Now that the third quarter is safely behind us, it’s time to pull out the brokerage accounts statements and see how we did. While I always end up checking my portfolio every couple of days on Personal Capital, I also like to do a deep-dive analysis once a quarter to make sure I understand everything that is going on.
I’ll usually only re-balance things once or twice a year, unless things are seriously out of whack. For those of you who did not see my 2016 mid-year portfolio review, here is my investing philosophy.
It’s not sexy, but it works and has me well on my way to financial independence. Here are the highlights:
- I automatically contribute from my paycheck into my 401k each pay period
- I stick to low-cost index funds for the bulk of my investments
- I allocate the investments between stocks and bonds, but I also include alternative investments
- I re-balance once or twice a year if the percentages are really out of whack (more than 5% off), but let things ride if they are within a few percentage points of my allocation strategy
This is the most rational and data-based approach to investing for the long-term and it has been working well for me. When I was younger and just learning to invest, I would occasionally make a “bet” on a single stock, but not any more. I was lucky that I never got burned with a single-stock bet.
While I was always cautious and never lost a lot of money, the expression that “experience is a cruel teacher, it gives a test before presenting the lesson,” is very true for investing and I know several people that have been burned pretty badly with single stock investments.
Not only is my investing approach supported by numerous quantitative studies, but it accomplishes the goal of keeping things both simple and easy (remember that achieving financial independence is simple but not easy?). Whenever you can do both, that is a good thing.
So, how has my portfolio performed through the end of September? Up 10.2%, which is fantastic! The S&P 500 over that same time period was only up by 6.1%, so I beat the benchmark by 4.1 points. I suppose I shouldn’t be surprised, because I was beating the benchmark by 4.7 points at mid-year, but it’s still great.
Here are my current holdings and returns:
What’s the Same?
Similar to mid-year, I benefited from having a diversified portfolio and not putting all of my eggs in the U.S. equities basket. My alternative asset classes have returned a combined 20.3% return for the year, more than triple the benchmark. That is huge.
Leading the way, my precious metals fund (VGPMX), while not as high as in mid-year, is still up almost 60% for the year. I’ve also kept my cash position as low as possible with just my HCSA funds in cash.
After doing my deep-dive analysis at mid-year, I moved a few things around. Using Personal Capital, I realized that my 401k’s International fund was killing me with a .66% expense ratio! Thanks to Personal Capital for making it so easy to assess these annual fees. Over time, these fees can significantly impact your returns.
Because of the high fees, I sold off my 401k’s International fund and moved it into Vanguard’s Total International Stock Index (VTIAX) with an expense ratio of only 0.12% – much more to my liking! I also got out of my 401k’s fixed interest fund. I realized it was too conservative for me and I couldn’t figure out what the fees were, so I’d rather have my money in Vanguard where there is greater transparency.
I also wanted to expand my alternative investments from around 13% to closer to 25%. I expanded my investments by putting some money into Vanguard’s High-Yield Corporate Bond fund (VWEHX) since I was nervous about putting more money into a regular bond fund. VWEHX has returned 11.0% year to date. Very nice.
However, I could not find any other alternative asset class funds that I was comfortable with from Vanguard, so I bought into their Energy fund and Healthcare fund to focus my investments in two areas that I think will be “hot” for a while, also increasing my U.S. equity exposure. Those funds are up 26% and down 7% respectively for the year. So, overall, a net positive.
Overall 2016 Q3 Performance
Overall, it’s been a great year with a 10.2% return! My investment approach has been working great:
- stick to low-cost index funds
- automatically invest with every paycheck
- allocate funds across multiple asset classes
One of the biggest lessons I have seen play out this year is the benefit of alternative asset classes. Once your portfolio is large enough, it makes sense to diversify out of stocks and bonds.
Having 15%-20% of my money invested in REITs, precious metals and other alternative investments has been responsible for driving my strong returns this year and I would have just matched the market otherwise.
How are your investments doing for the year? Do you incorporate alternative asset classes into your portfolio? Do you look at expense ratios in determining which funds to buy?