Last time I reviewed a great book, published originally in 2008, called The Gone Fishin' Portfolio by Alexander Green. In this post, I review his proposed portfolio.
The Gone Fishin' Portfolio is a fixed asset allocation index fund portfolio rebalanced annually that consists of the following asset allocation:
- US Large Cap Stocks 15%
- US Small Cap Stocks 15%
- European Stocks 10%
- Pacific Rim Stocks 10%
- Emerging Market Stocks 10%
- REITs 5%
- Gold Miner Stocks 5%
- Inflation-adjusted bonds 10%
- Short-Term Corporate Bonds 10%
- High-yield Bonds 10%
Overall, I think it's a great portfolio. Fairly aggressive with about 75% equities and other risky assets and 25% in fixed income. (Remember that both corporate bonds and junk bonds have partial equity characteristics, so part of what looks like fixed income is actually equity). He recommends it be implemented with the appropriate Vanguard funds, and suggests an alternative in case the Vanguard Precious Metals and Mining fund is closed, and suggests alternative ETFs if desired.
I like that it is internationally diversified. I think REITs and miner stocks are pretty good alternative asset classes to include and I like the overall stock:bond ratio for a new investor. The criticisms I have are minor. First, there is no provision to make the portfolio less aggressive as you near retirement. Volatility that is easy to stomach on a $100K portfolio at 35 would be much harder to stomach on a $3 Million portfolio at 65. You can adjust that yourself, but I think he could have at least mentioned it as a concern. Second, the portfolio is VERY large cap heavy. There really is no great reason to have a small tilt domestically and not internationally (except for the fact that Vanguard didn't have a small-cap international fund in 2008 when the book was published.) He also gives nary a nod to the Fama-French data about value tilting. His suggested bond allocation deserves discussion.
It seems as though he is trying very hard to avoid holding nominal treasuries. Avoiding those in 2008 based on these recommendations would have been serious folly. Other fixed income, such as the corporates and high-yield bonds he recommends, was definitely the wrong thing to have in the portfolio during that market crash. Other authors make a very good point that fixed income ought to be very safe, and you should take your risk on the equity side. Of course, 4 years later, I find myself quite tempted by his suggested portfolio. Junk and corporate bond yield spreads look a lot more appetizing now than they have in a long time. In fact, muni bond yields are pretty enticing right now.
His justifications of his bond choices leave something to be desired. He suggests that you should choose short term corporates over treasuries because they “pay more.” He notes (at least at the time of writing) that ST corporates and LT treasuries have similar yields. Of course, over the last 5 years the return of the Vanguard LT treasury fund has been 12% per year and the return of the Vanguard ST investment grade bond fund has been 4.31% per year. Obviously they don't always “pay more.”
His justification for the high-yield bonds is that they have “returned more than either treasuries or high-grade corporates.” It's true that over the last ten years that high yield bonds have outperformed intermediate treasuries and intermediate investment-grade corporates by almost 1% a year. But look at 2008. The treasuries were up 17%, the corporates were down 6% and the junk bonds were down 26%. That's not exactly what you want at the time when you would prefer to be rebalancing from your safer fixed income to your riskier equities. I find the argument to include junk bonds in the portfolio lacking.
He also suggests that TIPS are less volatile than traditional bonds and that they are tend to rise when other bonds are falling. In my experience, neither of those statements are true. Don't get me wrong, I think most static asset allocation portfolios SHOULD include TIPS, but not for either of those reasons.
All that said, I think over the long run, for a portfolio held for a very long time as the Gone Fishin' Portfolio is designed to be, an investor would be just fine with this fixed income allocation. You do get some treasury exposure with the TIPS. But I think he would have kept it simpler with a slice of Total Bond Market.
He actually puts together several pages in the book (Titled “What to tell the naysayers”) arguing against common criticisms of the portfolio, and these are some of the best pages in the book, whether you agree with him or not, because it demonstrates how lots of very reasonable people can disagree about the exact components and the exact amounts of those components in a fixed asset allocation. The truth is that your savings rate and your discipline in maintaining any reasonable portfolio matter far more than the exact percentages in the portfolio. As I've said many times before, there are many reasonable portfolios, including the Gone Fishin' Portfolio. Pick one and stick with it.
Image Credit: Petritap, via Wikimedia, CC-BY-SA
Is there any way to model what the rebalanced portfolio today would have earned annually from 2008 until today including tax ramifications?
I want to know the performance V. S7p 500 for last four years.
Sure. All that data is a public record. You just have to take the recommended ETFs, see their 2008 return, then rebalance. Check the 2009 returns, then rebalance etc. You can then compare it to the S&P 500 Fund remember not to use just the index as it doesn’t include dividends. Vanguard’s site makes it a pretty easy chore (but not quite easy enough that I’m willing to do it for you!)
https://personal.vanguard.com/us/funds/snapshot?FundId=0540&FundIntExt=INT#hist=tab%3A1a
One thing im confused about, he recommends saving the most amount of fees and taxes by putting the tax inefficient assets in an IRA, he also says to rebalance. Question is when it comes to rebalance and say the assets in the IRA account performed well and I need to trade it with the tax efficient assets, wouldn’t that result in IRA fees of 10%?
