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Fall Review: ‘Savvy Senior’ Portfolio (Betting On Horses To Finish The Race, Not To Win It!)

Summary Total return (paper profit) lags as high yield and related sectors remain in the market “doghouse”. But cash returns have grown by over 11% since a year ago. Yields and re-investment rates over 10%. Credit still represents a more attractive way to earn “equity returns” than real equity. In other words, it is safer to bet on your horses merely FINISHING the race, rather than their having to win it. As we review our “savvy senior” IRA portfolio partway through the 4th quarter of 2015, the trends mentioned in recent articles ( here and here ) continue unabated. These trends are: 1. Our deliberately income-focused portfolio continues to crank out a steady stream of distributions and dividends, currently yielding 10.9%. We see no economic reason for these highly diversified income streams not to continue indefinitely. 2. With the compounding effect of re-investing our cash dividends at these high rates, we have seen our income stream (the output from the portfolio that we think of as our income “factory”) grow to where it was 11.5% higher for the first 9 months of 2015 than it was for the first nine months of 2014. This growth should also continue, as long as we continue to re-invest income, which the IRA structure encourages. 3. Even though the “factory” is producing 11.5% more current income than it was a year ago, the market has continued to value the asset classes we own – high yielding bonds and loans, high yielding structured vehicles (i.e. collateralized loan obligations), MLPs, BDCs, and closed end funds in general – pretty negatively. 4. This has lowered our total return (cash income plus market appreciation or depreciation) to date in 2015 to a negative (- 2.97%), while also providing us with some terrific re-investment opportunities, with numerous solid, well-managed closed end funds sporting discounts in the teens. Overall Strategy To use a horse race betting analogy, my investment philosophy is like betting on a whole lot of horses to “finish the race” rather than on individual horses to “win the race.” Most of the funds I own are credit or credit-oriented investments rather than investments in equity. When you invest in credit funds you are betting that the companies in the fund will merely stay in business (i.e. pay their bills and not go bankrupt). That’s a pretty low hurdle. Yet by making credit investments via the closed end fund market, you can earn what I consider a pretty steady “equity” return of 9-10%. That is because you start with high-yield companies that pay interest rates on their debt of 5 to 8%. (High yield means non-investment grade, and remember that the great majority of all companies in the US and the world are non-investment grade companies, so we should not let the term “high yield” or even “junk” scare us. High yield debt – bonds and loans – had historically high default rates as one would expect during the recession, but as asset classes they performed well and investors who held on and didn’t sell in a panic made out very well.) You put those in a closed end fund structure where you can often buy at a discount, which adds another 50 or 100 basis points, and then you add in the benefit that CEFs can leverage themselves modestly (less than one-half times) which may add another 200 basis points or so, and you are up to yields in the high single-digits and higher. As I’ve written before, I sleep well with this sort of a strategy. A bet on hundreds or maybe thousands of companies staying in business, paying their bills, or if they are utilities and other types of infrastructure companies, continuing to operate and pay their dividends, seems like a more reasonable and predictable bet than an equity bet, where the company has to not only survive, but grow and increase its dividend over time for the bet to pay off. (Some of my funds are equity funds too, mostly of the high-yielding dividend variety, but the bulk of the portfolio consists of credit-oriented investments.) My approach seems compatible with the current economic situation, where it seems we are on track for steady but hardly spectacular domestic growth, within a weak global economic context, and a volatile domestic and global political context. That suggests that interest rates, when they do rise here in the US, won’t rise by much; and that inflation is pretty well contained as well, given that wages in the US (for ordinary workers, not for CEOs) are held down by the global outsourcing