Best Index Investment Strategy?
 

Glad I found this forum. Great discussion and advice. Thanks

Here is my first question:

I'm thinking of foregoing active account management and just putting my investments in a portfolio of index funds

Just sold off lots of assets (LVS, DODFX, JAOSX and FLVCX all which have had nice rides) and I'd like to create a strategy with a bit more balance for the long term and one that I can easily fund each month without having to constantly re-tweak the allocation.

Any suggestions for a successful passive indexing portfolio for a $100k chunk and $5k monthly investment?

Should I go with index mutual funds or exchange-traded funds?

I'm 32, OK with some risk, in it for the long term. What percentage of international exposure makes the most sense? Any sound international recommendations?

Thanks!

Re: Best Index Investment Strategy?
 

Congratulations on taking the passive approach. You should have a very good long-term investing experience without having to make any forecasts or rely on the forecasts of others.

I am a financial advisor, and recommend passive investments for my clients. I am going to respond to this in a few posts, and perhaps if it is judged good enough could be added to the FAQ, like my 401(k) responses.

The most important decision is how aggressive or conservative you'd like the portfolio to be. You are young and OK with some risk, but you don't sound like you want an extremely aggressive portfolio. The more aggressive portfolios should have a higher average return, but more frequent losing years and larger losing years. The best portfolio is one that you can live with during the bad times - where you can sleep at night and won't tweak/change your allocation.

Take a look at these 6 portfolios, especially the losses, to see how aggressive you want to be (I apologize for the lack of columns that line up):

POTENTIAL ODDS OF WORST WORST
AVERAGE LOSING MONEY YEAR OF YEAR OF
RETURN IN ANY ONE YEAR 80 YEARS 35 YEARS

Portfolio A 11.0% 1 in 3 -47% -25%
Portfolio B 10.5% 1 in 4 -42% -22%
Portfolio C 9.8% 1 in 5 -38% -19%
Portfolio D 8.5% 1 in 6 -29% -13%
Portfolio E 7.5% 1 in 7 -23% -9%
Portfolio F 6.3% 1 in 8 -16% -4%

Column 1 is the portfolio name: Portfolio A is the most aggressive (with the most amount of stocks), and Portfolio F is the most conservative (with the least amount of stocks, and highest amount of fixed income). Column 2 is the expected return for the portfolio after investment expenses.

Columns 3, 4 and 5 have to do with the risk. How frequently does this portfolio have a losing year? Portfolio A loses about 1 out of every 3 years, but Portfolio F only loses about 1 out of every 8 years.

Column 4 is what a really bad year could look like, and it is the worst year in the last 80 years (which includes the crash of '29 and the Great Depression). Portfolio A lost 47% in a year. Portfolio F, with a lot of fixed income, still lost 16% in one year (when interest rates shot up in a big hurry).

Column 5 is what a typical bad year looks like, and it is the worst year of the last 35 years. Portfolio A lost 25%, and Portfolio F lost 4%.

So, concentrating on the loss columns, what kind of losses would you feel comfortable with? Risk and reward go together, and to get a higher return, you have to be willing to accept periodic losses.

When you have an idea of what kind of losses you'd be able to handle, then you can convert the portfolios to target allocations:

Portfolio A: 100% stock
Portfolio B: 90% stock, 10% fixed income
Portfolio C: 80% stock, 20% fixed income
Portfolio D: 60% stock, 40% fixed income
Portfolio E: 45% stock, 55% fixed income
Portfolio F: 30% stock, 70% fixed income

Note: These are all globally diversified portfolio of index mutual funds.

I think for someone 32 who can handle some risk, perhaps portfolio C would be best for you, 80% stock, 20% fixed. You certainly would not want E or F. You might go halfway between C & D, with 70% stock and 30% fixed.

I will continue with the allocation and specific investments in the next post.

-Tom

Re: Best Index Investment Strategy?
 

I generally use the same allocation for all clients. The stock allocation is divided into these asset classes:

20% US large cap
20% US large cap value
10% US small cap
10% US small cap value
10% US real estate stocks
20% International stocks
10% Emerging markets stocks

The fixed income portfolio is generally divided as:

50% short-term bonds (high quality)
50% intermediate-term bonds (high quality)

So, someone that chose portfolio C, 80% stock, 20% fixed would have this allocation:

16% US large cap
16% US large cap value
8% US small cap
8% US small cap value
8% US real estate stocks
16% International stocks
8% Emerging markets stocks
10% short-term bonds (high quality)
10% intermediate-term bonds (high quality)

This is based on academic research that show that small stocks and value stocks have higher returns than large stocks and growth stocks, over long investing periods. Taking risk with the fixed income is not properly rewarded. The purpose of the fixed income is solely to reduce the risk in the entire portfolio.

