Weaknesses in my Retirement Portfolio

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Shikoku
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Weaknesses in my Retirement Portfolio

Post by Shikoku » Fri Oct 27, 2017 11:28 pm

Greetings: My retirement portfolio looks like the following. I would appreciate if forum members help me identify weaknesses in it.

TIAA Traditional: 35%
Fidelity Real Estate Index: 9%
Fidelity Total Market Index: 14%
TIAA-CREF High-Yield: 5%
Fidelity Mid Cap Index: 6%
TIAA-CREF International Equity Index: 16%
Vanguard FTSE All-World ex-US Small-Cap ETF: 6%
Fidelity Emerging Market Index: 4%
Fidelity New Markets Income: 5%

I consider TIAA-CREF High-Yield and Fidelity New Markets Income as part of my equity allocation. TIAA Traditional is my substitute for bond; it is earning 3.15% with no risk of principal. My plan is to retire in about 15 years.

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ruralavalon
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Re: Weaknesses in my Retirement Portfolio

Post by ruralavalon » Sat Oct 28, 2017 6:29 am

Welcome to the forum :) .

I like to keep things simple, with broad diversification (to decrease risk) and low expense ratios (to increase net return).

I don't think that I would call anything in your plan "weaknesses", but I do think there could be improvements.

Shikoku wrote:
Fri Oct 27, 2017 11:28 pm
Greetings: My retirement portfolio looks like the following. I would appreciate if forum members help me identify weaknesses in it.

TIAA Traditional: 35%
Fidelity Real Estate Index: 9%
Fidelity Total Market Index: 14%
TIAA-CREF High-Yield: 5%
Fidelity Mid Cap Index: 6%
TIAA-CREF International Equity Index: 16%
Vanguard FTSE All-World ex-US Small-Cap ETF: 6%
Fidelity Emerging Market Index: 4%
Fidelity New Markets Income: 5%

I consider TIAA-CREF High-Yield and Fidelity New Markets Income as part of my equity allocation. TIAA Traditional is my substitute for bond; it is earning 3.15% with no risk of principal. My plan is to retire in about 15 years.
In my opinion it's very reasonable to consider TIAA Traditional as a bond, it is fixed income.

On the other hand I would not consider any bond fund, even a high-yield bond fund or an emerging markets bond fund, as a stock fund. I suggest not using any high yield (junk) bond fund or emerging markets bond fund. Both are too risky in my opinion. In my opinion bonds are primarily for portfolio stability, not for risk taking. For risk invest in stock index funds.

I would not add the extra emerging markets stock fund, nor would I add international small-cap. Emerging markets are already included in TIAA-CREF International Equity Index Fund (TIIEX). Small-cap stocks are an almost trivial amount of the international stock market. Keep it simple.

My idea is to more simply just use these four funds for a portfolio with retirement in about 15 years, in something like this allocation:
40%, Fidelity Total Market Index Fund
05%, Fidelity Real Estate Index Fund
15%, TIAA-CREF International Equity Index Fund
40%, TIAA Traditional

I don't know your age, health, personal circumstances, or particular investing goals, so the percentages which I gave are just rough ideas.

If you have any questions just ask.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

dbr
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Re: Weaknesses in my Retirement Portfolio

Post by dbr » Sat Oct 28, 2017 8:47 am

With the exception of the total market fund I would not even know where to begin to understand what those funds might do over the future, aka the expected return and the variability of return. That makes it very difficult to project a range of likely outcomes for your investments. That, however, does not mean there is anything at all wrong with your portfolio. I would not want to be invested in something that hard to understand. That also, however, does not mean you don't understand it well enough.

Olemiss540
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Re: Weaknesses in my Retirement Portfolio

Post by Olemiss540 » Sat Oct 28, 2017 8:59 am

Personally I would favor simplification over the desire to tilt to different sectors. I favor a 3 fund variation of total market/international/bond component.

pkcrafter
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Re: Weaknesses in my Retirement Portfolio

Post by pkcrafter » Sat Oct 28, 2017 11:03 am

Shikoku,

Considering you have to work with TIAA, I think you've done a pretty good job of hammering out a broadly diversified portfolio. What you actually have is an allocation of 55/45, but you've counted the high-yield bonds as stocks. I've looked at Vanguard's high yield corporate bond risk and performance and it matches up pretty well with Life strategy conservative, which is 40% stock and 60% bond. Since you've only got 10% in new markets and high yield, it won't make much difference, but if you did consider them as stock/bond it would lower your overall AA to about 50/50. Will that provide enough growth potential to meet your target in 15 years?

