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Benchmark Needed for Extra-Safe Dividend Portfolio
Old 03-23-2018, 12:45 PM   #1
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Benchmark Needed for Extra-Safe Dividend Portfolio

Several years ago (I donít recall how many years ago) I started putting together a portfolio of dividend stocks in an attempt to supplement my bond portfolio income (and perhaps picking up some capital gains along the way).

Among the many things I donít have however, is a benchmark that I can use to measure against the dividend portfolio. The difficulty Iíve been encountering is that my dividend portfolio is made up mostly (very much so) of the safest of the safe blue chips. (Okay, okay, maybe two or three slightly less than the safest of the safe).

Any ideas for a benchmark for this type of dividend portfolio?
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Old 03-23-2018, 12:51 PM   #2
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I'd keep it simple. If this was meant to be a 'safer' (less volatile) alternative to the Total Market, maybe just use something like a 60/40 AA of Total Market and Total Bond? Or 50/50? Or maybe reverse-engineer it to see if a specific AA would track your portfolio?

Then consider if there is any advantage to one versus the other.

Be sure to use Total Return in these comparisons, NAV won't include the divs of either.

-ERD50
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Old 03-23-2018, 01:25 PM   #3
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Well, there are two distinctly different kinds of benchmark.

The first answers the question "Am I doing the thing right?" This is a benchmark that mirrors your portfolio composition. For this an investor in large cap US stocks might use the S&P 500. If he is competitive with this benchmark then his investment decisions are probably pretty good. This type of benchmark is sometimes called "dynamic" as it can change as the portfolio changes. Add 20% small cap to the large cap portfolio, then the benchmark s/b 80% S&P and 20% some small cap index. A dynamic benchmark says nothing about whether the investor's portfolio is a good choice or not.

The second kind of benchmark attempts to answer the question "Am I doing the right thing?" Using the US large cap portfolio as an example again, an appropriate benchmark might be the total US market/Russell 3000 or even the MSCI All Countries World Index (ACWI). If the US large cap portfolio is underperforming one of these benchmarks, that begins to call into question whether the investor is doing the right thing versus holding a more diversified portfolio. This type of benchmark is sometimes called a "static" benchmark.

IMO the first kind of benchmark is interesting but the second kind is critical. So for your equity portfolio, I would suggest the Russel 3000 or, better, one of Vanguard's total US market funds. (As ERD50 points out, the comparison has to be based on total return.) You can also compare standard deviations as a means to assess risk. By looking at risk numerically and comparing total return you will be able to see whether you are doing the right thing or not.

Portfolio Visualizer (https://www.portfoliovisualizer.com/backtest-portfolio) makes this fairly easy, including total return, standard deviation, Sharpe, and Sortino ratios, although of course it can't predict the future.

Finally, if you haven't seen this video: https://famafrench.dimensional.com/f...dividends.aspx I'd suggest that it would be a good investment of six minutes.
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Old 03-23-2018, 01:28 PM   #4
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Look up S&P High Yield Dividend Aristocrats Index. Another one is an ETF you could use as a benchmark - Vanguard Dividend Appreciation ETF (VIG).
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Old 03-23-2018, 02:50 PM   #5
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Look up S&P High Yield Dividend Aristocrats Index Another one is and ETF you could use as a benchmark - Vanguard Dividend Appreciation ETF (VIG).
Good answer!
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Old 03-23-2018, 05:28 PM   #6
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I tried to follow everybody's suggestions. I took the first 10 (or 20 in one case) of my 24 dividend stocks in alphabetical order and pretended I was working with a $100,000 portfolio ( I have way more than that in the dividend portfolio). I'm only mentioning this because I need you to know this stuff isn't just fun and games (I guess maybe it's still mainly fun and games). Anyhow, I digress:

I went to the Backtest Portfolio Asset Allocation website and here's what turned up using various dates (not deliberately, however). . I think Feb. 2018 is as far as I could go.

