Back in August 2008, I designed a diversified, all-ETF portfolio before the collapse of Lehman Brothers triggered the huge sell-off of the stock market. The goal I had in mind when I built the portfolio was to have a portfolio that covers a wide range of asset classes, so it gives me the diversification I need, with both domestic stocks and foreign equities. The funds I chose for the portfolio (and their respective allocations) are:
- Domestic stocks: SPDRs (SPY): 40%
- Foreign stocks: iShares MSCI EAFE Index (EFA): 30%
- Domestic REIT: Vanguard REIT Index ETF (VNQ): 5%
- Foreign REIT: iShares S&P World ex-U.S. Property Index Fund (WPS): 5%
- Precious metal: SPDR Gold Shares (GLD): 10%
- Domestic bonds: Vanguard Intermediate-Term Bond ETF (BIV): 5%
- Foreign bonds: SPDR Lehman International Treasury Bond (BWX): 5%
As you can see, the ETFs I picked for the portfolio are all index funds (of course, back then only passive, index ETFs were available. Now there are also actively managed ETFs). The reason for choosing index funds is obvious: To have as many securities in the portfolio as possible.
Now, one year later, after what the market has gone through in 2008 and early this year, I am curious about the performance of my portfolio if had I followed my plan of making regular investments in each fund. Like I have been doing with my mutual fund investments for years, if possible, I wanted to buy each fund every month on the 5th, but the amount of each new purchase would be based on the pre-determined allocation, not the same amount for all funds, as I do with mutual funds.
For example, I would invest $1,000 per month in this portfolio, then $400, or 40%, would go to SPY, and 30% would go to EFA, and so on. There’s no particular reason why I buy on the 5th of the month (that’s my date of making investments) and purchasing based on asset allocation means having each asset in the portfolio stay as close to its allocation as possible (of course, rebalancing is still needed over time).
So how’s my all ETF portfolio doing? From August 05, 2008 to September 08, 2009, the total invested amount is $14,000 in 14 investments. As the following table shows, of the 7 funds, only 3 have positive returns over the past 14-month period, with the best performance by the gold ETF GLD. The worst performer is VNQ, the domestic REIT fund, which lost more than 33%. However, when purchases were made regularly, the picture changed completely.
With my plan of investing, the total market value on September 8th when I made last purchases was $16,007.15 without dividend reinvestment. With a total of $14,000 invested, the overall return is 14.34%, better than any single fund return. And looking at each fund’s return in the portfolio with monthly purchases, all but one had double-digit returns from August 2008 to September 2009 (the Portfolio Return column in the above table).
Why such a huge difference? It is because of the dollar-cost averaging [DCA] method used in making the investments. I have discussed dollar-cost averaging in detail when I looked at a much longer period of the broad stock market in the past. My conclusion at that time was that DCA isn’t really the good way to invest as far as the performance is concerned, because in an up market, shares purchased through DCA have less and less value than those purchased in a lump-sum.
However, it’s a different story in a down market, like the market in the past 14 months. In this case, DCA let me purchase more and more shares as the market kept going down until March when it started to rebound. And once the market starts to recover, the shares purchased when the market was tanking will have a bigger impact on the overall return of the portfolio, as it is clearly shown in the above table.
Of course, using dollar-cost averaging isn’t all about performance. Rather, it’s more about making regular investments a habit, in good times and bad, instead of trying to find out when to get in and when to bail out based on the market condition at the moment.
BTW, it seems that making purchases based the asset allocation of each fund works pretty well. At the end of the 14-month period, the allocation of each fund in the portfolio only drifted a little bit from the target allocation, despite each fund’s dramatic performance.