For value funds, the deepest value (if diversified) is the best. For small cap funds, the smallest cap (if diversified) is the best.

For the allocation to International, if there are choices for intl small or intl value, I would definitely use those; break up the 20% intl maybe as 10% intl, 5% intl value, 5% intl small. If available, Emerging markets can also be tilted to small and value.

So, in terms of the "international" question, I like having 30% exposure to international and 70% to the US. Anything in the ballpark will be fine; if you want a little more or less exposure it shouldn't make that much difference.

You can have a successful investing experience with open-ended mutual funds or with ETFs. Since you are starting with $100K and because you are adding $5K per month, I'd suggest using open-end funds held directly with Vanguard. You get low expense ratios, no transaction fees, and no minimum balance fees.

I will get to the specific investments in the next post.

-Tom

Re: Best Index Investment Strategy?
 

If you are going with portfolio C, 80% stock, you might consider:

16% Vanguard Total Stock Mkt Idx Inv
16% Vanguard Value Index Fund Inv
8% Vanguard Small-Cap Index Fund Inv
8% Vanguard Small-Cap Value Index
8% Vanguard REIT Index Fund Inv
8% Vanguard European Stock Index Inv
8% Vanguard Pacific Stock Index Inv
8% Vanguard Emerging Mkts Stk Idx Inv
10% Vanguard Short-Term Bond Index Inv
10% Vanguard Inter-Term Bond Index Inv

The Total Stock market fund is mostly large cap, is more tax efficient that the other large cap funds, and the extra exposure to small does not hurt you.

If you are in a high tax bracket, you might consider a municipal bond fund instead of these taxable fund, although it should still be short or intermediate term.

Since you are starting with $100K, each of the purchases will be over Vanguard's $3,000 minimum. (For people starting with less money, you could start a similar but simpler allocation with fewer funds, and use the full allocation when your portfolio is large enough.)

Since you are in this for the long term, you could buy your initial allocation in one lump sum. The market may move up or down over the next 1, 3, 12 months. Since I advocate not making forecasts, I won't consider any forecasts. However, if you think you might feel "stupid" if you buy the whole lump sum, and the market moves down over the next few months, you could buy your initial allocation over some period of time, using an unemotional dollar-cost averaging. Maybe buy 1/3 today, buy the next 1/3 in 2 months, and the last 1/3 in 4 months. That's really up to you.

I'll talk about the $5K monthly and rebalancing in the final post.

-Tom

Re: Best Index Investment Strategy?
 

Since you are able to invest $5K more each month, you are in a great position where you can keep your portfolio allocated without having to sell funds and generate capital gains.

When it is time to invest your new $5K contribution, you should take a look at what % each of your funds is in your total portfolio. The funds that have done the best will be "overweighted." For example, if emerging markets are doing particularly well, instead of 8% of your portfolio, it might now be 10%. The funds that have done the worst (by declining or by increasing the smallest amount) will be "underweighted." For example, if large cap value stocks are doing poorly, instead of 16% of your portfolio, it might be 14%.

When you are ready to invest more, you should add to the funds that are the most underweighted. By doing this, you will more the portfolio closer to the original target allocation.

Keeping the allocation the same, over a long term horizon, makes sure that your portfolio aggressiveness is the same as what you originally intended. It also allows you to "buy low" as you buy more of the asset classes that are performing poorly.

After some time, your portfolio may be significantly out of balance. For example, if stocks go up a lot over a few years, instead of an 80% stock portfolio, you may now have 90% stocks and only 10% in fixed income. Even though you are adding $5,000 per month to fixed income funds, you can't bring the allocation back to the target. In this case, you should consider a "rebalance," and actually sell some of the overweighted funds. You definitely want to wait at least one year and one day so that any sales are considered long-term capital gains.

Just as before, see which funds are overweighted and which are underweighted. You then want to exchange shares from the overweighed funds into the underweighted ones so that it is back to the original allocation. You might to move your fund balances to a spreadsheet to help with the calculation.