This was with my first 20 stocks: The dollars represent the final balance for the time period Jan. 2015-Feb. 2018.

My Portfolio:xxxxxxxxxxxxxxx $143,216 CAGR 12.01%
SPDR S&P DIV. ETFxxxxxxxxxx$134,068 CAGR 9.70%

Below are with my first 10 stocks but this goes from Jan 2015 to Dec. 2017 because I did something wrong with the backtester.

My portfolio: xxxxxxxxxxxxxxx $147,412 CAGR 13.81%
Van Total Bond Mktxxxxxxxxxx $106,775 CAGR 2.21%

My portfolio: xxxxxxxxxxxxxxx $147,412 CAGR 13.81%
Van Div Apprec. xxxxxxxxxxxx $134,187 CAGR 10.30%

And, this is from Jan 2017 to Dec. 2017
My portfolio:xxxxxxxxxxxxxxxxxx $126,630 CAGR 26.63%
Van 500 Indexxxxxxxxxxxxxxxxxx $121,668 CAGR 21.67%

(As a bonus for oldshooter, my last listed portfolio had a Sharpe ratio of 2.96; compared to a Sharpe of 4.84). I have no idea what a Sharpe ratio is, so I'll look at the video after I rest.
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Old 03-23-2018, 06:18 PM   #7
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Good job! We're all learning, all the time. No reason you should be any different. Some comments:

If you set up a login, Portfolio Visualizer will save your portfolios for you. You don't have to peck them in every time. It will let you enter and save all 24 stocks, too.

Statisticians would probably tell you that 24 stocks is not enough to diversify away individual issue risk, especially if they are not well diversified across sectors, but IMO it's a reasonable start. People argue that the right number might be as high as 100, but others say 50 is enough. It's just a matter of degree. If no stock is more than 1% of your portfolio and most sectors are represented I think you can certainly say you are diversified.

Portfolio comparisons are best done over fairly long periods, like ten years. Currently, though, 10 years takes us exactly back into the 2007-8 excitement, so I prefer at least 12 though 8 can make some sense too.

Assuming you are entering only stocks, comparing to a bond fund isn't really going to tell you much.

Comparing to dividend funds is like doing the first kind of benchmark. Comparing to a total market fund like VTSMX is the second kind of benchmark.

Standard Deviation, Sharpe Ratio, and Sortino ratio are all derived from Markowitz's Modern Portfolio Theory that equates volatility with risk. I have some trouble with that, but it is the standard viewpoint. Sharpe and Sortino ratios claim to be better downside risk metrics than simple standard deviation. Wikipedia is your friend on this.
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Old 03-24-2018, 12:16 PM   #8
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I run 2 different portfolios against my own for benchmarking. These are chosen to be alternative ones that are even easier to implement. So my purpose is to ensure that over multiple periods my portfolio has outperformed the others.

One of these is based on Wellington with some extra international funds in there too. The other is a pure index portfolio that is less variable then mine.

I've found that over 12 month periods my portfolio outperforms about 67% of the time. So over 1/3 of the time it under performs one of the others.

The data spans 25 years. Looking at only a few recent years is a mistake. You can get a lot of monthly data from Yahoo (history tab).
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Old 03-24-2018, 12:28 PM   #9
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Originally Posted by OldShooter View Post
...
If you set up a login, Portfolio Visualizer will save your portfolios for you. You don't have to peck them in every time. It will let you enter and save all 24 stocks, too.

Thanks for the login tip.

Statisticians would probably tell you that 24 stocks is not enough to diversify away individual issue risk, especially if they are not well diversified across sectors.

Twenty-four stocks is about all I can handle. My entire portfolio is pretty well diversified with the use of ETF's and Mutual funds.

Portfolio comparisons are best done over fairly long periods, like ten years. Currently, though, 10 years takes us exactly back into the 2007-8 excitement, so I prefer at least 12 though 8 can make some sense too.