Looking at U.S. allocations, you are overweight in mid/small, but the small allocations aren't going to make much impact. I think that's what other posters are pointing out.

A simpler portfolio might look like this, but you don't get the tilts:

Bond
TIAA Traditional:
TIAA-CREF High-Yield:

stock
Fidelity Real Estate Index:
Fidelity Total Market Index:
TIAA-CREF International Equity Index:
Fidelity Emerging Market Index:


We don't have any personal information to know where you are in terms of meeting your goals, so if you want any more input, please post according to this recommended format.

viewtopic.php?f=1&t=6212




Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

delamer
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Re: Weaknesses in my Retirement Portfolio

Post by delamer » Sat Oct 28, 2017 11:26 am

The Boglehead concensus is that investments that make up less than 5% of your assets just complicate your portfolio and are too small to have an impact on its return. You have several that are right on that cusp.

So I agree with the earlier recommendation to simplify. What are your other investment options? Is this all in one account?

I recommend checking out the "lazy portfolio" section in the Boglehead wiki.

Shikoku
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Re: Weaknesses in my Retirement Portfolio

Post by Shikoku » Sun Oct 29, 2017 12:42 am

Thank you very much everyone for your thoughtful insight. :happy I am learning and am curious. Therefore, I am trying to understand the role of international small cap, high-yield corporate bond, global bond, and other asset classes in a portfolio.

I have low tolerance to volatility. My investment choices are primarily limited to a group of Fidelity and TIAA-CREF funds. A small part of my portfolio can access Vanguard funds/ETFs. My goal is to earn 5-7% on average every year for the next 15 years.

I have just backtested the following four fund portfolio (let say Shikoku4) with SatuMedia Four Funds portfolio:

35% - Intermediate Term Treasury
25% - High Yield Corporate Bonds
15% - Global Bonds (USD Hedged)
25% - International ex-US Small Cap

I can test it only for years 2001-2017 using portfoliovisualizer.com. Here is the result: :o

Final Balance
Shikoku4: $33,545
Boglehe4: $27,238

Standard Deviation
Shikoku4: 6.06
Boglehe4: 12.14

Worst Year
Shikoku4: -11.43%
Boglehe4: -31.53%

Max Drawdown
Shikoku4: -17.64%
Boglehe4: -44.34% <-For many, hard to stay invested after this decline

Recovery Time
Shikoku4: 1 year 10 months (for -17.64% drawdown)
Boglehe4: 3 years 6 months (for -44.34% drawdown)

Sharpe Ratio
Shikoku4: 1.00
Boglehe4: 0.44

Sortino Ratio
Shikoku4: 1.59
Boglehe4: 0.63

I was told that international small cap, high-yield corporate bond, and global bond are good for a portfolio diversification and stability. That is the only reason I have added some of them to my portfolio. Although my portfolio is not Shikoku4 as presented above, I have tried to tilt it towards Shikoku4 which appears to be much more stable than SatuMedia Four Funds portfolio at least for the years 2001-2017.

I am trying to present my rationale for selecting some of the asset classes in my portfolio. If I am missing anything, I would appreciate to get corrected. :confused
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

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ruralavalon
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Re: Weaknesses in my Retirement Portfolio

Post by ruralavalon » Sun Oct 29, 2017 4:50 am

Shikoku wrote:
Sun Oct 29, 2017 12:42 am
Thank you very much everyone for your thoughtful insight. :happy I am learning and am curious. Therefore, I am trying to understand the role of international small cap, high-yield corporate bond, global bond, and other asset classes in a portfolio.
In my opinion the role if any in a portfolio of high-yield bond (junk bond) funds, international bond funds, international small-cap stock funds is to supplement broad market funds, their role is not to be the majority (like 65%) of any portfolio no matter what the goals might be.

To learn more you could do a little reading. Please see the wiki page "getting started" (I give the link to that at the bottom of my posts), and read the wiki article "Boglehead's Investment Philosophy" which gives a good short outline of investing basics. Then also read one or two books on general investing, please see the wiki article "books: recommendations and reviews".

