be overlooked in the rush to stop radioactive leaks and start to rebuild. Like New Orleans where the levies were known to be a problem area, Japan’s nuclear reactors were living on borrowed time, having had their life extended — just another year. The temptation to delay is very seductive until disaster strikes.
For years, we have put off retirement investments for — just another year. Many now face and ugly repair crisis as portfolios have been blighted by the financial melt-down and they are left with a hole. The good news is that there are actions you can and must take to repair the damage and make the most of the time you have left.
Asset allocation is critical in determining risk adjusted returns from your portfolio.To make this clear, we use SIB — Simpler Is Better — to show the potential difference in returns between the portfolios with different numbers of asset classes.
Each of the SIBs are built from one ETF per asset class.
|LARGE BLEND||(VTI)||Vanguard Total Stock Market ETF|
|Foreign Large Blend||(VEU)||Vanguard FTSE All-World ex-US ETF|
|DIVERSIFIED EMERGING MKTS||(VWO)||Vanguard Emerging Markets Stock ETF|
|REAL ESTATE||(VNQ)||Vanguard REIT Index ETF|
|COMMODITIES BROAD BASKET||(DBC)||PowerShares DB Commodity Idx Trking Fund|
|Intermediate-Term Bond||(BND)||Vanguard Total Bond Market ETF|
So the three asset SIB has (NYSE:VTI), or (NYSE:SPY), (NYSE:VEU) or (NYSE:EFA) and (NYSE:BND) or (NYSE:AGG). The four asset SIB adds emerging markets (NYSE:EEM) or (NYSE:VWO). The five asset SIB adds Real Estate (NYSE:RWR) or (NYSE:VNQ). The six asset SIB adds commodities (NYSE:DBC) or (NYSE:GCC). These are index funds, we are not attempting to pick the best fund for each asset class but to make sure we have each asset class covered.
The three asset portfolio is old school. The world comprises the US and the rest.
Four asset classes add emerging markets which provides an equities asset class that behaves differently from US and international.
Five asset classes provides real estate trusts which moves away from equities and provides an asset that delivers dividends and is uncorrelated.
Six asset classes provides commodities which is a great hedge against inflation and also times of international stress when equities can drop sharply.
Let’s now look at five year returns for each portfolio and what that would mean if these returns were applied over a decade in terms of additional money in your portfolio.
|Portfolio Name||5Yr AR||10 Yr Additional Money Compared to 3 Asset Class Portfolio|
|Six Core Asset ETF Benchmark Tactical Asset Allocation Moderate||13%||137%|
|Six Core Asset ETF Benchmark Strategic Asset Allocation Moderate||7%||34%|
|Five Core Asset ETF Benchmark Tactical Asset Allocation Moderate||10%||79%|
|Five Core Asset ETF Benchmark Strategic Asset Allocation Moderate||6%||22%|
|Four Core Asset ETF (EM) Benchmark Tactical Asset Allocation Moderate||8%||48%|
|Four Core Asset ETF (EM) Benchmark Strategic Asset Allocation Moderate||5%||22%|
|Three Core Asset ETF Benchmark Tactical Asset Allocation Moderate||4%||–|
|Three Core Asset ETF Benchmark Strategic Asset Allocation Moderate||4%||–|
Unfortunately, most portfolios in retirement plans only support three asset classes. In a study of over 800 mainly retirement plans, we noted that the majority of plans supported only three asset classes which is going to have a significant impact on the potential returns for the participant.
How can you leverage the benefits of six asset classes if your plan only supports three asset classes? If you have an IRA, overweight the missing asset class (or more) in the IRA to compensate and create a more balanced portfolio that can deliver higher returns and lower risk.
Prevention is better than cure, which we all know. Just don’t leave it — one more year — until you get started.
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
LTI Systems, Inc. is the operator of MyPlanIQ.comand ValidFi.com. The founders of LTI Systems have extensive technology and business background in computer and semiconductor industries. They have been using the strategies provided by MyPlanIQ for their own personal retirement and taxable investments. The mission of LTI Systems is to make wealth management investment strategies that are used to be only accessible to institutions and high net worth individuals available to private investors with a fraction of flat cost and ease of use. The founders of LTI Systems, investors themselves, take pride in creating such a system and service for investors by taking the perspective from the investor side. They are using the system and the strategies for their own investment and align their interests with their customers.
MyPlanIQ’s blog provides periodical articles to discuss issues related to retirement plans (401(k), 403(b) and IRAs), deferred compensation plans (457), college savings plans (529), taxable brokerage investment accounts, variable annuities and universal life insurance plans. It also covers investment strategies, specifically strategic and tactical asset allocation and investment products such as ETFs and mutual funds. In addition, it syndicates daily articles that are related to retirement planning, personal finance, investment strategies, annuities, insurance, college savings and market/economic outlooks. It provides a comment and discussion community for readers.