Lazy Man and Money

Plugging the Emerging Markets Portfolio Hole

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This past weekend, I was playing with one of my favorite tools, SigFig.com. You add all your brokerage accounts and it gives you an awesome consolidated view. You can read my SigFig review here.

There was one thing that stood out… I only had 7% of my stock portfolio in emerging markets. That may make sense for many people, but as I’ve written about before here, I am a firm believer in being diversified in stocks around the world. As you can see with the image on the right, I have 70% of my portfolio in the United States and another 15% in Europe. That doesn’t leave a lot for the rest of the world.

Remember when BRIC (Brazil, Russia, India, and China) funds were popular a few years ago because those four large countries were expected to grow greatly in economic power in the coming decades? Well my Brazil, Russia, and India exposure seems to add up to %0.8 of my stock portfolio (which is 74% of my total portfolio). I’ve got a little more exposure in China at least.

So what do I do about this? The easy answer is Vanguard’s FTSE Emerging Markets ETF (VWO). If you scroll down from that link you’ll see that the ETF has all four of the BRIC countries in the top 7 holdings. With an expense ratio of 0.20%, I know that my returns aren’t going to get eaten up by Vanguard’s management.

It’s not like VWO’s 6% allocation in Russian equities is going to revolutionize my portfolio. My goal here isn’t to focus my portfolio on those BRIC countries, but to diversify my holdings so that I’m not so dependent on the United States and, to a lesser extent, Europe.

Today’s lesson is simple: check and make sure your asset allocation is what you think it is. It never hurts to revisit it every few months. I thought by buying Vanguard FTSE All-World ex-US ETF (VEU), I had my international exposure well-diversified throughout the world. I was wrong and this is where tools like those from SigFig can be extremely valuable (or you can go with the low-tech method of checking the fund for its diversification).

Oils Well That Ends Well

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I’ve been really surprised that the Dow Jones industrial average continues to drop. The last time it dropped to 8,200 I thought it would be the last chance at those prices. As I write this, the mark is at 7,500 and some indications seem to say that it could go even lower. Despite that, we’ve been buying some index funds with our Zecco account. Specifically we’ve been picking up Vanguard Total Index (VTI) and Vanguard All-World Ex-US (VEU).

However, one of my worst investments seems to have been PowerShares DB Oil Fund (DBO) which generally moves with oil prices. If you’ve been following gas prices you’ve seen the drop they’ve taken lately. What did I see in DBO that interested me? I remember that a barrel of oil was around $150 this summer towards it’s peak. Recently with it $60-65 it seemed like a tremendous bargain. Consider this 6 month chart of DBO:

Here is where I made my mistake. I didn’t look at the big picture. If I had, I might have remembered that $150 was due to speculation. I might have looked at this 20-month chart:

The chart might be a little small (you can play with a full version here), but if you Rip Van Winkle’d 2008, the price of DBO might seem in line with 2007.

The price of oil just broke below $50 and some are saying that it get as low as $30. If it gets below $40, I may have to dollar cost average and pick up some more of DBO. I can’t help but feel that at some point in the next 3 or 4 years we’ll see $100 oil again.

What are your thoughts?

How I Invested My Roth IRA This Year

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About a month ago, I asked you to help me invest my money. I got a lot of great recommendations. As he did last year, Get Rich Slick had the most creative idea, involving options trading. Like last year, I’m sure it will do fantastic. I’m currently not entirely comfortable with options at this stage. I understand the basics of how they work, but I would essentially be putting my money in something that I don’t understand. Doesn’t Warren Buffett say that you should invest in what you know?

I looked at the other suggestions. A few people mentioned investing in gold. I simply hate gold as an investment. I don’t like how it’s not a basic necessity of life in today’s modern world. It makes as much sense to me as investing in tulips. I know it’s stood the test of time, but I think times were different before flat panel TVs and flashy cars. People would use their gold collection to show off their value in society. Today, people use other possessions. I don’t see a trend toward people selling their useful possessions for a hunk of gold. If anything it’s the other way around.

I do recognize that gold has become a way to hedge inflation and the falling dollar. However, there are other ways to do that with assets that are required in the modern world. The rising price of oil is one such example. If all the gold disappeared from the earth, we could likely make due with copper wiring. If oil disappeared, much of the modern society would have great difficulty recovering. Another example is the raising cost of food. Again, it’s a basic necessity that people are required to buy.

For the above two reasons, I heavily considered oil (Powershares DB Oil Fund – Ticker: DBO) and food ETFs (Powershares DB Agriculture – Ticker: DBA). However, in the end, I decided that they were too expensive for me at this stage. They’ve simply appreciated too much in a small timespan. DBO is up 80% in the last year while DBA is up 45%. So I went with expanding my international exposure. I purchased 75 shares of Vanguard FTSE All-World ex-US ETF (Ticker: VEU), which is essentially unchanged over the last year. I felt I was underweight global stocks in what has increasingly become a global economy.

I want to thank everyone for their help. I found there was tremendous value in reading about different investment strategies.

A Lazy Portfolio

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Investing can seem very complex if you are new to it. There are so many options out there. How is one to choose between stocks, mutual funds, CDs, corporate bonds, treasury bonds, savings accounts, and even more exotic options like lending on Prosper. With all this complexity it may be worth simplifying things dramatically. Here’s my idea of a simplified or lazy portfolio.

The first step to my plan is to get a Zecco account. I choose Zecco simply because they charge no commissions to buy exchange traded funds (ETFs). That means, that’s you can re-balance and add to your portfolio each week without incurring huge costs.

What does this lazy portfolio look like? It splits 100% of your money equally into the following ETFs:

  • 25% – Total Stock Market Index (Ticker: VTI) – This ETF tracks the performance of many US stocks. It’s a great way to diversify yourself in across large and small, growth and value stocks.
  • 25% – Vanguard All-World Ex-US fund (Ticker: VEU) – This invests in the many stocks all outside of the United States. I believe you shouldn’t put your eggs in one basket and I consider the US one basket. This reduces currency risk and mitigates against some of the problems that pop up from time to time, like the sub-prime lending one that we are in now.
  • 25% – First Trust Global Real Estate Index Fund (Ticker: FFR) (Ticker: FFR) – This invests in real estate around the world. While it does hold a fair share of US real estate, over 60% is outside of the US (hat tip to Sun’s Financial Diary for the help on this one.) This is a great hedge when all the stock markets aren’t performing.
  • 25% – Vanguard Total Bond Fund (Ticker BND) – This tracks the performance of a huge number of bonds. Bonds can be a little risky if bought individually, but in a fund such as this, that risk is reduced with the many holdings. Bonds also move independently of stocks and real estate, so if either of those two areas are doing poorly, bonds may stabilize your portfolio.

You won’t get rich overnight investing in this allocation. However, since it covers so many areas, you’ll likely find that you sleep well each night.

[Please note that like all my writing, it does not constitute financial advice. I’m simply sharing ideas that I have. Please check with your financial advisor before following through on these ideas.]