The 3rd Quarter Result–My Portfolio Year-To-Date Return
Not bad for a boring, conservative and uncomplicated portfolio that has 70% fixed accounts (bonds) and 30% stocks
January 1st through September 30, 2016
The bull market year continued into the third quarter. The broad averages grew into the record books, reflected by the DOW, S&P 500 Index, and the NASDAQ returns. My bond funds also continued to grow even after the Federal Reserve increased interest rates last December. Remember? That increase was the first in years and was supposed to be the end of the bond bull market according to the media pundits. They have been predicting gloom and doom blah, blah, blah, again and again. It’s getting boring. When interest rates increase, the value of bonds will decrease. Technically, I agree, and sooner or later the pundits will be correct–bond values will drop when rates increase.
But not yet. The opposite happened–bonds increased in value. Just look at the returns on my two bond funds below! What a year. My Vanguard portfolio gained 6.7%. If this current portfolio return holds steady until the first of 2017, I will be a happy camper.
The pundits are smart media people who know the ins and outs of the stock and bond market every which way. They are incredibly articulate and can talk for hours. BUT NOBODY CAN ACCURATELY PREDICT THE FUTURE. A few have predicted correctly but were lucky. Nothing wrong with being lucky, but I think about luck in this way: Over the long haul, we are all lucky that the markets grow over time. I am lucky the stock and bond markets increased this year and that my portfolio is constructed in a manner which captures the gain.
My portfolio is constructed to go-with-the-flow. If the markets go down and they will eventually, my portfolio will lose value too. For example, in 2008, my portfolio lost 11.8% and last year, 2015, it was flat, no gain or loss.
Here are the results of how each fund in my portfolio performed during the first nine months of 2016. Once again look at the returns for my two bond funds: Total Bond Market Index (5.97%) and Total International Bond index (astounding 6.84%!). Wellesley invests in 65% bonds and 35% stocks and it has a return even higher (8.83%) because of the balance between stocks and bonds.
For those “geeky” investors who want to look under the hood, Morningstar.com (M*) deploys hundreds of statistics of each mutual fund, index fund, ETF or individual stocks and bonds known. When you create your portfolio in M*, you can choose which statistic is important to you. Below are the statistics that I find important.
The Definition of Terms:
- The Standard Deviation is a statistical measure that reflects the volatility: stocks would have a higher standard deviation than bonds. Notice that the balanced fund Vanguard Wellesley has a low standard deviation because its contains 65% bonds and only 35% stocks. The higher this number, the more risk.
- I don’t pay much attention to the Morningstar Rating for Funds because I construct my portfolio according to the major asset classes, never solely on past performance. Only if it’s rated low, then I find out why.
- The % Weight is the percent of my total portfolio which is invested in the individual investments. The Total Bond Market Index contains over 52% of my portfolio. This index has three different bonds, corporate, GNMAs and treasuries.
- The Costs are illustrated in a separate table above.
- Alpha measures if the investment returned higher, about the same or lower than the market averages.
- A Beta measurement less than 1 indicates that the investment is less volatile than the market, while a beta more than 1 indicates that the investment is more volatile than the market.
- Credit Quality is the measure of how likely you will get your money back. AAA is the highest rating and -B or lower is the lowest. -B or lower has the highest risk.
- % Turnover Ratio is the percent of the fund that is sold and bought during the last year. I want a very low turnover rate in my portfolio. I loathe excessive buying and selling.
- Lastly, each investment returns for each year since 2011.
- Morningstar has hundreds of additional statistics. It’s all free.
For the record, past performance is not a guarantee of future performance. I constructed this portfolio with these parameters:
- fully diversified with Vanguard’s index funds
- one managed fund for my Roth IRA money (Wellesley)
- bond allocation reflecting my age and need to take risks
- MOST IMPORTANT: Future returns are NOT considered when constructing my portfolio. I have NO CONTROL or knowledge about future returns, and neither do the experts.
My portfolio delivered a 6.7% return because the market produced, not because of anything I did or expected.
My fully diversified portfolio with an allocation of bonds reflecting my age of 69 is simply riding along for the stock and bond market. In 2015 my portfolio had a zero return. That’s right: last year, my portfolio did not grow in 2015 because the stock and bond market was flat (click here for the 2015 return).
I know you have heard this before and I will mention it again: Never choose a fund because it produced a history of positive returns. Instead, construct a portfolio which is fully diversified with the core asset classes and low-costs.
*Stephen A. Schullo, Ph.D. (UCLA ’96) taught in the Los Angeles Unified School District (LAUSD) for 24 years and UCLA Extension teaching educational technology to student teachers. Steve wrote investment articles for the United Teacher-Los Angeles (UTLA) newspaper for 13 years. Thrice featured retirement plan advocate in the Los Angeles Times and U.S. News and World Report. He co-founded an investor self-help group (403bAware with a colleague, Sandy Keaton) for teacher colleagues and wrote 5,000 posts in three investment forums since 1997. Frequently quoted by the media, testified at California State legislative hearings and honored with the “Unsung Hero” award by UTLA for his retirement planning advocacy. For the last ten years, he serves on LAUSD’s Investment Advisory Committee as a “Member-at-Large” and former co-chair. The committee monitors the district’s 457b/403b/PARS of 55,000 former and current LAUSD employees, worth $2.2 billion in total assets. Lastly, Steve and his late husband, Dan, were featured participants for the award-winning documentary, PBS Frontline: The Retirement Gamble, aired April 23, 2013.
Steve is the author of an additional new book, released last year, “Fighting Powerful Interests: Educators Challenge Tax-sheltered Annuities and WIN!” A story of how a handful of LAUSD educators struggled for years to improve the 403(b) to no avail. But we never quit! We were instrumental in LAUSD’s implementation of the new 457(b) plan, and winning a “Plan Design” award. How cool is that?