Retirement is now a "hair on fire" problem. There is much talk of working longer, downsizing and living on less. If you are a boomer looking at how to manage your retirement or a generation X-er who hasn't really thought about retirement until now, there is little time to waste. With pressure on social security, medicare and medicaid, we all must pay attention to our retirement investments. We simply can't leave it to somebody else to figure it out if we want to retire comfortably.
We continue to review luminary portfolios to see what theycan teach us and to see the limits of their potential. Alexander Green proposed The Gone Fishin' Portfolio which was outlined in his book of the same name. Based on the book, the following is the allocation using Vanguard low cost index funds (in the popular Bogleheads forum, there is a discussion thread devoted to this portfolio). We also show ETFs that can be substituted if desired.
- Vanguard Total Stock Market Index [VTSMX], (NYSEARCA:VTI) - 15%
- Vanguard Small-Cap Index [NAESX] (NYSEARCA:VB) - 15%
- Vanguard European Stock Index [VEURX] (NYSEARCA:VGK) - 10%
- Vanguard Pacific Stock Index [VPACX] (NYSEARCA:VPL) - 10%
- Vanguard Emerging Markets Index [VEIEX] (NYSEARCA:VWO) - 10%
- Vanguard Short-term Bond Index [VFSTX] (NYSEARCA:BSV) - 10%
- Vanguard High-Yield Corporates Fund [VWEHX] (NYSEARCA:HYG) - 10%
- Vanguard Inflation-Protected Securities Fund [VIPSX] (NYSEARCA:TIP) - 10%
- Vanguard REIT Index [VGSIX] (NYSEARCA:VNQ) - 5%
- Vanguard Precious Metals Fund [VGPMX] (NYSEARCA:XME)- 5%
When we break this down into asset class allocation, we see the following.
- US Equities 30%
- International Equities 20%
- Emerging Markets 10%
- REIT 5%
- Commodities 5%
- Fixed Income 30%
This has six assets and as such is well diversified. However, we note that REITs and Commodities are significantly underweighted. This is a widely used approach by professionals -- have six asset classes to give you diversification while still relying on the older style three assets (US, International and Fixed Income) for the bulk of the portfolio (80% in this case).
- We contrast this with a portfolio that has six asset classes but they are evenly spread. The fixed income portion is higher (40%) so we would expect less volatility but lower returns if the approaches were similar.
We also contrast the lazy portfolio -- once a year re-balancing with more active approaches -- monthly re-balancing of a buy and hold strategy and monthly re-balancing of a tactical asset allocation strategy.
The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies.
For comparison purpose, we also include the moderate model portfolios of a typical 6 asset SIB (Simpler Is Better) plan . Each asset class has only one ETF so it is less sophisticated than the Gone Fishin' plan but the funds are spread differently.
This SIB plan has the following ETFs equivalent:
- US Equity: SPY or VTI
- Commodity: DBC, GCC
- Foreign Equity: EFA or VEU
- REITs: IYR or VNQ or ICF
- Emerging Market Equity: EEM or VWO
- Fixed Income: AGG or BND
Portfolio Performance Comparison
|Alexander Green`s Gone Fishin ETF Portfolio Strategic Asset Allocation Moderate||12%||94%||2%||12%||4%||17%|
|Alex Green The Gone Fishin Lazy Portfolio||12%||87%||4%||16%||5%||21%|
|Alexander Green`s Gone Fishin ETF Portfolio Tactical Asset Allocation Moderate||6%||49%||7%||57%||10%||66%|
|Six Core Asset ETF Benchmark Tactical Asset Allocation Moderate||11%||84%||10%||76%||13%||87%|
|Six Core Asset ETF Benchmark Strategic Asset Allocation Moderate||14%||118%||4%||19%||7%||32%|
We see two clusters of returns:
- Tactical Asset Allocation strategies: The benchmark, even with the simpler fund structure consistently beats the Gone Fishin' portfolio.Given that they have access to the same number of asset classes, there are three sources of differences -- better funds (unlikely because most are similar), access to broad commodities as opposed to precious metals (likely major contributor), funds rotation in the sub-classes no tbeing effective (possible minor contributor). It is possible to track the holdings month by month to see the difference.
- The Strategic Asset Allocation strategies: We see that all the portfolios suffered equally badly but we can see that the benchmark portfolio with broader commodities does a little better overall.
- The longer term view shows clearly the contrast between tactical and strategic asset allocation -- tactical asset allocation limits the loss in bear markets whereas strategic asset allocation closes the gap in bull markets. We have been through an extreme downturn which highlights the benefit of tactical and a fairly strong recovery which highlights the benefits of strategic asset allocation. What is harder to quantify is the angst and stress of the V shaped depression. Most would be glad to not have that.
- The difference between the lazy and monthly rebalancing for the strategic asset allocation appears to not be worth the extra effort. It appears that itis worth putting the effort into selecting the right funds in the first place and deciding the balance of those funds but a quarterly rebalance would suffice and annually at a pinch.
We can expect choppy markets over the next years so care and thought about the choice of funds and strategy are important.
The memory of the triple disasters in Japan soon fades for those not immediately impacted but there is a longer series concern as we hope for no serious release of radiation. Likewise, the gut wrenching drops of the markets fade in the memory but there is a longer term problem that remains -- how to fund our retirement with what we have less knowing the government isn't going to provide as much as we would like.
We are each forced to reckon with our own cleanup efforts that will last for years to come but will be essential for a happy retirement.
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans.The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
Disclosure: I am long DBC.