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What Should ‘Risk On’ Mean For You?

Summary Evidence suggests that in many quarters, a “risk on” phase of investing sentiment is afoot. The kinds of risks being taken suggest to me that we are in the later stages of a favorable stock market environment. Nevertheless, the U.S. economy seems to me to be basically sound, which makes a negative market event in the near future relatively unlikely. Still, there are enough ways that a negative market event could be triggered that a level of caution – rather than throwing oneself into the risk-on fever – is advisable. On November 2, 2015, The Wall Street Journal brought us flashing signs that the markets have entered a new “risk on” phase. Cam Hui predicted this a few of weeks ago, and now the mainstream press is confirming the trend. Here is one of Cam’s excellent slides focusing on the markets in 2011 and how fear and greed come and go: (click to enlarge) Cam’s slide shows sentiment in the market yees and yaws has little relation to fundamentals. The Wall Street Journal shows risk on The WSJ’s November 2 risk on coverage included these three Page One articles (Note: The headlines here are from The Journal ‘s print edition): In my opinion, these all are signs that financial markets are taking on increased risks. And usually they would be signs that trouble is ahead. Of course trouble always is ahead-somewhere, some time. To say that trouble is ahead helps very little. The problem for investors is whether the time is proximate and the place is wherever they are invested. But before we get to the ‘when and where” hard part, let’s be sure we understand how risk builds up and how certain kinds of institutions react to the forces that impel risk-taking. The role of international funds flows External debt almost always is involved in the build-up of asset values that crash. Robert Aliber, Chicago Booth School professor emeritus, explains how this works in the sixth and seventh editions of Charles Kindelberger’s classic Manias, Crashes and Panics , of which he is the author. Even if you have read Kindelberger’s earlier editions, Professor Aliber’s opening chapters are worth your time. We can trace external buying of debt, often in currencies that are different from the currency of the country whose entities are incurring the debt, as important parts of the crises in, for example, Latin American debt in the 1980s, the Mexican peso crisis of 1994, the Asian contagion crises of 1997, and the U.S., Ireland, Iceland, Spain and Greece problems beginning in 2007. I ascribe this phenomenon in part due to foreigners’ unfamiliarity with local markets. The foreign money is dumb money, I say. And it goes abroad when it is seeking better yields (and is unable to evaluate the risks properly) or simply has too much cash that it cannot invest at home (Eurodollar recycling by U.S. banks in the late 1970s, for example). I have not convinced Professor Aliber that my “dumb foreign money” theory is correct. He thinks macroeconomic forces are more likely the origin of the international capital flows. Maybe both forces are at work. Whichever (or whatever) the origins, the historical record suggests that we should be wary when we see large international capital flows, especially when the borrower cannot print and does not naturally trade in the currency borrowed. Foreign adventures by domestic players We also know that when certain kinds of institutions that have little international experience open offices and make investments in unfamiliar nations, the jig soon will be up. Within about three years, the flaws in their strategy will begin to appear. The German Landesbanks are perfect subjects for this test because they were established by the state and are owned by the state to serve purposes that became unnecessary decades ago. (I explained this in my book Debt Spiral .) Therefore they are always looking for new ways to make money. The Landesbanks were prominent victims of that tendency in the 2007-2009 market events. They were, if you recall, among the first banks to get into trouble in August 2007 because of their Ireland-based, U.S.-invested SIVs. Punters’ success lauded When the financial press starts lauding the successes that risk-takers are having, such as those that buy out-of-the-money Brazilian and Russian bonds, that is anther sign of trouble ahead because people will emulate the apparent successes at precisely the wrong times. Such games work if you can get out fast enough. But the door is not large, and it closes swiftly. Nevertheless, the WSJ reports that “fund managers are trying to manage those risks by staying nimble, rather than holding positions for an extended period which could be hurt by sudden market downturns.” Good luck. Record bond issuance but not much actual investment The WSJ touts the healthy corporate bond market as a sign of a strong U.S. economy. I do not think the economy is weak, but I do not think the strong bond market is such a good sign. What is the money being used for? It is being used