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, are laid out in the article linked in the first paragraph above.
So, how has the retirement version performed? During Q4, the portfolio was basically flat, registering a tiny gain of .05%. For the full year, the portfolio generated a return of 6.66%.
The two benchmarks I selected against which to evaluate the portfolio performed as follows:
- During Q4, the S&P 500 Index registered a solid gain of 3.25%. For the full year, this average was up 9.54%. This index closed at 2,238.83 on 12/30, the final trading day of 2016, vs. 2,168.27 on 9/30 and 2,043.94 on 12/31/15.
- During Q4, The Vanguard implementation of The ETF Monkey 2016 Model Portfolio was up .32%. For the full year, this implementation registered a gain of 7.47%.
From the above two references, you can see that the Vanguard implementation of my 2016 model portfolio underperformed the S&P 500 index by a large margin in Q4, and also trailed the index for the full year. For an analysis and discussion of these results, feel free to take a look at my year-end update for that portfolio. Since this retirement variant started from that model, the reasons outlined in that article also have application to this portfolio.
For the remainder of this article, then, I will focus on the differences between my 2016 model portfolio and this retirement variant, 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.
Please take note of the fact that the retirement variant returned a mere .8% less than its equivalent in the model portfolio, and 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.
Looking a little closer at that first graphic in this section, you might also notice that the retirement portfolio managed to keep pace with the S&P 500 index until the U.S. presidential election in early-November. Following the election of Donald Trump, however, U.S. stocks staged an amazing rally into year-end. In fact, in what I consider a great ironic twist, you could have bought this stock on November 8 and netted a mind-boggling 31.6% by December 30! Meanwhile, bonds suffered due to an immediate rise in interest rates and foreign stocks continued their underperformance. Both of these factors conspired to make Q4 difficult for the portfolio.
I might note that I did not stand idly by while all of this was going on. In classic ETF Monkey style, I executed a rebalancing transaction on November 14, moving a small amount out of U.S. stocks and into REITS and bonds. As I featured in the rebalancing article, I left a little more in cash than in my more aggressive portfolios, so I still have some "dry powder" available to put to work in 2017 if and when I believe that circumstances warrant.
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 turned out to be solid over the course of the full year. Based on their closing prices on 12/30/16 vs. 12/31/15, VIG returned 9.54%, VTI returned 10.56% and VYM returned a stellar 13.51%. Given that 50/50 weighting, the average return for the 2 ETFs I selected for this portfolio was 11.53%.
- I dropped my weighting in Europe slightly in favor of generic developed markets exposure - This turned out to be a winning decision. As featured in my year-end update for the model portfolio, of the 6 themes on which the portfolio was based, the specific targeted exposure to Europe was the biggest 'loser' of all. The fact that this exposure is minimized in this portfolio has helped.
- The increased allocation in TIPS and Bonds - Their larger allocation in this variant of the portfolio is largely responsible for its slight underperformance compared to the model portfolio. At the same time, given the relative protection they will provide should the market experience a severe downturn, I have no issues with this at all.
- The decision to avoid 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. All in all, this was probably a good decision. While emerging markets were on fire during portions of 2016, by the end of the year you would have done even better in an S&P 500 index fund. Further, 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. Again, please note that when I performed my November 14 rebalancing, I left almost $1,000 in cash for future use. Including the nice haul from dividends in December, our cash balance sits at $1,877.35.
One final note on dividends. When I set up the portfolio, I calculated a forecasted income by looking at the latest 30-Day SEC Yield numbers for each of the selected ETFs and then multiplying by its weight in the portfolio. As can be seen in the original article, I came up with a forecast of 2.516%, or $2,516.00 for the year. I am happy to note that the actual results came in a little better than that, as the portfolio took in $2,606.03 for the year, or 2.606%.
Summary and Conclusion
Everything considered, I am happier with the performance of this variant of my 2016 model portfolio than with the base variant. Since the portfolio is designed for individuals at or near the age of retirement, I am just as interested in protecting you from devastating losses as I am in attempting to capture every last bit of gains. Because of the symbolism often associated with this number, I wish the exact number could have been something different than 6.66%! However, considering how conservative the portfolio is, and how sharply the S&P index rose in Q4, were I your portfolio manager I would have been more than happy to sit down and review the results with you.
Despite the market's strong finish in 2017, in my recent interview with Seeking Alpha, I mentioned that I currently lean towards the bearish side. I go on to explain some of the issues that concern me. I look forward to seeing how this portfolio holds up as we navigate the environment ahead. It may well be that I get some opportunities to put that cash balance to work scooping up a bargain or two in beaten down asset classes.
Last but not least, two quick comments on the future of this portfolio. First, in my year-end update on The ETF Monkey 2016 Model Portfolio, I announced that I would no longer track all 3 implementations of the portfolio as we moved into 2017 and beyond, but would continue to track the Vanguard implementation, along with the retirement variant of the portfolio! My plan is to simply update both in the same article, resulting in a lot less tracking and writing on my part. Second, since it is, after all, a Vanguard-based portfolio, I decided to rename it The ETF Monkey Vanguard Retirement Portfolio. Simply put, having the name "Vanguard" in the title seems to pick up a few more hits from search engines and may generate a little more exposure for the portfolio.
Until then, as always, I wish you . . .
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Disclosure: I am/we are long VIG, VTI, 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.