Category Archives: Index Funds

Passive Portfolio September 2016

As discussed in the post on my overall portfolio construction, approximately 40% of the total is designated as “passive” which I define as following a relatively static asset allocation and utilizing low-cost index funds as much as possible. It is not the intent of this blog to teach the basics of passive investing. There are plenty of free resources available, among them the Bogleheads forum and Wiki pages. The asset allocation in my passive portfolio is given in the table below.

Passive_20160904

The salient features are:

  • The high level breakdown is 45% equities, 40% fixed income and 15% alternatives.
  • The equity percentage would be considered “very conservative” by most in the personal blogosphere where the standard recommendation is “100-120 minus age”.
    • The domestic/international split is roughly equal, in-line with the actual cap weighting. Today VTI has a P/E ratio of 19, VXUS 15 and VWO 13. Thus the expected returns are higher for international/EM.
    • REITs are implemented with VGSLX/VNQI. I count them towards the equity allocation while some count them towards alternatives. A good argument can be made for either approach. I would have preferred the mutual fund version of the international REIT index, VGRLX, were it not for the 0.25% purchase fee. Also note that the P/E ratios for VNQ/VNQI are 34 and 14 respectively, again underscoring the cheapness of international markets.
    • Domestic equities are implemented through a combination of large cap blend (VINIX and similar investment trust for S&P 500), and small/mid cap blend (VSMAX, VIMAX, VEXAX). The convoluted choices are due to the availability of funds in certain accounts: VINIX and VEXAX in my 401k, similar investment trusts in my wife’s 401k, VSMAX and VIMAX in my HSA. There is an overweight of the small/mid caps when market weight is only about 20%. In general I’m a believer of the factors research, but limited in fund access.
    • International equities are implemented through a combination of total international index funds (VTIAX and similar investment trust) and emerging market index funds (VEMAX). Since VTIAX already contains about 15% emerging markets I’m imparting a much greater overweight in EM than in small caps in domestically.
  • The 40% weight in fixed income is mostly in stable value funds. My wife’s 401k has an excellent one yielding over 3% currently, whereas mine has one that yields just over 2%, compared with current treasury yields of 2.28% for 30-yr and 1.6% for 10-yr. I keep a small percentage in total bond market, but otherwise happy to take the yield while avoiding any principal risk.
  • I have 15% allocated to precious metals (PM) which is probably the most controversial decision. I won’t go into the reasoning here since PM/gold deserves a separate series of posts on its own. For now I’ll only say that I have been heavily influenced by the ideas behind the Permanent Portfolio. PM_passive is meant to contain only physical bullions but still has a sliver of mining companies that I’ll reposition gradually.
  • The table also contains target and current weights. I have a relaxed rebalance limit of relative ± 30%, but allow myself the discretion to rebalance at any time. In fact I did just that last month when the PM sector was entering a correction.

Overall this is a very conservative portfolio that is meant to serve as a stable foundation. I plan to review the allocation on an annual basis. I do not foreseen any drastic changes; any tweaks will be small and take effect gradually.