Nearly four months ago, I mentioned that my portfolio contained about 98% of cash and that I intended to make some efforts towards changing the situation. Now, after some agonizingly slow progress, I have managed to take some concrete steps towards that.
Things started to take shape after I finally (successfully) opened a brokerage account at Zecco. In the three months that followed, my portfolio underwent the following transformation:
[I call it "stocks" as a general term - but they are, in fact, ETFs]
The current portfolio is built entirely of various ETFs (Exchange Traded Funds), which I put together after reading several pieces of articles on several websites and forums. Here is how the different ETFs contribute towards the portfolio:
[To learn more about the symbols, hover or click on these links: SPY, EEM, EWZ, VTI, VWO, IXG, FNI, EFA, ADRE]
I played around with MorningStar’s Instant X-ray tool to understand how this portfolio looks like, in terms of asset allocation, and here is what I got (unfortunately, I did this AFTER I bought all those ETFs) :
MorningStar called this distribution as “conservative” and described it as:
Your portfolio is conservative. An asset mix such as yours normally generates low returns but experiences very little volatility. Financial planners typically recommend these types of mixes for investors who have investment horizons less than three years, are risk averse, or have already saved enough to meet their goals.
However, this assessment was heavily skewed on the conservative side because of the presence of the huge pile of cash. After I removed the cash from the picture, I got this:
Apparently, now it turned out to be an aggressive mix.
Your portfolio is aggressive. An asset mix such as yours normally generates high long-term returns but can be very volatile. Financial planners typically recommend these types of mixes for investors who have investment horizons longer than 10 years, need high returns, and are comfortable with a high level of risk. Note also that your portfolio has greater exposure to foreign stocks than is typical.
That seems to be more like it. This assessment also correctly describes my current temperament with regards to investing. I am just going to “buy and hold” for as long as it is feasible. With sufficient liquid cash still existing in my portfolio, I think I can let these investments marinate for around 20 years (or even more). However, as I keep converting more cash into stocks, I will probably have to tone down the aggression a bit in future.
So that’s how things are at present. So far, it has been a great learning experience, but there are miles to go before things become all nice and rosy.
Now, a quick summary of the amateur mistakes that I committed during this phase of investing:
- I jumped into buying the ETFs before clearly understanding what it means by “asset allocation”.
- Ended up buying too much of foreign stock without realizing it - in a way this may turn out to be good in the end, but I need to understand this better.
- People who are familiar with ETFs will immediately realize that I have two different ETFs that track the same market subset (emerging market ETFs - VWO and EEM) - one of them (EEM) has a higher expense ratio than the other. I completely overlooked this issue.
I intend to address some of the issues before I go on a buying spree again. Towards that, here are some specific short-term goals that I am setting for myself:
- Learn more about asset allocation. Understand what is “large cap”, “small cap”, and “mid cap” - and how changing these things will distribution will affect the portfolio’s performance.
- Understand expense ratios of ETFs properly.
- Understand what is meant by “rebalancing a portfolio” and figure out how to do it in order to reduce the percentage of foreign based ETFs [right now I am just thinking about buying more US based ETFs to do this - my mind cannot think beyond "buy and hold" at this time, so there won't be any selling].
- Learn to (properly) use MorningStar’s portfolio X-ray tool to analyze and understand how future buying will affect the nature of my portfolio.
Plenty of work to do here.
By the way, feel free to correct me if I have showed signs of not having understood certain concepts correctly - I am still in the learning phase and all feedback will be appreciated.
Meanwhile, I think I am turning into some kind of a bear … ever since I actively started buying ETFs, I have been hoping that the market goes down - so that I can buy some at discount. Bad bear, no cookie for you.
[A quick note: some of you may remember that I recently spent a boat load of cash on our car. In order to compare apples to apples, I haven't considered that decrease in cash when comparing the two portfolios in the first figure]
{ 7 trackbacks }
{ 22 comments… read them below or add one }
It looks like you’ve got a nice start on your plan of converting cash to equities (I cannot comment on any individual ETF; I haven’t researched them). I think you’re moving in the right direction. Your money should have greater growth potential in the long run.
And don’t beat yourself up over mistakes. I guarantee you we’ve all made more than a few. The point is, you got your money in there and you are learning and investing. I look back at my early investments and think about how I wouldn’t do the same thing now. But, at least I had a head start, and doing so forced me to learn more about investing. That is the key.
Wanting the stock market to sink so that you can buy is a Good Thing(tm). It means you have contrarian impulses, and such impulses are more lucrative than any herd impulses.
