While poking around doing research on municipal bond funds, I ran across this 2010 Marketwatch article about the personal portfolio of Jack Bogle, founder of Vanguard.

The 81-year-old Bogle said that for his personal portfolio he follows an age-based formula. The founder of the Vanguard Group has 81% of his personal assets, including his retirement plan, in bonds and 19% in stocks. […] “I’ve always had in the back of my mind this incredibly simplistic idea, that your bond position should have something to do with your age,” he said.

[…] In his retirement portfolio today, he’s got two-thirds of his bond portfolio in the Vanguard Total Bond Index fund and one-third in the Short-Term Investment Grade bond fund. In his personal portfolio, Bogle’s got two-thirds of his bond portfolio in the Vanguard Intermediate-Term Tax-Exempt bond fund and one-third in the Vanguard Limited-Term Tax-Exempt bond fund.

Now, you have to remember that Bogle is 81 and even though he didn’t take the Goldman Sachs private yacht route, it’s safe to say he doesn’t worry about wringing every last penny out of his investment returns. Of course, I don’t think he’d want to own something that would tank in price, either. I’m sure he thinks of his portfolio as more of a lesson to other investors than anything else. As such, here are my takeaways:

Age in bonds. Bogle said age in bonds, not bet the house on bonds as the article seems to suggest. If you’re 25, that’s just 25% in bonds which provide some needed stability to your portfolio. Look at 2011 year-end returns as just one example. At age 65, that’s 65% in bonds. Even if you think the stock market is going to outperform bonds, do you really want to expose yourself to 70% or 80% stocks in retirement? Even if you don’t follow this rule exactly, it can serve as a rough guide.

(As for the 19% stocks, you can reference this older 2006 Morningstar article where he lists the Vanguard Total Stock Market Index fund as well as some active holdings in Wellington, Wellesley, Windsor, and Explorer. These are sentimental holdings – he was once Chairman of Wellington Management before founding Vanguard – which aren’t index funds but are still very low-cost.)

What kind of bonds? In tax-deferred accounts, he holds the Total Bond index fund (mix of Treasuries, GNMAs, corporates) and some short-term high-quality corporate bonds. In taxable accounts, he holds intermediate to short-term municipal bonds. The Vanguard muni bond funds are actively-managed to maintain diversification across states and counties, and all maintain relatively high credit ratings. I currently hold the same muni bond funds (limited and intermediate). I also own TIPS, which is not mentioned in this article but was in his portfolio as of 2006.

Now, he is obviously pro-Vanguard but an important thing with bonds is low-cost. With Treasuries and TIPS, the credit risk is all the same so you could technically buy them directly yourself. Otherwise, low-cost funds and ETFs are the only thing I hold. Bogle also doesn’t extend his average bond duration very long in any case, which protects you somewhat in the event of rising interest rates. I also gather from this that he does not fear widespread defaults in the muni bond arena. I don’t know where Bogle lives (I think Pennsylvania) but he chooses not to use any state-specific muni bond funds.

I’ve been waiting for some good graphics about the performance of various asset classes for 2011. Got any? I’d try and make one myself, but I’m exhausted from year-end festivities. Below is one from Scotty Barber of Reuters (click to enlarge):

I also saved as a PDF the performance data from all Vanguard mutual funds after the close of the last trading day of 2011 (download link). Selected funds:

As a reminder that being this year’s best performing asset class is no guarantee of for future years, here’s the Periodic Table of Investment Returns from Callan that shows the relative performance of 8 major asset classes over the last 20 years (1991-2010, click to view PDF).

Any predictions for 2012? 🙂

I’ve written a little bit in the past about including small-value stocks to your investment portfolio. “Small” means companies with a relatively smaller market cap (total market value) – definitions vary from being the bottom 10% by capitalization or being worth less than $1 billion. “Value” stocks are those that tend to trade at a lower price relative to others when measured against markers like earnings, dividend yield, sales, or book value.

This NYTimes article on the portfolio of investment advisor and author Larry Swedroe included some concise examples of how significant this small-value premium has been in the past. For one, small-value stocks outperformed the S&P 500 by about 4% annually from 1927-2010.

Put another way, by making a portfolio using small-value stocks and US Treasury bonds, you could have gotten similar performance to the S&P 500 with much lower risk. Specifically, you could have held 1/3rd small-value and 2/3rd Treasury bonds and had close to the same return as the S&P 500 over a 40-year period from 1970-2010. This chart summarizes:

Source: Buckingham Asset Management, New York Times

Will this “small-value premium” continue to persist? There are a few theories out there. One is behavioral, where small-value companies tend to be the more ignored and unpopular companies and thus are consistently underpriced. Another is based on the fact that small-value companies are simply riskier, and thus investors demand a higher return for holding them.