largely for stock buybacks and acquisitions. Using debt for those purposes weakens the U.S. economy over the long term because it makes more companies fragile in downturns. And it tends to support stock market prices at levels that naturally decline when the flood of acquisitions and stock buybacks eases. Debt for productive investment can be a positive, but debt that mostly reduces the float of common stock serves no beneficial purposes that I can see, other than those of management and shorter-term stockholders. It is not something to celebrate as indicative of a strong economy. It is indicative of low interest rates, the reach for yield, and the temptation to replace equity with debt. Deal volume Another sign of a long-in-the-tooth market is deal volume. The deal volume in this case goes hand-in-hand with debt issuance. The deals mostly are designed to reduce competition, which may be good for corporate profits but is bad for the economy as a whole. And it indicates that companies do not see organic growth in their futures, which is not a sign of strength. Most companies do not sell out or pay up to acquire when they see bright futures for their independent selves. But don’t get carried away, please Don’t listen to scare-mongering, however. The FT had a particularly egregious article on November 2, in which the writers explored the possibility of a market meltdown caused by investors fleeing balanced mutual funds because the bond market was going down. That is preposterous stuff foisted by the big banks that want lower capital and the right to trade freely for their own accounts. The FT writers are particularly susceptible to this bilge; I do not know why. Balanced open-end funds are safer than houses, so long as they are not leveraged. The U.S. economy is OK I think the U.S. economy, despite all the negatives that I have listed for the future of capital markets, is OK. Neil Irwin had an interesting piece on The New York Times Upshot site last week in which he said he was undecided about whether the U.S. economy was OK or not. As I read the article, he really came out that the economy, despite all the negative signs, is OK. (If you haven’t read it, it is worth a look.) And that is where I come out. At the end of 2012, I wrote on seekingalpha that I was optimistic about the U.S. economy through 2015. Here we are almost at the end of 2015, and without going into detail here, I remain optimistic for the near future. Continued slow growth seems likely. We seem likely to have neither the great strides in productivity nor the large working population increase that might lead to faster growth. And I do not expect the government to begin any historic spending sprees. But the downside negatives almost all emanate from abroad, and the U.S. economy has been dealing with foreign negatives for the entire time it has slowly recovered since 2009. When, where, how? So much for the easy stuff. When, where, how will a negative market event occur? “Why” is not for us to know. “When where, and how” is hard enough. If I really knew when, where, and how, I would be a very rich man. Since I am not a very rich man, we must presume that I do not know. But thinking about such things concentrates the mind. And if you think about this question along with me, I think you will clarify your own views. The relative status quo could go on for quite a long time. And I do not expect the downside stimulus to come from China in the near future. Even though I think China is in for some rocky times, I think the Chinese government and economy will be able to handle them. I have written about that at nexchange.com, where I publish short pieces weekly. But weak credits have attracted too much money and stock markets are priced high largely because of low interest rates. Both those factors would be quite vulnerable to a material increase in interest rates. But I do not think the Fed is going increase rates significantly. There is no reason to do so. A discursion on monetary policy I do not regard myself as an expert on monetary policy, but so many commentators talk about it without meeting that requirement, why shouldn’t I? I do a lot of reading and even correspond with some macroeconomists. It seems to me that for the Fed to raise rates in order to have room to lower them again when a recession occurs lacks logic. The U.S. economy is in slow-growth mode. If it could stay there for an extended period of time without a recession, that would be a good thing. Therefore monetary policy should encourage continued growth, if possible without encouraging credit bubbles. I take that to suggest a monetary policy that is neutral, by which I mean a policy that permits the market to set rates to the extent possible. If the “natural” rate of interest is about zero, then policy should permit rates to remain near zero. And there is considerable evidence that the natural rate (economists call it the Wicksellian rate) is near (or even below) zero. Why raise the rate artificially, which may cause a recession, merely to have the “firepower” to lower