http://funds-newsletter.com
Copyright 2020 Tom Madell, PhD, Publisher
Aug. 2020. Published Aug. 2, 2020.
Are Your Stock, Bond, or Cash Allocations Out of Whack?
Now is a good time to take a glance at your asset allocations as recent fund performance may have changed how your funds are weighted within your portfolio. Thanks to the recent four month-plus rally in stocks, and to a lesser, but still as nearly an eye-popping extent in bonds, even assuming you changed nothing in your portfolio in response to the coronavirus crisis, your overall portfolio value may be back to near even to where it was before the crisis hit. While all types of funds have seen marked improvement, the springback among particular stock and bond fund categories has been highly scattershot. At the same time, cash returns are now barely above zero.
Look at the tables below to get an idea of how various categories of funds as well as my recommended funds have grown since the March lows. (Remember that the funds I recommend are the ones I personally have the biggest positions in, such having been achieved by a myriad of decisions about them over many, many years.)
Stock Fund Category and Recommended Fund Performance
| Category | My Recommended Funds (Symbol) | From Bear Mkt. Low |
YTD Return | 1 Yr. Return |
| Large Growth | Vanguard Growth Idx (VIGAX) | 58.66% | 19.81% | 31.31% |
| Large Blend | Vanguard 500 Index (VFIAX) | 47.17 | 2.37 | 11.93 |
| Large Value | Vanguard Windsor II (VWNFX) Vanguard Equity Income (VEIPX) |
46.68 36.07 |
-5.21 -10.30 |
3.73 -2.68 |
| Mid-Cap Growth | None | 63.18 | 12.14 | 17.73 |
| Mid-Cap Blend | Vanguard Extended Market Idx (VEXAX) | 61.81 | -0.20 | 5.21 |
| Mid-Cap Value | None | 47.39 | -14.21 | -7.94 |
| Small Growth | Vanguard Small Cap Growth Idx Adm (VSGAX) | 62.94 | 6.53 | 11.97 |
| Small-Cap Blend | Vanguard Small-Cap Index (VSMAX) | 54.59 | -7.43 | -2.58 |
| Small-Cap Value | None | 46.69 | -18.73 | -14.39 |
| Pacific Asia | Vanguard Pacific Index (VPADX) | 32.32 | -7.20 | 0.97 |
| Foreign Large Growth | Vanguard International Growth (VWILX) | 61.78 | 22.09 | 37.51 |
| Europe | Vanguard Europe Idx (VEUSX) | 41.67 | -9.43 | 0.19 |
| Emerging Markets | Vanguard Emerging Markets Idx (VEMAX) | 42.48 | -1.97 | 6.40 |
| Foreign Large Value | Tweedy, Browne Global Value (TBGVX) | 23.52 | -13.68 | -10.45 |
| Energy | None | 55.49 | -39.27 | -39.29 |
Note 2: Where no fund is recommended, shown as "None", returns are for the Vanguard Admiral index fund of that category.
Note 3: The Vanguard Energy Fund ((VGENX), a formerly recommended fund, no longer makes the cut.
Bond Fund Category and Recommended Fund Performance
| Category | My Recommended Funds (Symbol) | From Overall Bond Idx Low |
YTD Return | 1 Yr. Return |
| Interm Muni | Vanguard CA Interm-Term Tax-Exempt Inv (VCAIX) | 9.61% | 3.59% | 4.80% |
| Interm Core Plus | PIMCO Total Return Instl (PTTRX) | 10.71 | 7.75 | 9.97 |
| Interm Core | Vanguard Total Bond Market Index Adm (VBTLX) | 9.20 | 8.01 | 10.40 |
| Long-Term Treasury | None | 17.02 | 26.39 | 30.27 |
| High Yield | Vanguard High-Yield Corporate Inv (VWEHX) | 20.90 | 0.91 | 4.87 |
| Short Term Corp | Vanguard Short-Term Investment-Grade Inv (VFSTX) | 7.11 | 3.98 | 5.47 |
| Long Term Corp | None | 33.47 | 13.11 | 18.13 |
| International Bond | PIMCO International Bond (USD-Hdg) Adm (PFRAX) Vanguard Total Intl Bd Idx Admiral (VTABX) |
8.60 4.45 |
2.91 3.40 |
3.27 3.71 |
| Inflation-Protected | Vanguard Infl Prot (VIPSX) | 13.07 | 8.43 | 10.23 |
Note 2: Where no fund is recommended, shown as "None", returns are for the Vanguard Admiral index fund of that category.
Note 3: VIPSX is newly added to my recommended list.
