$10,000 Benchmark Portfolio Update – January 2013

Posted on January 8, 2013 // 9 Comments

Time again for a Beat the Market Experiment monthly update, for the first of three portfolios started on November 1st, 2012:

  1. $10,000 Passive Benchmark Portfolio that would serve as both a performance benchmark and an real-world, low-cost portfolio that would be easy to replicate and maintain for DIY investors.
  2. $10,000 Beat-the-Benchmark Speculative Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 Consumer Loan Speculative Portfolio – Split evenly between LendingClub and Prosper, this portfolio is designed to test out the alternative investment of peer-to-peer loans. The goal is again to beat the benchmark by setting a target return of 8-10% net of defaults.

$10,000 Benchmark Portfolio as of January 1, 2013. I chose to open an account at TD Ameritrade due to their 100 commission-free ETF program, including the best low-cost, index ETFs from Vanguard and iShares. I funded it with $10,000 and bought all the ETFs required to be fully invested on 11/1/12. All trades were commission-free. My target asset allocation is below.

Due to simplicity and small portfolio size, for now I am going with 100% stocks and no bonds. This is meant to be appropriate for young investors, who should try to get a long horizon for stocks and can add more bonds later on. According to popular glide paths, a rule-of-thumb is having your age minus 20% in bonds. Here are the ETF components that represent each asset class:
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Filed Under: Investing, Monthly Updates //

Investment Returns By Asset Class – 2012 Annual Returns, Year-End Update

Posted on January 1, 2013 // 3 Comments

Happy New Year! 2012 has come to an end, which makes this monthly update into an annual wrap-up of the trailing total returns for selected asset classes. Passive ETFs are used to represent major asset classes, as they represent actual investments that folks can buy and sell. Return data was taken after market close at the end of December 2012.

Asset Class
Representative ETF
Benchmark Index		 1-Mo 1-Year 5-Year 10-Year
Broad US Stock Market
Vanguard Total Stock Market (VTI)
MSCI US Broad Market Index		 1.23% 16.41% 2.29% 7.94%
Broad International Stock Market
Vanguard Total International Stock (VXUS)
MSCI All Country World ex USA Investable Market Index		 4.19% 18.23% -3.03% 9.41%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
MSCI Emerging Markets Index		 5.88% 18.84% -0.87% 16.20%
REIT (Real Estate)
Vanguard REIT ETF (VNQ)
MSCI US REIT Index		 3.72% 17.67% 6.07% 11.68%
Broad US Bond Market
Vanguard Total Bond Market ETF (BND)
Barclays U.S. Aggregate Float Adj. Bond Index		 -0.21% 4.04% 5.89% 5.17%
US Treasury Bonds – Short-Term
iShares 1-3 Year Treasury Bond ETF (SHY)
Barclays U.S. 1-3 Year Treasury Bond Index		 0.02% 0.31% 2.20% 2.61%
US Treasury Bonds – Long-Term
iShares 20+ Year Treasury Bond ETF (TLT)
Barclays U.S. 20+ Year Treasury Bond Index		 -2.16% 3.25% 9.60% 7.75%
TIPS / Inflation-Linked Bonds
iShares TIPS Bond ETF (TIP)
Barclays U.S. TIPS Index		 -0.64% 6.80% 6.89% n/a
Gold
SPDR Gold Shares (GLD)
Price of Gold Bullion		 -2.43% 6.60% 14.46% n/a

Here is a chart of the 1-year trailing returns for the major asset classes above (also 2012 total annual returns), which I use to help decide where to invest new funds and for rebalancing. Note that I do not necessarily invest in all the listed asset classes, see my personal portfolio for details.

2012 Total Annual Returns

Every single asset class ended up in the green, with equities overall having a very strong year despite lots of continued uncertainty. I haven’t bothered to look, but I remember most forecasts from this time last year predicting a “sideways” market. I see 2012 as another year where it was helpful to ignore all the short-term predictions and instead focus on long-term returns.

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Filed Under: Investing, Monthly Updates //

Explanation For Recent Big Drop In Mutual Fund Values

Posted on December 18, 2012 // 26 Comments

Many people will log into their brokerage accounts in December and be surprised by some curious losses. Not to worry, most likely this is due to your mutual distributing either capital gains and/or dividends. Mutual funds and ETFs are baskets of stocks, so just like with stocks, they can create capital gains when they sell holdings for a profit. By law, mutual fund companies must distribute 90 percent of realized capital gains and dividends each year, and ’tis the season for passing these out.