You definitely don’t want to make a rebalancing move that involves withdrawing money from an IRA. You simply have some of that asset class in the IRA and some in taxable.
Thanks for the quick response.
i know that prompted to research this to see if anyone else had this question cuz it’s a big one. if the assets in the IRA account performs better than the ones outside of the IRA account and when it comes to rebalance, how would i move stocks outside of the IRA account without incurring the 10% fee?
You buy more stocks in the taxable account and swap stocks for bonds in the IRA. You don’t have to take money out of accounts to rebalance them.
sorry, i’m confused.
The important thing is the ratio of stocks to bonds, not where the stocks are. You never need to make a withdrawal to rebalance.
Imagine 50% of your portfolio is an IRA and you used it to be a Total Stock Market Fund. The other 50% of your portfolio is a taxable account and you used it to buy a Municipal Bond Fund. Now stocks drop 25% and bonds go up 5%. Your ratio is now 41% stock to 59% bond. You need to rebalance. So how do you do it? You exchange some of that muni bond fund in taxable for Total Stock Market Fund in taxable. You don’t touch the IRA.
Hope that helps.
that’s very helpful, yes. what happens the other way around, when the funds in the IRA go up and it’s time to rebalance, how would i rebalance without incurring 10% fee for withdrawing from an IRA account to reinvest in the taxable account?
Sell some of what is in the IRA and buy what is in the taxable account in the IRA.
thanks. what i’m wondering is that Alex Green recommends placing tax-inefficient funds in an IRA to save money but if when rebalancing funds out of an IRA that will actually result in a 10% fee, i’m surprised he hadnt thought of that or why he’d recommend doing that?
thanks. what i’m wondering is that Alex Green recommends placing tax-inefficient funds in an IRA to save money but if when rebalancing funds out of an IRA that will actually result in a 10% fee, i’m surprised he hadnt thought of that or why he’d recommend doing that?
?
Again, you don’t take money out of an IRA when you rebalance it. You simply buy and sell within the IRA to rebalance. I’m not sure how else to explain this point.
i guess i’m not explaining it correctly, if the funds in the IRA account goes up by 25% and taxable funds drop by 5%. My ratio is now 59% in the IRA fund to 41% taxable. I need to rebalance.
I need to exchange some of that muni in the IRA fund. that will result in a 10% fee for withdrawing from the IRA account. am i explaining myself better?
Okay. I’ll try again.
You now have 59% of your money in an IRA. Let’s say those are your stocks. Your IRA was completely full of stocks and your taxable account was completely full of bonds. So your stock to bond ratio is now 59/41. Your IRA to taxable ratio is now 59/41 too.
You are only rebalancing the first ratio, not the second. So how can this be done? The way it is done is to leave your taxable account alone and go to the IRA. Inside the IRA, sell some stocks and buy some bonds. But all the money stays in the IRA. When you’re done, the stock to bond ratio is now 50/50 and your IRA to taxable ratio is still 59/41.
Did that help? This is going to click any minute now for you.
that was my question all along, sorry if i did not explain myself clear enough. thank you much for your time and your assistance.
now, one more question, i hope i can explain it in a way to avoid the back and forth.
as i buy and reballance funds outside of the IRA that are not tax-efficient, should i move them into the IRA?
if i do that, wouldnt at some point all of my funds end up in the IRA account?
I’m not sure what you mean by “moving them into the IRA”?
You obviously can’t make additional contributions to the IRA above the annual contribution limits. But yes, ideally all of your assets are in an IRA and protected from taxes. Many people, including me, can’t do that because a significant portion of our assets are in a taxable account. I’m actually “moving” asset classes out of IRAs and 401(k)s to taxable. For example, I used to have TSM, TISM, SV, SI, and bonds all in tax-protected accounts. As my taxable account has grown, I have slowly moved asset classes (although not the money itself) out of tax protected into taxable by swapping them in tax protected accounts for less tax efficient asset classes and using my newly earned taxable money to buy them. So now I have TSM, TISM, some bonds, and most of my small international in taxable.
I hope that helps. Same concept as before though. You don’t actually move any money in or out of the IRAs and 401(k)s except the annual contribution amounts.
sorry, i missed this. what do you mean by the last sentence that you dont actually move money in or out of the IRA?
Ari- why don’t you email me your phone number and I’ll give you a call. I can’t think of any more ways to explain this in writing but I’m hoping an actual conversation can clear it up for you.
yes, thats perfect and answers my question. thanks so much for your time, i really appreciate it. i was so confused, never done this before nor am i good with numbers.
one more question then, so i’m going to rebalance the funds in the IRA separate of the taxable accounts, perfect.
question is, in the taxable account i’ll need to buy tax-inefficient funds when i rebalance in order to set it’s percentage back to its’ original percentage of the asset classes, what would i do with the tax-infefficient funds in order to be tax-effecient? normally i would move that to the IRA account. do i do the same here? if yes, wouldnt at some point all funds in the taxable account slowly be moved into the IRA account doing so?