Every year, investment consultant firm Callan Associates updates a neat visual representation of the relative performance of 8 major asset classes over the last 20 years. You can find the most recent one below (view as PDF), which covers 1995 to 2014. For each year, the best performing asset class is listed at the top, and it sorts downward until you have the worst performing asset. You can find previous versions here.

The Callan Periodic Table of Investment Returns conveys the strong case for diversification across asset classes (stocks vs. bonds), investment styles (growth vs. value), capitalizations (large vs. small), and equity markets (U.S. vs. international). The Table highlights the uncertainty inherent in all capital markets. Rankings change every year. Also noteworthy is the difference between absolute and relative performance, as returns for the top-performing asset class span a wide range over the past 20 years.

I like focusing on a specific color (asset class) and then visually noting how its relative performance has bounced around for a few years. The ones that enjoy a stint at the very top are usually found on the bottom eventually.

So instead of trying to predict one asset class that will outperform this year, why not commit to holding a multiple, productive asset classes that will balance each other out over time. Pick ones that will have a long-term positive return, but in any given year might perform poorly. Hold them in a low-cost manner, and rebalance your holdings if they get out of whack.

I don’t always check my portfolio performance, but when I do, I do it at the end of the year. Here are the trailing 1-year returns for select asset classes as benchmarked by passive mutual funds and ETFs. Return data was taken from Morningstar after market close 12/29/14.

Stocks. The Total US Stock Market (VTI) went up nearly 15%, while the rest of the world’s markets (VXUS) dropped around 3%. Europe specifically struggled, and Emerging Markets (VWO) only eeked up 1.5% total return. US REITs (VNQ) went on a tear, up 32%.

Bonds. The Total US Bond Market (BND) went up ~6%, even though most market pundits thought rates would go up in 2013. Short-Term Treasuries (SHY) were mostly unchanged, while Long-Term Treasuries (TLT) shot up 27%. Inflation-linked TIPS (TIP) inched up 3%.

Gold (GLD) had its gyrations but ended the year with very little change, down ~3% over the past year.

In the end, nothing really went down that much and a few things did really well. It was another year where half of the predictions were wrong, and new predictions will no doubt sprout up soon. Business Insider has a hilarious post on completely meaningless market phrases that sound smart. On that note, my official position will be “cautiously optimistic” for 2015.

The overall asset allocation of my personal portfolio hasn’t changed much since my October 2014 update, but I’ll probably do a final update once the year is officially over. Some quick calculator work indicates the overall 2014 return to be roughly 7%.

Here is an interesting chart comparing the correlation of various asset classes to the S&P 500 over the last 5 years. Chart is from Richard Bernstein Advisors, found via The Reformed Broker.

A negative correlation between two asset classes means that they tend to move in opposite directions. While long-term US Treasury bonds have been the most strongly uncorrelated, it is also worth noting that intermediate-term US Treasuries (5-7 years) were nearly as uncorrelated. Of course, this is the past and correlations can and will change.

Still, this would seem like good news for people who hold a “total” bond fund like the Vanguard Total Bond Market Index Fund (VBMFX, BND) or iShares Barclays Aggregate Bond Fund (AGG) as these contain ~70% US government bonds and have an intermediate average maturity. You want your bonds to serve as a hedge against stock movements, and they did over the past 5 years while still maintaining positive returns (~4% annualized for AGG, ~15% annualized for S&P 500).

(Updated. Lending Club ended their first day of trading at $23.43 a share, up 57% from their IPO price. With roughly 361 million outstanding shares, LC is roughly a $8.5 billion dollar company! I have updated the post to include the rest of the IPO documents and process. I ended up selling my 100 shares for roughly a $800 gain during the first day of trading. Details and rationale below.)

LendingClub connects individual borrowers with individual lenders, and I’ve been writing about them since 2007. They successfully had their IPO on Thursday, December 11th, 2014 and they actually set aside a few shares for individual investors. Usually you’d either need serious cash or insider access. If you were an investor at LC by 9/30/14 you should have gotten an e-mail asking if you were interested.

I participated in this IPO for a few reasons:

• I’ve been a lender on LendingClub since 2007 and have been following their progress since.
• I have never participated in an IPO before, and am curious about the process.
• I view this investment as purely speculative. It is not an investment, it is a gamble!
• I can commit as little as $250 and up to about $5,000 (details below). I can choose a number that will keep my interest but it won’t break the bank either way.