If you invest with Vanguard, they have a nicely organized list of estimated year-end distributions for Vanguard funds and ETFs, with capital gains broken down into short-term and long-term. Most index funds have very low turnover, so for the most part they have very little capital gains to distribute. Many index funds and ETFs are however distributing dividends.

While your fund’s net asset value (NAV) will drop after a distribution, you’ll get an equivalent amount of cash in your account. Let’s say your NAV is $10 and they make a $3 distribution – you’ll end up with $7 in NAV and $3 in cash. If you have it set to automatically reinvest, then that cash will go back and buy more shares. If you hold them in a taxable account, this means you’ll have to pay the appropriate taxes on these gains on your upcoming tax returns. If they are in a sheltered account like an IRA/401k, then you don’t have to worry about taxes.

For example, the Vanguard Wellesley Income Fund Investor Shares (VWINX) went down $0.53 a share (–2.15%) on Monday 12/17/2012, and the Vanguard Health Care Fund Investor Shares (VGHCX) went down –$4.01 (-2.70%). But the overall market went up? We see though, that VGHCX had the following distributions:

$2.661 per share in dividends
$0.173 per share in short-term capital gains
$1.964 per share in long-term capital gains
—————————————————————–
$4.798 in total distributions

So the vast majority of the changes were in reaction to these distributions ($0.53 vs $0.54, $4.01 vs $4.80). The rest is the actual market value change of the underlying investments.

Find Your Specific Fund’s Distributions
The first place to look for past and future distributions is the website of your fund company, like I did above with Vanguard. If you can’t find it there, I use the Morningstar quote system a lot. Plug in your ticker symbol into the quote box and scroll down for a specific section called “Dividend and Capital Gains Distributions” which will provide you a past distribution history.

Filed Under: Investing //

P2P LendingClub and Prosper Loan Portfolio Update – December 2012

Posted on December 6, 2012 // 10 Comments

As the last part of my ongoing Beat The Market Experiment, here’s the December 2012 update for my consumer loan portfolio. See also my $10,000 Benchmark and $10,000 Play portfolio updates for December 2012.

On 11/1/12, I deposited $10,000 split evenly between Prosper Lending and Lending Club, and went to work lending other people money and earning interest. Here’s how I’m doing it:

  1. 8-10% target return, net of defaults and fees. Each site provides an estimated return based on the interest rate and expected delinquency rate, but I am also using specific filters to try and maximize my return. Overall, I would say my risk profile is moderate/conservative. If I can get an 8% net return over the next 3+ years in the current interest rate environment, I’ll view the portfolio as a success.
  2. Minimal time commitment. I’ve done the manual loan-picking thing, and I’m over it. 400 loans at $25 a pop would take forever. Both sites allow you to save customized loan filters and use an automated investment algorithm to pick a portfolio for you.
  3. Loan Filters. I’m constantly tinkering with the loan filters, but you can get a good idea of what I am using by reading this best Prosper filters post and this older LendingClub filter post. Nothing too fancy, just some broad filters based on historical inefficiencies that may or may not persist.
  4. Loan term lengths and reinvested interest. I thought about only buying loans with 3-year terms in order to have a clean ending timeframe to this experiment, but in reality that would leave a lot of cash at the end as many people pay off their loans early. Also, higher rates are found in 5-year loans. Given the ample liquidity I found in secondary market, if I wanted to end the experiment I could just sell all my loans and cash out. (In October, I sold all of my existing loans on the secondary Folio market in a matter of days, quite easy as long as you’re willing to sell at a discount.) This way I will reinvest any additional cash into new loans maximize return.

LendingClub Details
Below is a screenshot of my LendingClub account as of 12/3/12:
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Filed Under: Investing, Monthly Updates //

$10,000 Play Portfolio Update – December 2012

Posted on December 4, 2012 // 8 Comments

As part of my Beat the Market Experiment, I started three portfolios on November 1st, 2012:

  1. $10,000 “Good Boy” Passive ETF Benchmark Portfolio that would serve as both a performance benchmark and an example portfolio that would be easy to build and maintain for DIY investors.
  2. $10,000 “Bad Boy” Beat-the-Benchmark Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 Consumer Loan Portfolio – Split evenly between LendingClub and Prosper, this portfolio of peer-to-peer loans will have a target return of 8-10% net with the goal of beating the Benchmark portfolio over the long run.

