As stated, this article is mainly for “fund” investors who like to keep things simple. By this I mean that you meet these three basic criteria:
1. You are a “fund” investor. You don’t like picking individual stocks because you’re either not good at it or you don’t wish to commit the time to get good at it or you find it too risky, so instead you prefer to own ETFs (exchange traded funds) and CEFs (closed ended funds). You want to participate in the markets without spending a lot of time doing research.
2. You like things simple. You’re looking for exposure to a variety of asset classes with as few funds as possible. You believe that most funds in the same asset class over the long term will have more or less the same total return, so as long as you pick a fund with a broad base of holdings you’re likely to do well. You accept the fact that this approach will not generate spectacular returns but given the little time needed to create and monitor it, the results should be satisfactory.
3. You don’t like a lot of volatility. You don’t like huge swings in the value of your portfolio. Ideally your portfolio would increase in a somewhat linear fashion over time. Owning asset classes that often move in opposite directions makes sense to you.
Note: I know that there are investors out there who are quite good at picking stocks, so instead of calling investors like me “simplified fund investors” you’ll probably refer to us as “simpleton fund investors.” Ha ha, good joke (actually it’s quite lame). We get it: we know that that’s how we will be perceived by some but we don’t care because it works for us and we’re happy with it. So if you are one of those people, spare us any lame cracks and please move on as this is not the article for you!
Background
In my last article published in September of 2019, I listed some 25 funds that would be candidates as replacements for bonds because of the income they generate. We held those issues in my IRA and my wife’s IRA. Our retail account is 100% fixed income (CDs, municipal bonds, GSE bonds and US Treasuries). So this article relates to our tax-deferred accounts, but they could be held in a retail account as well. At one time or another I owned every fund mentioned in that article. I thought owning small amounts of many different issues would reduce risk. Here’s the link to that article.
Then in March I had a change of heart when I saw most issues of each asset class drop by about the same basic percentage. I decided that owning all those issues did NOT reduce risk. All it did was add unnecessary and unwanted complexity. At that time I decided to revamp the entire investment portfolio, go in the exact opposite direction, consolidate my holdings and focus on simplicity.
I call the resulting plan the “Asset Allocation Plan for Simplified Fund Investors (SFI).”
How Does It Work/What Are The Funds?
I decided I wanted exposure to the following asset classes: common stocks, preferred stocks, equity REITs, precious metals, long-term bonds and multi-income funds. Where I list a current yield, I calculated it by taking its most recent distribution and annualizing it.
I decided upon the following 5-6 funds:
- common stocks: $SPY, $QQQ (can be replaced with $VUG)
- preferred stocks and REITs: $RNP
- precious metals: $GLTR
- long-term bond fund: $TLT (can be replaced by $QLTA, $AGG or $BAB)
- multi income funds: $ETY (can be replaced with $CII)
Because so few funds are involved, it will be quick to review the plan.
1. There are many common stock funds available but keeping with the “simplicity” theme I chose just the $SPY (S&P 500) and the $QQQ (NASDAQ 100) index tracking funds. Since then, I read an article here on SA about $VUG (Vanguard Growth ETF (NYSEARCA:VUG)) which can be used to replace the two funds I own. You can look at the holdings of these three funds and select the one or two to use for your common stock asset class. From this point on, I will list $VUG where a 50-50 $SPY/$QQQ can also be used. Hey, one fund instead of two – that’s even more simplification! All three funds pay dividends quarterly but capital appreciation is the main objective with these funds.
2. The second fund, $RNP (Cohen & Steers REIT & Preferred Income Fund (NYSE:RNP)) is one of my favorites. It is about 50-50 preferred stocks and equity REITs (Real Estate Investment Trusts). One fund: two asset classes! I love it! It’s a great fit since I was looking for my REIT and preferred exposure to be equal anyway. Thus a fund holding equal amounts of each asset class is an ideal choice. The REIT holdings hedge against inflation and generate income and the preferred holdings provide income and NAV (net asset value) stability. This fund generates monthly income and its current yield is 7.6%. You could, of course, separate this one fund into two funds – one for preferreds and one for REITs. $RNP does use about 26% leverage. I am comfortable with that but it is important to note as some investors are not. It also has a pretty hefty expense ratio of 1.9% and I am also comfortable with that.