As can be observed, the dispersion of performance results has been highly uneven. As a result, depending on which categories you currently own and your prior allocation to these categories, your current allocations may have become skewed toward the categories that have done very well, and skewed away from these that have done much less well. For example, if you own a Large Growth fund, it may now represent a significantly higher percentage of your portfolio than before the crisis and even since August of last year. If so, while you may pat yourself on the back for your investment prowess, you may now have an overweight position in the category as compared to what you originally envisioned given your level of risk tolerance.
Likewise, your allocations to bonds, as a percentage of your entire portfolio, may now be lower than your personal "portfolio ideal" as stocks have recently outpaced bonds, although not necessarily over the last 12 months. Also, the same would be true of your cash position, as cash has returned so little. Of course, to the contrary, if one sold either stocks or bonds early on in response to the crisis and raised cash, cash levels may have become outsized.
As a result of these potential changes, your portfolio may have become either too heavily stock-invested, especially in Growth funds and tech-oriented funds, as compared to your pre-determined comfort levels such as, say, 60% stocks, 30% bonds, 10% cash; also, perhaps too lightly invested in bond funds.
While there is no telling whether stock funds, and in some cases bond funds, will continue to rise meteorically, investors should realize that extreme rises of this magnitude over a relatively short period of time are extremely rare. One should not assume that stocks, or certain relatively aggressive categories of them, will continue to be the best place to be going forward. Some "reversion to the mean" is highly possible, meaning that the categories of funds that have done the best over the last number of years, are likely to underperform and vice versa for categories that haven't done well.
You Can Still Request Free Help with Your Portfolio
Last month, I made the extraordinary offer of free, personalized portfolio advice to anyone who requested it. Mind you, not the same "cookie cutter" portfolio recommendation for everyone, but an individualized evaluation based on each responder's particular needs and situation. I am not aware of any other major financial website making a comparable offer. The offer still stands; my email is funds-newsletter@att.net
Of course, I had no idea of how many readers might take me up on the offer. And since I have only so many spare hours to devote in addition to writing my Newsletter, I was forced to develop a waiting list when a large number of requests did come in. While I have replied to the great majority of requests for help with maintaining one's portfolio, there are some requests that came in later than others and were placed on that list. Additionally, after replying to their requests, some investors had further follow-up issues. So if you are one who is still awaiting a further response from me, it is only because of the large volume of requests; I promise to respond as soon as possible. And don't hesitate to contact me again if you think I never got your message.
How It Works
Imagine if you were to go in person to see an advisor for advice about your investments. She/he would need to know certain basic pieces of information in order to customize recommendations tailored specifically to you. Likewise, for the most part, I requested such of each respondent to my offer, asking a few basic questions. And perhaps most importantly of all, I needed to know what was presently in their portfolio along with specific amounts. Most people would recognize the importance of providing this information. Of course, all information provided by respondants is kept confidental. Since any one investor's investment issues are probably similar to issues faced by many other investors, I have stipulated that pieces of the dialog between an investor and me may be posted on my site without revealing any identifying information about that investor. You will see some of these email dialogs below, at times edited for brevity and clarity.
Obviously, I have been dependent on my email messages getting through to respondents and theirs to me. But in perhaps a few isolated cases, email programs did not always deliver my messages and vice versa regarding replies. (Sometimes "spam filters" divert messages which wind up never being seen. I hope everyone who did respond saw my messages and if they didn't, can check their spam or "Bulk" folders.)
Also, please remember that there can be no guarantee that the advice I provide will always turn out to lead to the best possible results for your portfolio in the future; no one can guarantee that. But the suggestions that I provide are similar to the ones I myself have followed for managing my portfolio which in the past have led to highly successful outcomes in my own personal situation. Needless to say, the advice I provide cannot take the final responsibility for your own choices as to what you decide regarding your own portfolio.
Don't forget that I am asking each respondent to make at least a small charitable contribution, if they are satisfied after receiving my free advice; see brief details in the July Newsletter.
Already Received Requests for Help May Be of Interest to Many Investors
Here are some of the requests I have received followed by my advice.
Paying an Advisor
Investor: Until a few years ago I made my own investment decisions. While I didn't do badly, I got tired of studying and keeping up. So I met with a fee-only financial advisor company and decided to turn over my investments to them. After an initial investment decision to keep about 2/3 of my funds in stock mutual funds and the rest in bond mutual funds, they now make the specific investment and rebalancing decisions for me, for which they charge 1% annually. Almost all of my current portfolio is in Dimensional Fund Advisors (DFA) funds.
While I'm not unhappy with their handling of my investments, I'd appreciate your perspective on DFA's philosophy and their funds.