This is the monthly update for $10,000 Play Portfolio as of December 1, 2012. I have to admit upfront that I haven’t devoted much time into this portfolio. I am no wannabe-Warren Buffett, as he would read the financial statements and 10-Ks of any company before buying in. Still, I am serious about trying to beat the market, as this is my own hard-earned money I’m using. I am using a TradeKing account for this portfolio, and here is a screenshot as of close 11/30:


(click to enlarge)

Here’s a pie chart of my holdings:

Details below:

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Filed Under: Investing, Monthly Updates //

$10,000 Benchmark Portfolio Update – December 2012

Posted on December 3, 2012 // 5 Comments

As part of my Beat the Market Experiment, I started three portfolios on November 1st, 2012:

  1. $10,000 “Good Boy” Passive ETF Benchmark Portfolio that would serve as both a performance benchmark and an example portfolio that would be easy to build and maintain for DIY investors.
  2. $10,000 “Bad Boy” Beat-the-Benchmark Portfolio that would simply represent the attempts of an “average guy” who is not a financial professional and gets his news from mainstream sources to get the best overall returns possible.
  3. $10,000 Consumer Loan Portfolio – Split evenly between LendingClub and Prosper, this portfolio of peer-to-peer loans will have a target return of 8-10% net with the goal of beating the Benchmark portfolio over the long run.

This is the monthly update for the $10,000 Benchmark Portfolio as of December 1, 2012. I opened an account at TD Ameritrade due to their 100 commission-free ETF program, including the best low-cost, index ETFs from Vanguard and iShares. I funded it with $10,000 and bought all the ETFs required to be fully invested on 11/1/12. Due to simplicity and small portfolio size, I am going with 100% stocks and no bonds. My target asset allocation is below.

Here are the ETF components that represent each asset class:

Here are my holdings and their market value as of the end of day 11/30/12 (full screenshot):

Here’s the asset allocation:

Total value of stocks: $9,982.21
Cash balance: $24.18
Total portfolio value: $10,006.39

Not too much to talk about this month, I bought everything in a matter of minutes with no commissions at all, and a month into the experiment our total return to date is a snoozefest 0.06%. The Play Portfolio update will be up tomorrow.

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Filed Under: Investing, Monthly Updates //

Investment Returns By Asset Class – November 2012 Update

Posted on December 3, 2012 // 3 Comments

Here is my monthly update of the trailing total returns for the major asset classes that I find useful. I am using passive ETFs to track asset classes, as they represent actual investments that anyone can buy and sell. Return data was taken after market close at the end of November 2012.

Asset Class
Representative ETF
Benchmark Index		 1-Mo 1-Year 5-Year 10-Year
Broad US Stock Market
Vanguard Total Stock Market (VTI)
MSCI US Broad Market Index		 0.75% 15.94% 1.92% 7.19%
Broad International Stock Market
Vanguard Total International Stock (VXUS)
MSCI All Country World ex USA Investable Market Index		 1.84% 10.51% -4.26% 8.59%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
MSCI Emerging Markets Index		 1.32% 8.53% -2.07% 15.16%
REIT (Real Estate)
Vanguard REIT ETF (VNQ)
MSCI US REIT Index		 -0.37% 18.74% 4.20% 11.36%
Broad US Bond Market
Vanguard Total Bond Market ETF (BND)
Barclays U.S. Aggregate Float Adj. Bond Index		 0.16% 4.99% 6.35% 5.39%
US Treasury Bonds – Short-Term
iShares 1-3 Year Treasury Bond ETF (SHY)
Barclays U.S. 1-3 Year Treasury Bond Index		 0.07% 0.33% 2.25% 2.70%
US Treasury Bonds – Long-Term
iShares 20+ Year Treasury Bond ETF (TLT)
Barclays U.S. 20+ Year Treasury Bond Index		 1.34% 9.13% 9.96% 8.45%
TIPS / Inflation-Linked Bonds
iShares TIPS Bond ETF (TIP)
Barclays U.S. TIPS Index		 0.47% 7.56% 6.99% n/a
Gold
SPDR Gold Shares (GLD)
Price of Gold Bullion		 0.37% -1.54% 16.63% n/a

Here is a chart of the 1-year trailing returns for the major asset classes above, which I use to help decide where to invest new funds and for rebalancing. Note that I do not necessarily invest in all the listed asset classes, see my personal portfolio for details.