option and the continuing post-recession reluctance of many businesses to add permanent workers. This situation – slow growth in the US, but lots of overall uncertainty – suggests to me that a somewhat predictable 10% return (received in cash and immediately re-investable) from credit risk beats a less predictable higher return from taking equity risk. Some other more traditional equity-oriented, dividend-growth approaches have done better so far this year than my approach from a total return (i.e. paper profits) perspective, but the dividend yield (i.e. money in the pocket) has been far less. Here are some examples: · Vanguard’s Dividend Appreciation ETF (NYSEARCA: VIG ): YTD total return of – 0.76%, with a yield of 2.28% · Vanguard’s High Dividend ETF (NYSEARCA: VYM ): YTD total return of 1.66%, with a yield of 3.1% · ProShares S&P 500 Dividend Aristocrats (NYSEARCA: NOBL ): YTD total return of 0.96%, with a yield of 1.89% · SPDR Dividend ETF (NYSEARCA: SDY ): YTD total return 0.72%, with a yield of 2.44% · Vanguards’ Wellesley Income Fund (MUTF: VWINX ): YTD total Return of 2.52%, with a yield of 2.83% · Vanguard’s Wellington Fund (MUTF: VWELX ): YTD total return of 2.1%, with a yield of 2.58% I have attached my entire portfolio, listing the securities (most of which are closed end funds), their yields and premiums or discounts from NAV, the percentage each represents of the total portfolio income, and the percentage each represented back in April when I last posted the entire list. Readers will see that the previous list only accounts for 85% of the income from the current portfolio, which means 15% of the previous list’s income came from investments since eliminated and replaced. Those investments are listed separately at the bottom. New Positions Added: · Cohen & Steers MLP Fund (NYSE: MIE ), which I bought because it seemed some of the distribution, storage and transportation MLPs were being unfairly tarred with the same brush as the exploration and production MLPs, despite their being in different businesses. The market can’t make up its mind on this and MIE’s price gyrates wildly from day to day. Having sold at over 20 last year it is now in the 12’s, paying a 10% dividend. Seemed like a good opportunity to me. · Babson Capital Partners (NYSE: MPV ) , which is a decades old fund that buys and holds the sort of private placements that insurance companies like the fund’s parent Massachusetts Mutual have been doing successfully for years. I switched into this because it seemed like a nice “hunker down and forget it” sort of investment, paying close to 8%, with an 11% average annual return since 1988. · Cohen & Steer’s Infrastructure Fund (NYSE: UTF ) , which I’ve owned off and on with good results. It seemed that utilities were getting beaten up by the market unduly, so I created a new position in UTF, which I will be adding to in the future as well. Has been up over 22 and now sells under 20 and yields 8%. Cohen & Steers are long-time, experienced managers. (Similar thinking in the increased position in Duff & Phelps Global Utility Fund (NYSE: DPG ) . Yield of 8.5% with a 15% discount to NAV.) · Blackstone Long/Short Credit income Fund (BGX ) is essentially a loan fund. I think the long/short part means they have the authority to short loans and other instruments that they think may default. I opened the position because loans had taken what seems to me an unreasonable beating in the market and yields and discounts had gotten pretty attractive. Currently BGX is discounted 15% and yields 8.3%, which is pretty good for a fund that holds well-secured floating-rate loans (i.e. virtually no interest rate risk). · Nuveen Tax-Advantaged Total Return Strategy Fund (NYSE: JTA ) . I added a small position here when I read Douglas Albo’s valuable piece in mid-summer pointing out the unusual value this seemed to represent. Yields 8.88% and sports an 11.4% discount. Here is Doug’s article for anyone who wishes to read it. Some other changes to my portfolio: · Added to both Oxford Lane Capital (NASDAQ: OXLC ) and Eagle Point Credit (NYSE: ECC ) after attending OXLC’s annual meeting and then also meeting with ECC’s management. I think both funds have been beaten up price-wise unduly by (1) the general drop in high yield assets overall, (2) the fact that in both cases the traded stock as opposed to what is owned by institutions is apparently rather small and therefore the price bounces around a lot based on small volume while most of the stock sits quietly in the portfolios of long-term holders, and (3) the disconnect between