Tag Archives: demographics

What I Bought And Sold In October

Summary I’m sharing my personal portfolio moves with investors. Over the last few days, I picked up a huge position in CYS Investments and funded it by liquidating my position in VNQI. I left my position in Renesola to grab the tax loss. Aside from buying CYS Investments, my investments were very late in September when I kept sending in new cash to buy up equity ETFs. I’m holding some cash outside the portfolio. If prices fall again, I’ll buy equity. If they don’t, I’ll pay down the mortgage. October has been a fairly easy month for generating positive returns. If an investor’s portfolio isn’t up relative to the start of the month, they should really be contemplating their investment strategy. With about a week left in the month, I thought it would be a good time to go over the changes I recently made in my portfolio. Most Recent Acquisition: CYS Investments (NYSE: CYS ) The most recent purchase for my portfolio was a large chunk of CYS Investments. This is a great mREIT and I’ve been looking for it to go on sale. I wish I had picked these shares up even earlier, but it took me quite a while to build the model I was using to establish movements in book value. If the model had been completed by the end of September, I think I would have tossed more cash into my portfolio and started grabbing up the shares. Avoiding Hindsight Bias Of course, it is easy to establish a hindsight bias and think we would have bought when the market was bottoming out. I try to watch for that kind of bias as I evaluate my own choices. When it came to buying with the market down, I transferred new cash in multiple times to buy up shares of some ETFs in late September. My major acquisitions late in September were the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) and the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ). When prices were falling hard and speculation about another recession was getting stronger, these were the ETFs I felt confident tossing more capital into. My Other mREIT The other mREIT in my portfolio is Dynex Capital (NYSE: DX ). Prior to their latest dividend, the low price on shares was about $6.41. On one day I put the floor in for the market with an order at $6.42. That order came back only partially filled, but the shares I got were a great bargain. I didn’t have the capital available to support the price again when it dipped down to $6.41. It did fall below $6.40 following the dividend, but it had just paid out a $.24 dividend so I still see the $6.41 and $6.42 opportunities as the best buys. Since I had the conviction to double down on my bet there, I feel confident I would have been able to pull the trigger on CYS Investments if I had the data available. Selling the Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ) This isn’t a bad fund. It offers a fairly unique exposure with a low expense ratio compared to other international equity REIT funds. Unfortunately it has a fairly high correlation with other international equity investments so I didn’t feel compelled to keep it. When I bring my international exposure back up, I’ll probably do it with acquisitions of SCHC and the Schwab International Equity ETF (NYSEARCA: SCHF ). I’m already long both of those securities and expect to buy more during the next 12 months. I am not remotely bearish on VNQI, but when I completed the analysis on CYS there was no way to make a big move without liquidating an existing position. I looked at my existing positions and decided which one I was most willing to sacrifice so I could make the play on CYS. VNQI came up as the top choice for me. It was a large enough position to give me the kind of capital I wanted for the trade and I had no problem with using SCHC and SCHF to get my international exposure back. If I had enough cash on hand to establish my position without selling VNQI, I would have kept the shares. Selling Renesola (NYSE: SOL ) Renesola is the crowning achievement in wealth destruction for my personal investments. It was a remarkably effective tool for destroying net worth and generating a tax loss shield. There is one thing about this investment that I absolutely love: It was in a taxable account. Most of my investing is done through tax advantaged accounts. When I started buying up more investments, I made it a priority to learn what account types would be available to me. Personal financial planners would be giddy at seeing the volume of options I was able to access. It isn’t just IRA accounts. I’ve added a solo 401K for myself and my wife was able to get a 401A, 403B, and 457B. I held onto the position in Renesola for years because I recognized that the value of the tax loss was more important than the value of the individual shares. That’s a pretty nasty gut punch huh? Since the value of the position was in the tax loss, I wanted to ensure that I could time the loss for a year when the benefits would be optimized. I’ll be reaping this tax loss for a while. Increased Cash I sold the VNQI and spent it all on CYS, but I’ve also got some dividend income in my accounts. That money is currently sitting