[Read more…]

Filed Under: Investing, Monthly Updates //

Paying Down a 30-Year Mortgage Faster vs. 15-Year Mortgage

Posted on November 28, 2012 // 16 Comments

What a difference a year makes. In August 2011, I did a mortgage comparison of a 15-year at 3.75% vs. 30-year at 4.75%. Now I’m redoing that same comparison at current market rates of 30 yr @ 3.25% vs. 15 yr @ 2.625%! To be fair, the numbers I used in 2011 were somewhat high.

In any case, the purpose of this comparison to compare the numbers if you wanted to pay down a 30-year mortgage in a 15-year accelerated timeframe, as opposed to just going with the lower interest rate and mandatory higher payment. I’ll be using the mortgage calculators at Dinkytown.

The 30-year at 3.25% would have a monthly payment of $1,305, while the 15-year would have a monthly payment of $2,018. Now, what would happen if we simply paid the $2,018 towards the 30-year mortgage? Using the calculator, we would enter an additional monthly payment of $713. That tells us the 30-year-plus-extra mortgage would be paid off in 15 years and 11 months, requiring 11 additional payments of roughly $2,000 and thus an extra $22,000 of interest in the end. However, the 30-year does allow me the flexibility to reduce my payment by about $700 a month if things get tight. Is the higher cost worth the extra flexibility?

I thought so when I got my first mortgage, but changed my mind once I figured that if I were to hit so hard that I couldn’t make the 15-year mortgage, I probably wouldn’t want to keep paying the 30-year either and would just sell the house and move somewhere cheaper and smaller. I viewed the potential payoff of going with the 15-year mortgage as being to retire one full year earlier.

Lots of people see the low interest rate for the 30-year mortgage and want to use that money to invest in the stock market. That may work out well if you actually invest your money as planned, I don’t know. I personally have enough invested in the stock market as it is, I don’t really want the extra leverage of essentially investing on margin with borrowed money. There is also a chance that the mortgage interest deduction may get capped or phased out over the next several years. That’s a lot of unknowns. I do know a top rate for a long-term certificate of deposit is the 10-year CD from Discover Bank with a yield of 1.90% APY. Meanwhile, the yield on a 30-year Treasury is 2.79%.

In the end, I don’t think there necessarily is a right or wrong answer. There are even more small nuances that went into my decision process, I’ll try and gather those thoughts for next week.

Filed Under: Investing, Real Estate //

Mortgage Rates Still Dropping: Good Time To Switch From 30-Year to 15-Year?

Posted on November 28, 2012 // 12 Comments

In case you haven’t been paying attention, mortgage rates are still dropping to new lows. Here’s a chart of the historical mortgage rate averages since I bought my house in late 2007, courtesy of HSH.com. It includes the 30-year fixed, 15-year fixed, and the 5/1 30-year adjustable.

From looking up some quotes (see below), 30-year fixed rates are ~3.125% now (~3.5% with no closing costs), and 15-year fixed rates are ~2.5% (~2.875% with no closing costs). Can you honestly say that you would have expected this 10 years ago? Another example of the difficulty of predicting the future.

If you haven’t refinanced in a while, it is definitely worth a try to see how much you could save a month. But what are you going to do with that savings? Buy more stuff that you don’t need? Buy more house that you don’t need? Why not consider refinancing into a 15-year mortgage and have that house paid off much sooner? From this CNN Money article using recent average rates:

Homeowners current paying off 30-year loans with rates of 4% spend about $1,098 a month in mortgage payments on a $200,000 balance, paying a total interest cost of $143,739. Refinancing at 2.63% for 15 years would cost them about $250 a month more, but they would wind up paying just $42,250 in total interest and their payments would end years earlier. Refinancing into another 30-year loan at 3.31% would cost homeowners only $877 a month, saving $221 from the existing loan.

If were to give advice to my future kids, it would be to determine home affordability only using the 15-year mortgage. Just forget the 30-year exists. You’ll be forced to budget properly and if you buy a house at age 30 you’ll be mortgage-free by 45! I think they would thank me in the end. I can still tell them their old man paid his off at 35, of course. 😉

Compare with rate quotes from:

I hear that Costco provides a mortgage refinance referral service now as well – any real-world experience with them from readers?

Recent mortgage refinance articles:

Filed Under: Investing, Real Estate //

Beating the Market: Investment Skill, or Luck?

Posted on November 13, 2012 // 9 Comments

One of the eternal questions in investing is whether performance results are due to skill or luck. We’ll probably never get a universally-accepted answer, but Michael Mauboussin (chief investment strategist at Legg Mason Capital Management) explores the subject in his new book The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing.