reported GAAP earnings and the actual cash flows and taxable earnings from which distributions are paid is a bit too complicated for most investors to understand, despite recent efforts by the managements to try to explain it better. The confusion in the market about the effect of the Dodd-Frank legislation on the ability of new CLOs to be issued and/or held by their underwriters and managers doesn’t help either. My take on all this is that I will keep monitoring the funds’ quarterly reports to look for any signs that their cash flow is eroding or insufficient to pay their future distributions. So far both funds appear to have healthy future cash flows. I also know that lots of institutional investors made a lot of money holding CLOs in the past and the structure “works” as far as creating good returns for equity investors. The managers of both funds sound like they know what they’re doing whenever I’ve met with them. So for now, I’m in. · Third Avenue Focused Credit Fund (MUTF: TFCIX ). This fund has taken a pounding like all high yield bond funds. I cut my position in half because since it was a mutual fund, not a closed end fund, I could take my money out at the NAV and then re-invest it in similar assets, if I chose to, or even different assets, in any number of closed end funds, at a 10% or higher discount to their NAVs. So I figured if I were going to wait around for the market in high yield bonds to turn up, I might as well get paid a bonus for doing so. · For a similar reason I sold the PowerShares CEF ETF (PCEF ) and bought more of Cohen & Steers CEF Opportunity fund (NYSE: FOF ) . With FOF you can buy the shares at a discount, get active management as opposed to an index approach, and get a slightly higher yield. Some of the other moves represented an attempt to move out of equities and into specific credit-oriented securities that seemed particularly cheap and beaten down at the time (i.e. moves out of Eaton Vance Risk Managed Dividend Equity Income Fund – NYSE: ETJ – and Wells Fargo Advantage Global Dividend Fund – NYSE: EOD ) . Like many of my moves and portfolio tweaks, these were not because I disliked these funds, but because I saw particular opportunities on occasions in other funds. Often in the closed end fund market, because prices and discounts can be so quirky, it is a case of saying “This looks too good to be true. What can I sell to take advantage of it?” So you end up selling a position you are perfectly happy with, in order to buy something you are even happier with. (My Income Manager excel spreadsheet, that some of you also use, allows me to see at a glance as I add or subtract positions in the portfolio, what the impact is on the annual cash distribution of the entire portfolio. Anyone who wants a copy, please send me a message with your actual email address and I’ll send it to you. It’s not fancy but it works. Helps to refocus attention from the market value of the “income factory” to what the output of the factory is.) Hope that’s useful and/or interesting. As Porky Pig used to say, “That’s all, folks!” Savvy Senior Portfolio 10/29/2015 Symbol Current Yield CEF Premium/ Discount Portfolio Income % This Holding Portfolio Income % Last April Increase/Decrease as % of Portfolio income Eaton Vance Limited Duration EVV 9.22% -12.49% 10.41% 6.8% 3.57% Oxford Lane Capital Corp. OXLC 21.07% -17.94% 7.95% 4.2% 3.78% Eagle Point Credit Co. ECC 14.18% 6.95% 7.22% 3.8% 3.45% Pimco Dynamic Credit Income Fund PCI 10.44% -13.33% 7.15% 7.3% -0.17% Cohen & Steers CEF Oppty Fund FOF 9.04% -11.67% 6.52% 5.8% 0.74% Calamos Global Dynamic Income Fund CHW 11.04% -15.25% 4.37% 2.7% 1.64% First Trust Specialty Financial Oppty Fund FGB 11.24% -1.27% 4.37% 2.3% 2.02% Ares Dynamic Credit Allocation Fund ARDC 9.78% -15.43% 4.21% 4.73% -0.52% Cohen & Steers MLP Fund MIE 10.51% -11.61% 4.15% 0.00% 4.15% Pimco Income Strategy Fund II PFN 10.39% -6.29% 3.86% 4.15% -0.29% Nuveen Real Asset Inc & Growth Fund JRI 9.01% -8.19% 3.50% 3.76% -0.26% UBS ETRACS Leveraged CEF CEFL 21.90% NA 3.38% 3.80% -0.42% Babson Capital Global Shrt Duration HiYld BGH 1.97% -12.62% 3.17% 1.41% 1.76% Duff & Phelps Global Utility Fund DPG 8.59% -15.02% 2.93% 1.27% 1.66% Third Avenue Focused Credit Fund TFCIX 9.97% NA 2.92% 7.23% -4.31% UBS ETRACS Leveraged REIT MORL 23.70% NA 2.70% 2.90% -0.20% First Trust Inter. Duration Pfd & Inc FPF 8.94% -7.98% 2.61% 2.30% 0.31% Babson Capital Partners MPV 7.96% -0.59% 2.51% 0.00% 2.51% Eaton Vance Tax Mgd Global Div Inc Fund EXG 10.66% -8.22% 2.32% 3.83% -1.51% Pimco Income Opportunity Fund PKO 9.66% -3.24% 2.19% 