Questions on VG Investment Strategy

[CaseInPoint]

I finally moved some money out of a high-fee investment I had at a “wealth management” company (although I am not wealthy), and am about to reinvest that money into Vanguard where I already have some investments. The money will be invested at a much lower fee. It wasn’t an easy decision for me, but it’s done.

The past year has really caused me to rethink the whole concept of buy-and-hold investments. Until the market crashed, I always believed that if you worked hard, saved, and invested conservatively, then over the long run you’ll come out considerably ahead. Maybe something like 5-10% annually on average. But now I wonder if that’s true, having seen big losses on my mutual funds and ETFs, as the market dropped.

Anyway, I still haven’t found any good alternatives to the types of investments I’ve made, so I’m considering a strategy of periodically shifting some or all of the dividends that I will (hopefully) eventually receive from my investments and buy into T-Notes, TIPS, etc., as a hedge against future market downturns.

Ideally, I’d want this process to happen as automatically as possible through VG, as I don’t want to take on the lifestyle of a day-trader.
I have 2 questions:

1. I wanted to ask for some opinions on this strategy. I know it’s not an original concept, and I wonder if anyone has either an opinion or actual experience doing, at least some of this, through VG?

2. I’m sure that some other investors are reaching the same kind of conclusions about the long-term buy-and-hold investment strategy. If so, what kinds of investments are you turning to? Or are you just staying the course and waiting for the usual economic upturn to recoup your losses and pull ahead?

[LOL!]

I'm not sure I understand what you mean. If you are taking dividends and not re-investing them, then that is pretty standard stuff for a taxable account. Such a strategy helps with some tax bookkeeping and also retirees like to use those dividends for current cash flow and expenses. Nothing at all new there.

If you take the stock dividends and invest them in fixed income, then there is nothing new there either. You are simply adjusting your asset allocation slowly but surely away from equities. Target retirement funds are just an institutionalized method of using a "glide path" like this. You are just saying that as time goes on, that you want more fixed income in your asset allocation. That makes sense to many people because as one gets older, one usually increases their fixed income allocation and reduces their equity allocation.

Or did you mean something else?

[LOL!]

As for a strategy, one could say that I am long-term buy-and-hold, but that does not mean that I don't perform some portfolio management along the way.

For example, I have a set asset allocation of about 31% US stocks, 31% foreign stocks, 31% fixed income and 7% commercial real estate. My equities are also set up to be 50% large cap, 50% mid/small cap, 50% blend and 50% value. Given those percentages, whenever they shift by 5% or so, I rebalance. Also, if I have any losses, I do something called tax loss harvesting.

Thus I am buying and selling several times a year. It's easy to do that with ETFs and commission-free trades. It's harder to do that with Vanguard mutual funds because of some of Vanguard's pesky trading restrictions.

[CaseInPoint]

Quote:

Originally Posted by LOL! I'm not sure I understand what you mean. If you are taking dividends and not re-investing them, then that is pretty standard stuff for a taxable account. [...] If you take the stock dividends and invest them in fixed income, then there is nothing new there either. You are simply adjusting your asset allocation slowly but surely away from equities.

Right, I try at all costs not to reinvent the wheel.

Quote:

Target retirement funds are just an institutionalized method of using a "glide path" like this.

Right. Rather than using the dividends I would want to reinvest them (or at least some of them) into Treasuries to make sure my retirement is not derailed by another downturn like this one. Or, at least I'm giving this some thought, due to my portfolio losses over the past year.

My question is really about the mechanics of having a portion of the dividends shifted into a "holding account" automatically. For example, let's say I invest $100, then when it hits $120, I would like to automatically have $10 shifted into a holding account. Or more generally, if it goes up by 20%, sweep 10% automatically. Automatically is the key for me.

Also, is this a common (or advisable) strategy for someone with 7-10 years until retirement?

Quote:

Originally Posted by LOL! As for a strategy, one could say that I am long-term buy-and-hold, but that does not mean that I don't perform some portfolio management along the way. For example, I have a set asset allocation of about 31% US stocks, 31% foreign stocks, 31% fixed income and 7% commercial real estate. My equities are also set up to be 50% large cap, 50% mid/small cap, 50% blend and 50% value. Given those percentages, whenever they shift by 5% or so, I rebalance. Also, if I have any losses, I do something called tax loss harvesting. Thus I am buying and selling several times a year. It's easy to do that with ETFs and commission-free trades. It's harder to do that with Vanguard mutual funds because of some of Vanguard's pesky trading restrictions.

