Low returns for 2014

[younginvestor2013]

Hi all,

The thread someone else posted made me realize that my returns were materially lower than the S&P's 2014 return for the year. I don't generally pay attention much to my account balances day in and day out, or my overall asset allocation since I "set it" and am just on auto pilot going forward. I had a trusted/wise financial advisor suggest an overall asset allocation.

My returns (as calculated by Vanguard in the personal performance/portfolio analysis section of their website) for 2014 were only about 7%, and I believe the market (S&P 500) churned out about 12%.

I suspect the reason my returns were lower than is due to some funds/asset classes not performing as well. I could look into all of my funds below and see which ones brought my overall return down. But, I guess my question is more "looking forward" and seeing if I should make some changes.

On one hand, I could simplify things and put all my eggs into the S&P 500 fund and call it a day. On the other hand, I am looking at a 15-25 year horizon. So, I am willing to sacrifice some returns in one year if my overall yearly average return for that 15-25 year horizon is higher than it would be if I just put my eggs into one or two funds.

I also would prefer not to sell to trigger a taxable event, since some of these funds are non-retirement oriented.

What do you think of my asset allocation? It is listed below.

Thanks for any feedback!!

(All Vanguard ETFs)

VSS International, Small Cap 3%
VWO International, Emerging Markets 2%
VUG Domestic, Large Cap Growth 22%
VO Domestic, Mid Cap 11%
VOO Domestic, Large Cap S&P 500 Index 11%
VB Domestic, Small Cap 11%
VXUS International, Large Cap 16%
VTV Domestic, Large Cap Value 23%

 

[audreyh1]

As I answered on another thread:

When you have a diversified portfolio, you'll never beat the top returning asset class. But you never know in advance which will be the top performing asset class, so it's best to keep a well diversified portfolio.

The worst thing you can do is pile all your investments in last year's winners.

 

[heeyy_joe]

Monetary policy changing in Japan and the EU. I foresee money flows into Japan funds and European real estate funds. Tinker some, not too much.

 

[clifp]

My target benchmark is a moderately aggressive portfolio which is 80/15/5 (cash)
It consists of 5% Citigroup 3 Month T-Bill, 45% S&P 500, 20% MSCI EAFE Developed Markets (TRN), 15% Russell 2000, 15% Barclays U.S. Aggregate Bond.

Last year the performance of this index was 6.8% the same as yours. As you can see the components are also the same. In particular you have 21% international vs 20% for the this index. Overall for international was down 5% and small caps (Russel 2000) was up 5%.

With US large caps up 14% this year and foreign stocks down 5% the case for having 20% of your portfolio in international stocks is stronger Jan 2015, than it was Jan 2014.

 

[donheff]

Yeah, I suffered the international blues this year also. I suspect that may repeat in 2015 with Greece on the way out again but if I (you) moved to domestic, Greece would reconcile with the EU, Merkel would become a Keynesian and Europe would blast ahead 30%.

 

[marko]

I was equally disappointed as well (7.1% performance).

International, oil and a small stake in high yield dampened what could've been a pretty good year.

Not complaining about 7% (off of a fairly large portfolio) mind you, but I usually hold 8% as my 'minimum acceptable return'.

Win some, lose some. Dividends and Cap Gains were unusually impressive however.

I am (perversely) happy to see that I"m not alone, but we have to remind ourselves that recent 12% runs have not been normal!

Began a larger stake in Mid Caps as I've been low in that area.

 

[Al18]

I only saw 7.2% return on investments this past year on my diversified portfolio. I'm entertaining the idea of buying some of Fidelity's Select Health Care fund (FSPHX) if we see a 10% market correction this year. This fund has consistently outperformed the S&P500 over the short and long term.

 

[athena53]

Yeah, mine was also running about 7% and I was feeling bad about that but remembered the "placemat chart" that Edward Jones (and probably other financial firms) produces. The columns represent years and the rows are colored blocks representing various investment segments (fixed income, large-cap stocks, small-cap stocks, developing countries, utilities, etc.). The blocks are arranged within each year from those with the highest return to those with the lowest on the bottom.


Not surprisingly, the way the blocks are ordered changes every year- in the financial crisis years, fixed income investments won out because their returns were positive! It really reinforces the importance of a balanced portfolio. You'll be in the losing segments but you won't lose out on the large gains in the highest-performing segments.


Personally, I wish I'd had the foresight to put all our $$ in Berkshire Hathaway and Lockheed (LMT) on 1/1/2014, but at least we had some of both!