0.26% 1.93% Cohen & Steers Infrastructure Fund UTF 8.07% -16.93% 1.85% 0.00% 1.85% TICC TICC 18.07% NA 1.79% 1.79% 0.00% Blackstone Lg/Sht Credit income Fund BGX 8.30% -15.35% 1.61% 0.00% 1.61% John Hancock Pref Income HPI 8.43% -8.79% 1.12% 2.86% -1.74% Eaton Vance Tax Mgd Global Buy Write Fd ETW 9.89% -1.58% 1.07% 3.58% -2.51% Western Asset High Income Fund HIX 11.95% -8.82% 1.02% 1.09% -0.07% Nuveen Tax Advantaged Total Return Fund JTA 8.88% -11.42% 0.85% 0.00% 0.85% Brookfield High Income Fund HHY 12.06% -11.30% 0.80% 2.61% -1.81% Nuveen Preferred Income Oppty Fund JPC 8.70% -10.47% 0.80% 3.10% -2.30% Voya Natural Resources Eq Income Fund IRR 13.33% -16.30% 0.66% 0.89% -0.23% 100.00% 84.53% Positions Eliminated Previous % of Portfolio Income Eaton Vance Risk Mgd Div Equity Income Fd ETJ 4.20% Wells Fargo Advantage Global Div Fund EOD 3.00% Credit Suisse High Yield DHY 1.70% THL Credit Senior Loan Fund TSLF 1.60% Wells Fargo Advantage Inc Oppty Fund EAD 1.40% VOYA Global Advantage Fund IGA 1.00% Powershares CEF ETF PCEF 1.00% Cohen & Steers Ltd Dur Pref Inc Fund LDP 0.90% First Trust Strategic High Income Fund FHY 0.60% 15.40%

Browne’s Permanent Portfolio Vs. Porter’s ETF Retirement Portfolio

Summary I construct and examine three ETF-based portfolios that follow Harry Browne’s “Permanent Portfolio” investment advice. I compare the best of my three portfolios with a mutual fund and an ETF that are also based on Browne’s advice. I compare my ETF retirement portfolio against the Permanent Portfolio candidates in terms of both total return and dividend yield. My last article drew some rather critical comments, some of which were quite interesting; 1 one comment in particular brought up the Harry Browne Permanent Portfolio – something I had not encountered before. 2 In this article I take a look at the Harry Browne Permanent Portfolio (hereafter, HBPP ), what it might look like populated with ETFs, and how it might perform. The Strategy Harry Browne’s strategy is articulated in his book, Fail-Safe Investing: Lifelong Financial Security in 30 Minutes . It also seems to be a regular topic of conversation on the internet. 3 The strategy is based on a simple premise: a safe portfolio will be diversified according to types of investments that provide performance during particular economic environments. Browne identified four types of holdings and the economic state each type was geared to: U.S. stocks , which will perform strongly during a prosperous economy (apparently using an index based on the S&P 500); Long-term Treasury bonds , which will do well in prosperous times, but also during deflation; Cash (money-market funds) in recessions; Precious metals (specifically gold) during inflationary periods. 4 According to Browne, the portfolio should be divided equally between the four sections: Browne felt that index funds would be appropriate for the stock portion, and preferred a fund based on the S&P 500. He also preferred that the precious metal be gold, in the form of gold bullion coins . Other than those preferences, nothing seems to have been written in stone – hence this is more of a portfolio allocation strategy , rather than a hard and fast portfolio description. HBPP is intended to be permanent ; not that the investor should expect to be able to set it up and walk away, but that it should only require minimum maintenance. Periodic rebalancing is desirable, either annually or – as suggested by many – when any section of the portfolio becomes more than 35% or less than 15% of the portfolio overall. Certainly, if any holding in the portfolio becomes unsuitable, it should be replaced. A Suggested Portfolio ETFs became popular about 25 years after Browne developed his strategy, but it seems that ETFs would be particularly well suited to HBPP ; 5 all that is needed is to choose a fund for each section of the portfolio. Here’s where we encounter some “controversy.” Browne suggests that one should use at least three funds to cover stocks, 6 but there is indication that Browne himself used only one. I tried three formulations. In one (the first one I tried) I used: SPDR S&P 500 ETF (NYSEARCA: SPY ) SPDR Gold ETF (NYSEARCA: GLD ) iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) / SPDR Barclays 1-3 Month T-Bill ETF (NYSEARCA: BIL ) 7 I will refer to the above portfolio as HBPP1 . The second portfolio I considered used three funds for stocks and two for precious metals: Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ) First Trust NASDAQ-100 Equal Weighted ETF (NASDAQ: QQEW ) SPDR Global Dow ETF (NYSEARCA: DGT ) GLD ETFS