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Portfolio Philosophy
Old 03-11-2011, 05:29 PM   #1
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Portfolio Philosophy

Does anyone have a portion of the portfolio that is truly speculative and how does it figure into your retirement forecasting? The reason I ask is about 1/3 of our total investments is currently in VGENX. It is the fund that ate our account- and I'm having a hard time talking to DH about this. DH did a tremendous amount of serious research into energy in 2005-2006. It was his "passion" LOL. We invested early and rode the energy wave up and down never selling- though to his credit he called the "top" and almost sold but didn't- kicks himself- but he is in it for the long haul. Since getting more serious about FIRE, he's sort of excluded that fund from the rest of our investments and likened it to say real estate speculation or starting his own business. He is still very engaged in reading and researching the sector and has no desire to sell in order to re-balance. I know some investors have "side" accounts that they don't rely per se and this is sort of how I/ we view this. So in terms of FIRE we've run the numbers with and without this fund and of course seen different results but both put us on track for target retirement date- but obviously different amounts after. I don't know just curious if others would feel comfortable with this or similar "outside investments".
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Old 03-11-2011, 06:02 PM   #2
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I have had VGENX since 1987 and they would have to pry it out of my hands .The average annual return since inception are just under 14% . I do consider it part of my portfolio but I view my brokerage account as " outside investments " . I only use it for fun money that I want to gamble with .
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Old 03-11-2011, 10:58 PM   #3
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I used to have VGENX. I now have several individual energy stocks. There is nothing wrong with VGENX, it is just that since I work in the energy business and I figured I could find a few good stocks and buy on weakness. For example, I own some BP. That is speculative, but not very. I do think that 1/3 of your eggs in one sector is more risky than a more diversified portfolio would be. Even though I am in the energy business, I have no more than 15-20% in energy stocks.

I would not call VGENX speculative at all. Sometimes the daily price of assets do go up and sometimes they do go down. I expect this and you should, too. Speculative is buying gold or day-trading. You should have a long-term perspective. Try looking at ten-year performance. Find an asset allocation that you are comfortable with for the long run and stay with it. Rebalance when some things go down and some go up. I focus on dividends these days. Once I buy something, I primarily watch earnings and dividends. Sooner or later, retained earnings ought to reappear in the price of the stock. Look at Exxon's long-term performance, for example.

Exxon Mobil Corporation Common Stock Chart | XOM Interactive Chart - Yahoo! Finance

As two of my asset types, I have a few energy stocks and Vanguard VGHCX, Vanguard Health Care. I figure that there are two things that will do well over time--energy and health care. But I don't bet the farm on them.

Heed Moemg. Keep a ten-year perspective.
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Old 03-12-2011, 07:56 AM   #4
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The road to retirement wealth is littered with the burned out hulks of investments that folks did not rebalance out of.

One should have an asset allocation written down in their Investment Policy Statement and one should follow the rebalancing rules that are also written down in their IPS.
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Old 03-12-2011, 08:12 AM   #5
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If DH sees this targeted investing as a hobby/business, then he'll understand keeping it separate from your retirement investments. How does your actual $$ in VGENX today compare to the $$ when you started (adjusted for inflation)? If it is well above water (now) compared to where you started, then think about letting this side business/speculation/hobby live on its own: take out the money you put into it and the inflation-adjusted growth since you started--all that goes into your "regular" investments and gets rebalanced. The rest is mad money and DH can invest it however he wants for as long as he wants (you wouldn't tell him how to run "his" doughnut shop--provided he didn't need to dip into the retirement accounts to keep it running). And you should probably write it off--if he does great with it, maybe you guys can take a cruise. But you won't need it and you won't have to fret over it.

PS added: He'll enjoy his business more if it lives on its own, and that includes paying any taxes it causes. If his balance starts to go down, I'll bet he'll diversify on his own to keep some seed corn so he can keep the business afloat until things turn around. That's great--much better than him dipping into the retirement account to replenish his working capital. Retirement and business--two separate things for everyone's peace of mind.
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Old 03-12-2011, 08:23 AM   #6
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1/3 of the investment account is not a "outside investment", it is a "major focus".

We have vgenx and vgpmx (vanguard metals and mining) in our portfolio but never more than 10% combined. Twice over the past year we have sold to take the share down. The narrow focus and high volatility of these funds mean they should be limited to a small share of the portfolio and rebalanced with discipline.

If your investment portfolio is needed to finance your retirement, 1/3 in any asset class is risky, and in a single equity sector is very risky. It's also probably unnecessary.

If your portfolio is just a small part of of your retirement income the investment risk remains but it won't have that much of an impact on your income.
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Old 03-12-2011, 08:36 AM   #7
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The aggressive parts of my AA include 4.6% VGENX, 2.4% VGSIX (REIT) & 6.7% VEMAX (Emer Mkts). I have the first two for low correlation/diversification and long term returns.

My intent with VGENX was to have a commodity holding, but I went with Energy because I am convinced the world (esp USA) is incapable of weaning itself off "energy" in the next 10-20 years at least. I see it all around me every single day. We'll conserve only when we have no other choice (intolerably expensive and/or real scarcity) - but YMMV.