it again? On this subject, let me share an interesting graph from Bill Longbrake’s monthly letter that is published by my friends at the Barnett, Sivon & Natter law firm: (click to enlarge) The chart is hard to read, but the data are important. What they show is that the Fed and some other major forecasters (the BofA and Goldman Sachs forecasters that Bill follows every month) are expecting a Fed Funds rate of 3% or more by 2018. If that is going to happen, then I think bad things are going to happen to the U.S. economy and to the U.S. stock market by 2017. Fortunately, Bill Longbrake disagrees. He forecasts close to a zero Fed funds rate still in 2018, and Bill has a better forecasting record than the Fed. I am sticking with Bill on this, but please recognize that we seem to be in the minority and that our being wrong could have significant negative consequences. What might cause a negative market event? Regardless of what the Fed does, I think we will see is some of the risky bets not paying off, the weak credits being unable to refinance, as well as a rise in bankruptcies and delinquencies that already have been occurring over the last year in the energy sector. Many parts of the global economy have depended on the energy sector to buy their products. They are likely also to experience problems, and it is likely that they, like the energy companies, borrowed heavily to expand their capacity quickly and that their creditors also will suffer. U.S. housing remains expensive. Here is a graph of real house prices through August 2015 from Calculated Risk. (click to enlarge) As you can see, house prices are almost back where they were at the top of the boom in 2005-6, with middle class incomes having barely budged since 1999. As I wrote in a lengthy article back in February 2012, housing cannot lead the economy until house prices are affordable for the middle class. In that article, I saw 1997 as a benchmark year when house prices were still affordable in terms of incomes. But house prices now are even more above the 1997 level than they were in 2012, with barely any progress in middle class incomes. Houses are more affordable than they otherwise would be because interest rates are low and heating oil costs have declined. But house prices remain a problem, and household formation and the healthy consumer expenditures that follow that are deterred by the high prices of houses, as well as by student loan balances, a lower marriage rate, and several other economic and social forces. Some respected forecasters say household formation is picking up. So far, I do not see it. A decline in house prices therefore would be a mixed event. It might stir household formation, but it also might cause another round of foreclosures, particularly on properties that have little equity (which means just about everything financed by the FHA), and it might have a negative “wealth effect”. A big change from my thinking a couple of years ago is that whereas in February 2013 I saw rising capital flows propelling global stock prices higher, I now think global capital flows are reversing. That means liquidity most likely will not continue its upward thrust. These various cautions suggest that the U.S. stock market will not produce large returns over the next year or two. But will something cause a major disruption in the next year or two? I am starting to think that is not likely. I have no better crystal ball than anyone else, but I do not see a catalyst on the horizon. The major suspects would be politically or geopolitically unsettling. For example, both parties in the U.S. have enough dumb ideas that, if adopted, one of them could have negative economic consequences sufficient to cause a recession. Or a trigger-happy president could find reasons to do foolish things. Or the Fed could raise rates at a pace that would knock the value foundation out from under the stock market. I am hopeful that American public officials will see the difficulties and not score an “own goal”. A few days ago, I published A Portfolio for the Next Market Crash-Revisited . In that article, I discussed my February 2013 prediction that a negative market event likely would occur in the next five years and that we are now half way through that period. I concluded that I had not changed my investment strategy as a result of events over the last two and a half years. Even though I am suggesting today that I do not think a market event is likely in the next two years, I remain convinced that, at least for investors over, say, age 50, prudent portfolio management indicates being somewhat protective even while maintaining an optimistic outlook. “Risk-on” may be fine for traders. For longer-term investors, it is best not to be tempted at this point in the cycle. Of course, if you’ve really gotta have that new Porsche Panamera, and you only have a spare $40,000…

The Two Definitions Of Net-Nets: Net-Net Working Capital Versus Net Current Asset Value

