Monday marked the end of the first full calendar year of Joanne and I considering our savings an actual investment "portfolio". Some thoughts:
- We socked away about 36% of our gross income into retirement accounts. I'm optimistic we can approach that in 2008 (the percentage can only go down though), but I wonder if we'll budget tight enough to max everything out with LBA, starting his 529 plan (a forthcoming topic!), home maintenance, etc unless one of us gets a raise.
- Our overall return lagged the market a bit, primarily due to still owning MOT. Excluding that, I think we beat the S&P 500 slightly. It would have been more, but we established value, small cap and real estate allocations a little too late into the game.
- Monday I engaged in my first 'tax loss harvesting'. Kind of small potatoes--it saves us less than $30. I considered harvesting more, which would have allowed us to move more of our small cap holdings into tax advantaged accounts, but again, the amounts would have been small and it would introduce more turnover than I'd like.
- When we established our allocation plan, I questioned whether it was too late to get into emerging markets (no) and real estate (yes), so that all canceled each other out. Each had a run up in the previous 3-4 years. One kept going. The other didn't.
- I'm just now engaging the thought of buying losers/underperformers for the first time. As part of our small cap allocation, I established a position in BRSIX, a micro cap fund, which seems to be living off of 1 great year (2003). Having some doubts about it, I stopped making planned contributions in 2007. That worked out, as it went down. But I didn't pull the trigger Monday to include it in the harvesting, as I go back and forth on whether it is worth keeping. But if we keep it, we should be willing to put more in it. A rule of thumb is that any holding under 5% won't affect your portfolio in any great way, and I wouldn't expect it to meet that level (max would be about 3%). But it is a historically non-correlated asset class and the fund is part of a firm, Bridgeway, that gets high marks for its operations and ethics. Based on what I just wrote, it looks like it should have been a goner.
- The other "loser" area is real estate, which brings up dealing with long time horizons. Having missed out on most of the bubble, it will likely be a while before real estate outperforms again. But part of developing an allocation plan is sticking with it, even if it doesn't seem "right". THat's not to say it can't be readjusted (an increasing percentage of fixed as years go by), but it should be based of an assessment of needs and risks, not market fluctuations. In theory.
Looking ahead to 2008:
- What asset class do you want to do well in 2008? Let me know and I can overweight it in Joanne's holdings. Everything in her name is gold. Mine? not so much. She got emerging markets and international growth. I got small caps and real estate. Good thing its community property!
- We're sticking with our allocation plan: 30% large cap; 15% mid/small cap; 30% international; 5% real estate; 20% fixed. Similar to 2007, MOT is not included in the allocation. The big change is a more legitimate holding for our fixed income (bonds). In 2007 we "cheated" a bit by using OAKBX, a balanced fund, as a large component of our fixed allocation. We got lucky with it--it had a good year, but with recent volatility, we deemed it better to actually to follow the plan.
- As I mentioned, I'm optimistic at maxing out our 401k's again. I'm not sure if we'll be able to fully fund our Roths on January 2, 2009 though. We'll see what happens.
- Most of the rebalancing math is done. Some of the execution remains, particularly in regards to deciding where to put the Roth dollars. My plan had been to switch real estate holdings from my 401k to one of the roths, by purchasing VNQ, but based on the difference in the current holding and the 2008 roth limit, Joanne would like a little more due diligence before buying up. In thinking more about it right now, though, the only additional risk is that difference. We're not reducing my 401k holding, so now (or soon) is as good of a time as any to make the switch.
- For the other Roth contribution, I'm considering a position in international small caps. My concern, though, is how sliced and diced does one need to be? The value of S&D is in the rebalancing. ETFs and commission trades make that more difficult, and location in the Roth doesn't help either. It will be in international something though, as other moves has opened up a spot for those $$.
- 2008 also provides some opportunity for capital gains harvesting--since there's 0% capital gains for those in the 15% bracket or lower, it's possible to raise the cost basis of some holdings with no tax effect. We're taking advantage of this to swap into a slightly better taxable account holding, going from an S&P500 fund to a total market fund with a lower expense ratio. The only (minor) disadvantage is restarting the clock on short-term and long term capital gains.
- One other change: I made the small mistake last year of putting a chunk into a municipal bond fund, as I didn't want the extra income. Its returns were OK, but we're in a low enough bracket (due to our 401k contributions) that the tax advantages of a muni fund didn't really benefit us. So we're integrating a strategy discussed by Jonathan Clements to take the best advantage of the tax structure that involves moving fixed income to tax advantaged accounts and having our "emergency funds" in more tax efficient holdings (index funds) in our taxable accounts. If an emergency pops up, sell the index funds and rebalance in the 401k's.
- S&P December 31, 2008 prediction (pulled directly out of my a$$): 1537, up 4.67% from 1468. I plan on taking no action that would indicate any prescience on my part.
