Archives For Index Funds

I have seen Pamela Yellen’s books before, but never really paid attention to them until I read this piece by Allan Roth.

Yellen is known for her “Bank on Yourself” books, a strategy that utilizes whole life insurance (UGH!).

Yellen is very outspoken when it comes to traditional financial advisors (on that we can agree). Perusing her blog, I found mentions of how misleading Wall Street is and such. Okay, fine.


Ms. Yellen is also misleading. Take a look at the following graphic she posted on her website to see why (click on the graphic to see a larger version):

Your-Retirement-Plan-Slide2 - 420wide

Do you notice anything interesting in that graphic?

She left out dividends!

Is this an oversight or was it done to make her strategy look better? Either way, it doesn’t make her look good. If it was an oversight, it makes her look amateur. If it was done to make her strategy look better, it makes her look dishonest. She looks no better than the Beardstown Ladies did when they calculated their returns INCLUDING their contributions.

Regardless, there is NO REASON for this.

How big of a difference does leaving out dividends make? A lot.

I did some research and found that the S&P 500 Total Return Index closed at 2107.28 on March 24, 2000. The same index closed at 3127.87 on February 3, 2014. There are 5064 days (13.8644 years) between the two dates. If we divide 3127.87 by 2107.28, we get 1.4843. If we raise 1.4843 to 1/13.8644 and subtract 1, we get .0289 or 2.89% as the annualized rate of return between the two dates. No, it’s not good, but it’s a lot better than the .95% return that Yellen states in her chart.

I mentioned this in a couple of comments on her blog, but my comments went to moderation and I’m pretty sure they will end up in the trash. She is not interested in having a discussion. She is not interested in people who disagree with her. All of the comments I read were very positive about her strategy, which I find unbelievable and yes…dishonest. I pray her followers are more sophisticated than they appear.

DISCLAIMER: I have not read any of Yellen’s books. I do not want to spend money on them.

Today’s quote of the day comes to us from the latest Kirk Karlgaard column in Forbes. This is the opening paragraph to his piece:

In early 1966 the Dow topped 1000 for the first time. In August 1982 the Dow was at 777. The apparent 22.3% loss in value over 16.5 years is actually much worse when adjusted for inflation—figure a 70% haircut, excluding dividends.

Why is this useless? Because he left out dividends.

I don’t have total returns for the Dow Jones Industrial Average but I do have the monthly total returns for the S&P 500 that we can use as an example. Based on my findings, using to the monthly total returns from January 1966 (the Dow crossed the 1000 mark during the day on January 18, 1966) through July 1982, the S&P had a total return of 130%. If inflation is included using the monthly CPI data, the total return over the period is -25%. No, it is not good. But, it is better than the numbers Kirk used in his column.

I have an email in to Dow Jones Indexes to see if I can get the actual total return numbers for the Dow. We will see if they come through for me.

I thought it might be interesting to look at the monthly performance of three different exchange-traded funds that track the S&P 500 Index (iShares S&P 500 Index ETF (IVV), SPDR S&P 500 Index ETF (SPY), and Vanguard S&P 500 Index ETF (VOO)). The newest ETF of the bunch is Vanguard’s VOO, which has monthly return data going back to October 2010. I used that month as the basis for the comparison.

Of the three ETFs, VOO has the lowest expense ratio of .05% compared to .09% for IVV and SPY.

To calculate the returns, I downloaded the data from Yahoo! Finance and used the Adjusted Closing Price, which adjusts the price for dividends and splits.

Here’s what I found:

Comparing the Monthly Performance of IVV, SPY, and VOO

The performance differences were very close between the three. The best performing ETF of the three was iShares. Keep in mind that these numbers do not reflect transaction charges (brokerage fees and such).

I read this NY Times article about John Bogle over the weekend. Pretty good piece.

I found this part of the article interesting:

…he says, long-term investors must hold stocks, because risky as the market may be, it is still likely to produce better returns than the alternatives.

“Wise investors won’t try to outsmart the market,” he says. “They’ll buy index funds for the long term, and they’ll diversify.

“But diversify into what? They need alternatives, bonds, for the most part. What’s so frightening right now is that the alternatives to equities are so poor.”

In the financial crises of the last several years, he says, investors have flocked to seemingly safe government bonds, driving up prices and driving down yields. The Federal Reserve and other central banks have been pushing down interest rates, too.

But low yields today predict low returns later, he says, and “the outlook for bonds over the next decade is really terrible.”