Speaking of the herd, I hope that you might challenge yourself to re-evaluate buy-and-hold as a myth. It doesn’t always work, even over 20+ years. It pays to evaluate how cheap or dear any asset is before you buy it, rather than drinking the buy-and-hold Kool-Aid. The financial advice combine is built to churn out batch after batch of this Kool Aid because it is the easiest money in the world for them: you put your money in their fund for long stretches of time and they get paid based largely on *how much* money you have not on *how wise or efficient* a custodian they are. The financial combine doesn’t care how well your investments do; they just want to convince you that buy-and-hold works; if it doesn’t pan out for you, by the time you figure it out, they’ve still made a lot of easy, passive money on sheer volume. Buy-and-hold investing is thinly-veiled long-term momentum/herd speculating.
Asked whether value investing would apply overseas, Warren Buffett replied that all investing is about value. “What other kind of investing is there?” I have found it useful to remember that much of one’s potential investment gain is locked in when the investment is made, not just when it is sold (and paper gain becomes taxable gain). That’s where the margin of safety concept comes in. I don’t think there’s much (if any) margin of safety in SPY right now.
I have found it useful to be conversant with the following investing terms: dividend yield, earnings yield, and margin of safety. Even for an ETF, these concepts are relevant. E.g. for SPY, both earnings yield and dividend yield are historically on the low side (i.e. SPY is on the dear side of valuation), and therefore is poised to underperform on the buy-and-hold plan.
Here are some great books that I’ve read, that you might like, too:
* Fooled By Randomness, Nassim Taleb (how to think probabilistically about returns in investment — and in life)
* Irrational Exuberance, 2nd ed, Robert Shiller (how to challenge the efficient market hypothesis — stocks and real estate)
* Contrarian Investing The Next Generation, David Dreman (how to insult those who believe in or tout the efficient market hypothesis — how and when to find cheap assets)
* Stock For The Long Run, Jeremy Siegel (how to use dividends to justify buy-and-hold)
* Security Analysis, 2nd ed., Benjamin Graham, Christopher Dodd (how to find assets that stack the odds of investment gain in your favor — I haven’t read this whole book)
Please let me know if you find a good book on asset allocation. I’m exceptionally weak in that area.
I was going to say that EEM and EFA is about the same exposure.
By the way EZA is doing well, I’m thinking about buying shares
A lifetime ago I was a broker on Wall Street who hated his job and his life no matter how much money was made. Luckily I quit that and moved on to something I not only love to do, but also makes me much, much happier. I tell you this so that you’ll understand that what I say is not just random advice from a guy who doesn’t know crap, it’s something that I told countless clients to help them make a lot of money.
Never, EVER invest in ANYTHING if you don’t understand the investment well enough to know when, why and how to sell it.
You mention that two investments you have track the same markets but one is more “expensive” (higher fees) than the other. Sell the higher cost investment. I cannot be more direct than that. If you want, put all the money from the sale into the lower cost investment you already have which will cost you less in fees or, simply find another investment you like and put the money there instead.
I don’t want to beat a dead horse, but if you went looking for a new compact car and came home with not only that new car, but ALSO a brand new sports car with a higher monthly payment than the compact, would that make sense to you? You only need to track that segment of the market once, why pay twice?
Please keep my advice in mind. So many ‘investors’ dig themselves into deep holes because they’re unwilling, or unable, to sell when they know they should. Reallocating a portfolio doesn’t just mean buying, it also means selling what you need to sell to align the portfolio with your investment objectives.
Perhaps you should write down your reasons for buying each and every ETF, mutual fund, stock or whatever, when you buy them. That way, if your investment strategy or goal changes, you can refer to your original reasoning to help you make better buy/sell/hold decisions.
Congratulations. Actually, I am also looking into buying some ETS’s. I myself am reading and trying to understand about ETF’s.
If you don’t mind me asking, what was your initial amount of investment?
Are you doing automatic investments on a montly basis or are you investing once you have saved up enough money and then buying them?
Cheers
RV
Why not dump a lot of that cash into a savings account, at least temporarily while you figure out what else you want to invest in? I’m using eloan.com and it’s been great. Just find one that doesn’t have a minimum account balance requirement and you should be set. Make your money work for you!
Patrick: “But, at least I had a head start, and doing so forced me to learn more about investing. ” - I think that’s exactly what happened with me.