By making a rebalance, you are able to "sell high" and "buy low." You generally will not need to do this very freqently, maybe once every year or two. By doing this infrequently, your low-turnover portfolio will have only a small amount of capital gains.

There you have it. You can have a low-cost portfolio of index mutual funds that are globally diversified, and tilted to small and value stocks. This portfolio should do very well over a long period of time, with low turnover.

-Tom

Re: Best Index Investment Strategy?
 

great posts, this should definitely be linked from the FAQ.

Re: Best Index Investment Strategy?
 

If we do this in an IRA we don't have to worry about long term vs short term gains, or any other tax matter, correct?

Re: Best Index Investment Strategy?
 

Excellent post. The only quibbles would be around the margins of the allocation, or whether there shoulld be other asset classes represented. The quality of this advice is far higher than usual message board quality and provides a simple easy to follow recipe for the great majority of people.

Good work. Link this.

Re: Best Index Investment Strategy?
 

Tom,

Thanks for all the great information and level of detail. This is very, very helpful.

Can you elaborate a bit on what you mean when you say "you might consider a municipal bond fund instead of these taxable fund, although it should still be short or intermediate term." I'm in a high tax bracket, combined with my wife's income, and I have absolutely no idea how that should, if at all, alter our strategy today.

Also, when you mention "tax efficient," in relation to the Total Stock market fund, what does that mean? How can I judge the "efficiency" of a fund and is it an important consideration for an investor in my shoes?

Also when you say "you definitely want to wait at least one year and one day so that any sales are considered long-term capital gains," pardon my ignorance but, does this mean that tax rates are different on a sale of a fund or stock held a month versus one held for over a year? If so, how different?



Regarding forecasting, although your against it I have to ask if it is a bad idea to touch REIT's right now.

Again, great, great information. Thanks.

Re: Best Index Investment Strategy?
 

[ QUOTE ]
Can you elaborate a bit on what you mean when you say "you might consider a municipal bond fund instead of these taxable fund, although it should still be short or intermediate term." I'm in a high tax bracket, combined with my wife's income, and I have absolutely no idea how that should, if at all, alter our strategy today.

[/ QUOTE ]

muni coupons can be triple-tax-free, which is a huge boost to returns if you live in a locality with high state and/or city taxes.

i think this might be moot if you are in the amt, but if you have enough investments for this to be a big issue, you should be asking a tax attorney or a real financial adviser or something.

Re: Best Index Investment Strategy?
 

[ QUOTE ]
Can you elaborate a bit on what you mean when you say "you might consider a municipal bond fund instead of these taxable fund, although it should still be short or intermediate term." I'm in a high tax bracket, combined with my wife's income, and I have absolutely no idea how that should, if at all, alter our strategy today.

[/ QUOTE ]
When people are in the lowest tax brackets, (0%, 10%, 15%), it always makes sense to have taxable bonds and pay the tax on it. When people are in the highest tax bracket (35%), it always makes sense to have tax-free municipal bonds. The yield is lower, but you end up with more money than if you had taxable bonds and paid the tax on it.

In between (25%, 28%, 33%), it sometimes is better to use one or the other, depending on where the yields are. If your state or local tax rates are high, lean toward municipals.

For Vanguard, instead of using the taxable funds, you could use Short-Term Tax-Exempt Inv and Inter-Term Tax-Exempt Inv. If you live in California, you could use CA IT Tax-Exempt Investor as in the intermediate-term bond fund.

[ QUOTE ]
Also, when you mention "tax efficient," in relation to the Total Stock market fund, what does that mean? How can I judge the "efficiency" of a fund and is it an important consideration for an investor in my shoes?

[/ QUOTE ]
All funds distribute their income annually to their shareholders. The dividends from the stocks, and the interest from the bonds and the money markets are distributed. Also, if the fund sells a stock for a gain, the capital gain is distributed. Funds that sell their stocks frequently have more distributed capital gains.

Most index funds do have to follow their benchmark closely (or exactly), so that some stocks are removed from their index and must be sold, and other stocks are added to the index and must be bought. For example, a small-cap value index has a bit of turnover, because stocks either grow to be too big or are not "value" anymore.

The Total Stock Market index is more tax-efficient than an S&P 500 Index fund because it has less turnover.