 

[audreyh1]

Search on the Callan Periodic Table of Investment Returns 2013

I'm sure they'll update it to include 2014 before too long.

 

[Niuatoputapu]

As I answered on another thread:

When you have a diversified portfolio, you'll never beat the top returning asset class. But you never know in advance which will be the top performing asset class, so it's best to keep a well diversified portfolio.

The worst thing you can do is pile all your investments in last year's winners.

+1 International equity was a drag on overall returns last year, but the tide will turn and that portion of your portfolio will ultimately be a top performer. Stay diversified and gauge your success over the longer term

 

[samclem]

What do you think of my asset allocation? It is listed below.

Thanks for any feedback!!

(All Vanguard ETFs)

VSS International, Small Cap 3%
VWO International, Emerging Markets 2%
VUG Domestic, Large Cap Growth 22%
VO Domestic, Mid Cap 11%
VOO Domestic, Large Cap S&P 500 Index 11%
VB Domestic, Small Cap 11%
VXUS International, Large Cap 16%
VTV Domestic, Large Cap Value 23%

Thoughts:
1) There are no bonds in this allocation. That may be okay with you, or you may just be showing us your equities. But even with a 15-25 year horizon and a willingness to accept a lot of volatility now, having a small amount (20% or so) in bonds can significantly reduce volatility at only a very small reduction in expected returns. The returns from bonds are often not well correlated with the returns from stocks, so when you do your rebalancing you'll frequently get a chance to "buy low". Full disclosure: I have a very low allocation to bonds--still afraid of the coming interest rate climb (that hasn't happened).
2) You've got 20% in international. I'm not sure if there's a reason it is broken up into three funds, you could get good, broad intl exposure with the VXUS (Vgd Total Intl Stock ETF, .14% ER) you already own or VEU (Vgd FTSE All-World Ex US, .15% ER). It looks like your intl portfolio as presently constructed is tilted to smaller stocks and emerging markets, something I probably wouldn't do.
3) You've got your domestic stocks in several ETFs, (Large cap, small cap, value, growth, etc) but they roughly replicate the actual market. Unless this has been done for a particular reason (i.e. to tax-loss harvest when one category or another outperforms), it would be easier, less expensive, simpler, and more efficient (daily automatic rebalancing rather than less frequently doing it yourself) to just buy VITSX (Vgd Total Stock market (US) mutual fund) or VTI (Vgd Total Stock Market (US) ETF).
4) I lean a bit more toward small and value stocks, so I'd buy VTI and then augment a bit with VB and VTV (or other small/value offerings). But, that's me.

But, those are all very minor points (except maybe the bond thang). I'd bet your equity allocation as shown above is a better fit for most investors than what they already own, and that it will outperform most active traders.

 

[Bikerdude]

Psst.... Wellesley did 8.07%. Wellington 9.82%. Set it and forget it.

 

[REWahoo]

Psst.... Wellesley did 8.07%. Wellington 9.82%. Set it and forget it.

+1...almost. Set it, but never, ever forget it.

 

[Chuckanut]

I spent part of the morning looking into banks that pay more interest on regular savings. I figure that is a way to add a few tenths of a point to this year's return with no extra risk. I found one paying 0.99% compared to the 0.15% of the local credit union.



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[target2019]

VSS International, Small Cap 3%
VWO International, Emerging Markets 2%
VUG Domestic, Large Cap Growth 22%
VO Domestic, Mid Cap 11%
VOO Domestic, Large Cap S&P 500 Index 11%
VB Domestic, Small Cap 11%
VXUS International, Large Cap 16%
VTV Domestic, Large Cap Value 23%

Are you aware that the holdings of VUG + VTV = VOO?

Essentially your portfolio was held back this year by the international diversification you have. The non-S&P500 US investments also held you back. If you go all S&P500, what will you think in the years when that places low in the returns?

VXUS is actually total international market, so the holdings of VSS + VWO are contained in that already. If you really intend that, then fine.

 

[audreyh1]

Psst.... Wellesley did 8.07%. Wellington 9.82%. Set it and forget it.

Wellington will do well when US large cap stocks (like the S&P500) do well. ditto, Wellesley plus if the bond market does OK. Both were true in 2014, but all years aren't that way.

 

[audreyh1]

I spent part of the morning looking into banks that pay more interest on regular savings. I figure that is a way to add a few tenths of a point to this year's return with no extra risk. I found one paying 0.99% compared to the 0.15% of the local credit union.



