A Lazy Model ETF Portfolio Underweighting US

Mohamed El-Erian, who managed Harvard University's investments and is now at PIMCO, has been in the news recently recommending long term investors to underweight US securities. He suggests the following asset allocation:

US Stocks 15%
Developed ex-US stocks 15%
Emerging Stocks 12%
US Bonds 5%
International Bonds 9%
Real Estate 6%
Commodities 11%
Inflation Protected Bonds 5%
Infrastructure 5%
Private Equity 7%
Cash for Special Opportunities 8%

You can read more about it here.

I started a model ETF portfolio inspired by El-Erian's suggested asset allocation. The asset allocation is as follows:

US Stocks (VTI) 15%
Other Developed Market Stocks (VEU) 15%
Emerging Markets Stocks (VWO) 12%
Frontier Markets Stocks (FRN) 1%
US Bonds (BND) 5%
International Bonds (BWX) 9%
Real Estate (RWO) 8%
Commodities (RJI) 10%
Infrastructure (IGF) 5%
US Inflation Linked Bonds (IPE) 7.5%
International Inflation Linked Bonds (WIP) 7.5%
Cash 5%

The portfolio's average expense ratio is 0.33%.

Overall, the target allocation is:

Stocks (including Infrastructure and REITs) 56%
Bonds 29%
Commodities 10%
Cash 5%

The portfolio is moderately risky in its allocation, and is intended for a long investing time horizon.

RJI was chosen over the more popular DBC for commodities because it has the same expense ratio, offers exposure to a greater variety of commodities, and does not make distributions. RJI is an ETN; it matures in late October 2022. At that time, it will be replaced in the portfolio with a similar vehicle.

RWO was chosen over VNQ, because, while more expensive, it offers global real estate exposure (foreign holdings account for more than half of its portfolio). The idea behind the portfolio is that the rest of the world will outperform the US in the future. FRN was chosen in the same spirit, to add a little boost from nascent growth in places like Nigeria and Poland.

BND was chosen over the more popular AGG because it performs the same way, but with a smaller expense ratio. Same goes for IPE over TIP.

The sizable allocations in inflation linked bonds may be question begging. Many contend (correctly, in my opinion) that inflation is much higher than is reflected in government figures. Investing in TIPs thus potentially results in losing to inflation. However, it's better than keeping the allocation in cash, at least in time of low interest rates (if in the future regular bond rates become substantially higher than those of TIPs, the portfolio's target weightings may be changed to compensate). Also, TIPs can provide portfolio stability in tough times. Consider how TIPs performed vs the S&P 500 over the past year (not including monthly distributions):

In the chart above, S&P 500 is in green.

How the Portfolio Will Be Tracked

The portfolio will be tracked in the spreadsheet below. For viewing ease, it will also be available here.

The portfolio starts out with $10,000. It will be updated once a month, here, on the first Saturday or Sunday of every month that follows a trading day (e.g., if the first Saturday of the month falls on the 1st, the portfolio will be updated on the 8th or 9th).

No holding will ever be sold, unless it tracks its underlying index incorrectly or there is something wrong with the index (e.g., it diverges significantly from other comparable indexes). The portfolio will be rebalanced monthly with an additional investment of $500. Any dividends received will be reinvested along with the $500 each month. For sake of ease, dividends will be tracked by the ex-date rather than the pay date. As dividends are part of the portfolio's gain, they will not be added to the cost basis. For sake of ease, taxes will not be factored in the portfolio's performance.

Cash will not earn interest.

There are brokers that have commission free trading (Zecco, for example). There are other brokers that allow fractional share buying (Sharebuilder, SogoTrade, for example). For sake of ease, it will be assumed that the portfolio is in a brokerage account that has both these features, fractional share buying and no commissions.

Starting purchase prices were determined at market close on Wednesday, August 13, 2008. Purchase prices for future $500 monthly investments will be determined as of market close on the first trading Friday of each month.

The portfolio's performance will be compared with that of the S&P 500. A hypothetical $10,000 was invested in SPY on Wednesday, August 13, 2008. Monthly investments of $500 will be made under the same rules and assumptions as those outlined for the portfolio above. The spreadsheet will track the S&P's returns.

Disclaimer: This is for demonstration and entertainment purposes only and should not be considered investment advice.

Disclosure: At the time of posting, I do not hold any positions in the securities discussed above.


August 11, 2008 Edition of the Simply Investing Blog Carnival

Welcome to the August 11, 2008 edition of the Simply Investing Blog Carnival.

Bootstrap presents How to Find A Decade posted at Bootstrap Investing. With the market at 1999 levels, the author examines whether investors really have lost an investing decade, as the Wall Street Journal has claimed. Did regular monthly investments help? Or would you have been better off in cash or CDs?

Joe Manausa
presents HR 3221 - Good For Tallahassee posted at Tallahassee Real Estate Blog, saying, "For Fannie and Freddie, it seems they got much of what they asked for, and a few things they did not when the President signed HR 3221. It authorized $300B (B as in Billion) to expand the Federal Housing Administration (FHA) loan guarantee programs."