Physical Precious Metal Basket Shares (NYSEARCA: GLTR ) TLT iShares Short Treasury Bond ETF (NYSEARCA: SHV ) I will refer to this portfolio as HBPP2 ; for the stocks, RSP receives 12.5%, with QQEW and DGT getting 6.25% each. 8 GLD receives 25% until 22 October 2010, when GLTR was issued; at that point GLD receives 15% of assets and GLTR receives 10%. The third portfolio represents an effort to simplify HBPP2 by returning to the one-ETF-per-section mode: Oddly enough, I called this formulation HBPP3 . I tracked the performance of each of these portfolios back to 1 January 2007, and ran a test through 23 October 2015 for each. I decided to “compromise” between the two rebalancing schemes suggested by Browne: I rebalanced HBPP1 in June 2007 to switch from SHY to BIL, and switched HBPP2 in October 2010 to add GLTR. Other than that, I checked distribution of assets in June and December of each year; if a fund was weighted more than 30% of the portfolio as a whole – or less than 20% of the portfolio – I rebalanced. The following chart shows how the three portfolios performed: (click to enlarge) HBPP1 (which was the first formulation I tested) turns out to lose quite decidedly to the other two formulations. I initially tried HBPP2 to see if there was a difference between using a single equity fund and the three-fund equity position. 9 I also added GLTR to broaden the precious-metal holdings a little. HBPP2 clearly defeated HBPP1 , and it seems it does so shortly after the rebalancing that was needed on 2 January 2009 – after that point HBPP1 started to gradually lose traction. All else being “equal,” it seemed the combination of three equity funds and two precious metal funds did the trick. 10 What interested me the most at this point was the extent to which swapping RSP for SPY made any difference, which was why I tried HBPP3 . And clearly, HBPP3 outperformed HBPP2 , and there is some reason to believe GLTR dragged HBPP2 down. GLTR was added to the portfolio on 22 October 2010 (at which time the portfolio was rebalanced), and it is after that point that HBPP2 begins to fall off. 11 There would not be another rebalancing until 1 July 2012(and then, for HBPP3 only – HBPP2 would not get rebalanced again until 1 July 2013), and by that time HBPP2 had noticeably diverged from HBPP3 . 12 So, HBPP3 , with only one ETF for each of the four sections of the portfolio, is the one which provides the best performance of the three portfolios tested. The following chart shows the performance characteristics for each of the four component ETFs: (click to enlarge) The performance for the components gives a good indication of why the performance of the permanent portfolio is fairly smooth and constant. As one component decreases the others increase, and the general trend for all of the funds is to at least stay constant. Most elements move fairly regularly, the only exception being GLD. The precious-metal fund has a dramatic rise from late 2008 into late 2011, then begins to cool off. The drop in gold prices has been persistent for the past three years, although it is expected to become somewhat bullish as early as 2016. 13 That attitude is not shared by everyone, however. 14 The only ETF that seems completely dependable is SHV, which is up just over 1% for the 8-year period tracked. Overall performance The following chart shows the overall return from HBPP3 since 2007: (click to enlarge) The portfolio earned $1,581.79 in dividends and interest over the nearly nine-year period tested, resulting in a total return on the initial $10,000.00 investment of $7,005.32, or a total return of 70.05%. This amounts to a compound annual growth rate (CAGR) of more than 6%. Its yield (TTM) is 1.80%. How HBPP Compares to “Browne’s Own” Permanent Portfolio In 1982 The Permanent Portfolio Family of Funds offered a mutual fund, Permanent Portfolio (MUTF: PRPFX ). Harry Browne was himself one of the founders of the fund; however, PRPFX is not strictly structured as Harry Browne had specified in his writings. Still, it strives to achieve the same sort of equilibrium between portfolio components; specifically: 35% Dollar Assets (government & corporate bonds) 25% Precious Metals (20% gold, 5% silver) 10% Swiss Franc Assets 15% Natural Resource & Real Estate Stocks 15% Aggressive Growth Stocks The fund’s performance is represented below: (click to enlarge) The Global X Permanent ETF (NYSEARCA: PERM ) tries to be faithful to the spirit of Browne’s writings, but still does not quite capture the essence of the four-way division of the portfolio: 57. 