Yes, I understand that 10 years is preferable to 2 years, but 2 years is what I rather readily have at hand. When I have some free time, I'll try to do some digging. (Hmnn, I have nothing but free time).

Standard Deviation, Sharpe Ratio, and Sortino ratio are all derived from Markowitz's Modern Portfolio Theory that equates volatility with risk.

I wouldn't know (or understand) this stuff if I stepped in it.
For more please see below:
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Old 03-24-2018, 01:03 PM   #10
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Re diversification, when you said "stocks" I assumed individual stocks. If a substantial portion of the portfolio is in diversified (not sector) MFs then the question is moot. Even a portfolio of only one mutual fund can easily provide adequate diversification provided it is not a sector fund. My Vanguard Total World Stock Index fund is the extreme, holding 8000 issues. That's diversification!

Re the volatility ratios all you really need to know is that smaller numbers are better and small differences in numbers don't matter. One portfolio's numbers being double those of another? That matters. Use volatility ratios for something like the Russell 3000 or the MSCI ACWI to compare yourself with average market volatility. Volatility is probably a major factor in how people sleep at night, but I think it is not really a good surrogate for risk. Risk is Enron. Risk is Toys 'R Us. Risk is Sears Holdings.
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Old 03-24-2018, 01:10 PM   #11
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Volatility is probably a major factor in how people sleep at night, but I think it is not really a good surrogate for risk. Risk is Enron. Risk is Toys 'R Us. Risk is Sears Holdings.
+1. Risk" is also earning 2% nominally if long-term inflation averages 3%.

I'm not sure how "annual variation in value" came to be synonymous with "risk," but it is very misleading.

If we'll be withdrawing money over 30+ years, annual ups and downs may not be especially significant, especially once we get a few years away from the launch pad and have a bit of cushion.
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Old 03-24-2018, 01:16 PM   #12
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I'd keep it simple. If this was meant to be a 'safer' (less volatile) alternative to the Total Market, maybe just use something like a 60/40 AA of Total Market and Total Bond? Or 50/50? Or maybe reverse-engineer it to see if a specific AA would track your portfolio?

Then consider if there is any advantage to one versus the other.

Be sure to use Total Return in these comparisons, NAV won't include the divs of either.

-ERD50
Here are some more numbers. The goal remains: to find a benchmark to help to see how the Dividend Portfolio) measures up.

Van. Total Stock Mkt. (VTSAX) Final Bal. $13,897 CAGR 10.95%

Van. Total Bond Fund (BND) Final Bal. $10,436 CAGR 1.36%

redduck's folly (HUH?) Final Bal. $14,321 CAGR 12.01%

OK, ERD50, what is this 50/50 you speak of?


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...One of these is based on Wellington with some extra international funds in there too. The other is a pure index portfolio that is less variable then mine...

The data spans 25 years. Looking at only a few recent years is a mistake. You can get a lot of monthly data from Yahoo (history tab).
Thanks for giving me some much-needed direction. I think it would be kind of neat to get that 25 year data span using the two years I already have and then continue to go forward from there. I may need some luck on completing this goal. Maybe I should just use Wellington as a benchmark and call it a day. (I mean, who is going to know--or care)?
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Old 03-24-2018, 01:27 PM   #13
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Maybe I should just use Wellington as a benchmark and call it a day. (I mean, who is going to know--or care)?
^ I think you've answered your own questions.
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Old 03-24-2018, 01:31 PM   #14
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+1. Risk" is also earning 2% nominally if long-term inflation averages 3%.

I'm not sure how "annual variation in value" came to be synonymous with "risk," but it is very misleading.

If we'll be withdrawing money over 30+ years, annual ups and downs may not be especially significant, especially once we get a few years away from the launch pad and have a bit of cushion.
Yes.

