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June, 2022: 8

Disclaimer - IMPORTANT - Read this first!

Investor's Journal is a diary focused strictly on investments and personal finance issues, primarily from a contrarian and retiree point of view. Follow along with an average guy's failures and successes as he learns, by trial and error, the fine art of value investing.

Our portfolio is as yet on track to provide total dividends this year of at least $58,320. (As earlier indicated, our goal for portfolio dividends is, from their latest base of $50,000 in 2020, to assure an annual 8% or better increase.)

Liquid assets are up $52,452, or 2.96%, since 5/21 and now stand at $1,822,965.

Assets of all kinds (real estate, equities, collectibles, etc.) are down 8.12%, or $213,652, since the end of last year. As of today, they total is $2,418,285.

There is an ongoing debate about which approach is best, being an active investor, buying and selling individual stocks, vs. simply purchasing shares in index funds or exchange traded funds and mostly holding them for the long-term. While I think I have learned from prior mistakes and can do pretty well in the former, I had also thought that in the past and nonetheless for years at a time have underperformed the major market indexes. In case a conservative, passive investor technique appeals to you, there are sets of mutual funds or exchange traded funds that, taken together, have proven superior in performance to, say, the S&P 500 Index, often also with less overall volatility.

Per backtesting, one such group of winning exchange traded funds (ETFs) involves an equal portion invested in each of these: 1. the S&P 500 Index; 2. the S&P 600 Small-Cap Index; 3. large-cap domestic value assets; and 4. small-cap domestic value assets, together offering average annual total returns of about 12%, though with volatility, so any particular year may have returns significantly above or below that performance level. Vanguard offers ETFs that, respectively, cover these four financial categories: VOO; VIOO; VTV; and VBR. To use this method, simply buy an equal dollar amount of shares in the four categories, then rebalance annually to restore them to a 25% each target allocation.

But what if one wanted exposure to international assets as well? There are some indications that including foreign company value shares in a passive investment portfolio can, over the long-run, boost returns, perhaps by as much as a full percentage point. The investor seeking exposure both at home and abroad can have an equal investment in the following categories: U.S. large-cap value; U.S. small-cap value; international large-cap value; international small-cap value; and international emerging markets. He or she might see returns averaging 13% a year or better, though, at times, with a lot of volatility.

The addition of international funds might moderate the severe downturns of a domestic portfolio alone. Arguably, one could have an all-equity set of securities, dispensing entirely with bond assets, and yet still have lower volatility by mixing in international stocks or funds, instead of purchasing only U.S. securities.

For greater passive investor simplicity, one might just invest in a few Vanguard ETFs:

The Vanguard Total (domestic) Bond Market ETF (BND);
The Vanguard Total International Bond ETF (BNDX);
The Vanguard Total (domestic) Stock Market ETF (VTI);
The Vanguard Total International Stock ETF (VXUS).

Per data from Vanguard, since 1926 and through 2021, an 80% allocation to U.S. stocks combined with a 20% allocation to U.S. bonds, rebalanced annually, would have provided an average annual total return of 11.1%.

Also per Vanguard data, since 1926 and through 2021, a 100% allocation to U.S. stocks would have provided an average annual total return of 12.3%. Assuming the VTI exchange traded fund provides roughly similar returns in the decades ahead, the result is hardly to be sneezed at for merely investing on a passive basis. To do this, it is suggested that one dollar-cost-average his or her investments in VTI or wait and invest when the fund is off 7% or more (the average amount stocks are below their 52-week highs in downturns, corrections, and bear markets).

Information is not as readily available regarding international bond or stock historical performances. However, recent international returns have tended to be lower than for U.S. debt and equity securities. Even if reduced volatility is one's goal in international exposure, it might be better to invest less than half of one's overall intended bond or stock allocations in the international sphere.

Suppose I continue to wonder which method is better, buying/selling individual securities vs. just a passive investor model with ETFs. A compromise that might work in the interim, till more sure of the advantages of one over the other, is just to invest half one way and half the other. After a reasonable trial period, I could switch my money and efforts 100% to whichever approach wins my self-imposed "contest."

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