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7 comments:
As usual, you analyze this stuff about five levels deeper than I ever have. I've found over time the only constant in investment performance seems to be that the more actively I am involved, the poorer my results.
You're trying to have, it seems to me, your cake and eat it too by actively managing a broadly diversified portfolio (i.e. creating your own life-cycle/asset-manager fund). The "experts" say diversified, passively-managed funds, (i.e. index) beat the individuals over time. What makes you think you've got access to timely and accurate information that will allow you to time/beat the market over the long haul?
I'm looking forward to the 529 discussion. That vehicle came around much too late for us to consider. When I looked at it originally, out of curiosity, one thing that spooked me a little was the end-date. What happens if congress decides not to continue the 529 plan? Have you given any thought to just giving the funds to LBA and managing the portfolio for him? Of course if you do that, you'll have to be prepared when he decides to attend the College of "cool new car" with his funds instead of ASU...
Happy New Year!
Who said anything about actively managed funds? We're indexed where possible. The only expensive holdings we have (by expense ratio) are the real estate holdings and the international fund in Joanne's 401k (which recently has returned alpha, but i'm looking for cheaper options). Our emerging markets ETF is indexed, as are our small caps, as is the bulk of our large caps, and I'd like to make the real estate holdings indexed as well.
"slicing and dicing" is not based on buying funds with active fund managers. it is designed to work with an index approach (this prevents style drift--so you know your small cap stays small cap, for example). it requires a little more work in whatever rebalancing schedule one has, but that's not a bad thing-- the more asset classes held (particularly if not correlated) provides more opportunities for to benefit from rebalancing.
What I ponder is how much S&D to do and what to overweight. But in order for the strategy to work, one has to stick with the plan, ie sell winners and buy losers, as well as not make changes to the plan just because of performance over a year or two (which is a drop in the bucket for a 20+ year time frame). It's easy in theory; a little tougher in practice.
Your original post seemed to me to be concerned with market timing your asset mixing/rebalancing actions, which felt like you are actively managing a bunch of index funds. There is a fine line, it seems to me, between rebalancing and attempting to time the market. Perhaps I read to much into your comments in the original post.
Also, the value of an index fund would seem to diminish if it is a too-narrowly-focused index fund (if you get my drift). Assuming one could find an index fund aimed at small-cap international, does that really provide the "protection" of a passively-managed broader index fund?
Eh, I'm probably suffering from holiday-induced mental confusion anyway.
If *I* had a blog, I might write on how weird it is to try and decide how long your spouse is going to live so that you can choose the "right" option on retirement payout. Do you go with the actuarial tables? Can you find an actuarial table that makes adjustments for personal health issues? Do you just ignore the unknown/unknowable and take the max monthly payout?
It's the other side of the coin from your discussion. You're trying to build the fund. We're trying to decide how to draw it down (this applies only to the ASRS pension portion, not the personal nest-egg portion).
JT, how good is the return on the un-withdrawn portion of the retirement portfolio - which is to ask, what is the incentive for *not* withdrawing the max each year?
And if you withdraw "too much" money in a given year, can't you re-invest the overage in some other investment vehicle?
Ken,
What I didn't include in my comment above is that the ASRS pays out in an annuity. They present a series of choices at the front end for how you want it paid out. The choices are basically; lifetime (the max per month until the retiree dies), then a series of different lesser monthly payments, each tied to a different "insurance" formula (e.g. 5 year minimum, 10, 15 year min, joint survivor options, etc.). The "insurance" options include options to continue payments to the surviving spouse when the retiring spouse dies. If you can predict which spouse is going to die first, it's obvious which is the one to pick...
So many comments, so little space. :)
1) I have learned over a decent amount of time that I suck at picking stocks. As a result I only go with low cost (i.e. no load) funds. I do it through the standard retirement avenues (401K, Roth IRA). Here is the deal. There are people who are as smart as I am (although not as modest) that do stocks for a living. They have more time, and better tools. Every trade has a winner and a loser. I'm willing to pay someone to be the winner. Especially when I pay them a pittance.
2) College Funds. When I set mine up (ie for the kids, not for my second time through college) Iowa had the best ones. The voter base (rich, college educated) will prevent congress from eliminating that. One thing to consider. Open it as your parents, for your children. Why? Your assets and your childs assets are considered when dealing with financial aid, the grandparents are not. I'm fortunate in that my father is healthy. :)
3) JT: I'm not sure I understand your problem. It's easy to figure out how long your spouse is going to live. How much longer can you stand them? ;) If they can't stand you for a time less than that, well, then it won't matter to you.
-Jot
For those keeping track, I got 2.5 comments on my comment on your original post, and your original post got 1.5 comments. Woohoo! I win.
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