I happen to believe that there is something enduring about small-value stocks, but the size of my bet on that belief is relatively small – only about 5% of my target stock allocation. But I also know that you need to hold a very strong belief in whatever internal explanation you have for the outperformance. Otherwise, when small-value is the dumps for a while relative to the Current Hot Thing – and it will be, one day – you’ll sell and lose any potential edge.

E-Trade has decided to join in on the commission-free ETF party, announcing a limited set of ETFs that you can trade with no commission fees effective 12/16/2011. However, to “discourage short-term trading, E*TRADE will charge a short-term trading fee on sales of participating ETFs held less than 30 days.” I tried but couldn’t find how much that fee was on the fees page. Thanks to reader Shraz for the tip.

The fund companies represented include WisdomTree, Global X, and db-X (Deutsche Bank). Many of the ETFs are definitely niche products, like a New Zealand Dollar ETF or a Aluminum ETF… meh. There are a few ETFs that may be somewhat interesting, if you like the idea of a dividend-weighted strategy:

WisdomTree Total Dividend ETF (DTD)
WisdomTree LargeCap Dividend ETF (DLN)
WisdomTree SmallCap Dividend ETF (DES)
WisdomTree Emerging Mkts SmallCap Dividend ETF (DGS)
WisdomTree International SmallCap Dividend ETF (DLS)

For context, here’s more information on other brokerage companies with their own specific ETF lists:

• Vanguard commission-free ETF list
• Fidelity commission-free ETF list
• Scottrade commission-free ETF list
• Firstrade commission-free ETF list
• Schwab commission-free ETF list
• TD Ameritrade commission-free ETF list

If you are the type of investor that wants to buy low-cost, index/passive ETFs with no commmission fees, I would say that Vanguard and TD Ameritrade are the best bets. You could build a low-cost and simple ETF portfolio from Total US (VTI), Total International (VEU), Total Bond (BND), and Inflation-Protected Bonds (TIP) for free at TD Ameritrade. You’d have to either go with a mutual fund version for TIPS or pay a commission for TIP from Vanguard.

Jemstep is a new website that lets you track your investment portfolio along with providing advice on improving your mutual fund and ETFs holdings. In terms of existing products, you could call it a combination of the all-in-one view of of Mint.com plus the mutual fund ratings of Morningstar.com. However, the key difference from Morningstar is that their Jemscore ranking system is customized for your specific preferences. The weighting of different factors changes with your answers to the topics covered by their “goal preference” survey:

• Demographics: Age, time to retirement, etc.
• Risk tolerance: Common risk-questionnaire survey questions about return vs. volatility
• Fees, Taxes, & Income: Sensitivity to fees, taxes and gains, preference for income vs. total return
• Fund preferences: Active vs. passive, manager tenure, loads, etc.
• ETF preferences: Liquidity (volume) preferences, bid/ask spread sensitivity

Investment Account Aggregation
I haven’t entered all of my brokerage accounts, but so far the aggregation service works fine and all my different holdings including individual Treasury bonds shows up fine. Jemstep uses CashEdge for account aggregation, which is well-known and the backbone of several big banks. Although anything with a ticker symbol is tracked, Jemstep only provides rankings for mutual funds and ETFs and not individual stocks or bonds. There isn’t much in the way of asset allocation breakdowns or volatility measurements. (Update: There is an asset allocation chart available in the Portfolio summary page, although it may not pick up all your holdings.) It does track the historical performance of your accounts, which you can compare to a few basic benchmarks like the S&P 500.

Mutual Fund Rankings
I certainly like the idea of a customized ranking system. However, if anything, I don’t know if it goes far enough. The main weakness I see in their ranking system is the same as for Morningstar. Despite my survey answers, overwhelmingly what matters most is recent past performance. The rankings change each month, so if you always want to hold the “best fund” you’lll be left chasing one hot fund after the next. The top-ranked fund will rarely ever be an index fund.

For example, let’s look at my holding of the Vanguard Emerging Market Index ETF, VWO. Instead, it recommends as #1 the iShares MCSI Malaysia ETF (EWM). Okay, the Malaysian market has been doing quite well recently, but would it really be wise to hold a single small country ETF with a 0.53% expense ratio as opposed to one that holds all the emerging economies from China to Southeast Asia to Latin America, all at 0.22% expense ratio? Likewise, Morningstar has EWM at a 5-star rating and VWO at only a 4-star rating. Screenshot (click to enlarge):

Another #1 fund ranked for me was the Yacktman Fund (YACKX). I actually kind of like this actively-managed fund as a “fun money” holding, as the manager takes concentrated bets and isn’t afraid to be different than the crowd (right now, its portfolio is 11% Pepsi and 11% News Corp). But again, right now the past performance of Yacktman looks really great. But some quick research shows that back in 2000, recent performance was awful, and the fund’s assets were only $69 million which means very few people owned it. The fund’s own board of directors tried to oust him (see 2001 Kiplinger’s article). Would Jemstep (or Morningstar) have been recommending it then?