Summary There are two definitions of net-nets: Buying stocks at below two-thirds of net current asset values (NCAV), and purchasing stocks trading under net-net working capital, a revalued version of NCAV. I offer some general principles and caveats that apply in the case of both low P/NCAV net-nets and low P/NNWC net-nets. My exclusive research service, Asia/U.S. Deep-Value Wide-Moat Stocks, provides watchlists and profiles of net-nets, net cash stocks, low P/B stocks and sum-of-the-parts discounts. Defining Net-Nets Two different “versions” of net-nets have evolved from the teachings of Benjamin Graham in his two books “Security Analysis” and “The Intelligent Investor.” The first definition of net-nets involves comparing the net current asset values (current assets – total liabilities) (NCAV) per share of stocks against their share prices and buying them if the P/NCAV ratios are below two-thirds. The second definition of net-nets, more commonly known as net-net working capital (NNWC), makes an attempt at “revaluing” NCAV with the following adjustments: +100% of cash and short-term investments +75% of accounts receivables +50% of inventories -100% of all liabilities Both definitions of net-nets try to incorporate a margin of safety for the collectability risk of accounts receivables and the salability of inventories to a certain extent (the former through an arbitrary discount assigned to the net current asset value; the latter via specific discounts for accounts receivables and inventories). Most deep value net-net investors tend to use the first definition of net-nets, P/NCAV, in their search for potential investment candidates, as the screening for low P/NNWC stocks is more difficult in reality (compared with low P/NCAV stocks). Firstly, there is a greater likelihood of data services providers getting the calculation of accounts receivables wrong since a significant number of companies tend to lump accounts receivables and other receivables and may not provide the necessary disclosure to differentiate between them. If one incorporates all receivables (including non-operating receivables) in the calculation of low P/NNWC net-nets, he or she may be overstating the value of NNWC. Secondly, simply taking 100% of cash and short-term investments at their face values may not be the wisest thing to do since the market values of short-term investments will fluctuate and not all cash are unencumbered and excess in nature. Thirdly, the 25% and 50% discounts assigned to accounts receivables and inventories respectively may not be appropriate for all companies. For example, some companies may have customers which are MNCs or government-linked where the probability (and history) of defaults is close to zero, so even a 25% discount for accounts receivables is considered harsh. On the other hand, for companies which sell products with short lifecycles and shelf lives and are witnessing growing inventory days, a 50% discount for inventories may be simply too little. The second definition of net-nets, buying at less than two-thirds of NCAV tries to solve this problem by assigning a blanket 33% discount to all the current assets on the balance sheet. Stocks Trading At Low P/NCAV But High P/NNWC Continuing from the discussion above, it will be intuitive to conclude that stocks trading at low P/NCAV ratios but high P/NNWC are likely to have lower margins of safety since the “quality and quantity” of assets are questionable. I provide two examples of such stocks for illustrative purposes below. I focus on assessing the margin of safety for the stock (comparing net current asset value against net-net working capital) rather than the stock’s investability as a net-net. STR Holdings (NYSE: STRI ), a provider of encapsulants to the photovoltaic module industry, appears on the net current asset value screen as a net-net trading at 0.32 times P/NCAV, but it will not qualify as a net-net if one considers its P/NNWC ratio of 1.5. This is because STRI’s current assets include income tax receivable and other current assets amounting to $8.3 million and $4.7 million respectively, which I do not include in the calculation of NNWC. Hong Kong-listed Xinjiang Tianye Water Saving Irrigation System Co. ( OTC:XJGTF ) (840 HK), a company engaged in the design, manufacturing and sales of drip films, PVC/PE pipelines and drip assemblies used in water saving irrigation system, is valued by the market at a P/NCAV of 0.64 times, but its P/NNWC ratio exceeds 2 times. This is largely due to the fact that inventories and accounts receivable contribute 63% and of 16% of Xinjiang Tianye Water’s current assets respectively and are therefore heavily discounted based on the net-net working capital formulae. The full list of 75 U.S. and Asian low P/NCAV (less than 1) net-nets trading at high P/NNWC (greater than 1) ratios, which should warrant greater attention to their underlying asset values, is available exclusively for subscribers of my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service in a separate bonus watchlist article. Assessing The Real Margin Of Safety For Net-Nets There are some general principles and caveats that apply in the