Dorian Wales presents A Look at Global Stocks Markets 6 Months into 2008 – 4 Important Lessons Learned Yet Again posted at The Personal Financier, saying, "Some things never change...""Ominous news is all around and waves of hacks and slashes in many corporations are clouding the sky. However, if I were to ask the average Joe just by how much exactly did global stock markets drop what would be the average response? I believe it would paint a much darker picture than things really are."

Ben Dinsmore presents Should You Borrow Money From Your 401K? posted at Trees Full of Money, saying, "If you need cash and your financial situation leaves you no other alternatives, borrowing money from your 401k might help you get your financial life back on track."

Dividend Growth Investor presents "Determining Withdrawal Rates Using Historical Data" - My Opinion posted at Create Rising Passive Income From Dividend Paying Stocks. The author analyzes William P. Bengen's asset research on the proper asset allocation at retirement. "The basic idea behind this research is that year over year fluctuations in annual returns could drastically change the standard of living of retired individuals, who rely on their investments for income."

FIRE Getters presents Digging for Gold - Online! posted at FIRE Finance. The authors talk about Everbank's Metals Select account, as well as two Vanguard funds tracking the MSCI US Materials Index.

Raymond presents The Benefits and Dangers Of Payday Loans and Cash Advance posted at Money Blue Book. The author discusses payday loans, what they are and their risks and benefits.

Card Blogger presents 0% Balance Transfer Credit Cards posted at Credit Card Blog. The author provides a list of 0% balance credit cards and discusses their common uses, including paying off higher interest debt and investing through balance transfer arbitrage.

Helen Anderson presents 3 Warnings Signs Your Bank May Fail posted at Bankaholic. As the title suggests, the author discusses the signs of impending bank failure.

Elias Tsepouridis presents Lehman Covered Call Results | FinancePuzzle posted at Finance Puzzle, saying, "Here is my covered call strategy on Lehman."

Investing Angel presents I Heart Luby’s (LUB) » Free Stock Market Investing Tips posted at Stock Tips. "Author explains his investment in Luby's, a small cap value company."

Wilfrid presents Money In The Bank - How Much Of It Is insured? posted at Your Finish Rich Plan, saying, "Your protection can often exceed the advertised $100,000."

Michael Cintolo presents "Bull Market Stocks" Perk Up posted at The Iconoclast Investor. The author looks at the recent performance of a few "bull market stocks" (e.g., "brokers, trading firms, mutual fund managers and the like").

Billy Akerman presents Weak Dollar | Beating The Stock Market posted at Beating The Stock Market, saying, "What we need is a strong dollar."

KCLau presents Average Monthly Household Income in 2007: Is it enough? posted at KCLau's Money Tips, saying, "According to a survey done by the Statistic Department for the Economic Planning Unit, published in Personal Money Magazine June 2008 edition, a typical family in Malaysia earns only RM3686/month. How much this is worth and how much can be spent."

Lane Wright presents Three Forex Trading Strategies posted at Awesome Forex Alerts. The author discusses scalping, trading currency pairs, and three day rolling pivots.

Larry Russell presents Financial Planning Reading List posted at Pasadena Financial Planner. "This article provides a list of recommended reading from among the many hundreds of articles that I have authored in the past several years. Note that I have personally written all the content that you will find on the six personal finance and investment websites referenced below."

That concludes this edition. Submit your blog article to the next edition of Simply Investing Blog Carnival using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

Technorati tags: , .


Looking for Dividend Paying Stocks?

I check my site logs from time to time. I've noticed that many people arrive here from search engines, looking for "dividend paying stocks." Are you looking for a list?

There are thousands of dividend paying stocks. I doubt there is a site that lists them all. As with most quantitative financial information, using a stock screener is your best bet (not to get a buy list, but a list for further research). Here is a list and review of stock screeners. Searching for stocks with a dividend yield greater than or equal to 0.01 should provide you with a list of almost all the dividend paying stocks you can buy.

Note, though, that stock screeners (and financial sites) can have outdated information, so the lists they give you are not complete, and may not be accurate. Some listed companies have paid out a one time special dividend, others have eliminated their dividends but are still listed as having them (Whole Foods [WFMI] and General Motors [GM] are recent examples), and some may have initiated payments but are not yet listed.

Or perhaps you're looking for great dividend paying stocks. Some past winners have included Altria (MO), Pepsi (PEP), and Pfizer (PFE). It's a matter of opinion what the best dividend paying stocks are now. I really like General Electric (GE), Johnson & Johnson (JNJ), Philip Morris International (PM), Procter & Gamble (PG), and Realty Income Corp (O). (I own GE, JNJ, PM, and PG.)

You can find a list of past great dividend paying stocks (which may be great in the future too) here.

Some of the best places to look for dividend paying stocks with great future potential include Jubak's Journal and Dividends4Life (and DivNet). You may also be interested in the Dogs of the Dow.

But don't simply take others' word for it. Do your own research. A pretty good book on how to find great dividend paying stocks on your own is Josh Peters' The Ulitmate Dividend Playbook.