January 2015 Portfolio Update

Its been an interesting month!  All kinds of news from various central banks all over the world.  100’s of companies reporting earnings and projecting what their sales and profits will be in the coming quarters.  Oil down, gold up, whats an investor supposed to do?  Ha, its easy.  Remember, a 6th grader can do this.  First lets review what we did in January:

01/31/15
VNQ 201 86.55 17396.55 4.66%
MTUM 248 67.59 16762.32 0.78%
VGLT 209 84.5 17660.50 6.08%
VTV 200 81.03 16206.00 -2.33%
VBR 160 102.28 16364.80 -1.35%
VBK 134 124.79 16721.86 0.66%
Cash 302.22
101414.25 1.41% 1414.25

The S&P 500 was down 1.27% since we entered the market and our portfolio was up 1.41%, a very respectable out performance. A $1414.25 profit for the month.

OK, what do we do now?  Well, I have done some additional research and have decided that instead of investing in the Top 6 of our 13 investment choices, we will now be investing in the Top 3.  Although this hasn’t been the case recently, over the past 40 years, investing in the Top 3 has returned a bit more than holding the Top 6.  The numbers don’t lie.  I thought going with the Top 6 might give me a little more protection and diversity but I cant deny the numbers.

I will post the details of the 13 investment choices next week but it looks like the top 3 have not changed so all we are doing here is selling off the 4-6 ranked investments from last month and reinvesting those proceeds evenly into the top 3.

So, that being said, our portfolio for FEBRUARY now looks like this:

02/01/15 Shares Price 2/1/2015 Change Month
VNQ 393 86.55 34014.15 0.00%
MTUM 492 67.59 33254.28 0.00%
VGLT 404 84.5 34138.00 0.00%
Cash 7.82
101414.25 0.00% 0.00

But what if the market crashes?  What if it doesn’t?  You see, with a portfolio built on rules, not predictions, you essentially remove guesswork and emotions from the multitude of variables that go into investing.  But what IF the market crashes…well, sometime this month I will review information from other blogs I read like http://www.investingforaliving.us and look at just what worst case scenario has been for a portfolio like this.

See, a six year old can apply these rules and techniques and make as much return (or more) than most money mangers.

Enjoy your month!

The Best Portfolios are Consistent and Boring

Another lesson I’ve learned the hard way has to do with volatility and its inherent risk.  When I stretched out for increased returns I always got more volatility and not always the extra returns.  Through this process I learned that although better returns are certainly possible the fact is it’s the consistency of a decent return that builds wealth over time.  Big returns followed by losses typically will not out perform small consistent gains.  Check out this eye opening set of data:

Return 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
Start 100000 107000 114490 122504.3 131079.6 140255.2 150073 160578.1
Return 15% -5% 15% -5% 15% -5% 15%
Start 100000 115000 109250 125637.5 119355.6 137259 130396 149955.4

First off, I love applying statistics to my investing strategies that are generated by math a 6th grader can understand  It makes what I am doing more understandable and quite frankly, fun.  I enjoy listening to “market pundits” pounding the table all day advocating this investment or that investment with no accountability to its results.  Two months later, the guys that were “right” come back on the show and pat themselves on the back…the rest off them come back on the show but never bring up the fact that they have been terribly wrong the last 5 times they made on air recommendations.  Anyway, back to that chart above…quite simply, 7% year after year is far better than a few good years with a few slightly bad years mixed in.  Don’t even think about having a really bad year….one 50% down year requires a 100% gain to break even…even a 25% loss requires a corresponding 33.3% gain to break even.  Last I checked, we don’t invest to break even!

On a side note, did you ever have a friend go to Vegas and gamble and when he came back said, “I broke even.”  That statement means he lost! No one in the history of Las Vegas went there and broke even…its statistically impossible!

In short, 7 years with 7% gains in a row is much better than 4 out of 7 years with 15% gains and the other 3 down 5%.  As you can see above, the slow steady approach left us with 160k after 7 years and the volatile approach with higher returns (sometimes) left us with only 150k.

I like a little action as much as anyone but I have learned action and excitement with investments is a bad idea.  So if you need some action, do what I do, bet on golf and invest in the market.