I’ve documented the process below:

11/17/2014. I got an e-mail with the subject “Lending Club IPO – Directed Share Program (DSP)” telling me that I was eligible to participate and that I had to opt-in to sharing my information with Fidelity Investments. Here is a screenshot:

I clicked, and then was instructed to wait. (More below)

[Read more…]

Whenever Vanguard founder Jack Bogle speaks, I listen. He has spent more time thinking about how to help the average investor than I have been alive. I found this recent Bloomberg interview covered a lot of topics regarding portfolio construction. Here are my notes, I have paraphrased what is not in quotes:

• “The best thing you can do for yourself is to make your choice [of a long-term strategy], keep it simple and stick with it.”
• The traditional 60/40* balanced fund is still a fine, simple choice for a portfolio. He prefers that over a target-date fund. (*60% stocks, 40% bonds)
• For the stocks portion, a traditional total US stock market fund is fine. You can add a little international stock exposure, but you don’t need it. The long-term returns for foreign companies will likely be similar but with increased currency risk.
• For the bond portion, a traditional total bond fund is fine. Higher yield won’t come without higher risks.
• Even if valuations are currently high on a relative basis, you should take the long-term view and invest now.
• “Financial planners and advisers need to sell their value as keeping their clients from doing the wrong thing at the wrong time.” That is their value-add, and it can be significant.

Keep in mind these are Bogle’s opinions and not necessarily my own.

Vanguard has announced that they now support two-factor authentication via SMS text messages when logging into your financial accounts. There should be a little blurb when you log in, or after logging in you can navigate to “My Accounts > Account maintenance > Security code” to activate it.

I definitely appreciate the availability of two-factor authentication, although my actual usage depends on how often I have to use it and the importance of the account. Since my Vanguard accounts contain a significant chunk of my assets and I usually log in less than once a week, I enabled it immediately. Here are the highlights:

• If activated, you’ll receive a unique 6-digit code via text message that can only be used once to gain access to your account. The code will expire after 10 minutes.
• Security codes sent via e-mail, phone call or other methods are not supported. No future plans are mentioned.
• You can choose to receive a security code every time you log in, or only when Vanguard doesn’t recognize the device that you’re using. This can be a good compromise if you log in frequently from the same computer.
• You’ll still need your current user name and password. You may also need to answer your previous security questions like “high school mascot?” when calling Vanguard.
• Security codes work with Vanguard.com and their official mobile apps. They do not work with Vanguard.mobi.
• Two-factor authentication may conflict with financial aggregation tools such as Mint.com, Personal Capital, or Yodlee.

Also: TwoFactorAuth.org is a nifty website that tracks which financial websites (and other services) offer two-factor authentication.

Here another data point on the topic of adding international bonds to your portfolio. The AllianceBernstein Blog has post on how adjusting the US/Global mix of your bond asset allocation affects risk-adjusted returns:

Using data from 1994-2013, you can see some trends as you go from 100% US bonds to 50/50 to 100% International ex-US (hedged). As you add more international the historical return drops a little bit, but the volatility drops even more. Thus, the risk-adjusted return actually goes up (dotted-line). The author suggests a 50/50 US/non-US mix as a “realistic target”, while reminding you that if you do add international bond exposure it should be currency-hedged.

Also note the fine print that the chart measures the performance of an index, while international bond funds usually have higher fees in the real world. For example, the Vanguard Total International Bond ETF (BNDX) has an expense ratio of 0.20%, while the domestic Vanguard Total Bond Market ETF (BND) has an expense ratio of 0.08%. The gap is smaller that it used to be, but it still exists.

So it is a critical asset class to include? International bonds are the world’s largest asset class by market cap. Since 2013, Vanguard has included international bonds in their Target Date Retirement and LifeStrategy all-in-one mutual funds – currently 20% of the total bond allocation.

I’m still not convinced myself. I think there may be a benefit in a real-world portfolio, but it likely will be small and even smaller after the higher fund fees and internal trading costs. I just don’t feel the need for such added complexity. As the cost gap shrinks further, I will reconsider.

Inside this AllianceBernstein post about the more complex concepts of levering bonds and risk parity strategies, there was a reminder about simple portfolio construction. For a very long time now, holding both stocks and bonds has been considered a “balanced” portfolio. Why is this? Because stocks and bond returns tend to move in opposite directions.

This behavior can be summed up using the finance term Beta. The 5-year rolling average beta of the S&P 500 return to the 10-year US Treasury return has consistently ranged from negative 0.1 to negative 0.3 over the past decade. This means that when when stocks went up, bonds tended to go down (but not too far down). When stocks went down, bonds tended to go up (but not too far up).

Always good to have a reminder of the benefit of holding both stocks and bonds.