I was just asked recently by a young professional group here in the Cleveland, Ohio area, to discuss the benefits of passive index-style investing. When writing this article, news came out that the famous passive index fund founder had suddenly passed. Even though I didn't personally know Mr. Bogle, I have come to appreciate his common sense approach to investing over the years. On his last CNBC interview, he told the financial news giant that he felt this was a good time for investors to re-balance their balanced portfolio to a little more bonds and a little less stocks. He never once made a market timing call, or never once told investors to be all in stocks. In this business, you have to appreciate such straightforward advice that sometimes is really hard to get. I don't work for Vanguard or receive any compensation for their products, and actually don't use them much for my clients. However, I have used plenty of his simple portfolio models that you can find on Vanguard's website here, which can help any type of investor figure out where he or she should park money. One last thing you will notice on his website, all of his models are stocks and bonds. No precious metals, commodities, bitcoins, internet coins, or other peculiar investments.
When making this article and thinking about my upcoming young professional presentation, I wanted to make a portfolio that was so simple to use, but would focus on managing risk while staying invested 100% of the time. Let us dig in and take a look at this favorite portfolio of mine for any age group for that matter.
The 60% S&P 500 Low Volatility ETF & 40% iShares Barclays Aggregate Bond Index ETF produced a positive annual return since 2012.
When building portfolios for clients, I always want to see a more linear, a more balanced approach to investing vs. an investment portfolio that looks like an EKG chart. That way, if you're retired, or just starting off at investing, it is something you could implement fairly quickly and easily.
| Year | 60/40 Portfolio with the SPLV | S&P 500 Portfolio |
|---|---|---|
| 2012 | 7.55% | 15.99% |
| 2013 | 13.10% | 32.31% |
| 2014 | 12.77% | 13.46% |
| 2015 | 2.59% | 1.25% |
| 2016 | 7.02% | 12.00% |
| 2017 | 11.80% | 21.70% |
| 2018 | 0.02% | -4.56% |
portfoliovisualizer.com
As you can see from the above table, if you have bought the S&P 500 and just hung on to it, you are doing really well! However, it is always when stocks start becoming volatile, the S&P 500-only style of investors start asking questions on whether or not they should have a little more balance. I like to think those investors who have been in the game long enough, just like Mr. Bogle, know it is way too risky to own just one asset class over the other. When adding the S&P 500 Low Vol ETF (SPLV) by Invesco, the investor really takes hold of simple risk management as well.
The Max Drawdown for the Portfolio was a -4.12% vs. the S&P 500 of -13.52%.
When looking at drawdowns over the past six or seven years, you can see that we did not really have that many. We have had some smooth sailing for years, but with the market weather turning, the S&P 500 just had a drawdown of over -13.52% in the last quarter of 18.' For any investor new to investing like my young professional group, or those who are just retiring this quarter, your account would have been upside down already. Let us take a look more specifically at the ratios to see why this portfolio is a lot less volatile than just owning the S&P 500 (SPY).
Drawdowns for The Balanced Portfolio
| Start | End | Length | Underwater | Drawdown |
|---|---|---|---|---|
| Aug 2016 | Nov 2016 | 4 months | 7 months | -4.15% |
| May 2013 | Aug 2013 | 4 months | 6 months | -3.96% |
| Dec 2018 | Dec 2018 | 1 month | -3.37% | |
| Aug 2015 | Aug 2015 | 1 month | 3 months | -3.16% |
| Feb 2018 | Feb 2018 | 1 month | 6 months | -3.03% |
| Jul 2014 | Jul 2014 | 1 month | 2 months | -2.54% |
| Sep 2018 | Oct 2018 | 2 months | 3 months | -2.49% |
| Mar 2015 | Jun 2015 | 4 months | 5 months | -2.47% |
| Jan 2014 | Jan 2014 | 1 month | 2 months | -0.93% |
| Sep 2014 | Sep 2014 | 1 month | 2 months | -0.77% |
Drawdowns for The S&P 500-Only Portfolio
| Start | End | Length | Underwater | Drawdown |
|---|---|---|---|---|
| Oct 2018 | Dec 2018 | 3 months | -13.52% | |
| Aug 2015 | Sep 2015 | 2 months | 10 months | -8.48% |
| Apr 2012 | May 2012 | 2 months | 5 months | -6.63% |
| Feb 2018 | Mar 2018 | 2 months | 6 months | -6.28% |
| Jan 2014 | Jan 2014 | 1 month | 2 months | -3.52% |
| Dec 2014 | Jan 2015 | 2 months | 3 months | -3.21% |
| Aug 2013 | Aug 2013 | 1 month | 2 months | -3.00% |
| Jun 2015 | Jun 2015 | 1 month | 2 months | -2.03% |
| Oct 2012 | Oct 2012 | 1 month | 4 months | -1.82% |
| Oct 2016 | Oct 2016 | 1 month | 2 months | -1.73% |
Source: portfoliovisualizer.com
As you can see from the above chart of the S&P 500 drawdowns, the overall index is still officially in a drawdown. Another very important notice is the balanced portfolio has never had more than a -4% drawdown as well. This is important to any investor, at any age, and any risk tolerance.
Summary
As you can see from the above data, owning simple balanced ETFs that include the S&P 500 Low Volatility ETF and iShares Core Total U.S. Bond Market ETF (AGG), you too can produce alpha. For any investor, this is crucial for long-lasting returns. It manages your emotions and keeps you investing in a more long-term way. No more guessing at which asset class to buy, you buy both of them at all times. If I only had read Mr. Jack Bogle's books before listening to a local stockbroker, I would have saved some money from my rookie investing ways when I myself tried my hand at timing asset classes. Young or old, do yourself a favor and own a simple balanced portfolio like this one.
Additional Disclosure: Ortner Capital consults clients on owning the above ETFs. Please consult your own advisor on your specific risk tolerances and objectives.