Dark as this outlook may be, he says, people need to “stay the course” if they are to have hope of buying homes or putting children through college or retiring in comfort.

He is still preaching the gospel of long-term, low-cost investing. “My ideas are very simple,” he says: “In investing, you get what you don’t pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.”

Summary: Bogle’s for buy and hold and diversification but there’s nothing to diversify into.

I would suggest looking into a broader diversification than simply a stocks/bonds portfolio. It might be a good time to check out Craig Israelsen’s work on the 7Twelve portfolio, which utilizes 12 different investments over 7 asset classes. He’s even written a book about the portfolio title 7Twelve: A Diversified Investment Portfolio with a Plan*.

Bogle Gets Political

One thing I found interesting in the article was that Bogle considers himself a Republican but he voted for Clinton and Obama and plans to vote for Obama again this year. This is slightly funny to me because he says that banks need more oversight when it was Clinton who signed the bill deregulating banks in the first place. Interesting. That’s okay. Mr. Bogle is entitled to his opinion.

*Affiliate link

I have been tracking a retirement portfolio for several years here at AFM. It’s split 30/20/50 between domestic stocks, international stocks, and fixed income, respectively. The domestic stock portion is invested evenly in the 10 sector exchange-traded funds that make up the Dow Jones Total Market Index. The international stock portion was invested in the iShares MSCI EAFE Index Fund from 2004 through 2009 when it was replaced with the iShares MSCI All World (excluding the U.S.) Fund (ACWX). The fixed income portion was represented by the iShares Lehman Aggregate Bond Index Fund (AGG) and iShares Goldman Sachs Investop Corporate Bond Index Fund (LQD) from 2004 – 2008 when the iShares S&P/CitiGroup International Treasure Index Fund (IGOV) was added.

So, here is how the portfolio performed over the years:

As you can see, 2008 was a tough year. The entire portfolio was down 16.75% that year. The domestic equity portion lost 36.99%, the international equity portion was down 40.50%, and the fixed income portion was up 4.89%.

I’ll provide a PDF of the year-by-year portfolios in a follow-up.

How’s that for a catchy title?

I have monthly total returns for the S&P 500 (S&P 90 prior to February 1957) going all the way back to January 1926. However, I only have the Barclay’s Aggregate Bond Index (formerly known as the Lehman Aggregate Bond Index) going back to January 1991.


I thought it would be interesting to look at different portfolio allocations and see how they would have performed from 1991 through 2011. I assumed a beginng balance of $100,000 and annual rebalancing at the end of each year. I started out with 100% stocks and no bonds and then decreased the stock allocation by 5% while increasing the bond allocation 5% until I got to 100% bonds. You can download a PDF of my findings here: S&P with Bonds (1991 – 2011).

What I found interesting was the portfolio that brought the biggest balance at the end of 2011 was the 95% stocks/5% bonds. Not only that, it delivered a better return with slightly less volatility—as measured by the monthly standard deviation.

Another interesting finding was how well the 70% stocks/30% bonds portfolio did. Take a look at the charts for the 100% stock portfolio and the 70/30 portfolio:

As you can tell from the charts, the 70/30 had significantly less volatility than the 100% stock portfolio. It captured 97% of the all stock allocation but only experienced 70% of volatility* (again, measured by monthly standard deviation). It seems like a reasonable trade-off to me.

But, that’s not the only way to look at it.

Another way to look at it is to look at potential retirement income. For instance, let’s say you want to withdraw 4% of your account balance upon retirement. Here are the different income amounts based on the ending values of the portfolios:

It’s important to note that past returns aren’t predictors of future results. That’s something to keep in mind when deciding on how to allocate your portfolio. I tend to be more on the aggressive side with our retirement portfolio but these findings are making me rethink my strategy. That said, I can accept more volatility now for hopefully higher income at retirement.


*To arrive at that number, I simply divided the monthly standard deviation for the 70/30 portfolio by the standard deviation for the 100% stock portfolio.

Well, another month goes into the history books. As you can see from the graphic I have put together (click on the graphic below to bring up a PDF version), it wasn’t a very good month. This most likely had to do with the looming debt ceiling deadline. July marked the third month in a row that the seven out of the ten indexes had a negative return. The last time that happened for the S&P 500 (the index that I have the most data for) was in 2008, when it happened twice.

Notice that I added a new column at the end for the weighted average return for all ten asset classes (assuming a ten percent stake in each asset class rebalanced monthly).