Category Archives: Passive Investment

Passive Account Asset Allocation, May 2017

In the most recent market commentary, I reiterated the view that the final phase of this correction was due to start in May and events in early May might serve as external triggers. Reality again strains the limits of patience: market-friendly outcomes from the the FOMC meeting and French election propelled S&P above the March 1st high before the “constitutional crisis” surrounding Trump’s firing of the FBI director James Comey precipitated a one-day 43-S&P-points drop on Wednesday. There was a lack of follow-through however. Although I still believe there will be a final drop, I’m not sure if even 2320 on the S&P is “in play” at this point.

One may rightly ask why the correction has been much shallower than anticipated. It’s easy to come up with conspiracy theories where the Central Bank or the plunge-protection-team (PPT) surreptitiously support the market to accomplish their policy objectives. It may be true, but this is one area where I consciously decide not to have an opinion. Not “I don’t know” but “I don’t want to know” — an intentional burying-head-in-the-sand that not everyone is willing to do. Besides deliberate intervention, it’s possible that there are enough other market participants also poised to buy the dip, or the stream of passive buy-no-matter-what crowd is so overwhelming. The question itself is misplaced, it’s not about why but is. The only conclusion to be drawn is that when something refuses to go down it will go up with a vengeance. Anything else is an opinion, ideology even, that I can’t afford.

Throughout this month, I have been steadily deploying cash into the buy-list, but there is still some ways to go. I have also been looking at the asset allocation in the passive accounts. My current plan is to further increase the equity allocation by another 5%. For reference, the current AA is 50% equities/35% FI/15% PM, I’ll move into the AA under the “Aggressive” heading below, shifting out of FI.

The composition of the subclasses are limited by access to funds rather than from any quantitative analysis. I can only access EM, and REITs in my Roth IRA accounts while the LB, SB and total international from HSA and 401K that see regular contributions. So they end up taking all of the increases. The overall portfolio will be at 55-60% equities by the end of the summer. This is at least 10 percentage points higher than my baseline allocation were there not the belief that we’re in the final bubble phase of this bull market. For reference, I also outlined what a “defensive” AA would look like. Keeping the PM allocation constant at 15%, there is a 15% overall shift between equities/FI. The composition of the subclasses is also different as the emphasis is to reduce risk and take advantage of the negative correlation offered by treasuries. Of course a new plan will be needed if the next crisis is triggered by a flee from US government bonds. I still see a likely transitioning into the “defensive” AA in Q3’18.

Performance Tracking January 2017

For calculation methodology see earlier post

2017 started with a bang — precious metals performed well even though it was looking to retest the 2015 lows at the end of last year. Since PMs are the main drivers in the “tracking error” (I hate that term!), my portfolio did well relative to the overall market. The S&P also had a good month, gaining 1.79% while the bonds gained 0.21%, meaning the benchmark 60/40 portfolio picked up 1.16% for the month.

Passive Portfolio

The total passive portfolio gained 2.11%, the portion outside of the 15% allocation to PMs gained 1.34%. In this post, I outlined my plan to increase the equity allocation by 5%. I’m about half way done. Funds has already come out of TBM but has not been added to equities just yet. The market has been directionless for a long time. Since the model has a low in February and I know it can’t be timed perfectly, I have already started to transfer funds slowly. I can only access the emerging market index fund, VEMAX, in a Roth IRA at Vanguard and the space is limited. Hence I had to dial down its allocation by 1% and shift to VTIAX. The allocation for the rest of 2017 looks like this:

Active Portfolio

The overall active portfolio gained 2.37% despite the drag from DGI whose main culprits were victims of presidential tweets and Target. Large changes are being made in FI: reducing muni CEFs in taxable and adding to taxable CEFs in taxed advantaged. I’m using this opportunity to cull back certain dividend stocks.

Plan and Forecast

Transition to my AA is straight forward and should be completed by the end of February. In the active portfolio, the goal is to maximize tax advantaged space for taxable CEFs. Consequently, dividend stocks will all end up in taxable. Tax considerations alone forces me to favor stocks with high dividend growth over high current payout. Currently, the blended payout ratio for my DGI stocks is 2.74% vs. 2.03% for SPY and 2.93% for VXUS. I expect this ratio to come down further. I’ve also started positions in MKL, aka “the baby Berkshire”. It doesn’t pay any dividends so doesn’t count towards DGI. I’m taking my time to buy the taxable CEFs as they have all been on a good run — patience is definitely a virtue. This process may continue well into March or April.

Portfolio Changes 2017

A new year is always a time for reflection and planning for the future. This is especially true for one’s investments. My investment policy statement (IPS) allows for a once-a-year plan review and gradual changes in my passive allocation. Those changes don’t have to be implemented right away and can subject to a range of dates or pre-conditions. The important thing is to keep a record of them and hold myself accountable.

2016 Results

I was quite happy with the portfolio level gains in 2016: 10.87%. It was calculated with the Simple Dietz method which meant contributions were properly accounted for. One of my pet peeves for many personal finance blogs is the co-mingling of contributions and investment returns. Another widely used formula is (end value – start value – contributions)/start value. It’s generally fine except when the contribution is large. The simple Dietz method adds half of the contribution to the denominator to approximate the time-weighted return. The 10.87% figure was calculated on an annual basis, more accurate would be to chain link monthly figures. Unfortunately the official record for this blog was only started in August. I’ll have much more data to work with in the future.