Steve Austin: I agree that I cannot be “holding” things for ever. However, right now, that’s the only thing I know. I need to look more into ratios and earnings in order to set yardsticks about when to sell a given ETF. Not yet comfortable with those things yet. Btw, thanks for the references to the books, I will check them out.
GeekMan: I appreciate your insight and I realized that about tracking the same index with two different ETFs - and hence it comes under “mistake”. However, for me, the amounts are not big enough right now to be *worried* about expense ratios. Sure I would like to be leaner in future ~ but even in it’s present state, it’s far from taking me down into deep holes.
Of course, I will rebalance things in time to come, but right now it’s just a few weeks since I have bought these ETFs, don’t you think it’s a bit too soon to be thinking about rebalancing?
I have another thought here. It’s the feeling of paralysis by analysis. Yes, I can wait another 3 years till I “completely” understand how every ETF works and then starting buying them - OR, I can start buying them based on what analysis people have already done and published and then take corrective actions in future if things start looking ugly. The problem with the “perfect” approach is that I am not sure anyone can get there in a reasonable amount of time - and that means a lot of missed opportunity. Instead, I can follow some popular options for now without investing a great amount of money, and then rebalance my portfolio when I have a better understanding of things. I would certainly like to know if there is something wrong with such an approach.
RV: There is no fixed pattern for my buying. I just did it when I felt like doing it (actually it was influenced by the weak market in the last few weeks). Right now the investing is not automatic. Not comfortable disclosing the dollar amounts.
BAMAToNE: “Why not dump a lot of that cash into a savings account, at least temporarily while you figure out what else you want to invest in?” - Well… it’s not like I hide all that cash under my mattress.
Great start Golbguru. From our experience with our portfolio, during the years where we can take on more risks, its a good idea to allocate a considerable portion of our portfolio to international markets. It also helps ease out some of the stress due to the weakness of the dollar.
But it is advisable to create a knob or wheel of varied risks as you age and tweak your portfolio accordingly. As an example, Vanguard has created such wheels for their Target Retirement Funds.
We had covered these scenarios in details in our series on Asset Allocation. Perhaps you can browse through it to see if any of the models are helpful for yourself (http://firefinance.blogspot.com/2007/02/investing-asset-allocation-part-1.html).
Why not create a mock portfolio (the one that you want to have in the future) in Morningstar and see how that looks.
plonkee: I thought of that.. and I will be using a mock portfolio before future buying.
In hindsight, I should have used it before I bought these ETFs, but I guess it’s OK - what’s done is done. Better late than never.
FireFinance: Hmm.. I need to think about how to create that knob of risk - I suppose that’s what “rebalancing” is all about. Thanks for the link to the article.
Golbguru,
Nice portfolio. For reference, the August 6, 2007 Wall Street Journal had an excellent article on all ETF portfolios. (The digital version is only available via paid subscription.)
One thing you may want to consider is that you own three types of ETFs, with different risks. You have several “market index” EFTs ( EFA and SPY), some country ETFs (IXG, EWZ) and some sector ETFs (EEM, VWO, FNI). The market ETFs carry market risk and the others carry additional sector/country risks. Also, you may want to consider some ETFs that are not correlated with the stock market - eg. real estate or precious metals.
As always, do your own due diligence
Golbguru,
By the way, if the Fed does not lower rates next week, you’ll get your wish. The market will drop like rock, making for buying opportunities:-)
Even if the Fed does lower rates by a 1/4%, the market will likely still drop, since the market is probably factoring in 1/2%. So you may want to be ready with your new and lower buy prices
Golbguru,
It’s never too soon to re-allocate.
I understand your feelings about holding the investment because it’s not a lot of money and you’re not worried about the expense ratio’s right now. And I want to make it clear that I cannot and will not dictate to anyone what they should or shouldn’t do with their own money. However, I would like to point out that for MOST people it becomes psychologically and emotionally more and more difficult to correct their own mistakes the more time that passes from when the mistake was made. Since it’s not a lot of money, doesn’t it make more sense to simply make the change now, as opposed to some undetermined point in the future when it “feels” right?
Also, and again, I’m not telling you what to do with your money, but I strongly urge you to re-evaluate the number of investments you’re trying to make at this time. You already have nine ETFs, at least two of which are tracking the same thing, and you’re already talking about investing in others. If they are all going to be small investments for you, then it makes far more sense for you to narrow your scope and invest in just 5 items instead of all nine (or however many you ultimately think you want). I’m no longer a broker so you should of course do your own research, but when I managed my client’s accounts I did my best to not hold more than 5 or 6 funds at any one time, because any more than that and they would most likely be spreading their assets too thin. Being spread out might lower your overall risk, but it also significantly compromises your returns unless you REALLY know what you’re doing. In your case though, where you are just beginning to learn how to invest, being so diverse usually leads to compromising your returns through either redundancy (two or more funds with similar strategies) or contrarian offsetting (two funds that, due to their investment strategies, work against each other so that when one gains the other usually loses).