[ QUOTE ]
Also when you say "you definitely want to wait at least one year and one day so that any sales are considered long-term capital gains," pardon my ignorance but, does this mean that tax rates are different on a sale of a fund or stock held a month versus one held for over a year? If so, how different?

[/ QUOTE ]
Significant. Investments held one year or less are taxed as short-term capital gains at ordinary tax rates, and could be 25%, 28%, 33%, or 35%. Investments held more than one year are taxed at long-term capital gains, generally all at 15%. (This may be a tax law that is set to expire, and may go up to 20% in a few years.) The investment strategy I suggested has you wait more than one year before selling anything, so you never create short-term capital gains for yourself.

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Regarding forecasting, although your against it I have to ask if it is a bad idea to touch REIT's right now.

[/ QUOTE ]
REITs are down this year. They may go down more from here. I don't make these kinds of forecasts. I like all of the asset classes in the allocation. They should all have good positive returns over long periods of time. I buy and hold all of them every year. By forecasting, you are second-guessing the allocation, and are giving yourself the chance to make a big mistake.

The biggest mistake that most investors make again and again throughout their investing lifetimes is buying asset classes that have gone up a lot recently (buying high), and selling asset classes that have gone down a lot recently (selling low). It happens generation after generation and in every market cycle. Most recently, huge numbers of investors got into tech stocks in 1999 and early 2000 (and got killed), then sold stocks in 2002 and early 2003 (near the bottom). Many of those investors then put their extra money into real estate - buying a rental property and so on, and they are having trouble now.

By having a globally diversified allocation, and rebalancing unemotionally, you can buy low, sell high, and avoid the big mistakes.

-Tom

Re: Best Index Investment Strategy?
 

[ QUOTE ]
If we do this in an IRA we don't have to worry about long term vs short term gains, or any other tax matter, correct?

[/ QUOTE ]
That's correct; investments in IRAs are not taxed annually, so you can rebalance without having to worry about taxes. It still might be best to rebalance infrequently (once per year or so).

-Tom

Re: Best Index Investment Strategy?
 

[ QUOTE ]
muni coupons can be triple-tax-free, which is a huge boost to returns if you live in a locality with high state and/or city taxes.

i think this might be moot if you are in the amt, but if you have enough investments for this to be a big issue, you should be asking a tax attorney or a real financial adviser or something.

[/ QUOTE ]
Only municipal bonds that are for "private use" are taxable for AMT purposes. So, a muni bond for the state, or a locality, or for highways, and so on are not taxable for AMT. But, bonds that are to build a stadium or things like that are taxable for AMT purposes.

I don't think you would need a "tax attorney" but an accountant should know about this.

-Tom

Re: Best Index Investment Strategy?
 

good thread. This will allow me to lock the million ETF threads each week cause im adding this to the sticky.

Re: Best Index Investment Strategy?
 

Thanks again jively for all of your help, I've really appreciated all of the posts that you've been making in this forum for a long time.

two questions:
Why REIT? I understand mixing small cap, large cap, european, pacific, etc as a way to diversify so is REIT just adding in more diversification? Why REIT over any other sector specific fund?



[ QUOTE ]
20% US large cap
20% US large cap value
10% US small cap
10% US small cap value
10% US real estate stocks
20% International stocks
10% Emerging markets stocks


[/ QUOTE ]
My portfolio looks similar to this but with a little bit more weight on international and significantly more weight on small cap and value. Any recommendations for an investor willing to assume a very large amount of risk for possible higher expected returns?

Re: Best Index Investment Strategy?
 

[ QUOTE ]
two questions:
Why REIT? I understand mixing small cap, large cap, european, pacific, etc as a way to diversify so is REIT just adding in more diversification? Why REIT over any other sector specific fund?

[/ QUOTE ]
I think the academic researchers looked at the stock prices of all of the sectors. For almost every sector (financial, consumer discretionary, and so on), the average return had only to do with the amount of value vs. growth and the amount of large vs. small. Real estate stocks (REITs) were actually classified as a separate asset class as they moved in a completely different cycle.

[ QUOTE ]
My portfolio looks similar to this but with a little bit more weight on international and significantly more weight on small cap and value. Any recommendations for an investor willing to assume a very large amount of risk for possible higher expected returns?

[/ QUOTE ]
I think tilting further toward small and value is OK if you have a high risk tolerance. Having a higher allocation to international is fine too as long as you are OK with "tracking error;" your portfolio will not move in synch with the US markets (and CNBC and so on). As long as you pick an allocation, rebalance periodically, and stick with the same allocation year in and year out, you should do well.

