2018 Portfolio Launches
Mother's Little Helper portfolio was UP today +$0.43 (+0.00%).
Overall GAIN YTD: +$99,995.43 (+0.00%).
Our benchmark index, the S&P 500 will be tracked January 1, 2018
http://money.cnn.com/data/markets/sandp/
"The stock market is a giant distraction to the business of investing."
- John Bogle (founder of Vanguard Funds)
Today I made my buys for 2018, you can see the new portfolio by clicking the portfolio link on the web site or (Click Here). Last year I was a bit like a child counting the days until Christmas or Summer vacation, I won't be doing that this year.
No Stocks & No Treasury Bonds
The biggest change this year is that there are no individual company stocks. I've talked in several posts about investing in index funds and how I think this should be the foundation of any portfolio, regardless of age. However, this time I'm going to actually select those index funds and make them 100% of the portfolio. My hope is that over the next year we'll all see if an average investor can earn a substantial return, with little risk and no management fees. While every investors situation is different and not every investment is appropriate for every individual; I think it's reasonable for most investors, young or old to be invested in the global broad market. My personal view is that this is the fastest and most efficient way for an individual to participate in the growth of the global economy with diversification and tax efficiency.
The other noticeable exception in this portfolio is the absence of U.S. Treasury Bonds or a Treasury Bond fund. My view on bonds is very simple, they provide an excellent form of income, but bonds are not a place I want to be invested at a time when interest rates are rising. Locking in a 2.2%-2.5% rate for 10 years as rates are rising means that in a short period of time those investors will be earning less on their bonds and taking a hit from inflation. An investor who wants to earn income would be better off buying shares of Verizon, right now paying 4.44%, or some other high dividend paying stock DOW stock that has the potential to grow in value and deliver income.
How Much?
I've debated with myself, which is a site to see, whether or not to sell the 2017 portfolio and use the cash to buy the 2018 portfolio, or just start with an amount of money that makes doing the math easier in case you're following along at home. This portfolio relies on proper allocations to achieve the growth and reduced risk so I decided to do the later so that the percentages are easy to calculate. The 2018 portfolio is starting with $100,000 allocated as indicated below.
What's The Risk Factor
The 2018 Mother's Little Helper portfolio has a BETA risk factor of 1.04 making it just 4% higher risk than the broad market, while the best performing analysts portfolio on TipRanks (our index for professional investors) has an average BETA of 1.18. Our dividends are projected at 2.16% while the best performing for the pros is 0.98%. In 2018 my goal is that we will again achieve better returns, better income from dividends and do it all with lower risk, lower fees and less effort.
The 2018 Portfolio
Vanguard Total Stock Market ETF (VTI) 35% Allocation - $35,000
The Vanguard Total Stock Market fund is the lowest cost way to invest in the U.S stock market. U.S. Stocks offer a great risk-adjusted return. There are many index funds available that invest in the S&P 500 or broader market index funds that offer great diversification, but what I like most about Vanguard's VTI is that it's been around longer and has so much money under management that selling your shares (liquidity) is very easy. Why does this matter? This fund is an exchange traded fund (ETF), that means that shares trade like a stock on the open market. If you need to convert shares to cash for an immediate need, simply go online, make the trade and the cash will be in your account faster than if you were trying to sell out of a mutual fund, CD's or an annuity. Vanguard also has a reputation for lowering costs. Even an ETF has expenses that need to be paid for by the investors in the fund, the important question to ask is, what's the fee. For ETF's the cost of operating the fund is expressed as the 'expense ratio'. The VTI has an expense ratio of just 0.04%, one of the lowest in the industry. Long history, great liquidity, excellent returns and low costs; that's a perfect investment.
Vanguard FTSE Emerging Markets ETF (VWO) 30% Allocation - $30,000
This fund is the second largest allocation in the portfolio and represents where I see growth occurring world wide over the next five years. Companies in these countries have under-performed for the past couple years, largely due to falling commodity prices. With commodity prices rising for copper, oil, lithium and many other vital commodities related to manufacturing I'm looking for this part of the world to grow fast. By owning shares in the VWO you'll be participating in the stock markets of Brazil, Russia, India and China. There are few practical ways for the average U.S investor to make investment choices in foreign markets, but owning shares in the VWO provides an efficient and lower risk opportunity to invest overseas. Looking at the funds top holdings we can see that owning the VWO provides exposure to these growing economies in the following percentages: China 31.8%, Taiwan 15.1%, India 12.0%, Brazil 7.7%, South Africa 7.5%, Thailand 3.9%, Russia 3.7%, Mexico 3.5%, Malaysia 3.2% and Indonesia 2.3%.