assessment of the margins of safety for both low P/NCAV net-nets and low P/NNWC net-nets. One of them is the collectability risks relating to accounts receivables. Accounts receivables are near-cash in nature as long as they do not become bad debts i.e. customers default on payment. One can assess the collectability risk of accounts receivables for a specific stock in terms of the trend in accounts receivable days, the credit payment terms for customers, the credit strength of major customers, the adequacy of current provisions for bad debts and the potential for further write-downs on the receivables. Another point to take note of is the salability risk of inventories. Under normal conditions, the costs and selling prices of inventories are relatively stable. In reality, rising raw material costs, changing customer preferences and lack of bargaining power with suppliers and customers could lead to overstocking, loss-making finished products, and eventually write-downs on inventories. Similarly, cash and short-term investments are not always as “safe” as they appear to be. The accounting values of short-term investments such as stocks, bonds, hybrid securities, structured products are typically mark-to-market with huge volatility in their prices and values. In addition, not all of a company’s cash balances are unencumbered and excess in nature since some cash may be set aside for security deposits or working capital purposes. Also, if a net-net is loss-making, the market may be discounting the future cash burn into its share price. For readers interested in learning more about the background of net-nets and specific Asian names, they can refer to my articles on Hong Kong net-nets and Japanese net-nets here and here respectively. Note: Subscribers to my Asia/U.S. Deep-Value Wide-Moat Stocks get full access to the watchlists, profiles and idea write-ups of deep-value investment candidates and value traps, which include net-nets, net cash stocks, low P/B stocks and sum-of-the-parts discounts. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Major Changes In My Retirement Portfolio

Summary I continue to keep skin in the game with my ETF-based retirement portfolio. This year saw two ETFs get sold, a new ETF added, and a change in the portfolio’s weighting scheme. Steps were taken to enhance the portfolio’s dividend yield (with the expectation of a nearly 20% capital gain on one investment). In May 2014, I set up a retirement portfolio (with my real money invested) made up only of ETFs (” 5 ETFs For A Reliable Retirement Portfolio “), which was followed quickly by a modification (” Adjusting the ETF Retirement Portfolio “). The ultimate goal is to construct a portfolio that will: Provide better than 5% yield (annually); Provide a modest level of growth; Be as maintenance free as possible. The initial portfolio consisted of the following five ETFs: SPDR SSgA Income Allocation ETF (NYSEARCA: INKM ) iShares Morningstar Multi-Asset Income ETF (BATS: IYLD ) First Trust Multi-Asset Diversified Income Index Fund (NASDAQ: MDIV ) PowerShares CEF Income Composite Portfolio (NYSEARCA: PCEF ) PowerShares S&P 500 Low Volatility Portfolio (NYSEARCA: SPLV ) PCEF was added to the portfolio in May, to replace iShares Moderate Allocation ETF (NYSEARCA: AOM ), which I quickly got rid of. This is how the portfolio (would have) performed for 2014: 1 (click to enlarge) It was never my expectation that I would outperform the S&P 500 ; my assets were divided between large caps (through SPLV ), bonds ( INKM & IYLD ) and high-yield instruments ( PCEF & MDIV ). That the portfolio kept it fairly close, though, was gratifying. In December I made two changes to the portfolio 2 : I sold both MDIV and PCEF to enable me to add to the holdings of INKM , IYLD and SPLV ; and I added iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ). My reasoning was that neither MDIV nor PCEF were performing up to expectations; if the point of the two funds was to provide dividends, I could find a better yield by switching to REM . PCEF was clearly underperforming, and while MDIV seemed to hold its own, it consisted of holdings in six high-yield areas: REITs, BDCs, MLPs, high-yield bonds, preferred stock and high-dividend stock. A weight on energy stocks struck me as undesirable, given the oil market, so I thought dropping MDIV was for the best. 3 By increasing the holdings in the other three funds, I hoped I would realize an improvement in growth. Stagnation During Early 2015 Over the course of the next five months, the portfolio consisting of INKM, IYLD, REM and SPLV performed thusly: (click to enlarge) Again, I did not expect to keep even with the S&P, but the following graph illustrates the quandary in which I found myself: Somewhat paradoxically, what was holding the portfolio back was SPLV , which is a subset of the S&P 500, which was doing just fine. Perhaps this is somewhat to be expected from a set of companies chosen for their low volatility, but that should not have meant a period of fairly significant underperformance (let alone