3. For precious metals, I am bullish on both gold and silver over the long term so rather than owning two funds, I instead opted for $GLTR which gives exposure to Gold (60.3%), Silver (22.5%) Palladium (13.4%) and (3.8%) Platinum. That’s 4 precious metals in one fund. Simple!
4. For my bond fund, I chose the $TLT (iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT)). I am still of the belief that long-term bond rates will have to decline in order to finance the national debt, so $TLT will move higher slowly but surely over the coming decade. This fund also pays monthly. Its current yield is just 1.4%. For more risk-tolerant investors, $QLTA (iShares Aaa–A Rated Corporate Bond ETF) with a yield of 2.2%, $AGG (iShares Core U.S. Aggregate Bond ETF) with a yield of 2.3% or $BAB (Invesco Build America Bond Portfolio ETF) with a yield of 3.3% can be used in lieu of $TLT.
5. Finally, I wanted a “multi-income” fund that generates high monthly income. My two choices over the years have been $CII (BlackRock Enhanced Capital & Income Fund (NYSE:CII)) and $ETY (Eaton Vance Tax-Managed Diversified Equity Income Fund (NYSE:ETY)). Their total returns over the past decade are comparable. They both employ the same basic strategy (hold common stocks and sell calls) and both pay monthly. But, my “simplicity” plan calls for just one fund so I opted for $ETY because it has a higher yield (9.32% vs. 7.20% for $CII).
So, there you have 6 asset classes in 5 funds. I can’t imagine things being much simpler than that and still “covering all the bases” as it were.
The beauty of this portfolio, I believe, is that all 5 funds will appreciate in price over the long run but on a daily basis a few will be up in price while a few will be down in price, thereby lowering the daily overall volatility of the portfolio.
Asset Allocation Based Upon Age
The following table gives a basic, “typical” asset allocation among the 5 funds based upon investor age, with age being divided into 6 periods.
|
Asset Class-Fund |
under 30 |
30-39 |
40-49 |
50-59 |
60-69 |
70+ |
|
Common Stock-VUG |
70% |
60% |
50% |
40% |
30% |
15% |
|
REIT + Preferred-RNP |
20% |
20% |
20% |
20% |
25% |
35% |
|
Precious Metals-GLTR |
5% |
5% |
5% |
5% |
5% |
5% |
|
Long-Term Bonds-TLT |
0% |
10% |
20% |
25% |
25% |
25% |
|
Multi-income-ETY |
5% |
5% |
5% |
10% |
15% |
20% |
|
TOTAL |
100% |
100% |
100% |
100% |
100% |
100% |
The chart is just a basic idea of how an investor might typically allocate each asset class as he winds down the road of life. Exact allocation percentages in all age periods, especially in the final two periods, can be modified based upon a variety of factors including net worth, income from sources other than investments, cash flow needs and risk tolerance. If one has income from other sources and/or sufficiently high net worth, then more can be allocated to the bond and precious metals funds; conversely, if more income is needed, one can boost the percentage of the REIT + Preferred fund and/or the multi-income fund.
I do feel that as the years progress, investment grade bonds will generate insufficient income for many investors. That was the gist of my last article and I still believe it. Those investors will increasingly turn to REITs, preferreds and multi-income funds (and thereby reduce their long-term bond holdings) to generate yield. It’s wise for young and middle-aged investors to get used to owning these funds.
Summary
I have laid out a very simple and easy portfolio composition that employs just 5 funds to obtain exposure to 6 asset classes. The percentages of each fund will typically change in a very logical pattern as the investor gets older, his personal financial situation changes or economic conditions dictate. Owning 5 funds makes managing one’s portfolio quite easy while still getting broad exposure to both income-producing and growth investments.
Disclosure: I am/we are long $ETY, $SPY $QQQ, $RNP, $GLTR, $TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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