idle. I’ll need to put that money to work. Since each account has a fairly small amount of cash the most likely way to invest it will be using the ETFs that are free to trade. Since my income substantially exceeds my expenses, I’ve also got more cash on hand outside of my investment accounts. I’m planning to use that cash to pay down the mortgage, but I’m hesitating for a bit because I want to maintain flexibility. If shares go back on sale like they were in late September, I’d feel compelled to put that cash into my investments accounts and buy up more ETFs. In addition to SCHC and SCHF, I’d look to buy up more SCHD if it went under $35 again or buy up some Schwab U.S. REIT ETF (NYSEARCA: SCHH ) if it was dipping back down around $37 again. Even though I already own positions in each of those ETFs, I’m happy to increase the positions if the values are highly compelling. My cash position in the investment portfolio is still fairly small, but it was only slightly above 0% at the end of September so it didn’t take much to increase it. I generally don’t consider cash in a “checking” or “savings” account as part of the portfolio. Interest Rate Expectations Some investors don’t like equity REITs in the current market because they know an increase in interest rates would push prices on equity REITs down. I agree with half of that assessment. A substantial increase in interest rates would probably push equity REIT prices down. However, I don’t foresee that happening. I don’t believe the Federal Reserve has the power it pretends to hold. Yes, they can push up short term rates and I think there could be a temporary increase in long term rates, but I’d be buying hard on the price drop. Europe has already seen quite a bit of negative interest rates. I don’t know if we are going there or not, but I do think the Federal Reserve will be completely unable to follow their target path for raising rates. Since I’m not buying into the increasing of rates, I’m happy to hold a heavy allocation to equity REITs and happy to buy more if the Federal Reserve attempts to raise rates. For the same rationale, I love the mREITs that are holding high quality assets that are substantially less susceptible to prepayments. That means either a portfolio of Agency RMBS with lower coupons (that is CYS) or AAA rated CMBS like Dynex Capital. Conclusion My best pickup of the last 30 days or so was shares of SCHD at $34.60. Those shares are now $39.30. When I pulled the trigger on putting in that limit order, I certainly felt some stress. I’m not big on selling shares in any investment unless I believe it is materially over-valued, so selling off the VNQI was a little painful but I wasn’t willing to miss out on the opportunity in CYS. Now you know which securities I’ve been buying and selling. What have you picked up over the last month?

FFFEX: Need A Target Date Fund? Keep Looking

Summary FFFEX offers investors a high expense ratio to go with a needlessly complex portfolio. By incorporating an enormous volume of other mutual funds the target date fund incorporates a higher expense ratio with suboptimal holdings. If the fund needs exposure to the total US market, they can ditch the complicated combination of funds and just use FSTVX. The bond holdings of FFFEX are suboptimal. Since the portfolio is so heavy on equity, the bond holdings should emphasize long term treasury securities. Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Fidelity Freedom® 2030 Fund (MUTF: FFFEX ). What do funds like FFFEX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of FFFEX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of FFFEX. Expense Ratio The expense ratio of Fidelity Freedom® 2030 is .74%. That expense ratio is simply too high. Investors using a target date fund need to keep an eye on those expenses. It is possible to create a very efficient portfolio using only a few funds. Ideally the funds selected for building the portfolio would be selected for offering excellent diversified exposure at very low expense ratios. At the most simplistic level, an investor is looking for domestic equity, international equity, domestic bonds, and international bonds. If any of those had to be left out, the international bond allocation is the least important. In my opinion, there is no need to use both growth and value indexes. There is no need to individually use large, medium, and small-cap allocations. For instance, the Fidelity Spartan® Total Market Index (MUTF: FSTVX ) has a net expense ratio of .05% and offers exposure to the vast majority of the U.S. market. If you were building a target date fund from Fidelity funds, you could simply use FSTVX and eliminate all other domestic equity funds. This method would provide investors with a low expense ratio on the underlying domestic equity position and excellent diversification. That is precisely why I am including FSTVX as a holding in my portfolio. The Vanguard Target Retirement 2030 Fund (MUTF: VTHRX ) has an expense ratio of .17%. Just so investors have a healthy comparison of how much it costs to run a very efficient target retirement fund, the Vanguard expense ratio gives a pretty