-Tom

Re: Best Index Investment Strategy?
 

Jively: Why do you have a focus on value and total market funds and no growth funds?

FWIW my portfolio (goal for balancing purposes) is

20% Large Value
20% Large Growth
10% Small Value
10% Small Growth
30% total International (fund is split 33% between Euro, Pacific, and Emerging)
10% REIT

(All vanguard funds)

Re: Best Index Investment Strategy?
 

[ QUOTE ]
Jively: Why do you have a focus on value and total market funds and no growth funds?

[/ QUOTE ]
Here is a good page regarding the value factor. From 1927-2005, value outperformed the market and the market outperformed growth, for both large stocks and small stocks in the US. Small cap growth had the lowest average return (9.33%) of all of the "corners" of the market.

-Tom

Re: Best Index Investment Strategy?
 

Giving up a lot of EV being so diversified and passive. Great for Joe Sixpack but the readers here should understand risk. With the new leveraged ETF's, readers here could easily beat that portfolio with same risk and minimal time invested.

Re: Best Index Investment Strategy?
 

[ QUOTE ]
Giving up a lot of EV being so diversified and passive. Great for Joe Sixpack but the readers here should understand risk. With the new leveraged ETF's, readers here could easily beat that portfolio with same risk and minimal time invested.

[/ QUOTE ]
There is no such thing as a free lunch. It is possible to create portfolios with higher EV but at a cost of higher risk. I'd be willing to discuss your portfolio recommendation, but I'd prefer to do it in another thread. This is a thread on index investment strategy. Why don't you start a new thread on leveraged ETF allocations.

-Tom

Re: Best Index Investment Strategy?
 

I would be very interested in such a thread

Re: Best Index Investment Strategy?
 

[ QUOTE ]
[ QUOTE ]
Giving up a lot of EV being so diversified and passive. Great for Joe Sixpack but the readers here should understand risk. With the new leveraged ETF's, readers here could easily beat that portfolio with same risk and minimal time invested.

[/ QUOTE ]
There is no such thing as a free lunch. It is possible to create portfolios with higher EV but at a cost of higher risk. I'd be willing to discuss your portfolio recommendation, but I'd prefer to do it in another thread. This is a thread on index investment strategy. Why don't you start a new thread on leveraged ETF allocations.

-Tom

[/ QUOTE ]
Arbitrage is a prime example of a free lunch.

My point was if readers here can beat 400nl they can managed risk. So it be stupid for same person to be so diversified. They could invest in 3-4 ETFs and use a longterm risk model(p/e 200Ma)and the returns will be higher with comparable risk then your cookie cutter portfolio. You portfolio has too many positions and is losing EV somewhere.

I was talking about the new ProShares 2x leveraged ETF,s. Not sure why you think these were not ETFs or would not apply to a ETF index investment strategy. You could even use your allocations but replace small caps with ultra Russell 2000 ETF. Reduce the size by half and move the difference into fixed income. Boom less risk for the same return. AKA on your way to a free lunch.
http://www.proshares.com/ [img]/images/graemlins/grin.gif[/img]

Re: Best Index Investment Strategy?
 

Leveraged ETFs are a bad idea for buy-and-hold investors. They do not work like you say. For example, over the last ten years, Rydex Nova fund (150% Daily S&P 500) has returned 3.5% annually compared to 5.9% annually for the Vanguard S&P 500 index fund.

Re: Best Index Investment Strategy?
 

[ QUOTE ]
Arbitrage is a prime example of a free lunch.

[/ QUOTE ]
So do you have a simple way for clients to use arbitrage in a long-term portfolio without being time consuming?

[ QUOTE ]
My point was if readers here can beat 400nl they can managed risk. So it be stupid for same person to be so diversified. They could invest in 3-4 ETFs and use a longterm risk model(p/e 200Ma)and the returns will be higher with comparable risk then your cookie cutter portfolio. You portfolio has too many positions and is losing EV somewhere.

[/ QUOTE ]
If you are suggesting something with 200-day moving averages, this is not a simple "index investment strategy." You are talking about having to watch your investments. With my portfolio, you can buy, don't pay attention for a year, rebalance, and then go back to not paying attention.

