On February 5, 2016, I introduced The ETF Monkey 2016 Retirement Portfolio.
As the above-linked article explained, this portfolio was a follow-up to The ETF Monkey 2016 Model Portfolio. Following the original set of articles related to the model portfolio I received multiple requests, both in the comments section of my published articles as well as private messages, to create a version of the portfolio that might be more suited to the needs of the investor either at, or nearing, retirement age.
As I documented in my Q1 update on the Model Portfolio, 2016 got off to a rough start. The model portfolio actually held up fairly well, with all three implementations beating the return of my selected benchmark; the S&P 500 index. At the end of that article, I dropped a little "teaser" to the effect that the retirement variant I created had done even better; that it outperformed all three implementations of the model portfolio. This actually came as a pleasant surprise. If the market had experienced an overall decline over the period, I would not have been at all surprised that the retirement version did better. But I have to admit I was surprised that it outperformed even in a rising, albeit slightly, market.
So there you have it, the subject of this article. Let's take a close look at how The ETF Monkey 2016 Retirement Portfolio performed during the quarter, and how some of the specific decisions I made contributed to that outperformance.
Overview: The "Model" Portfolio vs. the "Retirement" Portfolio
Before we dive into the details, here is a big picture look at the volatility level of the retirement variant vs. its Vanguard equivalent in the model portfolio.
First, the retirement variant.
Next, the Vanguard implementation of the model portfolio.
You will immediately notice that the retirement variant experienced much less volatility than its equivalent in the model portfolio. As just one data point, here are some comparisons as of the close on February 11, 2016; the U.S. markets' lowest point of the year:
- ETF Monkey Retirement Portfolio: -5.33%
- Vanguard "Model" Implementation: -8.18%
- S&P 500 Index: -11.99%
- Nasdaq Index: -16.46%
Clearly, the conservative choices I made for the retirement portfolio proved their mettle in the midst of a severe downturn. But what about the fact that the portfolio held its own as the market recovered towards the end of Q1? Let's dive in a little deeper.
The Devil's in the Details
I will now present the graphics of both the retirement and model versions, for easy side-by-side comparison.
First, the retirement variant.
Next, the model portfolio.
Let's now discuss 4 factors that affected the comparative performance, with the retirement variant returning 1.98% vs. 1.11% for the Vanguard implementation of the model portfolio:
- My decision to replace a "total market" ETF with two ETFs that focused on high-quality dividend payers - I elected to replace the Vanguard Total Stock Market ETF (NYSEARCA:VTI) with the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG). I also upped the weighting of the Vanguard High Dividend Yield ETF (NYSEARCA:VYM) such that VIG and VYM basically had a 50/50 weighting with respect to the Domestic Stock asset class. This move paid off handsomely in Q1, as VIG and VYM returned 4.49% and 3.42%, respectively, as compared to VTI's .67%.
- I dropped my weighting in Europe slightly in favor of generic developed markets exposure - This wasn't a huge deal, but it slightly minimized the effect of the 2.69% decline in Europe.
- The increased allocation in TIPS and Bonds - As can be seen, due to the worldwide economic malaise in Q1, a decline in interest rates benefited this portion of the portfolio.
- And now, a surprise - Emerging markets! One of my key decisions in the interest of lessening risk in the retirement variant was to eliminate any and all exposure to emerging markets. During the first part of Q1, this appeared to be a master stroke! But go back and take another look at the performance of the Vanguard Emerging Markets ETF (NYSEARCA:VWO) in the model portfolio. Up 6.11%! Ironically, had I included this asset class, the performance of the retirement variant would have been even stronger. But, here is where one must remember the big picture. Is this level of volatility desirable for an investor in this age group? Only you can decide for yourself, but I just wanted to feature this interesting turn of events.
Finally, here's a quick look at the dividends earned by the portfolio during the quarter. I have not added to any asset classes yet but, as can be seen, the portfolio has already amassed a balance of $1,036.88 that I can invest when and how I see fit.
Summary and Conclusion
I have to admit that I was very pleasantly surprised by the performance of this variant of the portfolio. Had you been a retired individual, and I your portfolio manager, I would have been more than happy to sit down and review the results with you.
The trick, now, is to see how happy I will feel at the end of Q2!
Until then, as always, I wish you . . .
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Disclosure: I am/we are long VIG, VTI, VWO, VYM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes, and to consult with their personal tax or financial advisors as to its applicability to their circumstances. Investing involves risk, including the loss of principal.