In an earlier comment, I referenced my risk adjusted total return in my Schwab account. 11/12 comment.
The time period for that calculation, made by Schwab, was between 12/1/20 and 11/10/21.
The standard deviation was 1.84 compared to 2.61 for a "conservative" portfolio.
My return was calculated at 8.44% vs. the conservative portfolio at 4.25%.
A conservative portfolio is defined by Schwab as 50% Bloomberg Aggregate Bond, 30% 3 month Treasury bill; 15% S & P 500, 5% MSCI EAFE. That portfolio would generate almost no income.
As a conservative investor, I am just trying to earn a total return in excess of a conservative portfolio with less risk.
I do not need to take any risks to meet my financial goals so this kind of portfolio management is a compromise involving taking some risk in exchange for more income and total return potential compared to a risk free portfolio.
Schwab selected the preceding referenced time period as the default.
I changed the time period from 11/10/20 to 11/10/21, the last day currently available for selection. The SD increased to 2.03 with a 10.29% return compared to the conservative portfolio's SD at 2.58 and a 5.31% return.
This is the snapshot showing the data:
Success is defined as having the green box to the left of the circled number 5 and higher as well.
Snapshot of Portfolio Mix Definitions:
My Schwab portfolio will produce far more income than the conservative portfolio and most of my income will be from tax free municipal bonds or tax favored dividends and capital gains. The tax free yield for my municipal bonds owned in that account is close to 3% at cost. The current yield on a taxable aggregate bond fund is currently at 1.81%. AGG | iShares Core U.S. Aggregate Bond ETF Overview | MarketWatch So the after tax adjusted return would be meaningfully better than the conservative portfolio that generates almost entirely ordinary taxable income.
What do you attribute the lower beta and better returns to?
ReplyDeleteThe legacy bonds don't hurt. They don't seem to be callable.
Land: The Tennessee municipal bonds are callable at par value ten years after issuance.
DeleteThe higher income generated by my portfolio is probably the primary contributor to the higher return. The higher income would come from both stocks and bonds (investment grade corporate and AA weighted average credit rating on the Tennessee municipal bonds)
Another factor contributing to my higher return is that my stock allocation is higher and mostly invested in lower beta stocks and significantly higher weighted average dividend yield compared to the S & P 500.
Risk management is helping too, which includes a lot of realized gains that reduce my average cost per share, my overall dollar exposure to a particular stock, and increases my dividend yield.
I have a much higher allocation to cash compared to Schwab's conservative portfolio definition. There is not much difference in the 3 month treasury bill yield (.05%) and what Schwab pays on its money market fund (.01%) The cash allocation earning .01% generally hovers in the 45% to 55% range of the total value.
So far I am spending only about 40% of the annual after tax income being thrown off by my brokerage accounts. That is an important point for me.
I also view the aggregate bond ETF AGG in Schwab's portfolio to be far more risky than my individual bonds that provide far more income.
The primary reason is that my bonds have maturity dates. Even if they are not called, I can hold to maturity and receive the principal amounts. That is not the case for AGG, whose net asset value will continue to decline during a period where interest rates are moving persistently higher. AGG has an effective duration of about 6.55 years. For every 1% increase in interest rates, the net asset value will decline by about 6.55%. 1 year of that kind of decline wipes out almost 3.5 years in interest payments. My Tennessee municipal bond portfolio in my Schwab account has a cost basis below the par value of the bonds and about an $8K unrealzied gain.
So even though div stocks (value) hasn't been favored, the higher income's made up for it compared to S&P.
DeleteThat and good prior bonds. I haven't ever bought a straight bond fund. That's like buying stocks, just a different type of vehicle.
How do you know AGG has an effective duration of 6.55 years?
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The IRS wrote to send me money. Not something I object to.
Land: The duration of a bond fund can generally be found at the sponsor's website.
DeleteThat was the case with AGG:
https://www.ishares.com/us/products/239458/ishares-core-total-us-bond-market-etf
For those invested in the CEF ADX, the fund declared its year end distribution.
https://www.prnewswire.com/news-releases/adams-diversified-equity-fund-declares-year-end-distribution-exceeds-its-annual-6-minimum-distribution-rate-commitment-301422613.html
"$2.76 per share from net capital gains realized during 2021, of which $0.35 was short-term gain and $2.41 was long-term gain."