92% U.S. Bonds, Financials and “Other” ( 48.91% short-term bonds!) 13.26% Precious Metals (9.71% gold, 3.55% silver) 28.83% Equities (short- and large-cap & international equities, real estate & materials) PERM ‘s performance since its inception in 2012 is reflected below: (click to enlarge) PERM ‘s performance to date seems to indicate why ETF.com judges that the fund “lacks investor interest”, and why they “see high fund closure risk.” 15 A Comparison A comparison of the three representations of Harry Browne’s Permanent Portfolio would seem appropriate. Furthermore, since the discussion of Browne arose from my article on changes to the ETF retirement portfolio, I thought it would be interesting to see how the retirement portfolio stacked up. In the following chart I provide the performance and total returns for HBPP3 (I will simplify this to HBPP ), PRPFX and PERM , along with the chart for ETF/R-A . 16 The comparison runs from 1 January 2014 through 15 October 2015; all performance data pertains to that period of time only. Each portfolio began with an initial cost basis of $10,000.00. Dividends/interest were not reinvested. (click to enlarge) PRPFX clearly has not fared well over the past 20 months. Even though it is up more than 243% historically, it has seen a drop of 1.81% over the trial period. 17 On the other hand, PERM – which had been losing – actually experienced a 5.11% growth over this period. Its growth was not overly facilitated by its annual dividend, which was $0.23/share, or $101.16 for purposes of the test. 18 Both HBPP and ETF/R-A put up superior numbers, with the retirement portfolio showing a 7.82% total return, and my rendition of the permanent portfolio topping that at 9.74%. Should I switch my money to HBPP ? Good question. Assessment The answer: no – at least, not yet . The following graphic gives a clearer (at least, less cluttered ) picture of HBPP and ETF/R-A : (click to enlarge) HBPP does outperform ETF/R-A by 192bps – nearly two full percentage points – and that is significant. However, scoping the full chart, it is clear that ETF/R-A is not exactly a performance slouch. Indeed, it seems to be only during the past three or four months that HBPP has led it consistently – otherwise, it seems that ETF/R-A has the advantage. A possible reason for the retirement portfolio’s recent performance is that it is equity-heavy compared to HBPP , which has “non-performing” short-term bonds and reasonably performing long-term bonds . Could these have countered any equity-based downwards pressure? Well, that is why Browne thought a permanent portfolio should have them. The real question is: will HBPP continue to outperform the retirement portfolio? Until I get a clearer picture over the next several months, I will stay with the portfolio I have. However, HBPP seems to have a lot going for it over the long haul. It is worth keeping an eye on. A Word About Yield Some readers of my last article noted – with some displeasure – the appearance that some changes made to ETF/R-A reflected a preoccupation with yield, and the chart above illustrates another reason why I am reluctant to switch from ETF/R-A to HBPP : the retirement portfolio beats the yield of HBPP by a very healthy 417bps . So, why a focus on yield ? From the outset last year, one of the ideas behind the retirement portfolio has been achieving a yield of at least 5% . This is in response to the traditional wisdom that advises retirees to figure on withdrawing about 4% from their portfolios per year. It struck me at the time – and still does – that it is possible to secure more than that in yield while still providing for a modicum of value growth. If the retirement portfolio continues to perform along its current lines, I will have achieved my goal . Why focus on earning the money in dividends, rather than capital gains? There are two reasons: First , making 5% or more in yield provides the ready cash to withdraw from the portfolio without disturbing my capital base. Otherwise, if I need funds I have to sell shares. Selling shares (if I am at all successful in choosing good ETFs) would involve capital gains (in addition to diminishing my capital). Unless the account is tax-advantaged, I’m going to have to pay higher taxes on those gains than I would on an equal amount of dividends (supposing the dividends were all eligible for the lower tax rate). If accumulated dividends become greater than foreseeable needs, I can always re-invest the excess. And since one has to pay taxes on dividends regardless, using them doesn’t constitute an extra tax burden. 