My Comments: While I don't claim to know much about DFA funds or philosophy, I don't believe any philosophy about investing should be used exclusively. I believe in giving a promising fund/philosophy up to several years to prove that its philosophy is working out well for investors. After that, I question staying.
I examined how all of the DFA stock and bond funds were doing. I got this information from https://us.dimensional.com/funds
I found that when I looked at the 5 year performance of all their stock funds, the great majority have returned in the low single digits.
When I looked at the 5 year performance of all their bond funds, were generally in very low single digits.
As a basis of comparison, I looked at the 5 yr. returns of all Vanguard stock and bonds at https://investor.vanguard.com/mutual-funds/list#/mutual-funds/asset-class/month-end-returns
I found that many stock fund results were clustered around 10% although some were in single digits.
When I looked at the 5 year performance of all Vanguard bond funds, many results were near middle single digits (although some were also low single digits.)
So it appears that merely investing in both Vanguard stock and bonds without paying any advisor expenses, one would have done much better. While it is convenient to have an advisor pick funds for you, and that is obviously worth something to you, you may be getting lower returns as a result.
Money Market vs. Bond Funds
Investor: I am 75 and consider myself risk averse. Here is my current portfolio:
Vanguard Prime Money Market 1,000,000
Fidelity MM Premium 100,000
Vanguard Dividend Growth (VDIGX) 100,000
Fidelity Select Health Care (FSPHX) 30,000
Fidelity International Small Cap Opp (FSCOX) 30,000
Vanguard Health Care Adm (VGHAX) 30,000
Dodge & Cox Stock (DODGX) 25,000
Vanguard Capital Opportunity Inv (VHCOX) 20,000
My Comments: It seems like your choice of stocks funds is mainly quite good.
My biggest suggestion would be, as I discussed in the July Newsletter, would be to have a position in bonds instead of 82% of the portfolio in MM funds. I would, as you yourself suggest, put around half of the MM funds in a bond fund. Probably the best one to choose would be Vanguard Total Bond Market Index Fund Admiral (VBTLX) with a current yield of 1.37%. This would increase your yearly income by about $6000 with very little added risk.
More on Bond Funds
Investor: With information from your newsletter, Money, Kiplinger, Morningstar, and close friends, I developed a plan and have been working toward establishing the investments in my portfolio. Today I rely mostly on your newsletter, various investment articles and portfoliovisualizer.com which is a fun tool to back test portfolios and check other information on different investments. I am 68 and currently have $1,300,000.00 invested 50/50 - cash / stock funds.
Bonds and foreign investments have always been a challenge to me. I have owned various foreign funds but have no experience with bond funds.
My eventual portfolio goal presently includes the following:
40 to 45% split evenly between Vanguard S&P 500 ETF (VOO), SPDR® Dow Jones Industrial Avrg ETF (DIA), and Invesco QQQ Trust (QQQ)
10 to 15% in Vanguard Mid-Cap ETF (VO)
10 to 15% in Vanguard International Growth (VWILX)
25 to 30% Cash and possibly Bonds
My acceptable goal is a yearly return of 5%, but 7% to 9% is a hopeful target.
My Comments: I think your current asset allocation of 50% in stocks and 50% in non-stocks should be a reasonable one to try to achieve a 5% portfolio return. However, to achieve a higher target of 7 to 9%, I agree that you will need to raise that stock allocation. Perhaps you might be able to get there with about 65 to 70% in stocks. And by switching your cash to bond funds, this should help considerably as well; if you look at the average 10 year return on cash, it's less than 1% while for high quality bond funds, most have earned 4% or even more.
Your current stock fund choices are pretty much focused on aggressive instruments, esp. QQQ; VOO is also pretty high priced after 10 years of strong gains. Perhaps one value-oriented ETF such as Vanguard Value ETF (VTV) might be a good choice in the face of overall high valuations.
Switching at least half of your cash to bond funds should not be difficult since there are many good bond fund choices out there. I would recommend about 1/2 to Vanguard Total Bond Market Index (VBTLX) and 1/2 to PIMCO Total Return (PTTRX), or their close equivalents (BND and BOND) if you prefer ETFs. Another good fund is Dodge & Cox Income (DODIX).
Diversification, Especially in an Overvalued Market
Investor: I am 70 years old and have been retired for 5 years. Currently we are invested 48% in equities at Fidelity, primarily an S&P 500 Index fund and a Health Care fund., 47% in bond funds, and 5% in cash. Do you consider this portfolio appropriate?