I've owned VGENX for over 5 years, I expect to hold it for a very long time, but I'm not brave enough to go 1/3rd with it at my age.
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Old 03-12-2011, 09:22 AM   #8
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5% of my portfolio is in VGENX in a Roth account created in March 2004.
I own a few shares of HK (1.4 %) just for fun.
Overall, 7% of my equities are in energy. I'm comfortable with that.
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Old 03-12-2011, 09:57 AM   #9
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Quote:
Originally Posted by countrymouse View Post
...(snip)... I know some investors have "side" accounts that they don't rely per se and this is sort of how I/ we view this. So in terms of FIRE we've run the numbers with and without this fund and of course seen different results but both put us on track for target retirement date- but obviously different amounts after. I don't know just curious if others would feel comfortable with this or similar "outside investments".
To me it sounds like faulty reasoning to take any investment accounts as, shall we say, "off book items". You might want to read Swedroe's Alternative Investments book which I seem to recall covers topics like VGENX. I personally considered VGENX but decided that I had a better more general strategy then that investment.

One trick you might try is to give VGENX a test case to beat. You could take 1/3 of VGENX and move it into something more general that has some energy exposure too. Maybe a fund that fits in with your other equities. So if you're light on small caps, it could be a small cap index. Then move the money in increments to bet on the winner -- the opposite of rebalancing but we're talking about a mental trick to wean oneself off a possibly flawed strategy. The object would be to move the money in the winning direction over a period of maybe 5 to 10 years.

Just a thought. I've never really done this as my own approach would be to correct the flawed strategy quickly.
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Old 03-12-2011, 09:58 AM   #10
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As MichaelB notes, 1/3 is a huge amount invested. In our portfolio we don't have any single asset class that reaches that level. In fact 30% is on par with what people recommend for their entire international allocation.

If it is his hobby, then the amount should be kept separate and it should be *small* amount that you can *both* agree on. Small in my mind would something like 5% or a fixed amount like $50k. You don't sound very comfortable with the current allocation because a big loss will have a material impact on your (as well as his lifestyle). Since this is the case you both should have a say in the investment plan.

If the amount is going to larger than 5% (a material amount), it should be invested according to your asset allocation with mandatory rebalancing. Again at a level and with rebalancing bands you both agree on.
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Old 03-12-2011, 10:11 AM   #11
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Countrymouse said:"Does anyone have a portion of the portfolio that is truly speculative and how does it figure into your retirement forecasting? The reason I ask is about 1/3 of our total investments is currently in VGENX. It is the fund that ate our account- and I'm having a hard time talking to DH about this. DH did a tremendous amount of serious research into energy in 2005-2006. It was his "passion" LOL."

It looks like you've done very well, at least in this 1/3 of your portfolio. VGENX has a 5 year total return of 9.75%, which is the second highest in all Vanguard stock mutual funds. This compares to Vanguard's S&P 500 index fund with a 5 year total return of 2.42%. Just remember that past returns are not always an indication of future results.

DW and I have a sizable portion of our assets in VGENX and plan no changes.

You've obviously been able to accept the funds volatility. Especially, if your were able to tolerate 2008 when VGENX lost 47.86% compared to the Vanguard Index 500 Index Fund which lost 37.02%.
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Old 03-12-2011, 10:55 AM   #12
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If you go to Morningstar and plot VGENX versus something like the SP500 you see that the outperformance dates from around the year 2000. Click on maximum to see the chart since 1984. You can plot the 5 year (60 month) rolling returns too. VGENX: Vanguard Energy Inv Fund Chart | Morningstar

So we could be seeing recency in action. Nobody really knows how things will go for the next 10 years. People think intermediate bonds have been great but that's only been recent decades, it was a different conclusion in the 1950-1970 period.

Another interesting observation. If you plot VGENX vs. VEIEX (emerging markets) they overlap very nicely over the last 10 years.
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Old 03-12-2011, 03:13 PM   #13
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I went and looked at the holding of VGENX and it is pretty much what you would expect a bunch of huge integrated oil company, and oil servicing companies.

The reality is if you took the 33% of your portfolio and divided among S&P 500 fund and international index fund it wouldn't look much different than VGENX,
For instance Exxon makes up 7.6% of VGENX and 3.01% of S&P500, Chevron is 4.41% vs 1.48%. On the international side Shell is 3.3% of VGENX vs 1.1% of a international fund (EFA) BP 3.18% vs 1.29%.

So essentially you have double or triple weight of oil stocks that you would have with a traditional index portfolio. Would you be uncomfortable if your husband had 10% of his portfolio in ten energy stocks because that would be essentially the same thing as owning 1/3 VGENX.

Yes you are overweighted in the energy sector, but the fund owns real companies, which produce an indispensable product, and they make an excellent profits, and trade for very reasonable (possible even cheap) P/E of 13.

The bottom line is that VGENX has a Morningstar rating of 5 stars, a low .35% expense ratio and very good long term track record. I would not pick a fight with DH over this investment.
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Old 03-14-2011, 10:22 PM   #14
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Thanks all- this has been helpful- We've got a lot of thinking to do. We're working our way through Booglehead's Guide and a Swedroe book so while we "know" this is risky it hasn't sunk in just yet. We've got a lot to learn, and I do appreciate all the comments. It will be interesting to look back and see what our basis is (it split then went to Admiral and I'm having a hard time tracking that info) but if we sold what we put in, I think I'm ok with the rest being "his" outside fund and not counting on it for retirement planning purposes. It goes up and down (yes we remember 08) so I'd feel better with our "retirement" being better allocated. VGENX is in our joint account and we stopped reinvesting dividends years ago - our one effort at trying to keep the % down
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