out to roughly an 80% stock, 20% bond allocation.
Building the Portfolio: Equally weighting the stock sectors is not a new idea, however this portfolio has a small twist to it that makes it more interesting than just indexing in my opinion. Each sector will initially have $3,000 invested in it using a combination of individual stocks and ETFs (I will use Vanguard ETFs, but many others are available). The ETFs will help with diversification. The individual stocks will allow for research and a chance to beat the index by being overweight the "best of breed".
Every quarter the portfolio will be rebalanced to maintain the 6% annual return per sector (1.5% return per quarter). For example, after the first quarter's return the individual sectors should be valued at $3,045 ($3,000* 1.5%) and the bond portion $8,120 ($8,000 *1.5%). Any over or under performance will be rebalanced by selling shares of the ETFs or buying shares using the cash reserves if they have gone down in value. This will keep transaction costs to a minimum as Vanguard ETFs trade for free within a Vanguard Account. Yearly IRA contributions will be added as well. These contributions will first go to make sure there are 10% in reserves. Any remainder will be invested. Having these cash reserves will allow for a consistent 6% annual return on the invested portion. I think it will be reassuring to know exactly what the portfolio will be worth every quarter.
The following table shows the current portfolio with actual shares and market values. The portfolio will be rebalanced next quarter to maintain the 6% annual return.
|Equally Weighted Sector Portfolio|
|Consumer Discretionary ETF||(NYSEARCA:VCR)||0|
|Consumer Staples ETF||(NYSEARCA:VDC)||0|
|Bond ETF (Short)||(NASDAQ:VCSH)||45||$3,983.00|
|Bond ETF (Intermediate)||(NASDAQ:VCIT)||50||$4,024.00|
|S&P 500 ETF (Test Acct.)||(NYSEARCA:VOO)||608.78||$38,000.00|
|S&P 500 Cash Reserves||$3,800.00|
|S&P 500 Total Account||$41,800.00|
Please respond with your ideas on this retirement allocation idea. I am relatively new to investing, and can learn from your responses and ideas. I will update this article in March 2013 with the portfolio's progress.
A Few Final Thoughts: Since this is a real portfolio whole shares will be purchased. The sectors will be re-balanced to within 1-2 shares. The portfolio starts out $91 behind the test portfolio to cover the transaction costs to purchase the stocks.
The lines between sector ETFs seems to be a little muddy at Vanguard. For example Target (NYSE:TGT) is consumer discretionary while Wal-Mart is a consumer staple. I am not sure Monster Beverage (NASDAQ:MNST) is a consumer staple either. I do not consider Berkshire (NYSE:BRK.B) a true financial either. I decided to put Phillip Morris and Altria under consumer discretionary, and realize some will disagree with that. These were older positions and i didn't want to incur any more transaction fees than necessary.