On February 5, 2016, I introduced The ETF Monkey 2016 Retirement Portfolio.
Shortly after setting up the three implementations of The ETF Monkey 2016 Model Portfolio I received multiple requests to create a version of the portfolio that might be more suited to the needs of the investor either at, or nearing, retirement age.
I didn't want to go to the effort of setting up and tracking three separate implementations for this new portfolio, but I did agree to set up a variant based on the Vanguard implementation of the model portfolio. In the retirement version, I both adjusted the weightings of various asset classes as well as made the decision to use a couple of different ETFs for the portion of the portfolio related to domestic stocks, both to raise the overall quality of the companies included in the retirement version as well as to generate a slightly higher level of income. All of these decisions, and the associated reasoning, is laid out in the article linked in the first paragraph above.
So, how has the retirement version performed? Through September 30, 2016, the portfolio generated a year-to-date return of 6.61%. For purposes of comparison, here are a couple of year-to-date benchmarks.
- The S&P 500 index was up 6.08%. This index closed at 2,168.27 on 9/30 vs. 2,043.94 on 12/31/15.
- The Vanguard implementation of The ETF Monkey 2016 Model Portfolio was up 7.12%.
What I find most impressive is that this relatively conservative portfolio managed to beat the S&P 500 index by .53%, even in the context of a rising market. I would not have claimed to expect this result when I built the portfolio because a core tenet of its design and construction was based on offering a measure of protection in a declining market. Compared to my slightly more aggressive Model Portfolio? It only trailed by .51%.
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 through Q3, and how some of the specific decisions I made affected its performance.
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. In each case, the blue line represents my portfolio, the red line the S&P 500 index.
First, the retirement variant.
Next, the Vanguard implementation of the model portfolio.
You will immediately notice that while the retirement variant returned just a little less than its equivalent in the model portfolio, it did so with much less volatility. As one example, take a look at the two graphs around the time of the Brexit. On June 27, the S&P 500 index closed at 2,000.54, roughly 2% lower than it closed on 12/31/15. You will see that represented in the sharp downwards spike on the red line. Now examine the blue lines of the two respective portfolios. In the Vanguard implementation of my model portfolio, the line is roughly breakeven on the year. In the retirement version? Still solidly in positive territory.
Digging in a Little Deeper
I will now present the detailed breakout 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 some of the differences in a little more detail.
- 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 has paid off through Q3. VIG has returned 7.93% compared to VTI's 6.92%. While VYM is in both portfolios, it is far more heavily weighted in the retirement variant. As a result, its stellar YTD return of 8.07% has paid off to a greater degree as well in the retirement variant.
- I dropped my weighting in Europe slightly in favor of generic developed markets exposure - This wasn't a huge deal, but through Q3 this has also turned out to be a winning decision. As featured in my Q3 update for the model portfolio, of the 6 themes on which the portfolio was based, the specific targeted exposure to Europe has been the one big 'loser' so far, and the fact that this exposure is minimized in this portfolio has helped.
- The increased allocation in TIPS and Bonds - While TIPS and bonds have both trailed the 6.08% return of the S&P 500, at 2.69% and 4.19% respectively they have offered surprisingly strong support to the portfolio. Their larger allocation in the portfolio is largely responsible for the slight underperformance compared to the model portfolio. Given the relative protection they will provide should the market experience a severe downturn, I feel good about these results.
- 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. When you take a look at the stunning 15.47% YTD return of the Vanguard Emerging Markets ETF (NYSEARCA:VWO) in the model portfolio it is clear that, 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. As shown in the first couple of months of 2016, this asset class can generate some truly frightening declines. Is this level of volatility desirable for an investor in this age group?
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 $2,210.39 that I can invest when and how I see fit.
Summary and Conclusion
Through Q3, I find myself very happy with 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.
Several recent articles on Seeking Alpha have offered the view that the valuation of various asset classes is stretched a little thin at this point. If the decline in the markets to which some are pointing actually transpires, I look forward to seeing how this portfolio holds up in such an environment. Further, I would look forward to putting that cash balance to work to hopefully scoop up a bargain or two in beaten down asset classes.
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.