Makes sense. That seems to me a fairly conservative portfolio with some good diversification. But to maintain that AA with ETFs, it would take a fair amount of trading, no? By "several times a year," you mean every month or two?

[Dennis]

WELL , the B&H is really in doubt now.. Buy and Monitor is more like it ..
But, I learned Not to B&H any of my Equity Investments..Don't care if they are Index Funds or AMF's..If you going to Try to manage your own Balanced Portfolio? Good Luck! I finally, after several Yrs, found a Nice Conservative Investment Firm that is very Pro Bonds ( like a Hussman ) and speicalizes in Bonds, Not Equities..so, All the following is Not of all my doing..

About the only things I B&H since 98' has been either Bonds and my Balanced funds which has 80% of my Retirement $ in them...Just keeping them Rebalanced to their Original % allocations and that's about it..

The other remaining 20% is 4 my Gambling Port for those Equities..be they Stocks or Funds and those are always changing..and Not In My VG Brokerage account, but in Ameritrade..

And just because they may be ETF's or Index Equities, don't mean nottin, they're still Stocks, just alot more of them and treat them accordingly Like Stocks, not Bonds and B&H them.. Just Use M* charts and their New Beta chart going back 20 yrs and do comparisions btwn those Equities vs your Bonds..

The Bonds? Just have stuck w/ the Traditional ones of Tips( ACIDX) , GNMA( VFIIX) & Treas. (VFITX and VUSTX ) for the LT $ ( or just go with Tot. Bnd Fund like VBMFX ) and Bank MMkt & Short term Bonds for my 3 yrs of $ I keep on hand to pay the bills.. And not worried about the Treas.. Up +13 and +22 last yr, can do "0" this yr and still be just fine.. and will go back up once Inflation starts again.. Could even be like the Carter Yrs again? One can Only hope.. LOL

Thanks to all this? Was Able to retire 10 yrs sooner..

[LOL!]

I don't think it is a wise idea to be shifting dividends automatically. Instead have them paid automatically into a money market fund or other similar fund (Vanguard lets you do that). Dividends on equities will only be between 2% and 3% a year anyways.

As for maintaining an asset allocation with ETFs, it is trivial and does not require much trading at all. I have had more trades for tax-loss harvesting than for rebalancing. I use "bands" to flag when to rebalance. I mentioned 5% above, but that was 5% of my total portfolio. So, for example, US equities could range from 26% to 36% of my total portfolio. I look often, but rebalance rarely. Some ETFs I own are VEU, VTI, VBR, SCZ, EEM and IWM. I actually use Vanguard bond funds: VFSUX and VFIIX mostly nowadays.

For TLH, I do trades like replace GWX with SCZ and replace IJS with VBR, etc.

And my portfolio is NOT conservative with only 31% fixed income. A conservative portfolio would have more than 50% in fixed income.

[walkinwood]

If you haven't done so, you should read some of the investment books recommended in this forum like Bernstein's two books - Four Pillars of Investment & The Intelligent Asset Allocator.

From your comments, it is not clear if you have a defined asset allocation in mind, or just want to drift towards more bonds as and when dividends materialize in the equity portion of your portfolio.

[clifp]

Quote:

Originally Posted by CaseInPoint Right, I try at all costs not to reinvent the wheel. Right. Rather than using the dividends I would want to reinvest them (or at least some of them) into Treasuries to make sure my retirement is not derailed by another downturn like this one. Or, at least I'm giving this some thought, due to my portfolio losses over the past year. My question is really about the mechanics of having a portion of the dividends shifted into a "holding account" automatically. For example, let's say I invest $100, then when it hits $120, I would like to automatically have $10 shifted into a holding account. Or more generally, if it goes up by 20%, sweep 10% automatically. Automatically is the key for me.

Well I don't think you can quite doing everything you want automatically. You would certainly need to do so monitored and set up your own (mental) rules. However, you can have VG do lots on automatic reinvestment for you. For instance I use the proceeds from my VG GNMA to buy more shares and in the VG Hi Yield fund. The distributions from the Hi Yield go into the money market, and fixed amount each month gets transfer from the VG MM into my checking account.

In your case you might want to consider having your capital gains and/or dividends from your equities reinvested in a government bond fund.

[CaseInPoint]

Quote:

Originally Posted by Dennis Thanks to all this? Was Able to retire 10 yrs sooner..