AllocateStartly had a summary of various allocation strategies for 2016. The Golden Butterfly portfolio which I drew inspirations from was the top dog at 10.79%, while the benchmark 60/40 portfolio returned 7.71%. So it doesn’t seem I have much to complain about. Though in all fairness I took on more risk — I have silver/miners in my PM sector, my equities are higher and cash position lower. Conversely, the equity slice-and-dice to include international hurt my returns. The timing of the start of this blog was unfortunate as July was the high watermark in terms of percentage gains. I gave back more than 3 points in the 2nd half of the year while the S&P was going gang-busters, so the results from August look rather poor. I’m an unabashed market timer, so that’s definitely something to improve on.

A New X

I have no plans to disclose actual dollar amounts — I hope it doesn’t detract from the ideas discussed here. At times I have spoken about the portfolio value in terms of X, where X is my non-inflation-adjusted, no-mortgage, target annual pre-tax retirement income. More recently, after some thought about desired life-style and future medical expenses, I’ve decided to increase X by about 10%. I don’t foresee any further changes to this figure.

Current investible assets stand at 17X after a contribution of 1.3X and a gain of 1.6X in 2016. I define “financial independence” as 25X plus a paid-for primary residence. There is still 4.5X left on the mortgage. Being naturally conservative I’ll probably keep working until reaching 30-35X. This amount will also include any future financial support for my daughters. There’s definitely some margin of safety in X, such that I call investible assets at 20X “financial independence lite” even without paying off the mortgage. It’s tantalizingly close, with luck may even be reached in 2017.

Passive Allocation

My guiding assumptions for the next couple of years are based on an equity pricing model I have been following. So the plan is to increase the equity allocation slightly after a drop in the market in the first quarter.

I’ll maintain the 50/50 split between US and international and increase the overall equity allocation by 5% which comes out of TBM. No changes in PMs.

Active Portfolio

The active and overall portfolios don’t follow a set allocation, although I do check it for risk management purposes. The overall equity allocation may grow to 55% by the end of 2017 from 50%. I expect the DGI portfolio that is heavy in consumer staples to under perform the broader market but don’t plan to make any major changes. Additions to the DGI will likely be old tech (MSFT, QCOM, CSCO), or a high-growth, low payout name like V. I plan to add more to growth stocks, currently at 7% of the active portfolio, and bring it up to 10%.

Option writing was a reasonably successful endeavor last year but my activity tapered off as job responsibilities increased. It’s still something I plan to continue this year, although I don’t have a target in mind. It is reassuring to know that if I ever lose my job I can generate some income this way. I do plan to use more synthetic equities (buy call, sell put) as a means to increase leverage. More details will follow when I open such positions.

Performance Tracking September 2016


For calculation methodology see earlier post

I caught an error in the DGI return calculation for August and corrected it here. August returns of passive/active/overall were not impacted.

Passive Portfolio

Continue to outperform vs. essentially flat for the benchmark. PMs proved an additional source of return this month contrary to last. Within the traditional equity slice_and_dice, both international and emerging outperformed. Lackluster results from $AGG continue to justify putting most of fixed income in stable value. There were no portfolio changes other than regular HSA and 401K contributions.

Active Portfolio

There are more activities to report here. The DGI portfolio had another weak month. Declines in the likes of Wells Fargo and Nike were insufficiently offset by advances in old tech. I took the opportunity to add to Wells, Nike and Exxon. I also sold puts in Nike and United Technology. These transactions capture the core of what I try to do in my DGI portfolio: add to names I’ve picked out on weakness. With dozens of candidates sufficient weakness occurs much more frequently than in an index.

I closed out profitable trading positions in Credit Suisse ($CS) and Fibria Celulose ($FBR, a Brazilian pulp maker). Both were small positions entered in July when market volatility was low and I couldn’t find any decent option selling opportunities. CS was a bet that the fall-out from Deutsche would be limited and I was able to close just before the latest flare-up. FBR as on the thesis that the conclusion of Rio Olympics would weaken the Real (true). The amount of profit wasn’t much higher than a typical successful option trade by design and I’m not particularly eager to do similar trades again.

One losing position was Novo Nordisk ($NVO) options. It was sized incorrectly (too large a position as I was trying something fancy) from the beginning. About the only good thing I can say about that trade was that I cut loss correctly. NVO continued to drop after my exit but that wasn’t consequential to whether the exit was good or not. Other sources of losses in the active portfolio included my company stock which is my single largest position (other than funds). It has done very well over the years and I have a plan to reduce. Additional losses were from my big chunk of muni closed-end funds.

Plan and Forecast

Unlike the prevailing pessimism I see a likely year-end rally followed by a correction in Q1’17. I can afford to engage in this kind of speculation since there’s little I can do to act on that opinion. My forecast model is calling for a normal level of market exposure. I’m staying close to fully invested and my “tracking error” will be mainly driven by sector allocation and stock selection.

The correction in the PM sector has a 50/50 chance of being completed – yes, I’m aware of the (lack of) information content in this statement. I’ve completed whatever tweaking on the periphery which mostly consisted of keeping the same dollar exposure but increasing leverage to gold price. Now I sit and wait.

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.


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.