Had I known that sloth and passivity paid so well, I would have pursued them more aggressively. That perverse thought came to mind as I assembled the numbers for this year's Mea Culpa Report.
This is the column where I tell you what I've been doing with my own money, with particular attention to mistakes. It also lets you see if I eat my own cooking and, if so, whether I choke on it.
My return for the year, as of Dec. 13, was 17.8 percent. There may be some injuries from flying champagne corks in the Burns household. But there will be no choking.
According to Morningstar, the average World Allocation fund returned 16 percent over the same period. The average moderate allocation fund returned only 11.1 percent. The average large blend fund returned 13.7 percent. That, in turn, was a full 1.4 percentage points less than the 15.1 percent return of the Vanguard 500 Index fund over the same period.
So, what choices made that 17.8 percent return?
It wasn't done by picking through the wastebaskets of brilliant hedge fund managers. Nor was it done by reading the mail of private equity managers. And it wasn't done by reading 200 newsletters filled with inside knowledge of the future and the names of obscure stocks poised to become Microsoft.
It was done by being simple and cheap.
The basic strategy was laid out in "The Coming Generational Storm" (MIT Press, $18), which I co-wrote with Boston University economist Laurence J. Kotlikoff. In the book we emphasize index funds and broad asset class diversification. We also suggest a tilt toward investments that offer some protection from inflation and a declining dollar -- international stocks and bonds, Treasury Inflation-Protected Securities (TIPS), REITs and energy stocks.
While many seers warned that REITs would bomb in 2006, the Vanguard REIT index rose 35.6 percent. Others warned that energy stocks would suffer in 2006, but the Vanguard Energy index returned 21.4 percent. Rather than own those funds (or comparable ETFs), I continued to make things complicated by owning a basket of individual REITs and a basket of individual energy stocks. As I commented last year, there is little evidence this is worth the time and effort.
Petrochina (ticker: PTR), my best performer, was up a stunning 64.7 percent, while BP (ticker: BP) my worst performer, was up only 10.3 percent. Burlington Resources was acquired during the year, at a nice gain. ConocoPhillips (ticker: COP) was up 24.9 percent, Chevron (ticker: CVX) was up 35.3 percent, and XTO was up only 17 percent. I sold ExxonMobil during the year and bought a much smaller position in Devon (ticker: DVN). The idea there was to put more emphasis on domestic reserves. For most people, including me, it would be about as rewarding to simply own an energy index fund.
A simple investment in the Vanguard REIT exchange-traded fund (ticker: VNQ) returned 35.9 percent. My Healthcare Properties REIT (ticker: HCP) returned 49.8 percent, but my largest REIT holding was Equity Residential (ticker: EQR). It returned 37.4 percent. Smaller holdings in Equity Lifestyle Properties (ticker: ELS) and Plum Creek Timber (ticker: PCL) returned 20.3 percent and 10.8 percent, respectively. Early in the year I sold Apartment Investment and Management (ticker: AIV) for disappointing returns. I also sold Plum Creek in the fall as housing starts declined.
Were those good decisions? Maybe. Maybe not.
The Fidelity Spartan Total Market Index fund (ticker: FSTMX) returned 15.4 percent. Its international counterpart, Fidelity Total International Index fund (ticker: FSIIX), returned 24.6 percent. The Powershares RAFI 1000 exchange-traded fund (ticker: PRF), which has a value tilt, returned 18.2 percent.
After a loss last year, American Century International Bond fund (ticker: BEGBX) redeemed itself with a gain of 9.5 percent, nearly balancing the disappointing 1.8 percent return of the Fidelity Inflation-Protected Securities fund (ticker: FINPX).
Significantly, I could have saved a lot of time and effort by simply sticking to the larger Building Block portfolios that I have written about. Skeptics should check the table below.
Recently, I transferred from my former employer's 401(k) plan to an IRA rollover -- a change that required selling all holdings. I used it as an opportunity to "lighten up." So I now have a healthy cash reserve, about 22 percent of the assets.
Was it a mistake? Time will tell.
But if next year is better than 2006, I'll know there's something in the water.
|The Couch Potato Building Block Portfolios (12/13/2006)|
|Ticker||Fund Name||YTD||12 Mos||Portfolio Name||YTD Return||12 Mos Return|
|VTSMX||Vanguard Total Market||15.29||13.61||na||na||na|
|VIPSX||Vanguard Inflation Protected Securities||1.96||3.10||Couch Potato||8.60||8.36|
|VGTSX||Vanguard Total International Stock Market||24.95||25.65||Margarita||14.05||14.12|
|BEGBX||American Century International Bond||9.47||9.34||Four Square||12.90||12.93|
|VGSIX||Vanguard REIT||35.65||34.19||Five Fold||17.45||17.18|
|VGENX||Vanguard Energy||21.84||18.54||Six Ways from Sunday||18.18||17.41|
|Source: www.Morningstar.com 12/13/2006 data|
|Couch Potato is: 1/2 each VTSMX, VIPSX||50% equity, 50% fixed income|
|Margarita is 1/3 each: VTSMX, VIPSX, VGTSX||67% equity, 33% fixed income|
|Four Square is 1/4 each: VTSMX,VIPSX, VGTSX, BEGBX||50% equity, 50% fixed income|
|Five Fold is 1/5 each: VTSMX, VIPSX, VGTSX, BEGBX, VGSIX||40% equity, 40% fixed income, 20% REIT|
|Six Ways is 1/6 each: VTSMX, VIPSX, VGTSX, BEGBX, VGSIX, VGENX||50% equity (a), 33% fixed income, 17% REIT|
|(a) counts energy as equity.|
Mea Culpa 2005: "A Bit More Laziness Would Have Paid Off
Mea Culpa 2004: "This Year, a Happy Return"
Mea Culpa 2003: "Summing Up My 2003 Investments"
Mea Culpa 2002: "Owning Up to My Investment Errors"
Mea Culpa 2001
Mea Culpa 2000
"Using a Self Directed Brokerage Account in Your 401(k) Plan" (9/30/2003)