I think that standard deviation became synonymous with with risk because Markowitz defined it to be so in his PhD thesis, published in 1952. He also made another questionable call in arguing that stock price distributions are close enough to Gaussian to make that assumption. From that, all kinds of fun mathematics can come and I have read that back then the economists were trying to distance themselves from other soft sciences by becoming more mathematical.

As you say, ups and downs are not all that significant unless you are forced to sell during a "down." (We'll skip the discussion of market timing, here.) The Gaussian assumption has problems too. Fat tails. Assymetric tails. Off-zero center. ... The biggest one is the assumption that the data samples are uncorrelated. But Markowitz is the guru and these approximations have lives of their own. If you find Nassim Taleb to be amusing, there are several places in his books where he fumes about this.
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Old 03-24-2018, 01:36 PM   #15
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...
Thanks for giving me some much-needed direction. I think it would be kind of neat to get that 25 year data span using the two years I already have and then continue to go forward from there. I may need some luck on completing this goal. Maybe I should just use Wellington as a benchmark and call it a day. (I mean, who is going to know--or care)?
When I use Wellington I make sure I would evaluate it using the same stocks/bond ratio as my currentl portfolio. So the Wellington based one would have the right ratios of Wellington, international stocks (I use a 60:40 USA:foreign ratio), intermediate term bonds, and short term bonds. Since Wellington has some foreign and bonds, one has to do a bit of calculations to get this right.

But again, when I look at the Wellington based portfolio it is with an eye towards possibly actually switching to it as I enter my dotage. Not there yet and still too much testosterone.
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Old 03-24-2018, 02:04 PM   #16
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^ I think you've answered your own questions.
Well, I'm closer to the answer. It was yet another interesting process.

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...But again, when I look at the Wellington based portfolio it is with an eye towards possibly actually switching to it as I enter my dotage. Not there yet and still too much testosterone.
And, just what benchmark have you been using for the last 25 years?
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Old 03-24-2018, 02:17 PM   #17
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The main advantage of a Wellington or Wellesly is that when one in his/her dotage they will re-balance and adjust on their own. No need for one to do the work every year.

The other advantage is that rather than using one's precious time trying to figure out which benchmark is best, how to match it, how to beat it, who is doing better than whom, etc. etc. etc., the simple minded investor can just enjoy life.

Of course, for some, tinkering with investment options is enjoying life.
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Old 03-24-2018, 02:25 PM   #18
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And, just what benchmark have you been using for the last 25 years?
I have made a lot of changes in my investments since 1993 ... a lot. I don't think Boglehead thoughts were on the radar until maybe the early 2000's.

So I'm just doing some careful backtesting. But I've been using the same portfolio methodology since about 2009 with minor tweeks. Probably started the benchmarking around 6 years ago.
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Old 03-24-2018, 02:51 PM   #19
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"..as I enter my dotage. Not there yet and still too much testosterone."
+++++++++++++++++

Thanks for the above reply, but I was asking about the benchmark you use to evaluate your testosterone. In any case, congratulations on exceeding your benchmark as apparently you still have too much. Have you considered increasing your SWR?
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Old 03-24-2018, 04:12 PM   #20
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The main advantage of a Wellington or Wellesly is that when one in his/her dotage they will re-balance and adjust on their own. No need for one to do the work every year.

The other advantage is that rather than using one's precious time trying to figure out which benchmark is best, how to match it, how to beat it, who is doing better than whom, etc. etc. etc., the simple minded investor can just enjoy life.

Of course, for some, tinkering with investment options is enjoying life.
ER really provides a lot of free time. One can travel only so much before it becomes dull. Soldering some fine-pitch chips and writing some firmware will get tiring, and overdoing it makes it too much like work, yet it does not pay like work. Cooking and eating only go so far. Badmouthing unscrupulous robot car makers can get one's blood pressure up, and that's not good either.

So, that leaves plenty of time to look at what other investors are doing, and doing the reverse of what they do when the frenzy gets to its max. Just another pastime.
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