Historically the returns from Emerging Markets Stocks have been greater than U.S. Stocks, however with with higher risk. While this fund adds risk, it also adds greater growth potential and greater diversification against events that may occur in the U.S stock market. To reduce the added risk exposure the portfolio has taken a smaller allocation than U.S. stocks. There are many emerging market ETF's available but I like Vanguards VWO for all the same reasons I like the VTI, a long history, great liquidity, excellent returns and low expense ratio. I also expect Vanguard to lower the expense ratio of its ETF's over time.
Vanguard FTSE Developed Markets ETF (VEA) 20% Allocation - $20,000
Europe has been on a tear in 2017 and the general consensus is that the economies of developed nations outside of the U.S will continue to grow. Why am I allocating so much money to foreign markets, simple that's where the money is. Between 2001 and 2014, the percentage of global gross domestic product (GDP) accounted for by the United States declined from approximately 33% to 22%. Nearly 80% of all publicly traded companies in the world are now headquartered outside the United States.
To gain exposure to this growth in Europe, Australia and Japan the portfolio is allocating a large percentage to the VEA. Foreign stocks in developed nations are an important risk reducer. Stocks in this part of the world are an investment in a changing economic landscape. My theory here is first based on the fact that developed nations have just begun fueling growth with stimulation policies while the U.S is in the early stages of tightening with the federal reserve trying to slow our economy. This is also a great place to invest to diversify against the dollar. Professional investors refer to this as protection against currency fluctuations. There are many developed nation foreign market ETF's available but I like Vanguards VEA for all the same reasons I like the VTI, a long history, great liquidity, excellent returns and low expense ratio. I also expect Vanguard to lower the expense ratio of its ETF's over time.
Vanguard Dividend Appreciation (VIG) 5% Allocation - $5,000
This fund invests in dividend growth stocks, the fund employs an indexing investment approach designed to track the performance of the NASDAQ US Dividend Achievers Select Index. Don't get scared off by the word growth. These are companies that have a long track record of increasing dividends. These are big companies that tend to be less volatile. In many cases the companies included in this fund have dividend yields higher than their corporate bond yields and the yields on U.S. government bonds. Some of the top holdings in Vanguard's VIG are; Microsoft, Johnson & Johnson, PepsiCo, 3M, Medtronic, Texas Instruments, United Technologies, Union Pacific, Accenture and Abbott Laboratories. The VIG is a great way to get exposure to these amazing companies without the risk of single stock ownership. With a nearly 2% dividend yeild, an expense ratio of just 0.08% and a year to date return in excess of 20%, this fund has a lot to like.
State Street Energy Select Sector ETF (XLE) 5% Allocation - $5,000
The XLE tracks investments in heating oil, natural gas, gasoline, gold and agricultural products like soybeans. As inflation increases investments in commodities and natural resources will provide a hedge against those rising costs. As demand for these limited resources increases from emerging market countries prices should increase. While there are several good funds that provide very similar exposure to natural resources, the XLE is the 800 pound gorilla which means that larger number of investors in this fund makes the quick sale of shares possible.
Vanguard S&P National AMT-Free Muni (VTEB) 5% Allocation - $5,000
We have a new tax law and must consider all income in the light of these new tax policies. When state and local governments need to raise money for roads, schools or other projects they issue bonds. We've all voted on these bond issues, but not all of us have sought out ways to invest in the debt being issued by local government. A unique feature of municipal bonds is that the interest is exempt from federal income taxes which is especially important if you're in a high tax bracket and need income. The investment seeks to track the Standard & Poor's National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interest is exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).
Keep Me Honest
I am attempting to keep track of my calls and predictions by logging them at the bottom of every post.
1. Launching the portfolio implies that I believe we can beat the S&P 500
As Always
Stay Invested
Clay Baker
Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio. Since I may on occasion discuss BitCoin and other cryto currencies I disclose here that I personlly own investments in the cryto currencies listed here: VTI, VWO, VEA, VIG, XLE, MUB, Bitcoin, LiteCoin
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.