clear indication. Holdings / Composition The following chart demonstrates the holdings of Fidelity Freedom® 2030: If you were making a target date fund, how many allocations would you need? Hopefully it wouldn’t be that many. Note that the holdings chart above simply showed the equity funds. There is simply no need for a portfolio to be this complex. The list below shows the bond portfolios: A Major Problem When you look at the equity portfolio, it is very complex. When you look at the bond portfolio, it is quite simple. The issue I’m noticing is that the portfolio is not holding any allocations specifically to treasury securities. There is one allocation to investment grade bonds, but that is it. This portfolio suffers from almost every sector allocation having positive correlation with the other sector allocations. When investors give up the negative beta of long term treasuries it is extremely difficult to be on the efficient frontier. When you combine missing out on the benefits of negative beta with having a very high expense ratio, you have a very poor choice for a retirement fund. Looking Deeper Since there is only one bond fund that is has an allocation greater than 4%, I decided to look deeper into that holding. The Fidelity® Series Investment Grade Bond Fund (MUTF: FSIGX ) is closed to new investors, has an expense ratio of .45%, and has a fairly weak allocation to treasuries as demonstrated by the following chart: (click to enlarge) Treasury securities are making up 20.4% of the portfolio. The resulting portfolio clearly deviates quite dramatically from the selected index fund. When I used Invest Spy to run a regression on FSIGX, the negative beta was only -.08. Fidelity has other long term bond funds like the Fidelity Spartan® Long Term Trust Bond Index Fund (MUTF: FLBAX ) which have dramatically lower betas. How much lower is the beta for FLBAX? It is around -.46. Simply put, FLBAX belongs in most Fidelity target date funds because it offers a great negative correlation to equity holdings. Of course, allocating money to FLBAX may be less profitable since it only has a .1% expense ratio. Volatility An investor may choose to use FFFEX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. (click to enlarge) When we look at the volatility on FFFEX, it is only moderately lower than the volatility on the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). For a fund that has the option to include long term treasuries, international diversification, and in general has an enormous combination of underlying funds, it is very disappointing that the target date fund for investors that are only 15 years from retirement has demonstrated almost as much volatility without offering even close to as much in the way of returns. Granted, the S&P 500 has thoroughly defeated international markets over the last several years. Having weaker returns is perfectly acceptable for FFFEX; the problem is that it also had a similar max drawdown. If the fund included a substantial position in FLBAX, that max drawdown would not have been near as bad. I’ve demonstrated a combination of FFFEX with a 20% allocation to FLBAX: (click to enlarge) Even though FLBAX also has a huge max drawdown, the extremely negative beta results in the max drawdown events occurring at different times for each funds and the combined portfolio has a max drawdown of only 9.4%. For the investor that is only 15 years out from retirement (20 years from when the sample period began), having a max drawdown of 9.4% sounds much better than 17.5%. Of course, investors should not rely on historical results as predicting future results. The example is simply to demonstrate that a portfolio of domestic equities and long term treasuries has been capable of maintaining fairly low portfolio volatility due to the historical negative correlation of the two asset classes. Conclusion When an investor takes on an expense ratio that is even .3% higher and pays that ratio for 20 years, they are looking at losing 6% of the value of the portfolio without accounting for compounding. If investors account for the benefits of compounding and assume annual returns are positive, the potential value lost is even greater than 6%. FFFEX is an expensive option for investors looking for a simple “set it and forget it” retirement plan from their employer sponsored retirement accounts. The volatility of the fund is not a problem and the total exposures are not unreasonable. The problem comes down to two issues. One is that the fund has needlessly complicated the portfolio holdings and the other is that the expense ratio is simply too high when compared to similar products offered by competitors. There are some great funds offered by Fidelity and I have positions in a few of them. Unfortunately, this fund just falls short of the mark. To improve the allocations within the fund, the managers should dramatically simplify the portfolio and use low expense funds for allocations to each core section. Those sections would be domestic equity, international equity, treasuries, and international bonds. Having a small allocation to junk bonds would be fine as well.