(Update: Betterment has a new promo for a $100 bonus with $10,000 investment held for at least 60 days. This is a bigger bonus with bigger requirement than the previous $25 bonus for a $250 investment. In case you wanted to know, my $1,000 experimental Betterment portfolio has been fully converted to the new asset allocation already, and is currently worth $964.)

Betterment.com is an investment service that started up last year, where simplicity and ease of use is the focus. Back in May, I opened an account for myself and wrote a review of Betterment. Right now if you open an account with at least $250, you will get a $25 bonus.

My primary gripe at the time was their asset allocation for stocks. (I actually liked the simply bond allocation.) However, I recently received an e-mail that they are making some changes in September. Before:

• 20% Vanguard Total Stock Market ETF (VTI)
• 20% iShares S&P 500 Value Index ETF (IVE)
• 20% iShares S&P 1000 Value Index ETF (IWD)
• 15% iShares Russell 2000 Value Index ETF (IWN)
• 15% iShares Russell Midcap Value Index ETF (IWS)
• 10% SPDR Dow Jones Industrial Average ETF (DIA)

After:

• 25% Vanguard Total Stock Market (VTI)
• 25% iShares S&P 500 Value (IVE)
• 25% Vanguard Europe Pacific (VEA)
• 10% Vanguard Emerging Markets (VWO)
• 8% iShares Russell Midcap Value (IWS)
• 7% iShares Russell 2000 Value (IWN)

The major change is that they are adding international stock exposure, which is nice since about 55% of the world’s publicly traded market value is outside the US. They have landed on a conservative 35%/65% international/US split. You may also notice that they got rid of the Dow Jones ETF, which I complained about as well since the Dow Jones is simply not a very good index. The iShares S&P 1000 Value Index ETF is gone as well, most likely because it had so many overlapping holdings with the S&P 500 Value index.

How will the change occur? From the same e-mail:

Starting in September, your account will automatically begin transitioning to the new portfolio, and will be phased in over a period of two months to take advantage of average pricing over time.

Such a change to their portfolio and the subsequent buying/selling will unfortunately mean some extra tax bills for investors, but this is how it goes with internet startups. In the long-term, I feel the changes make Betterment a better product.

I’ve gotten a few questions about the Dogs of The Dow, which is a stock-picking strategy that involves buying equal amounts of the 10 highest-yielding stocks from 30 companies in the Dow Jones Industrial Average. At the beginning of each year, you adjust the portfolio to again to hold only the top 10 highest-yielding stocks from the previous year, selling the rest.

This strategy had its 15-minutes of fame in the 1990s, but somehow keeps popping up now and again. At the site DogsOfTheDow.com, you’ll see a rather biased presentation of this strategy. I mean, look at the very first sentence of the site, after all the ads (emphasis mine):

Looking for a simple way to select high dividend yield Dow stocks for your investment portfolio? Try Dogs of the Dow. Read on and you will discover a technique that would have given you a 17.7% average annual return since 1973! That’s not bad, especially considering that the Dow Jones Industrial Average overall return was 11.9% during that same period (As reported in U.S. News & World Report, July 8, 1996)

Umm… yes, in 1996 this strategy was found to have excellent results looking backwards (known as data mining). That was fifteen years ago! You’d think the stats would have been updated a bit since then. I wonder why it hasn’t? Perhaps it’s because the Dogs of the Dow strategy has since lagged the Dow itself over the last 15 years. Check out this MarketWatch article by Mark Hulbert:

The strategy took the investment world by storm in the early and mid-1990s, on the strength of both its simplicity and excellent long-term track record — at least when back-tested. A funny thing happened on the way to the bank, however: In real time since then, the strategy has failed to keep up with a simple index fund. For example, the strategy has beaten the Dow itself in just 5 of the last 15 calendar years. And those five winning years have not come close to making up for the losses incurred in the 10 losing years.

As with many such simplistic strategies, as soon as it is pointed out, the market adjusts and the outperformance disappears. So while I’m still intrigued by the idea of living off of dividend income, I see nothing special about the Dogs of the Dow.