negative performance). In June 2015, I had the opportunity to examine a new ETF: iShares FactorSelect MSCI International ETF (NYSEARCA: INTF ). This fund seemed to address concerns I had about investing in global or international funds — it focused on roughly 200 companies located in fairly solid, developed nations; the companies were deemed to be good values , of high quality , and having positive momentum . The fund struck me as an excellent tool for investing in relatively safe foreign markets. So, in June, I sold off INKM and IYLD , and added INTF to the portfolio. My reasoning here was that IYLD looked better to be replaced with a larger position in REM (since REM was paying about double the dividend); INKM was where most of my foreign exposure was, but INTF looked to offer better growth opportunity with only slightly less dividend; the Greece situation seemed to be under control and Western European nations seemed to be recovering – and the largest part of INTF is invested in Western Europe. 4 I also considered revamping the weighting of the portfolio. Initially, the holdings were value-weighted, in that I had an equal number of shares of each ETF. This was disrupted somewhat when I dropped PCEF for REM ; REM is far less expensive than most ETFs (currently just over $10.00/share), and I would be able to take better advantage of its ~ 12% (at the time) yield if I doubled the number of shares compared to the other funds. When I reached the decision to sell INKM and IYLD , I decided to switch to an equal-weighted scheme, dividing the portfolio equally between REM , INTF and SPLV . 5 I hoped that these changes would result in a significant improvement in portfolio yield, along with an expected improvement in value growth. The market, however, had other plans. The Summer “Correction” The summer of 2015 was fairly brutal for stocks, which got dragged down by several factors: the Chinese economy looked to be faltering seriously; European nations had their social resources taxed by a dramatic influx of immigrants fleeing civil unrest in Syria and elsewhere in the Middle East; oil continued to be problematic; U.S. political issues continued to threaten increasing the debt ceiling, the Asian trade pact and the Export -Import Bank; the Fed seemed trapped by its earlier assertions that a rate increase would be imposed late this year. And to top it all off, ETFs were soundly trounced over the week of August 17-25. Exactly why the ETF market “misbehaved” may not be completely certain, but despite safety features in place to halt trading at points where the market is distressed, ETF prices seemed to march to the beat of a completely different drummer than their NAVs. The following chart tells the story: (click to enlarge) Between August 17 and August 25, the S&P dropped to $1867.61 from $2102.44 (-11.17%), and the ETF/R portfolio dropped to $10,182.82 from $11,104.26 (-8.30%). Overall, ETF/R dropped 3.74% since June 1, compared to a drop of 4.16% for the S&P. The following chart reflects the performance of the individual ETFs in the portfolio (INKM and IYLD are included for sake of comparison): Everything has been running negative since June, but SPLV only barely so. The drop in value suffered by REM is offset by its > 13% yield. Since Inception, Then… Here is the portfolio’s total return, up to 15 October 2015: (click to enlarge) Not bad, all things (especially August) considered. The current yield for the three funds taken together is 5.97%. Supplementing the yield is interest from a baby bond issued by Phoenix Companies, Inc. (NYSE: PNX ) – Phoenix Cos. Inc. 7.45% QUIBS (PFX). I purchased shares at a discount ($20.91), raising the yield to 8.90%. This raises my portfolio’s overall yield to 6.42%. Long term, redemption of the bond will result in a gain of 19.5% over purchase price (on top of the interest received). 6 What if… ? It may not always be a good idea to compare what one has now to what one might have had, had one not made certain changes; but in the spirit of “due diligence” I did look at what might have happened had I not swapped INKM and IYLD for INTF and larger holdings of REM and SPLV . 7 The following chart compares ETF/R (currently consisting of INTF , REM and SPLV ) to ” ETF/OP ” – ETF/”Original Portfolio” — consisting of INKM , IYLD , REM (with fewer shares) and SPLV : (click to enlarge) The divergence between the portfolios begins after 1 June, when the original portfolio was reconstituted; the difference between the two portfolios is a small — but still noticeable — 73bps . It occurred to me that there was one factor in the reconstitution of the portfolio that I had not yet taken into account: when I switched to INTF and an equal-weight system, I added ETF/R’s earnings from dividends to the proceeds from the sale of INKM and IYLD . The injection of capital into the equation may have tilted the comparison, so I added a third portfolio to the test: ETF/R-A — the portfolio as it would have been had I not infused the additional money (but still equal weighted). The following chart (covering only the period since 1 June) is interesting: (click to enlarge) (Note that the figures in the diagram cover only 1 June-15 October.) The only difference between ETF/OP and ETF/R-A is a hardly negligible 7bps . ETF/R suffered a larger loss, dropping an additional 58bps . From the above, it is possible to infer that the primary cause for the difference in performance between ETF/R and ETF/OP is the additional capital added to ETF/R. Injecting those funds changed them from a static datum added to portfolio performance, into a part of the data subject to the vacillations of the market value of the funds. Just as the extra capital resulted in larger losses during the market drop, however, that capital should yield improved performance as the market increases. 8 Observations It’s not really possible to determine if the switch from INKM and IYLD to INTF and increased holdings in SPLV and REM was a good move or not, in light of the bad summer. The following graph gives a snapshot of the performance of each of the ETFs that have occupied the portfolio: REM is not really to be expected to give much of a performance in terms of value — its function is to provide dividend income, and it does that well. INTF had the misfortune of being added to the portfolio just before the market took a dive, so any judgment of it will have to wait until more evidence is collected. It is paying dividends, however. SPLV was supposed to be the anchor of the portfolio, and it has served this purpose well. In the period from 1 January 2014 through 15 October 2015, the fund is up by 14.08%. By way of comparison, State Street’s SPDR S&P 500 ETF ( SPY ), which closely tracks the S&P 500, is up only 10.59% over the same period. It is possible that I reconsider INKM at some point. Likewise, IYLD . I think the portfolio will end up stronger, however, for the holdings in INTF . It will take a while to see if the shift to an equal-weighted portfolio will have significant benefit, but it does appear to have improved my yield: the greater the number of shares of REM in the portfolio, the more dividends I realize. That’s a good thing. Disclaimers This article is for informational use only. It is not intended as a recommendation or inducement to purchase or sell any financial instrument issued by or pertaining to any company or fund mentioned or described herein. All data contained herein is accurate to the best of my ability to ascertain, and is drawn from the performance information regarding the ETFs mentioned. All tables, charts and graphs are produced by me using data acquired from pertinent documents; historical price data from Yahoo! Finance . Data from any other sources (if used) is cited as such. All opinions contained herein are mine unless otherwise indicated. The opinions of others that may be included are identified as such and do not necessarily reflect my own views. Before investing, readers are reminded that they are responsible for performing their own due diligence; they are also reminded that it is possible to lose part or all of their invested money. Please invest carefully. 1 I say “would have” for two reasons: the chart begins on 1/1/2014, rather than when I actually started the portfolio, since I built the portfolio over the course of 3 months, from late February into May; also, I made changes to the portfolio in June and December. I discuss these changes in the course of this article. 2 ” The ETF Retirement Portfolio Revisited .” 3 The holdings in REITs and BDCs – both of which are notorious underperformers – didn’t help MDIV’s case. 4 It also has Asian holdings, notably Japan and Australia; in any event, all of its holdings are in developed nations. 5 If you’ve been following me for a while, you might remember that I have been favoring equal-weighted portfolios ever since I examined Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ) here . Of course, you might ask why I stay with SPLV if I favor equal-weighted portfolios (like RSP’s). Fair enough; I also have a thing about all-inclusive portfolios. I like a fund that uses some finesse to narrow the field somewhat. I shall have to look at this approach in the future. 6 PNX was something of a risk, as the company has been having its problems. However, it was announced on 30 September that PNX had reached an acquisition agreement with Nassau Reinsurance Group Holdings L.P. (according to Zacks Equity Research , here ); this should provide substantial financial security to PNX. Upon redemption, I would see a 19.5% gain on share value, based on the issue price of $25.00. 7 I believe that considering a “what if” scenario concerning PCEF to be unproductive; subsequent yield would have been lower, added shares of SPLV would not have been purchased, and – ultimately – PCEF would have ended up being sold in June, after having lost additional share value. 8 As should be expected; this is, after all, the point of DRIP arrangements: taking dividend earnings and using them to buy additional shares of a holding is intended to augment the growth potential of a stock.