Sent from my iPad using Early Retirement Forum

You can get 1% from a few of the internet high yield savings accounts.

Also 1 year CDs are available for 1.1%, including PenFed.

 

[clifp]

Thoughts:
1) There are no bonds in this allocation. That may be okay with you, or you may just be showing us your equities. But even with a 15-25 year horizon and a willingness to accept a lot of volatility now, having a small amount (20% or so) in bonds can significantly reduce volatility at only a very small reduction in expected returns. The returns from bonds are often not well correlated with the returns from stocks, so when you do your rebalancing you'll frequently get a chance to "buy low". Full disclosure: I have a very low allocation to bonds--still afraid of the coming interest rate climb (that hasn't happened).
2) You've got 20% in international. I'm not sure if there's a reason it is broken up into three funds, you could get good, broad intl exposure with the VXUS (Vgd Total Intl Stock ETF, .14% ER) you already own or VEU (Vgd FTSE All-World Ex US, .15% ER). It looks like your intl portfolio as presently constructed is tilted to smaller stocks and emerging markets, something I probably wouldn't do.
3) You've got your domestic stocks in several ETFs, (Large cap, small cap, value, growth, etc) but they roughly replicate the actual market. Unless this has been done for a particular reason (i.e. to tax-loss harvest when one category or another outperforms), it would be easier, less expensive, simpler, and more efficient (daily automatic rebalancing rather than less frequently doing it yourself) to just buy VITSX (Vgd Total Stock market (US) mutual fund) or VTI (Vgd Total Stock Market (US) ETF).
4) I lean a bit more toward small and value stocks, so I'd buy VTI and then augment a bit with VB and VTV (or other small/value offerings). But, that's me.

But, those are all very minor points (except maybe the bond thang). I'd bet your equity allocation as shown above is a better fit for most investors than what they already own, and that it will outperform most active traders.

I disagree with Sam on point 1, for young person no need for bonds in this environment (if you were 40 or certainly 50 different story.)
2. I like both emerging and small cap international funds, more than a broad fund (although most of mine international is in VEU and the Schwab equivalent SCHF)
3. I think as long as you keep the number of funds to reasonable level no more than 12 I think I slice and dicing is superior to all in one funds for tax harvesting reason.
4. I do the same.

Still I strongly agree with Sam on the larger point, your portfolio is really quite good. If I was young and working and didn't have time/interest in individual stocks. I'd hope that my portfolio looked like yours.

Some year international and small cap stocks will comeback and crush domestic and large cap, and I'll regret having only 10% international and too much large cap. Just not this year.

 

[athena53]

Search on the Callan Periodic Table of Investment Returns 2013

I'm sure they'll update it to include 2014 before too long.

That's the chart. Thanks! Interesting to see segments such as emerging markets sink from top-performers one year straight to the bottom the next. Definitely not a good idea to chase last year's winners unless you think there's a good reason those wins will continue.

 

[audreyh1]

That's the chart. Thanks! Interesting to see segments such as emerging markets sink from top-performers one year straight to the bottom the next. Definitely not a good idea to chase last year's winners unless you think there's a good reason those wins will continue.

Yes - that just shows how EM is the most volatile of the asset classes available for international exposure.

 

[samclem]

Definitely not a good idea to chase last year's winners [-]unless you[/-]even if you think there's a good reason those wins will continue.

At least that's what I'd say. The ability to reliably predict what the market will do, or keep doing, is very rare.

 

[green night]

+1 International equity was a drag on overall returns last year, but the tide will turn and that portion of your portfolio will ultimately be a top performer. Stay diversified and gauge your success over the longer term

I don't think international will turn in '15 b/c the US $ will likely continue to strengthen. I added to small caps and reduced my international exposure.


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[photoguy]

VSS International, Small Cap 3%
VWO International, Emerging Markets 2%

Right now these are a tiny slice of your portfolio and i would either drop them (to simplify) or double down and increase them to a meaningful percentage. In my AA they are each 10% of equities.

 

[Livin Large in MT]

International and some madcap and smallcap stocks also underperformed. The objective is to select funds that do better than the overall In That Category. So my international dragged me down but not as much as the average. Still it hurt this year and you just have to be philosophical. Most of us started out 2014 feeling pretty pessimistic about the year after the performance most had in 2013. So it is kind of a "all gravy" situation.

 

[HFWR]

I'll have to do some research on madcap stocks. Invest in what you know, and all that...