"$0.07 per share from 2021 net investment income"
The ex dividend date according to Yahoo is on 11/19:
https://finance.yahoo.com/quote/ADX?p=ADX&ncid=stockrec
ADX is one of the few CEF that started operations before the 1929 market crash and managed to survive that debacle and the ensuing Great Depression.
I mentioned the year end distributions for two other stock CEFs in an earlier comment, GAM ($3.05 per share) and CET ($3.55 per share), and those have already gone ex dividend.
CEF Connect pages:
https://www.cefconnect.com/fund/CET
https://www.cefconnect.com/fund/GAM
https://www.cefconnect.com/fund/ADX
Thank you. I would never have guessed that's what the i-box next to effective duration meant anything like...
DeleteNAV decreasing by the duration % for every 1% interest increase.
Lol. That box leaves no clue that that's it's point.
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Those CEFs have nice rises. Their divs aren't unusual now a days.
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I've been trying to figure out required withdrawals from 401ks and taxes and my best conversion plan...
The amounts can really add up.
The looking reminded me, I swear at some point I used form 8606 (to get tax benefit on year of IRA contribution). But don't have any regular IRA accounts. Did I convert years ago? Will the pile of old saved tax papers turn out handy for more than crowding my closet after all? The mystery unfolds.
I don't think I'm going to accidentally find a little pocket of money like you did the other day with some bonds.
The conservative portfolio as defined by Schwab has a 20% stock allocation.
ReplyDeleteI spent some time this morning trying to figure out my current asset allocations in that account, something that I normally just eyeball rather than attempting to arrive at a close number.
1. Money Market = 44.47%, at the low end of the recent range.
2. Bonds: 29.06% (mostly Tennessee Municipal bonds with an average weighted tax free yield of around 3%)
3. Mutual Funds: 2.67%, mostly in the balanced fund PRPFX that has a significant allocation to gold and silver bullion. Call it about .5% to individual common stocks.
4. ETFs and CEFs: 4.78%, mostly stock funds but a .93% allocation in leveraged bond CEFs (e.g. GDO) So about 3.85% in stocks
19.01% in individual common stocks, preferred stocks and exchange traded bonds ( exchange traded bonds and preferred stocks are at 1.44% of the total portfolio). So individual stocks are around 17.66% with the concentration heaviest in regional bank, BDC, and REIT stocks followed by utilities and energy stocks.
So my approximate allocation in common stocks in this account is around 22%, slightly higher than the 20% in the "conservative" Schwab portfolio mix.
The tamp down on the SD to 2.03 comes from the money market, bonds, preferred stocks and low beta, high yielding stocks allocations.
That explains the SD well.
ReplyDeleteThe yield double from S&P is less obvious. Looks like the distribution (heavy on banks, energy etc.) and adjustments have added up and made a difference.
Marketwatch has the beta numbers for individual stocks. The bulk of my individual stocks owned in my Schwab and other taxable accounts will have a beta below 1 which means that the stock is less volatile than the market.
ReplyDeleteExamples:
Stock/BETA/All dividend stocks.
GIS .39
IRM .82
ARCC .90
DUK .66
GILD .60
PFE .67
EVRG .77
UL .58
K .41
FNF .96
ETR .76
ENB .97
BMY .65
ABBV .80
AMCR .99
AQN .79
FLO .44
REYN .29
D .68
PEG .68
SJI .85
SPTN .44
ED .49
VZ .48
HTA .79
PLYM .82
KMB .50
PPL .79
Regional bank stocks will be more volatile and will generally have betas above 1. They crashed in 2020 recession and many then recovered to new highs.
REITs and pipeline stocks generally have betas between 1 and 1.2 with exceptions, but the dividend yields for the ones that I own are much higher than the S & P 500.
Morningstar has the SD for SPY at 18.4. The 1 year total return stands at 31.61% through yesterday. The beta is 1.
https://www.morningstar.com/etfs/arcx/spy/performance
To tamp down considerably on risk, there will of course be a sacrifice in total return when the stock market is strong, as it has been. The flip side is a much higher income generation compared to the S & P 500 for the risk side of my portfolio and substantially less downside when the market tanks as it will do. Returns over longer periods can be enhanced by buying into Catastrophic events (40%+ declines over a relatively short period) and major down cycles like the one that last occurred in March 2020. I was executing over 100 stock trades per day, mostly small ball, through mid-to-late March.
When a primary objective is capital preservation while assuming some risk, a 1 year return of 10.29% with a 2.03 SD is considered a victory.