How did I pick those 6 investments for January 2015?

I love market days like this when stocks are down 1% plus but 2-3 of my ETFs are positive on the day.  I also love knowing I don’t have to figure out or wonder what to do next because I already know what I am going to do.  On 1/31/2015 I will work my 6th grade math and adjust positions accordingly.

In the interest of getting up to speed on this “6th Grade Portfolio” I want to discuss how I came to recommending these six ETFs for my January 2015 investments mentioned in the previous post.  There are a few places online like here http://www.mebfaber.com/timing-model/ and here http://www.investingforaliving.us/ that I learned from and used to get a feel for this investing style.  I use the GTAA strategy they discuss as the basis for my strategy with a few of my own rules thrown in.  I have learned over time that one must eventually create their own investing style that suits their own comfort levels and risk tolerances.

We start every month with 13 different ETFs to choose from all representing different asset classes.  We choose 6 of the 13 each month to achieve diversification.  If you need to learn what an ETF is go here: http://www.investopedia.com/terms/e/  For a list of those ETFs please read my previous post.

Then using any charting service like http://www.freestockcharts.com I calculate each ETFs 1 month, 3 month, 6 month, and 12 month returns.  Average those together and that’s where I get the “Average Returns” column in the previous post.  Order them from highest average to lowest average return and voila you have the top 6 ETFs to invest in for the month.  Provided the ETF in that top 6 is above its 200 day moving average (also obtained by looking at the stock chart) you buy 1/6 of your portfolio in each.  Sometimes those top 6 will be the same top 6 as the previous month.  In that case (as was this month compared to December) you do nothing, just continue hold the ones you already had.  That’s the goal; to get into an ETF when it starts a reliable upward trend and as long as it stays in that trend it will stay in the top 6 and thus stay in the portfolio.  You never have to make a prediction about where you think its going to go as the 6th grade math will tell you if you need to buy, sell, or hold.  So the next time you hear someone predicting where the market will go you rest easy knowing that if it goes down you will get out and if it continues up you will stay in.

In summary, to execute this strategy you need to be able to read a chart, figure out averages and percentages.  Like I said, so simple a 6th grader could do it!

Here is an example of a chart that I use.  Its of the VGLT Vanguard Long Term Government Bond ETF and one of the best performers in the last three months.

VGLT

I am just writing here for fun so if you have any questions or I missed something please feel free to point it out or ask.  No ego here.  In my next post I will discuss what to do when the strategy recommends a new purchase.  I dont just jump in with both feet and buy, I wait until I get a signal (again obtained by reading the chart) before buying.  This is one of my wrinkles on the basic strategy.  This keeps me from over paying for an etf that is moving up quickly.  I will also touch on risk and returns on a later post.  Its important to know what to expect in terms of returns and its even more important to know what risk you are taking to obtain those returns.  There’s no free lunch.

Necessary Skills to Master Before Investing.

Since this is my first post to this blog I feel compelled to say that I don’t particularly enjoy writing and that I am doing this more or less to have a neat public place to document my investments, ramble about random thoughts on any topic, and perhaps answer any questions anyone may have.  I may not enjoy writing, but I do enjoy debate, poking fun at conventional wisdom (ignorance), and good conversation.  So please feel free to comment, disagree or whatever!

As a non-professional investor I have had many successes and many failures (I prefer to call them “Learning experiences” haha) and from what I have seen nobody is worth the huge fees that some of these so called “advisors” charge. Even if you are not inclined to do the work (6th grade math) I discuss below, you still don’t need an advisor.  There are numerous online services that allow you to systematically save for your retirement in a low risk low volatility way that I would be happy to recommend.  Most advisors are in the client count building and assets under management building business, not investing or stock market out performance business.  Thats why they constantly ask you for referrals.    Why send your money to an “advisor” that is just going to in turn send your money to the same funds you can invest in yourself.   Its like paying someone 2% of your pay check to take your check and deposit it in your bank account for you.  Its all a big scam they use to confuse and scare people into thinking they are too stupid or uninformed to invest their own money.  One last thought for now, what I am describing below isn’t predictive at all, its reactive to what “IS” happening, not what I think is going to happen or not what I think should happen.  Basically own funds when they are going up and when they stop, don’t own them.  Simple right?  Thats why I say a sixth grader can do it.