VNQI: International REITs For Diversification

Summary The Vanguard Global Ex-U.S. Real Estate ETF offers investors a fairly unique risk exposure. To improve portfolio diversification, ETFs like VNQI make sense as a small allocation. The best way to establish international diversification, in my opinion, is to focus on the map. Rather than focusing just on emerging vs developed markets, investors should look at the individual countries to ensure proper diversification. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds in my portfolio is Vanguard Global ex-U.S. Real Estate ETF (NASDAQ: VNQI ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. When I first looked at VNQI, it seemed like a great way to add a very unique exposure to my portfolio that would be not be duplicated by any of my other holdings. Since then, my perspective has been changing. This is still a good fund, but I think I weighted it too heavily in my portfolio. Expense Ratio While Vanguard funds are known for low expense ratios, this is ETF has the highest expense ratio of any of my holdings at .24%. I accepted that higher expense ratio strictly because I wanted the highly unique exposure and there are only a few liquid competitors in this niche of the market. Regions The following chart breaks down the regional exposure of the ETF. It is a useful chart, but it is remarkably vague about the specific exposures. For instance, I can tell that this fund offers me some emerging market exposure, but I can’t tell exactly which countries we are talking about. If an investor wants to ensure that their international diversification is giving them the full benefits of diversification, they will want to check the individual country allocations. Country Allocations I grabbed the following chart from Charles Schwab: (click to enlarge) This map is much easier for me to read. The allocations look fairly reasonable. Japan certainly appears to have a high weight relative to the amount of actual land there, but the country has a very developed market and makes sense as a key holding for the portfolio. As we go down the list the allocations to individual countries begin to rapidly decline which is another favorable factor in my opinion. Since the inclusion of the ETF is intended to diversify my portfolio, I want a diversified group of holdings. As you’ll see in the holdings section, the individual holdings are low enough in weight that the country allocations may be a larger factor than the individual holdings which include many companies you’ve probably never researched. Highlights Since I was a big bear on China, I like to see China with a lower weight in my international investments. After fierce selling and the falls we saw over the last couple months, the strength of my conviction is weakening and I’m more willing to accept exposure to China in my portfolio. I don’t think I’m to the point of actively seeking it, but I can deal with about 8.7% to China and 8.7% to Hong Kong. Missing Allocations Notice that only one small part of Africa is present and there are no allocations to Latin America. If you’re trying to build a thoroughly diversified international position for the portfolio, it would be wise to consider including ETFs that have these areas. That doesn’t mean investors should avoid VNQI, it just means the ideal compliments to VNQI will likely include exposures to Africa and Latin America. REITs The other thing investors should remember is that this international allocation is investing in REITs. In the domestic market REITs and regular equity markets can diverge quite substantially over years so investors would be wise to consider including allocations to the normal corporate international market. Holdings I built the following chart to represent the top 10 holdings. If you don’t recognize several of these names, don’t worry. I don’t recognize them either and I’m holding quite a bit of VNQI. I selected the ETF because of the country allocations and the REIT structure rather than the individual companies. (click to enlarge) Conclusion The Vanguard Global Ex-U.S. Real Estate ETF offers investors a fairly unique risk exposure. The fund is best used as part of a diversified portfolio and it should not be the only international equity ETF in a portfolio. I would favor complimenting the ETF with other funds that offer exposure to Latin America or Africa as well as some normal equity exposure to other develop markets.