My Comments: One recommendation might be to consider investing some internationally. US stocks are much more overvalued than international ones and so for the next 5 to 10 years, I expect the latter ones to do better. Regarding Fidelity's lineup of international funds, it is hard to find a really good one. One fund that I myself own is Fidelity Overseas (FOSFX) with moderate risk - not great, but pretty good, doing better this year than some other international funds I own. Even with just a Fidelity account, you can own other non-Fidelity funds as part of the Fidelity brokerage.
For stock funds, you might also want to consider a Large Cap Value fund; Fidelity Equity-Income (FEQIX) is a pretty good one. Although Value funds have trailed the S&P 500 for years, if there is a serious correction or mediocre returns in the years ahead, value may be a safer place to be.
Adjusting Asset Allocations to Spin Off More Cash
Investor: I am 75. These are my portfolios: To the nearest thousand, $71,000 in a Roth IRA and $606,000 in standard IRA accounts. Prior to mid-March, the funds had about $75,000 additional.
Currently at least 20-25% of each account is in cash because I believe the investment outlook is uncertain. But I usually tend to invest in a moderate portfolio with a goal of about 60% equity, 40% fixed income and very little cash. I'd rather operate on the premise of total return instead of harvesting interest and dividends.
I need to draw at least $35-40,000 a year from my accounts. Until now, I've been able to draw that and more while still growing the accounts.
My Comments: In order to get 35-40K from IRA withdrawals per year without drawing down the account, you will need to average about a 6.5% return. (You should not touch your Roth IRA since you want the tax-free growth of that account to continue to accumulate.) But as long as you have 20-25% in cash, you will only have about 450,000 working for you since cash is now not paying really anything. So unless you reduce that cash position, you will have to earn about 9% on the 450K This would require you to be quite aggressive in these investments. Even then, getting 9% will be quite difficult because US stocks, in general, have done quite well in the last decade and would appear to be overvalued. Additionally, we don't know how much the coronavirus may damage the economy and keep returns lower than usual.
I think you should try to get back to near 60% in stocks and 40% in bonds with very little in cash. Some of the bonds should be in short-term bonds so that if you need to, you can always withdraw some of them without much risk of loss since these bonds have limited volatility.
Roth IRA: Here is where you want to have the more aggressive part of your portfolios, since you will never have to pay taxes on the growth vs. the standard IRA where you will.
Specific stock allocation categories]s: I don't know what funds you already have so I can just give you some general suggestions. I would make sure that your standard IRAs are well diversified across stock categories - some Large Growth, Large Value, Small/Mid Cap, International. To be moderate risk, the allocations might be 20%, 25%, 20%, 30%, respectively, and possibly Real Estate. (International stocks are much more undervalued than US stocks.) For the Roth, I might focus more on growth stocks of all sizes, an International Growth fund, and possibly Emerging Markets. My Newsletters give my specific favorite funds; the Oct. '18 Newsletter gives you a variety of funds.
Specific bond fund categories: You want funds with potential for decent total return so I would focus on Total Bond Market, Corporate Bonds, High Yield, International Bonds, and possibly Emerging Market Bonds.
Should a Large Emergency Fund Remain in Cash?
Investor: We have 145K in the Vanguard Money Market fund as our emergency fund along with 42K in CDs. Combining all these assets, we have about 33% of our portfolio in cash, 23% in bonds, and the rest in stock funds. Unsure how much of Emergency Fund should be invested. We are 81 and 78, have a moderate risk tolerance and would like to leave a significant amount to our heirs.
My Comments: I suggest investing the emergency fund more broadly with at least 50% in bonds. The funds you mention, Vang. Tot. Bond, Vang. Interm. Term Treasury, Vanguard Long Term Treasury, and Vanguard Balanced Index, are reasonable, although Vang. LT Treasury is pretty high risk with interest rates already so low; you might want to also include a fund that has a corporate focus such as Vanguard Short-Term Investment Grade (VFSTX). You can always cash out some of your bond funds if you ever do need emergency money and a short-term bond fund such as VFSTX has pretty low volatility, lessening the possibility of loss.
One Way to Recognize If a Fund Is Risky
Investor: How do I recognize how risky a fund is, especially if you don't want an aggressively-oriented portfolio?
My Comments: Let me give you a way to determine the risk level based on past performance. You can go to morningstar.com, enter the fund symbol (e.g. THOPX), click on the "RISK" link under the fund name, and then view the 3 and 5 yr risk ratings. So for THOPX, it shows that the risk level is "high". You should try to hold funds whose risk level is shown as "average" or below. If however you are an aggressive investor, then the risk level can be higher than average.