I cannot urge you enough to look around at all those online finance guru retirement portfolios or personal finance articles written by the experts and you’ll be hard pressed to find any that recommend more than five or so funds in a portfolio at any one time. There’s a good reason they don’t have 15 funds in their recommended portfolios, find out why.
Again, I’m not an expert and what I’m saying here is NOT to be construed as real financial advice, so everything I’m saying should be taken with a large salt-lick of hefty skepticism. Do your own research. Ask people whose opinions on this subject you respect and listen to what they say. Investing is not rocket science, but it’s no walk in the park, either. And what I said earlier, while cryptic sounding, is the only thing I’ve written that I will ever admit is actual advice;
Never, EVER, invest in ANYTHING if you don’t understand the investment well enough to know when, why and how to sell it.
GeekMan: I hear you. More study is in order soon. Thanks for mentioning this: “However, I would like to point out that for MOST people it becomes psychologically and emotionally more and more difficult to correct their own mistakes the more time that passes from when the mistake was made. ” - I will keep that in background for future trades.
Super Saver: I am trying to evaluate the pros and cons of having precious metals ETFs instead of actual metals - obviously, I am thinking of gold here. However, the current recession fears is shooting Gold through the roof, so I am going to wait on those. I have to admit, I never gave a thought to real estate ETFs - yet another thing to learn about in time to come.
I am going to take GeekMan’s suggestions on keeping notes on things I find out from different source - I am sure it’s going to get confusing very soon. Strangely enough, it has been fun till now (instead of being stressful); I hope that feeling lingers on in future.
Hey Golb,
Just wanted to say congrats on taking a step towards investing online without the use of a broker
ETFs are 10x better then mutual funds. Your portfolio is far from aggressive btw!
Just one comment for ya, the mentality that you want the market to go lower so you can buy more is dangerous. The real saying goes, “buy high and sell higher!”
Best of luck with the portfolio.
Sell EEM and buy VWO with the proceeds ASAP. If they go up, you will have to pay cap gains tax to get into the cheaper version. With enough gains, that may cause a barrier you may never be able to overcome. So do it now while you have little gains to pay tax on. Since they track the same MSCI Emerging Markets Index, it makes no difference what happened in the stock market since you bought these ETFs because both will have either gone up or down in the same percentage.
Hey there. Great blog and article by the way. No matter what the FOMC does on Tuesday, you’ll have your opportunity to buy. My opinion is that the markets will tank Tuesday and Wednesday regardless of what the FOMC does. If they leave rates unchanged, the market tanks, and tanks hard. I think the 25 basis point cut everyone’s been chatting about is already priced into the market. If the FOMC cuts by 25 bp, I’d expect a down day but nothing horrible. If the FOMC cuts by more than 25 bp, it may be a sign that the Fed thinks we’re headed toward a recession and needs to act aggressively. To be honest, I think this week is a damned if they cut, damned if they don’t week. I’d be prepared late Tuesday or Wednesday to add to your ETFs if you are looking to buy on the way down.
Disclosure: I’m a three month old investor developing bullish tendencies. Problem is, it seems easier to make money when things go wrong than when things go right.
Hey,
Thanks for your comment on my post yesterday, and also this nice portrayal of your own learning curve. One good thing about not hitting the “saturation point” in our portfolio return yet is that it is still going up. I like your “paralysis by analysis” analogy, which is what I tried to bring out in my post.
I think it’s great that you do invest on your own, I wish I had the guts (and know-how) to do the same. Great article.
I am like you on liking it when the stock market has some nice downturns to pick up some high quality stocks at bargain prices. EEM looks good. Looks like you are pretty heavy in international. This week may provide you a chance to get some bargains, but we’ll see.
this (very long, but excellent) seeking alpha web article http://seekingalpha.com/article/15134-the-seeking-alpha-etf-investing-guide explains everything about ETFs and how to maximize your gains, minimize expenses and avoid ETF overlap.
all in all, the best one-stop explanation of ETFs i’ve found.
You’re still way too much into cash positions. You should consider at least short-term instruments. My personal fave are Icelandic 3 months bonds with 10%+ yield.
Leave a Comment