[ QUOTE ]
I was talking about the new ProShares 2x leveraged ETF,s. Not sure why you think these were not ETFs or would not apply to a ETF index investment strategy. You could even use your allocations but replace small caps with ultra Russell 2000 ETF. Reduce the size by half and move the difference into fixed income. Boom less risk for the same return. AKA on your way to a free lunch.
http://www.proshares.com/ [img]/images/graemlins/grin.gif[/img]

[/ QUOTE ]
I have looked at some articles on these. They provide twice the daily returns, but they will not produce twice the long-term returns.

There is a lot of history for portfolios of diversified index funds. We can see what the returns and annual standard deviations have been over lots of time periods. Do you have any type of long history, or theoretical back-testing for the funds? Then show me your allocation (with 50% leveraged ETFs and 50% fixed income), and let's see if your annual returns are higher, and if the risk is really the same or less.

-Tom

Re: Best Index Investment Strategy?
 

[ QUOTE ]
So do you have a simple way for clients to use arbitrage in a long-term portfolio without being time consuming?

[/ QUOTE ]
No of course not...I was just disproving that risk does not have to be high for good returns.
[ QUOTE ]
If you are suggesting something with 200-day moving averages, this is not a simple "index investment strategy." You are talking about having to watch your investments. With my portfolio, you can buy, don't pay attention for a year, rebalance, and then go back to not paying attention.

[/ QUOTE ]
Well average trade about twice a year with simple crossover system. Few hours a year of time invested.
[ QUOTE ]
There is a lot of history for portfolios of diversified index funds. We can see what the returns and annual standard deviations have been over lots of time periods. Do you have any type of long history, or theoretical back-testing for the funds? Then show me your allocation (with 50% leveraged ETFs and 50% fixed income), and let's see if your annual returns are higher, and if the risk is really the same or less.

[/ QUOTE ]
Yes I have and yes it would. Back-tested using 2x leveraged on SP-500 since 1957. Using 4% interest when short it returned the following verses buy and hold.
50/200MA Crossover
Annualized Returns - 11.23
Standard Deviation (Annual) - 22.68
Average Drawdown (Annual) -16.8
Peak Drawdown -59.9
Sharpe Ratio - .41

Buy and Hold
Annualized Returns - 7.1
Standard Deviation (Annual) - 16
Average Drawdown (Annual) -13.48
Peak Drawdown -49.16
Sharpe Ratio - .28
That is assuming 3% fees and no taxes. To be honest capital gains may have killed the returns. Still the point is for minimal time invested can improve risk reward ratio of the portfolio.
Even with buy and hold approach your portfolio can improve more with less diversification. Clients can use the Christopher Moth paper as a touchstone. I use his best return/risk asset allocation as my IRA core portfolio:

American stocks (S&P 500) 31%
US Treasury bonds (SSB GBI) 24%
Foreign government bonds (SSB WGBI ex-US 22%
A basket of commodities (GSCI) 23%

This portfolio has an expected annual return of 11.5% (not adjusted for inflation, not reflecting management fees) and a risk of 7.5% (measured as standard deviation of quarterly returns). If USD securities become worthless, then maybe foreign ones will be okay. If the whole system caves in, there will still be commodities which retain some value. It aims to preserve capital without hurting the returns.

I think you missed my point. Yes your textbook portfolio is great for 99% of your clients but readers here should be able to beat that without much effort. I am sure you would not recommend your clients to play poker as a investment. Yet you could for the readers here because they understand risk.

Re: Best Index Investment Strategy?
 

3.5% return of the mutual fund is not a measure of its total return, only its price history. Your analysis is in fact flawed. Mutual funds make distributions which reduce the net asset value (price) on the ex-dividend date and are in turn reflected as a lower return if you do not account for the additional shares you receive through dividend re-investment or the receipt of capital gains and dividends in cash. Please find the distributions for the RYNVX fund over just the past few years. I believe if you account for these distributions and increase the number of shares to reflect the distributions, you would have an accurate depiction of how the total return of the two investments would compare.

20-Dec-06 $ 2.014 Dividend
30-Dec-05 $ 0.297 Dividend
23-Dec-05 $ 0.553 Dividend
31-Dec-03 $ 0.005 Dividend
12-Dec-03 $ 0.005 Dividend
16-Nov-01 $ 0.052 Dividend
27-Jul-01 $ 0.073 Dividend
6-Nov-98 $ 0.411 Dividend
5-Dec-97 $ 0.051 Dividend
4-Dec-96 $ 0.25 Dividend
21-Jun-95 $ 0.888 Dividend
23-Dec-94 $ 0.21 Dividend

Re: Best Index Investment Strategy?
 