I haven’t read the book, but in a WSJ interview the author shares a graphic illustrating where he views investing on the skill-to-luck continuum. At the extremes are the pure luck of roulette and the overwhelming dominance of skill in chess.

Mauboussin is quick to explain that the luck factor comes into play because making money is a hugely powerful motivator and thus draws in the smartest people in the world. This leads to competition at such a high level that differences in results are mostly luck, especially in the short-term.

This reminds me of another famous skill vs. luck argument by Warren Buffett called The Superinvestors of Graham-and-Doddsville (Wikipedia). You can feel his annoyance at the academics suggesting that his mentors were simply statistical anomalies.

For the record, I don’t believe in the academic definition of the efficient market hypothesis either. But as the graphic above suggests, market efficiency is not a yes/no situation but a matter of degree. Even Buffett has repeatedly stated that most investors would be better off in low cost index funds, and even wagered $1 million that the Vanguard S&P 500 index fund would outperform a basket of hedge funds over a decade. The bet started in 2008, and as of March 2012 the index fund is ahead. Of course, no matter who wins, was it skill… or luck?

Filed Under: Investing //

Prosper: Best Search Filters for Automated Quick Invest

Posted on November 8, 2012 // Leave a Comment

(This post is for investors and lenders. If you need a loan or debt consolidation, check out my LendingClub vs. Prosper comparison for borrowers.)

As part of my new Beat-the-Market Experiment, I have dedicated $5,000 to Prosper. As a quick recap, Prosper.com securitizes person-to-person loans so that you can lend money to other people in $25 increments and earn interest. The idea is to replace banks and credit cards as the middlemen. Since their mid-2009 re-launch after SEC registration, there have been a full cycle of 3-year Prosper “2.0” loans fully maturing with an average net return of over 8% annualized. However, this is still unsecured lending which means no car or home as collateral, and thus there is a risk of loss (which can be mitigated by diversifying in multiple loans).

Prosper looks at the credit history of prospective borrowers and charges them an interest rate based on a Prosper Rating of AA, A, B, C, D, E, or HR (high risk). (The ratings are relative; the minimum credit score is 640.) Now, if Prosper’s grading system was perfect, life would be simple. The interest rate charged would be high enough to cover any defaults plus a little extra for the added heartburn. Ideally, after defaults and fees are accounted for, perhaps AA loans would earn 6%, C loans would earn 8%, and E loans would earn 10%.

However, things aren’t quite that neat. Prosper publicly shares all its loan information, and smart folks have made tools to analyze that data. Currently, the best place to go is Prosper Stats. If you take all the loans, we see that AA loans have a net return (after estimating losses from late loans and actual losses from defaults) of ~6%, C loans had a net return of ~11%, but E loans only returned ~9%. Hmm. Look further and you’ll see other small inconsistencies. For example, loans to people with 2 or less open credit lines actually have a measly 3% net return, while loans to folks with 18+ open credit lines open have net annualized returns of over 11%?!

As a result, many investors avoid investing in Prosper loans blindly and instead use specific search filters. Indeed, Prosper makes it easy with their “Automated Quick Invest” service which automatically invests in loans that satisfy your custom search rules. There’s no need to spend time every day looking for loans. So, what are some possible criteria?

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Filed Under: Investing //

Ask the Readers: Portfolio Advice for a World Traveler

Posted on November 5, 2012 // 4 Comments

One of my online friends, Nomadic Matt, approached me for some investing advice. Matt changed his career path and now travels around the world and writes about it for a living. Not a bad gig, eh?

Matt and I had a short chat about his goals and situation, which he agreed to open up to outside advice as he has some specific investment ideas and leanings that he’d like to explore. I believe he is single in his late 20s or early 30s, and he also has an MBA so he’s not starting from scratch.

MMB: So roughly how much money are we talking about here? How is it currently invested and in what types of accounts (bank, IRA, brokerage, etc)?

Matt: I have a small five figure sum invested in a SEP IRA.

MMB: What is your timeline and goals for this money? Are you looking to save for retirement, a house, or something else? Would you want access part of it if needed? If retirement, are we talking at age 40 or 65?

Matt: It’s in an IRA, so retirement. I just want it to grow. I wouldn’t need to before 65.

MMB: Approximately how much additional money are you going to be able to contribute in the future?
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Filed Under: Investing //
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