19 Second , selling shares may involve transaction costs – which costs are typically due even if one has the shares in a tax-advantaged account. Investor-managed accounts may not involve large costs (and some accounts are free – at least, to a point), but transactions performed on a regular basis are going to add up. Dividends, on the other hand, do not usually incur transaction costs when withdrawn – it is simply a matter of transferring funds. Some institutions may even offer the service of automatically paying one’s dividends to one’s checking account instead of leaving them in the investment account. This would typically be done without charge. 20 Ultimately, this becomes a matter of personal taste and investment style. My concern has been with the interests and needs of retired investors who want to maximize the functionality of their investment accounts while minimizing their efforts to maintain those accounts. 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 Company’s Prospectus, Statement of Additional Information, and fact sheets. 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 ” Major Changes In My Retirement Portfolio .” 2 My thanks to the reader, Edwardjk , for mentioning the portfolio strategy – very interesting, and worth a long-term look. 3 The main website to see is Browne’s own site, harrybrowne.org , although Mr. Browne died in 2006; a record of the Permanent Portfolio’s performance is here , but it only covers from 1970 – 2003. A concise description of the strategy can be found in the article ” Harry Browne s Permanent Portfolio: When You Can’t Afford to Lose Money ,” by Jason Jenkins. A more general discussion is presented by J.D. Roth in ” Fail-Safe Investing? Harry Browne s Permanent Portfolio .” Bogleheads.org , a site catering to Jack Bogle enthusiasts, has blogs such as this , as well as discussion groups. 4 Roth, here . 5 For his part, Browne used mutual funds in the original formulation of the portfolio, and only added one mutual fund to his list of suggestions in the 2001 update. 6 Fail-Safe Investing: Lifelong Financial Security in 30 Minutes, Harry Browne (St. Martin’s Griffin, 2001), p. 160. 7 BIL, which seems particularly useful in the capacity of “money-market” fund, was not issued until May 23, 2007; to bring that part of the portfolio back to January 1, 2005, I used SHY. Since neither SHY nor BIL actually grows in value much, there is little difference between the two. Browne’s intent in specifying cash, however, was to limit exposure to interest rates, and BIL is better suited to that purpose. 8 This keeps the weight on the S&P 500, and U.S. stocks in general, while adding a few foreign equities through DGT; this strikes me as keeping in the spirit of diversified investing while staying faithful to Browne. 9 I used RSP for S&P 500 coverage because – from previous study – I knew that it would outperform SPY. See my ” Guggenheim s RSP: Equal Weight Or Dead Weight? ” 10 The shift from BIL to SHV (which was made because SHV does pay an occasional distribution, while BIL has only paid one in the past four-plus years) shouldn’t matter. Neither fund undergoes any noticeable change in value in the course of the trials. Distributions paid over the past five years have been barely noteworthy. 11 The timing is the main reason why I see GLTR as being the issue, but it is also likely that DGT and/or QQEW played a role. 12 And only HBPP3 was rebalanced in 2012; HBPP2 would not get rebalanced again until 1 July 2013 – the last rebalancing that was needed for any portfolio. 13 ” Barrick Stays Bullish as Gold Prices Head for Third Annual Drop ,” Bloomberg. 14 ” Gold, silver set for more pain into 2016: poll ,” Reuters. 15 ETF.com . 16 ETF/R-A, for those who are interested, was discussed in my article; it contains the changes in ETFs that were made, but did not include the capital injection from accrued dividends that were part of the actual portfolio. 17 The rather severe drop shown just before 2015 is the result of a nearly $800.00 loss (-7.92%) on 10 December that was offset by a dividend payment of $3.17/share ($733.80 total, for this test). The fund’s current yield of 8.21% may be somewhat misleading – historically, its yield has been much less than $1.00 per share per year. 18 PERM’s yield is currently 0.98%. 19 I am not a tax expert. Each individual should consult their own tax advisor concerning the taxability of their investment income. 20 Investment companies differ in their policies about transaction costs and fees for services. Consult with your banker and/or broker to determine how your activities are charged.