Rydex Nova Fund

[ QUOTE ]

Total returns reflect the reinvestment of all dividends.

[/ QUOTE ]

Re: Best Index Investment Strategy?
 

[ QUOTE ]
Yes I have and yes it would. Back-tested using 2x leveraged on SP-500 since 1957. Using 4% interest when short it returned the following verses buy and hold.
50/200MA Crossover
Annualized Returns - 11.23
Standard Deviation (Annual) - 22.68
Average Drawdown (Annual) -16.8
Peak Drawdown -59.9
Sharpe Ratio - .41

Buy and Hold
Annualized Returns - 7.1
Standard Deviation (Annual) - 16
Average Drawdown (Annual) -13.48
Peak Drawdown -49.16
Sharpe Ratio - .28
That is assuming 3% fees and no taxes. To be honest capital gains may have killed the returns. Still the point is for minimal time invested can improve risk reward ratio of the portfolio.

[/ QUOTE ]
Are you comparing the leveraged S&P 500 with the S&P 500? I asked you to compare your leveraged diversified portfolio to my diversified portfolio. (And I show the S&P 500 averaging 10.6% from 1957-2006. Why are you subtracting 3% fees?)

The ifa.com web site has a lot of backtested results. Their "portfolio 90" is a 100% stock portfolio similar to the one that I recommended in this thread, but using DFA funds instead of Vanguard funds. According to this page, the hypothetical portfolio 90 averaged 13.51% with a SD of 14.15%. That is significantly better than your results.

Note that there are a lot of disclaimers about the backtesting; the international, emerging market stocks, and REIT data does not go back into the 50's and 60's, so they substitute US data.

-Tom

Re: Best Index Investment Strategy?
 

My point that you are avoiding is that for someone skilled in risk, such as a winning 400nl poker player, should use a more advance strategy. (leverage, rolling leaps, less diversified)
I assumed 3% fees in active traded account. Use whatever number you like for fees. I was comparing 2x leveraged SP 500 verses str8 up SP 500. Leveraged portfolio with simple crossover indicator beat SP 500 with comparable risk.
The portfolio I posted has an expected future return of 11.5% and risk of 7.5%. That I am sure this will have better returns and lower risk then what your portfolio will return in future years. In the end who knows but I do know anybody will averaged capital allocation skills will do better in a more advance portfolio.

Re: Best Index Investment Strategy?
 

I take your word for it Rydex Nova funds sucks. If you add a 200ma as a indicator to buy and sell you still would have beat beat the SP 500 by a bunch. Leveraged portfolio using ETFs, options, or margin will beat the market as long as you use some simple indicator to keep the risk comparable.

Re: Best Index Investment Strategy?
 

Thanks for this information. Is it correct that as long as you keep the money in the funds you have invested in you will not incur any taxes until you sell the interest in the funds? Or do you receive annual payments for dividends or the like on these funds (I am guessing they just stay in the fund, so no taxes are incurred but not sure).

Also with respect to the bond funds - if holding in the fund avoids taxes until you liquidate (unless, again, there are payouts in the form of dividends or interest), would a long term investor ever really be better off in tax-exempts as is suggested later in this thread?

Thanks in advance for any thoughts on this.

Re: Best Index Investment Strategy?
 

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Thanks for this information. Is it correct that as long as you keep the money in the funds you have invested in you will not incur any taxes until you sell the interest in the funds? Or do you receive annual payments for dividends or the like on these funds (I am guessing they just stay in the fund, so no taxes are incurred but not sure).

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I would double check with the particular fund you're interested in. In Canada, we have a registered retirement account that is not taxed until you withdraw from the fund.

Re: Best Index Investment Strategy?
 

jively,

I was reading articles at http://www.efficientmarket.ca/ which suggested allocating index funds based on market capitalization. So US would only be allocated 40% instead of 70% in your plan. What is your reasoning for investing so heavily in the US? Would you recommend differently for a Canadian investor?

Re: Best Index Investment Strategy?
 

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Giving up a lot of EV being so diversified and passive. Great for Joe Sixpack but the readers here should understand risk. With the new leveraged ETF's, readers here could easily beat that portfolio with same risk and minimal time invested.

