Adjusted for new money added during the year, the return on my combined accounts was 9.25 percent as of last Monday. Over the same period, the average "world allocation" fund--- funds that invest globally---returned 7.8 percent. The average domestic balanced fund returned only 5.2 percent. Ranked, that 9.25 percent scored at the 37th percentile of all world allocation funds.
This speaks well for slothful indexing. But, as you will soon see, true sloth would have done a lot better. It was done by keeping expenses low and by investing most of the money in index funds or "baskets" of securities that were picked to serve as de facto index finds. The basic portfolio was outlined in "The Coming Generational Storm" (MIT Press, $17), the book I co-authored with economist Laurence J. Kotlikoff. In the book we emphasize index funds, a tilt toward international equity investments, and a preference for assets that offer inflation protection. That's energy stocks, REITs, inflation-protected Treasurys, and foreign bonds.
Did I make any changes during the year?
Yes. At mid-year I expanded the energy stock basket--- ExxonMobil (ticker symbol: XOM), BP (BP), Royal Dutch (RDSA), and Petrochina (PTR) --- by adding Chevron (CVX), Conoco Phillips (COP), Burlington Resources (BR), and XTO Energy (XTO). The idea was to broaden the basket. I also wanted a stake in domestic producers. Petrochina is up 60 percent for the year. Burlington Resources is up 55 percent and XTO Energy is up 24 percent since my purchase at the end of June. In spite of that, the whole package is up less than the 43 percent of the SPDR Energy exchange traded fund (XLE).
Similarly, while my two largest REIT holdings, Equity Residential (EQR) and Equity Lifestyle Properties (ELS), returned 14 percent and 28 percent, respectively, Apartment Investment Management (AIV), Health Care Properties (HCP), and Plum Creek Timber (PCL) returned only 9 percent, 0 percent, and minus 1 percent, respectively. The package, at 11.6 percent, returned virtually the same as the 11.5 percent of Vanguard REIT index.
For me, making baskets doesn't seem very fruitful.
As expected, my inflation protected Treasury securities funds provided modest returns. The surprising negative return was from American Century International Bond fund. It lost 7.1 percent. I still think the dollar is toast, long term.
The sinking-dollar tilt includes a minor bet on gold, the only money that doesn't come off a printing press. I whittled my three gold stocks down to one, Newmont Mining (NEM). It returned 14 percent for the period.
Late in the year I bought three individual stocks simply because I thought they were good buys.
• FedEx (FDX) was purchased in September just before its earnings announcement. It is up 26 percent. I thought it was a good buy years ago. I think it's a good buy today because FDX, along with UPS, is the global beneficiary of rising online sales.
• I bought Bank of America (BAC) in November because it's cheap, yields over 4 percent, and has a real nationwide network. It's also where I do my banking. It's up 6 percent since purchase.
• I also bought Merck in November. The idea was simple: It would be a crime against humanity if Merck were pilloried for Vioxx while Altria got away with decades of misleading propaganda for cigarettes. Altria is the assumed name for Philip Morris. Merck is up 7.4 percent.
While the return on the whole portfolio is fair, I have some misgivings. It would have been easier to stay on my asset allocation targets had I limited the portfolio to Couch Potato Building Blocks. More important, if I had put one-sixth of my money in each of six assets--- Domestic Total Market index, Total International Stock index, Vanguard REIT index, SPDR Energy index exchange traded fund, Vanguard inflation protected securities, and American Century International Bonds, my return would have been 11.8 percent, not 9.2 percent. The 43 percent gain in SPDR Energy (XLE) would have easily offset the 7 percent loss in American Century International bond fund (BEGBX) and the weak return on the inflation protected securities. This portfolio ranked in the top 21 percent of all world allocation funds.
Had I taken a still easier path and bought the Margarita Portfolio (an equal mix of domestic total stocks, international stocks, and inflation protected government bonds) the return would have been an easy 7.8 percent--- the same as the average managed world allocation fund.
That's why you will continue to see columns about the Couch Potato Building Blocks and index investing.
It works. It takes little effort.
Resisting true torpor is futile.
Soon: How the Couch Potato Building Block Portfolios did.
On the Web:
Summing Up My 2003 Investments: Tuesday, December 23, 2003
Tuesday, September 30, 2003: Using a Self Directed Brokerage Account in Your 401(k) Plan
Mea Culpa 2002
Mea Culpa 2001
Mea Culpa 2000
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
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