FXIFX Is Proof That Fidelity Can Offer A Great Target Date Fund

Summary Fidelity has at least two target date funds for the same date. FFFEX offers investors a high expense ratio and a complicated batch of underlying holdings. FXIFX offers investors almost everything they could ask for in a target date fund. The ratio of domestic equity to international equity allocation is great. The fund is moving into inflation-protected bonds slightly sooner than I would, but the underlying fund is a good choice. Fidelity has multiple options for target date funds. A reader recently suggested I check out the Fidelity Freedom® Index 2030 Fund (MUTF: FXIFX ). The suggestion came after I looked into the Fidelity Freedom® 2030 Fund (MUTF: FFFEX ). The only difference in the names of the two funds is that one uses the word “Index”, but the difference between the funds is notable. Expense Ratios FXIFX has an expense ratio of only .16% on the net level and .24% on the gross level. The net expense ratio is very competitive with target date funds for Vanguard. Investors can replicate the portfolio with a lower expense ratio by manually managing their portfolio to the same allocations, but the difference in expense ratios between FXIFX and using individual allocations to the underlying funds is very reasonable for investors that don’t want to manage the portfolio themselves on a consistent basis. On the other hand, FFFEX had an expense ratio of .74% and appeared stuffed with actively managed funds that should be substantially more profitable for the sponsor. The annoying thing, in my opinion, is that some investors will find that their employer offers FFFEX but does not offer FXIFX. That is unfortunate because I think the lower expense ratio fund will win out over the longer term. I don’t believe the actively managed portfolios will be able to beat their passive counterparts by enough to overcome the difference in expense ratios. Allocations The allocations for FXIFX are quite solid. Take a look at the holdings below: The first thing to notice is that this list is fairly short. I like to see simple allocations in target date funds. A few underlying funds with low expense ratios and fairly passive strategies make for great holdings. Ideally those holdings should be rebalanced fairly frequently for a target date fund to take advantage of movements in the market price of the underlying holdings. Domestic to International The domestic allocation is about 2.25 times the international equity allocation. I like that allocation strategy. Some funds would go slightly heavier on the international equity allocation, but I find a ratio of 2.5 to 1 ratio is pretty much perfect and even going as heavy as 2.2 to 1 would be reasonable. This fund falls within that desirable range. There is plenty of international exposure to benefit from the diversification without betting heavily on international funds outperforming domestic equity. Inflation-Protected Bond Funds I see a good reason for including inflation protected bonds, but I wouldn’t mind seeing this remain fairly low for another five years since this fund is aiming for 2030. At less than 1%, this isn’t a meaningful allocation yet. The underlying allocation is the Fidelity® Series Inflation-Protected Bond Index Fund (MUTF: FFIPX ) which has an expense ratio of only .05%. I like the expense ratio; I’m just not big on inflation-protected bonds in the current macroeconomic environment for anyone that is still working. For a retiree, it is certainly understandable to keep a chunk of their portfolio in these securities for dealing with living expenses over the next 12 to 24 months. Personally, I prefer paying for most living expenses with interest income from corporate bonds (currently too weak) or dividend income from established champions. How About Some REITs? I’d love to see a small allocation to domestic equity REITs in the portfolio. Perhaps I’m biased as a REIT analyst, but I like domestic equity REITs as an allocation for a mutual fund that I would expect to only be held in tax advantaged accounts. The biggest drawback over the long term to investing in equity REITs is the potential for paying high levels of personal income taxes on the dividends. If the allocation is going to be within a tax advantaged account, then the income should bypass that difficulty. Of course, I don’t provide tax advice. Future Allocations The following chart shows the planned allocation over the next few decades: This is a great allocation strategy for a target date fund. The investor planning on a very long retirement will probably want to supplement this portfolio with some dividend growth investing to have a growing stream of income from high quality companies. In my view, investors shouldn’t plan to just hold the target date fund and assume that they are done investing. This is not the start and the end of retirement planning, but it is one reasonable piece to include inside the portfolio. Conclusion FXIFX is delivering on the most important metrics I want to see in a target date fund. It offers a low expense ratio, a simple allocation, and a very intelligent ratio of domestic equity to international equity. The only weaknesses I see are extremely minor issues compared to everything Fidelity got right in this fund. For any investors trying to pick between FXIFX and FFFEX, I see a clear winner. FXIFX looks like it should be able to win out over a very long time horizon.