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There is no such thing as a free lunch. It is possible to create portfolios with higher EV but at a cost of higher risk. I'd be willing to discuss your portfolio recommendation, but I'd prefer to do it in another thread. This is a thread on index investment strategy. Why don't you start a new thread on leveraged ETF allocations.

-Tom

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Arbitrage is a prime example of a free lunch.

My point was if readers here can beat 400nl they can managed risk. So it be stupid for same person to be so diversified. They could invest in 3-4 ETFs and use a longterm risk model(p/e 200Ma)and the returns will be higher with comparable risk then your cookie cutter portfolio. You portfolio has too many positions and is losing EV somewhere.

I was talking about the new ProShares 2x leveraged ETF,s. Not sure why you think these were not ETFs or would not apply to a ETF index investment strategy. You could even use your allocations but replace small caps with ultra Russell 2000 ETF. Reduce the size by half and move the difference into fixed income. Boom less risk for the same return. AKA on your way to a free lunch.
http://www.proshares.com/ [img]/images/graemlins/grin.gif[/img]

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dangerous attitude

Re: Best Index Investment Strategy?
 

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My point was if readers here can beat 400nl they can managed risk.

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The problem with that attitude is that it assumes that the reader (whether they are a successful poker player or a successful doctor/lawyer/etc.) has the time/inclination/desire to deal with investments. Some do, and could easily follow riskier advice. But many don't (just because you're a financially successful poker player or surgeon, doesn't mean you know anything about the stock market). That is where the Jively's strategy fits in.

Re: Best Index Investment Strategy?
 

Thanks for all the advice jively. If you get a chance to respond to my pm you can post it here or by pm.

Re: Best Index Investment Strategy?
 

if you don't mind variance, why not just go for emerging market etfs? why even invest in the us markets?

Re: Best Index Investment Strategy?
 

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Thanks for this information. Is it correct that as long as you keep the money in the funds you have invested in you will not incur any taxes until you sell the interest in the funds? Or do you receive annual payments for dividends or the like on these funds (I am guessing they just stay in the fund, so no taxes are incurred but not sure).

Also with respect to the bond funds - if holding in the fund avoids taxes until you liquidate (unless, again, there are payouts in the form of dividends or interest), would a long term investor ever really be better off in tax-exempts as is suggested later in this thread?

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If you are holding a mutual fund in a non-retirement (taxable) account, you do not have to pay tax based on the appreciation of the fund until you sell it. However, the funds distribute their interest, dividends, and their capital gains to their investors every year. For stock funds, much of this (dividends and long-term capital gains) will be at a lower tax rate. For bond funds and REITs, most of the income will be at your ordinary tax rate.

For high tax bracket investors, you should consider muni bond funds instead of taxable bond funds. When bond funds are sold, there may be a small capital gain or capital loss, even if you use a muni bond fund. (If you use short- and intermediate-term funds that have high quality bonds, this gain or loss should be pretty small.) However, as I said, most of the income is interest income that is taxed each year at your marginal rate.

-Tom

Re: Best Index Investment Strategy?
 

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I was reading articles at http://www.efficientmarket.ca/ which suggested allocating index funds based on market capitalization. So US would only be allocated 40% instead of 70% in your plan. What is your reasoning for investing so heavily in the US? Would you recommend differently for a Canadian investor?

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It is more diversified to have a country weighting similar to the size of the country. So, US investors should maybe only have about 40% of the stock portion in the US and the rest international.

However, there is a kind of "tracking" error associated with diversifying so much out of your home country. Most of the news, and most of your friends will have most of their investments in their home country. If your country is having an outstanding year, and your globally diversified portfolio isn't doing as well, investors without extreme discipline may be tempted to tinker with their allocations. Tinkering at that time is probably a mistake. It is better to pick an allocation and stick with it year in and year out. I think 70% to US for US investors is just fine. In general, I think most investors overweight their home country to some extent.

I think Canada's stock market is only 2-3% of the world in market cap. 40% to US is just fine for a Canadian investor. Besides being right next to us geographically, there's no reason to overweight the US. (What % allocation do they recommend to Canadian stocks?)

-Tom

Re: Best Index Investment Strategy?
 

I'm bumping this thread, stickied in the FAQ, so that it survives the forum upgrade.

-Tom