Shikoku wrote:I have low tolerance to volatility. My investment choices are primarily limited to a group of Fidelity and TIAA-CREF funds. A small part of my portfolio can access Vanguard funds/ETFs. My goal is to earn 5-7% on average every year for the next 15 years.
If you want low volatility, why abandon TIAA Traditional? That account is certainly the most stable investment among those you currently have. For low volatility increase your use of TIAA Traditional, don't eliminate it.

"Primarily limited to a group of Fidelity and TIAA-CREF funds"???? If you want more detailed input, then you need to list the accounts you have, sizes of accounts, and the fund choices offered in each account. Please give fund names, tickers and expense ratios, and please use the format in the post "asking portfolio questions" which pkcrafter gave you a link to.

We can't possibly suggest better fund ideas you could use without knowing the menu of fund choices available in your accounts.

You can simply add this to your original post using the edit button, it helps a lot if all of your information is in one place.

Think long-term. The goals should not be limited to "the next 15 years" until retirement, the goals also need to include the 20-30 years during retirement. A portfolio with only 25% stocks is a poor choice for the long-term, that's actually riskier over a 20-30 year retirement than a more balanced portfolio.

I assume that the primary investing goal is to fund retirement living expenses. Is that assumption correct? Are there other investing goals? Such as -- leaving an inheritance; helping pay college expenses of grandchildren; paying off mortgage or other debt before retirement age; paying for substantial home improvements; buying a second home; etc.?

Shikoku wrote:I have just backtested the following four fund portfolio (let say Shikoku4) with SatuMedia Four Funds portfolio:

35% - Intermediate Term Treasury
25% - High Yield Corporate Bonds
15% - Global Bonds (USD Hedged)
25% - International ex-US Small Cap

I can test it only for years 2001-2017 using portfoliovisualizer.com.
I don't know if you mean "global" or "international" bonds, it's a mistake to use the terms interchangeably as some people do. You didn't include ticker symbols or even the full fund names for the four funds that you backtested, so I am not certain what you meant.

Backtesting is fun but not informative or very useful in portfolio planning my opinion. Forecasting is much harder than backtesting.

Think long-term, 16 years 2001-17 is not long-term.

Also the goals should not be limited to "the next 15 years" until retirement, the goals need to also include the 20-30 years during retirement.

Start the long-term thinking by finding a period life table and looking up the average life expectancy for you and your spouse if any. The last time I looked, if I remember correctly, for a couple retiring in their mid-60s it is probable that at least one member of the couple would live into their 90s. Think long-term.

The portfolio you tried is very UNdiversifed, which is inherently very risky. The stock allocation, limited to international small-cap stocks, covers only about 3% of the world stock market. The bond allocation (especially if you meant "international" bonds for the third bond fund) is also very UNdiversified, which is inherently very risky, investing only in small areas of the bond market.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

dbr
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Re: Weaknesses in my Retirement Portfolio

Post by dbr » Sun Oct 29, 2017 10:11 am

Shikoku wrote:
Sun Oct 29, 2017 12:42 am


I am trying to present my rationale for selecting some of the asset classes in my portfolio. If I am missing anything, I would appreciate to get corrected. :confused
Trying to engineer out fine distinctions in portfolio construction is tilting at windmills. Especially it is tilting at windmills if done by trying to backtest over limited periods of time and for esoteric asset types. Whatever distinctions you might think you are seeing are to greater or lesser degrees random, changeable, and not actionable for planning future performance of a portfolio.

Shikoku
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Location: USA

Re: Weaknesses in my Retirement Portfolio

Post by Shikoku » Sun Oct 29, 2017 8:32 pm

Thank you ruralavalon and others who have responded to my post. I have a lot to learn and will continue to read the information that you have pointed out.

Majority of my retirement portfolio was in the following two funds for a considerable number of years.

-- Fidelity Freedom 2030 Fund (FFFEX) (0.70%)
-- TIAA-CREF Lifecycle 2030 Retirement (TCLNX) (0.67%)

Several years ago to reduce cost, I hired a financial adviser for a one-time fee to construct my present portfolio which has an expense ratio of 0.12%. I keep the portfolio balanced by adding new contribution and yearly rebalancing. If I get rid of the junk bonds as recommended by the forum members, the cost will even get lower.