Great! So, it's basically 80% actively-managed bond funds and 20% DYI Ameritrade in addition to 3 yrs cash? I like many things about that AA, but it does require free time.

Quote:

Originally Posted by LOL! I don't think it is a wise idea to be shifting dividends automatically. Instead have them paid automatically into a money market fund or other similar fund (Vanguard lets you do that). Dividends on equities will only be between 2% and 3% a year anyways. [...] And my portfolio is NOT conservative with only 31% fixed income. A conservative portfolio would have more than 50% in fixed income.

Thanks. I can see the advantage of shifting dividends to a holding account by VG. Mine is a tax-exempt muni MM, and setting that up is, as you say, very easy with VG. Maybe that's ultimately what's needed. Can't automate every detail.

I guess you're right about your portfolio not being conservative. I just spoke from my own perspective in which 31% fixed income would be conservative. Conservative really depends on age and stage in life of course.

Quote:

Originally Posted by walkinwood From your comments, it is not clear if you have a defined asset allocation in mind, or just want to drift towards more bonds as and when dividends materialize in the equity portion of your portfolio.

Thanks. Yes, I do have an approximate AA, although this year I've started do drift out of it, because I tend to be more conservative than what's typically recommended for my age. My tolerance for losses is apparently lower than I had expected when I started investing many years ago. I've been finding out this past year just how much I despise seeing losses, even knowing that things will eventually improve.

I suppose that I could just DCA into treasuries, but lately I've been thinking about the market as a casino, where I, as the gambler, would want to cash out some of my winnings and safeguard them, so no matter what I lose later I'll still wind up with something to go home with. That's what prompted me to start this thread.

[CaseInPoint]

Quote:

Originally Posted by clifp Well I don't think you can quite doing everything you want automatically. You would certainly need to do so monitored and set up your own (mental) rules. However, you can have VG do lots on automatic reinvestment for you. For instance I use the proceeds from my VG GNMA to buy more shares and in the VG Hi Yield fund. The distributions from the Hi Yield go into the money market, and fixed amount each month gets transfer from the VG MM into my checking account. In your case you might want to consider having your capital gains and/or dividends from your equities reinvested in a government bond fund.

Thanks. That's pretty interesting that you set up a two-step automated process.

Are you happy with the Hi Yield fund? Takes nerves of steel, no?

[LOL!]

Don't forget that the high yield fund acts pretty much like an equity fund. It ain't no bond fund. I prefer to take my risk with equities. I use my bond funds to reduce risk.

[clifp]

Quote:

Originally Posted by CaseInPoint Thanks. That's pretty interesting that you set up a two-step automated process. Are you happy with the Hi Yield fund? Takes nerves of steel, no?

The VG fund was only bought in Nov and its up 10% so yes I'm happy.

I have high tolerance for risk. I owning mostly individual stocks and bonds, I trade options (generally writing them), and I go to the World Series of Poker so for me junk bond fund is a lower risk asset. I did find during this market, that I didn't get depressed unless my losses hit the 6 digit mark in a day. So I'd say were in pretty opposite camps in the financial risk tolerance continuum.

[W2R]

Quote:

Originally Posted by CaseInPoint 2. I’m sure that some other investors are reaching the same kind of conclusions about the long-term buy-and-hold investment strategy. If so, what kinds of investments are you turning to? Or are you just staying the course and waiting for the usual economic upturn to recoup your losses and pull ahead?

I was shocked by the severity of the downturn, and I am a little pessimistic about the Dow getting back into the 14,000's anytime soon.

BUT - - I guess I "drank the Kool-Aid" because I am staying the course. It helps that my dividends are still reasonable, my portfolio is diversified, and my asset allocation was a very conservative 45:55 equities:fixed, even before the catastrophe downturn. In retirement I plan to live off of part of my dividends and stay the course.

I enjoy directing my yield to Vanguard money market and then deciding myself where it should go. It only takes a moment online to make a Vanguard transaction. In order to stay the course, I will be rebalancing at least once a year anyway.

[theloneranger]

I see that Vanguard has put together three funds under the umbrella:
Managed payout funds. From their information, you can get approximately $500 to 700 per month with an investment of $100,000. Payout is reset every year based on three year average returns. Can be purchased or sold anytime.
Seems to give some of the benefits of an annuity without the cost and retains flexability of the principal.
Has anyone has any experience with these?