Archives For Index Funds

Here are the total returns for the first six months of 2011 for the S&P 500, S&P Midcap 400, S&P Smallcap 600, MSCI EAFE, MSCI ACWI ex US, Barclay’s Aggregate Bond Index, Crude Oil, and Gold.

As you can see, June wasn’t a good month (click on the graphic to view a PDF version).

NOTE: I discovered a transposing error in last month’s numbers. I have made the correction on this month’s numbers.

Good article: The Big Idea – Indexing Works

…according to Vanguard: In four out of seven bear markets since January 1973, the Dow Jones U.S. Total Stock Market Index beat the average actively managed fund. The two bears in which many funds did better than the index were both in the 1980s.

This graphic included in the article doesn’t do much for the active management side of the argument (the graphic is slightly confusing because it doesn’t make clear that the bars represent the percentage of active managers that beat the Dow Jones U.S. Total Stock Market Index. You may click on the graphic to see a larger version):

This is all stuff we already knew but it’s interesting to read about it in a financial planning magazine.

I spent some time putting together the returns of some different asset class (LargeCap, MidCap, SmallCap, International, Emerging Markets, REIT, and Bond) Exchange-Traded Funds offered through iShares. I then took that information and ranked the performance for each year. I only used full-year returns. The earliest year for full-year returns was 2002. Not all of the ETFs were available in 2002 so I added them in the year they became available. Here are my findings in a PDF:

Next, I’ll look at the performance of the indexes vs. their growth and value sub-indexes. Stay tuned…

Here are the year-end returns for the 7Twelve Portfolio that was detailed in Craig Israelsen’s book, 7Twelve: A Diversified Investment Portfolio with a Plan*:

As you can see, the results looks pretty good—especially when you consider the fact that one-third of the portfolio is in bonds and cash. Dr. Israelsen gives much more detailed information in his book, which I reviewed here. I was also able to conduct an interview with Dr. Israelsen. I’m going to keep tracking this portfolio. I’ll rebalance back to the orginal allocation and post updates monthly or quarterly (as time permits).

*Affiliate Link

Here are the total returns for the 7 Twelve Portfolio through October 2010 (Click to see a larger version):

NOTES: This portfolio assumes $1,000,000 initial investment with a 5% income withdrawal on December 31, 2009 for a net investment of $950,000. The portfolio also does not include trading costs.

The Vanguard REIT Index ETF is up over 24% year-to-date and now makes up 9.49% of the total portfolio.

October 2010’s 3.81% total return for the S&P 500 Index was its best October return since 2003. October’s positive return brought the year-to-date return for the index 7.84%. The Midcap and Smallcap indexes have performed much better so far this year. Interestingly, the Barclay’s Aggregate Bond Index has outperformed the S&P 500 so far this year.

I’ll have an update for the “7 Twelve” portfolio today.

My friend, Allan Roth, posted an article today about an equity indexed annuity that he came across (you can read Allan’s piece here). It’s an interesting piece that details certain tricks that companies use in order to lure people into their products.

I want to focus on his trick #2 – “average annual” return. According to Roth:

If you actually possess the attention span to slog through the 373 page disclosure document, you would clearly see on page 189 that the term “average annual return” is defined as 1/12 of the first month plus 1/12 of the second month, etc. This translates to getting an expected tad over half the total annual return. Depending on the timing of the market increase, this could be either more or less than half. In this example, it yields about 54% of the total increase of the index.

I asked Allan for clarification on exactly how this works and this is what he said:

“You’d have to use 1/12 of the YTD returns. The 12th month would count the full year’s return but it would only weight 1/12 of the amount.”

Allan did not provide me with the name of this particular annuity so I don’t know all the details. He did, however, tell me that this particular EIA will not allow the account to have a negative return over the year. It’s important to note that this is over the year and not on a month-to-month basis.

In order to see how this would work in the real world, I used the 2009 monthly returns for the S&P 500 Index (NOTE: These are index returns and NOT total returns, which would include dividends). Here is what I found:

In case it’s not clear, the YTD column is what’s used to calculate how the account is credited. Each of the months are credited 1/12th of whatever the YTD return is on the index. Then, those amounts are summed to get the return for the year. So, for 2009, while the index returned 23.45% (not including dividends), this annuity was credited with a 5.01% return (BEFORE FEES!). If you take off the 2% for fees, the return is down to around 3.01%.

Who in the world would go for such a product? Clearly this particular product favors the insurance company. They get the dividends and the 2% management expense. If the insurance company invests in the underlying index, they get the spread in returns (23.45 – 5.01).

I would avoid these products. They are complicated and very different so that it’s very hard to make an apples-to-apples comparison. I would stick to a fixed immediate annuity or possibly a very low cost variable annuity. If you are enticed by a an equity-index sales pitch, do yourself a favor and get a second opinion BEFORE you sign any documents.