I am retired and 79 years old. I need about $100,000 from my portfolio every year, partly to pay huge medical bills. When the market dropped in March I sold most of my bonds
Our portfolio is around $830,000, all in IRAs. My approx. allocations are:
Cash 29%
US Stocks 50
Foreign Stocks 10
Bonds, including VWEHX 9
Gold ETF and Barrick Gold. 3
Regarding your investments, first let me tell you upfront that I cannot advise you on indiv. stocks, only mutual funds. Stocks are good for accumulating long-term wealth but that's not that important now - you need income.
You need income producing investments more than anything else to prevent having to withdraw too much principal from your IRA. The best way to get that would be to get back into more bonds that pay high dividends. You mention Vanguard High Yield so you probably need more of that - it currently pays 4.83%. Various other bond funds can pay somewhat less; DODIX pays 2.78%
There are several Vanguard stock funds that pay high dividends - Vanguard Equity Income (3.06%), High Dividend Yield Index Admiral (VHYAX) (3.64%), and Energy (VGENX) (4.81%). Of course, these 4 Vanguard funds may be somewhat risky but if you need dividends without touching too much of your principal, you have little choice but to opt for such funds. But even if you transfer your entire portfolio into these 4 Vanguard funds, your dividends will only reach about $32,000 per year. So you will need to start cashing out money from your IRA and your other cash sources you mention.
You do not need to keep so much money in cash or money market accounts. Bond funds will certainly earn more income with relatively little risk right now. You can arrange to get dividend checks sent to you from your fund accounts every time they are posted there.
Keeping Taxes to a Minimum
Investor: I have quite a bit in T Rowe Price Growth (PRGFX) & am worried about the tax consequences about selling all shares at once. Or should I sell in increments each year? If so, should I take capital gains in cash & start reinvesting them in an index fund? Same with Dodge & Cox International (DODFX)? I am hemorrhaging on this one. I have no problem divesting this completely & going with an index. I know Vanguard International Index (VGTSX) is good but I have that as part of my SEP Target Date. Overlap? I am using muni funds as ballasts as I am equity heavy.
My Comments: There are several ways to deal with reducing your exposure to T Rowe Price Growth. If you have large capital gains, you can offset them by selling some of Dodge & Cox International and taking a loss; cap. gains can be offset by capital losses. If you can match the gain with a loss this year, you won't have to pay the capital gain. Another thing you can do, although it is a very slow process, is to not reinvest your capital gains and/or dividends back into the fund. The result is that your shares in the fund will not grow bigger and you can either take the amounts as cash or have them directed to another fund such as a tax efficient index fund. Most Vanguard stock index funds haven't distributed gains for years such as Vanguard Growth Index. Finally, if you have an idea of your tax bracket, you can take only enough money out of T Rowe Price Growth so that it doesn't push you into a higher tax bracket. But you will still have to pay the cap. gain tax at your existing bracket rate. No problem with overlap between your different accounts.
From your attached spreadsheet, also consider moving additional money from your Interm. Bond (taxable) to an Interm. Term Tax-Exempt Bond fund, but be aware that budget problems may eventually hurt muni bond funds.
Reinvesting Dividends; also Roth Conversion This Year?
Investor: I am 74 years old and have been investing on my own for years. Not so long ago I changed many investments to ones that pay dividends. I have Vanguard High Dividend Yield (VHYAX) and Vanguard High Dividend Yield (VWALX). I have not sold either and have stopped taking the dividends. Would you continue to take the dividends if the funds are down or would you stop taking them? I also have a large amount of money in the Vanguard money market fund. Would you recommend putting some of it into VFSTX? There is another question I have which is an accounting issue. Would you change money into a Roth IRA from a traditional IRA this year?
My Comments: Regarding taking dividends, that mostly depends on whether you need/want the extra cash. Since you stopped taking dividends, I would assume you probably don't. When the funds are down and you reinvest the dividends, you are adding to the investment. Adding to an investment that is down and assuming the investment will recover, is a wise move. If however you are no longer confident that the investment will spring back, or maybe think that the investment is now too risky for you (especially VWALX), then maybe you should take them.
As I said in my July Newsletter, I don't think keeping a lot of money in a MM fund is a good idea for the next several years. I do think VFSTX will be a stable producer of low to mid-single digit returns over the period.
I have always been a fan of Roth IRAs. Since you don't have to take any required minimum distribution from your regular IRA this year, this will keep your taxes a little lower. While you will have to pay tax on the conversion, it will most likely be a better year to do a conversion than in subsequent years. And if taxes go up in subsequent years as they may well do, you will be better off having the money in a Roth.
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