Knowing what bonds (or bond-like components) does to a portfolio, and actually having them in a portfolio can be two very different things. In the past few days, it sure felt like a long and cold winter is approaching. A tweet by Four Pillar Freedom I recently saw that reminded me of this –
A lesson I am learning over and over again: What is obvious to you is not always obvious to others. Write + share what you know. You can’t predict who it will benefit.
This ended up being my motivation for this blog post. In my index investing portfolio, it consists of the following components –
- SPDR STI ETF, ES3
- Singapore Savings Bonds
- Global, via AutoWealth robo-advisor
- Equities (60%)
- Vanguard Total Stock Market ETF, VTI
- Vanguard FTSE Europe ETF, VGK
- Vanguard FTSE Emerging Markets ETF, VWO
- Vanguard FTSE Pacific ETF, VPL
- Bonds (40%)
- BTC iShares 7-10 Year Treasury, IEF
- SPDR Bloomberg Barclays International Treasury Bond ETF, BWX
- Equities (60%)
I will be using the last one-year performance to illustrate the effect of bonds. All data are obtained from my StocksCafe account. The past week has been brutal for investors. Prior to this, the performance of 100% VT (yellow) would have out-paced my portfolio (red) significantly.
Needless to say, it also appeared rather obvious that my portfolio is a less volatile version of VT. Slow and steady, with nothing to shout about.
In a pure VT portfolio, both gains and losses are amplified. With the addition of bonds, volatility is lowered so my portfolio doesn’t get to see wild swings in either way.
In the savage past few sessions, VT has dropped a massive 12% in terms of time-weighted returns whereas my portfolio has fared slightly better with a 4% drop. Nothing but data.
Just today, AutoWealth triggered yet another round of rebalancing, which is doing its intended job. As an index investor, I love volatility – frequent but short periods of huge ups and downs will trigger plenty of rebalancing transactions.
This is why folks advocate having some bond components in a portfolio – their price action are typically not directly correlated to equities, which dampen the performance – and makes it easier to sleep at night if one is not accustomed to price swings.
I maintain a dividend portfolio on the side because it is fun to stock-pick. The idea of a yield-shield appealed to me and shaped my dividend portfolio, and this term was popularized by Millennial Revolution’s Kristy Shen and Bryce Leung. Kristy explains the idea of a yield-shield in this Forbes article :
By building a portfolio of low cost index ETFs, and pivoting some funds toward higher yielding assets (like preferred shares, REITs, and corporate bonds), we can raise our yield (dividends + interest) so that it nearly covers our living expenses. Along with a cash cushion, this means we won’t have to sell any equities during market downturns. This is what we call the “Yield Shield.”
What Am I Doing?
The Straits Times Index closed at 3,011.08 points on Friday. Dow Jones endured a crushing week. In times like these, I like to read blogs for insights into what people are doing. My intention isn’t really figure what to do myself, but to get a general sensing of what others are thinking and feeling.
'Down' Jones 👇 pic.twitter.com/R54smtfjD7
— Kevin | Turtle Investor (@turtle_investor) February 29, 2020
For my index investing portfolio, I don’t intend to make any moves until the STI hits around 2,750. In case you’re wondering, I had used my CPF-IS to buy STI ETF @ $2.75 during the last round of market carnage. Before it does so, the automated re-balancing triggered by AutoWealth robo-advisor would be sufficient to emulate the action of ‘buying low’. Like I have said repeatedly, I would switch my AutoWealth risk profile to the highest risk level if the drop continues.
On the dividend portfolio side of things, I started buying a little (10%) for my shortlisted counters in case the drop was a short-lived one. On hindsight, that didn’t work out so well. What this means is that I will likely start buying more (20-30%) in the next week or two.
Live long, and prosper. Stay safe!
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