35% TIAA Traditional (0%)
09% Fidelity Real Estate Index (FSRVX) (0.09%)
14% Fidelity Total Market Index (FSTVX) (0.035%)
05% TIAA-CREF High-Yield Fund (TIHYX) (0.36%)
06% Fidelity Mid Cap Index (FSCKX) (0.05%)
16% TIAA-CREF International Equity Index (TCIEX) (0.06%)
06% Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) (0.13%)
04% Fidelity Emerging Market Index (FPMAX) (0.13%)
05% Fidelity New Markets Income (FNMIX) (0.86%)

I have access to around 200 Fidelity and 50 TIAA-CREF funds, and I am able to freely move money between funds. I have to figure out how I can post such a long list of funds with the ticker symbol and expense ratio.

From the comments of the forum members, I have so far understand that:
  • Domestic and emerging market high-yield bonds are not good choice.
  • My portfolio is heavy on mid cap.
  • International small cap also not needed.
  • Tilting a portfolio is not really a good idea; we do not know when the direction of the wind will change.
Here are the rationale my financial adviser provided when constructing the portfolio.
  • TIAA Traditional will provide significant portfolio stability.
  • US high-yield will move with US equity but has a lower volatility; it recovers quicker than equity. I somewhat bought to his this argument.
  • International small cap (developed market) has lower correlation with the US equity; it provides diversification.
  • Emerging market fund is for diversification; emerging market is not included in my international fund.
  • Fidelity New Markets Income move with emerging market equity but has a lower volatility; it is significantly geographically diversified with FPMAX.
I meet with the Fidelity and TIAA-CREF representatives every year. They have not recommended any changes to the portfolio in recent years. However, that does not mean my portfolio cannot be improved. I will continue to learn and incorporate some of the above suggestions. If anyone has any additional insight and recommendation, I will love to know. Thank you all.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

Shikoku
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Location: USA

Re: Weaknesses in my Retirement Portfolio

Post by Shikoku » Tue Oct 31, 2017 12:07 am

Never thought that learning can be so much fun! I agree with the forum members that there is no reason to invest in high-yield corporate bonds or junk bonds.

Instead of investing 5% of my portfolio in high-yield corporate bonds, I will invest 1% in US stock market index and remaining 4% in TIAA Traditional. It will produce the same final result as high-yield corporate bonds but with much less volatility.

Portfolio Analysis Results (Jan 1979 - Sep 2017) from
https://portfoliovisualizer.com/bac ... allocation. Performed backtest analysis for the following two portfolios:

Portfolio 1: 100% High Yield Corporate Bond
Portfolio 2: 18% US Stock Market + 82% Intermediate Term Treasury

Both produced the same final balance of $236K from an initial investment of $10K. However, Portfolio 2 achieve this much more smoothly.

Standard Deviation
Portfolio 1: 7.42%
Portfolio 2: 5.87% -- Lower volatility

Worst Year
Portfolio 1: -21.29%
Portfolio 2: -3.58%

Max Drawdown
Portfolio 1: -28.90% (Recovery time: 28 months)
Portfolio 2: -7.83% (Recovery time: 7 months)

Sharp Ratio
Portfolio 1: 0.54
Portfolio 2: 0.68 -- Higher is better

Sortino Ratio
Portfolio 1: 0.79
Portfolio 2: 1.09 -- Higher is better

Performed similar analysis starting with January 1980, 1990, 2000, and 2010. Pretty much similar results are obtained. This analysis is a true eyeopener for me. Am I missing something? Thank you all for your feedback on my portfolio! :D
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

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ruralavalon
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Re: Weaknesses in my Retirement Portfolio

Post by ruralavalon » Tue Oct 31, 2017 6:13 am

You advisors did right to keep your expenses down to 0.12%. Overall not bad fund selection although more complex than necessary. Nothing crazy. I have seen a lot worse from advisors.

I think you have correctly understood the comments we have been making, and ideas suggested for you. Use TIAA Traditional for stability, skip the junk bond fund, and stick closer to market weight in stocks rather than tilt. I don't think you have missed much if anything.

Don't have too much "fun" with backtesting. Settle on a simple easy to manage portfolio (all accounts and funds, not just part) that covers all the basics, if you wish post your plan for any additional input, execute the plan, and move on with life.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Shikoku
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Re: Weaknesses in my Retirement Portfolio

Post by Shikoku » Tue Oct 31, 2017 10:42 pm

Thank you ruralavalon and others for all your feedback on my portfolio. Appreciate it.
"I don't worry too much about pointing fingers at the past. I operate on the theory that every saint has a past, every sinner has a future." -- Warren Buffett

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