I believe that a 6th grader can produce investment returns just as well as most money managers.  They can do this just by applying a few techniques and rules any 10 or 11 year old can understand.  I am not talking about outperforming Hedge Fund gurus like Ray Dalio with risk capital, derivatives, and advanced option trading,  I am talking about long term, relatively low risk, low volatility investing and saving that most of us should be doing.  There are a few other websites that employ this type of strategy I just have added a few of my own rules to it.  Here are the skills needed to determine the investments I would make or stay in on January 1st.

1. Chart reading

2. Division and figuring out averages

3. Basic Microsoft Excel use

Keep in mind all 6 of these investment recommendations have not changed since October 2014 and have returned 5.66% thru 12/31/2014, but for the purposes of this blog we will start where December left off and start with a $100,000 portfolio.  We will also not factor in costs of the trades.  There are numerous discount brokerages out there that change a mere $6 per trade as opposed to broker assisted trades that can run $50-$100.  (Again, if you go online to a discount broker and make a trade you pay $6, if you call your broker and ask them to make the trade for you, they charge $50-$100, don’t do that! :))  We re-evaluate monthly so at the end of January we will revisit these recommendations.  This will also give me some time to discuss the 6th grade math necessary to come to these conclusions.  Here’s what should be invested in right now and I will use their 1/5/2015 closing prices to establish our starting point.  Buy the first six in equal amounts, so if you have 100k, its 16666.66 of each.

ETF INVESMENT CHOICES
Symbol Description Rank Avg Returns Position Closing Price 1/5/2015 Amount Invested Monthly Return Value 1/31/2015
VNQ Vanguard REIT Index ETF 1 14.33% Invested 82.7 16666.66 0% 16666.66
MTUM iShares MSCI USA Momentum Factor 2 11.80% Invested 67.07 16666.66 0% 16666.66
VGLT Vanguard Long-Term Govt Bd Idx ETF 3 6.84% Invested 79.66 16666.66 0% 16666.66
VTV Vanguard Value ETF 4 5.95% Invested 82.96 16666.66 0% 16666.66
VBR Vanguard Small Cap Value ETF 5 5.58% Invested 103.68 16666.66 0% 16666.66
VBK Vanguard Small Cap Growth ETF 6 2.57% Invested 123.97 16666.66 0% 16666.66
VCIT Vanguard Interm-Tm Corp Bd Idx ETF 7 2.19% Not Invested  TOTAL $$ 99999.96 99999.96
VGIT Vanguard Interm-Tm Govt Bd Idx ETF 8 1.83% Not Invested
IGOV iShares International Treasury Bond 9 -3.20% Not Invested PORTFOLIO RETURN JANUARY 0.00%
IAU iShares Gold Trust 10 -3.53% Not Invested PORTFOLIO TOTAL RETURN SINCE INCEPTION 0.00%
VWO Vanguard FTSE Emerging Markets ETF 11 -3.55% Not Invested
VEA Vanguard FTSE Developed Markets ETF 12 -5.96% Not Invested
GSG iShares S&P GSCI Commodity-Indexed Trust 13 -27.54% Not Invested

A couple final thoughts.  Remember this account is set up with funds slated for systematic retirement and savings generation and accumulation.  I would be happy with 7%-8% annual returns with very low volatility in this portfolio.  In a perfect world one would have VERY minimal debt, zero credit card debt, be living BELOW their means, and have minimum 2 months expenses in cash which should also be about 7% of your annual income.  That means a person making $75,000 per year would have $10,500 in cash in the bank and be spending about $5250 per month total.  This should leave about 16% of your annual income for savings.  Do that for 5 years and you would have a $100,000 portfolio. Lastly, I actually “think” this portfolio is too heavy on stocks considering where the market has gone over the last five years, BUT the whole point of this technique is not to “think” or “predict”, just follow the 6th grade level rules.  There’s probably more but I think I’ve written enough for one day.  In my next post I will discuss how we applied that 6th grade math to arrive at our investment choices.