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Vanguard Alternative ETFs?

 
 
Reply Wed 30 Mar, 2016 11:41 am
Are there any Vanguard ETFs for alternatives? I found an energy one, but I think that might be all that qualifies (I'm not sure).

For context, I am learning more about personal finance and investing and want to balance my portfolio using the efficient frontier portfolio strategy. It calls for an investment into "alternatives" and I'm looking for good options.

I really like Vanguard so far (might be the best place to invest in my uninformed opinion) and would prefer options that trade for free there but am open to alternative alternatives.
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Type: Discussion • Score: 3 • Views: 2,614 • Replies: 21
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engineer
 
  2  
Reply Wed 30 Mar, 2016 12:29 pm
@Robert Gentel,
Can't answer your question, but besides the efficient frontier portfolio strategy, you might find this article interesting. After hearing this uber-investor talk about the need to diversify, I changed up all my holdings right before the 2008 crash. I still got hit hard, but I recovered about two years faster than the overall market because I diversified away from the stock market and then when the market was low, I was shifting money back into it (completely against what my gut was telling me.)
Robert Gentel
 
  0  
Reply Wed 30 Mar, 2016 12:32 pm
@engineer,
Thanks! For some reason I had the impression you were further along on investing knowledge than me (probably because anyone who is investing is) and was hoping you'd show up!
Robert Gentel
 
  0  
Reply Wed 30 Mar, 2016 12:41 pm
@Robert Gentel,
After reading the article I'm a bit confused about what different portfolio strategy you used. If I undrerstand it correctly it's essentially a much less stock-heavy mix and much more bond-heavy than I have been advised (I think at my age I'm supposed to have less than 4% of my investments in bonds according to the advice I'm following and that was a lot higher).
engineer
 
  1  
Reply Wed 30 Mar, 2016 12:58 pm
@Robert Gentel,
That was exactly what I thought too and having a lot more in bonds saved me big, both in not taking as big a hit early on and in being in a position to take advantage of the depressed stock market later on. I saw you started a thread on personal finance. I'll jump in there a little later. What I learned from that article is that the people telling me to own pretty much 100% stocks were advising me to take significantly more risk for very little gain. It's like being farther on the right of the efficient frontier portfolio curve. You don't get a lot for your increased risk.
Robert Gentel
 
  0  
Reply Wed 30 Mar, 2016 01:05 pm
@engineer,
Ok, but was that for a bad market stretch or for general holdings? It makes sense for when the stock market crashes but goes against what I understand I should do to balance. My understanding now is that I should be more agressive while young and hold more and more bonds when I get older. I get that 100% stock is fractions of a percent better than having less while incurring much more than that in risk, but the mix in that article seems much more conservative than the advice I'm getting.

The mix personalcaptial.com (which as a general financial holdings aggregator and cash flow tracker I can't recommend highly enough, they are a free site like mint but much better) recommends me for my investment portfolio is 0.5% cash, 0.8% international bonds, 2.2% US bonds, 25.8% international stocks, 60.2% US stocks, and 10.5% alternatives (which is what I was trying to find ways to meet other than oil, gold and realestate ETFs that I know of).
engineer
 
  1  
Reply Wed 30 Mar, 2016 02:25 pm
@Robert Gentel,
For a long time I used the all stocks approach and it was a heady ride. Way up one year, lots of hand wringing the next year. The 87 crash happened right when I was starting up and it took lots of logic to overcome that gut wrench when 25% of your fledging investment just disappeared. The reality is that it's not a little bit extra risk you are taking with an all stock portfolio, it is a lot more. It all comes down to your risk tolerance or in my case to my wife's. She completely trusts me to do what I think is optimum, but she also knows that I'm going not going to put our money to far out there.

The mix I use matches one that the free advisory service my employer offers recommends: 30% bonds, 50% US Stocks, 20% International Stocks. I add in some REIT's to get some real estate exposure. That has worked really well for me in both up and down markets. I rebalance every few months. I have a master spreadsheet that computes all the values, tracks the overall growth over time and tells me how much to move where to get the balance right again. It works pretty well in both up and down markets and even for small fluctuations. With the recent market moves up and down, it has me moving money into bonds when the market is high and back when it is low. One advantage I have is I'm doing this between accounts that don't charge fees so I'm not worried about that.
Robert Gentel
 
  0  
Reply Wed 30 Mar, 2016 04:31 pm
@engineer,
Interesting, will have to do more research. The mix you have is 70% stocks and 30% bonds, what I have been shooting for is 85% stock, 10% alternatives and only around 3% bonds. Definitely agree on not being 100% stock but need to think more about the bond allocation (what kind of return do you expect with bonds? Do any approach 10% year?).

In any case I learned something neat from the article in that the rebalancing of these ratios can help time the markets (buying in down and selling in up as you mention). I hadn't yet run into any of that as right now all my investment balancing comes from injecting more into my nest egg (because it is tiny).
engineer
 
  1  
Reply Thu 31 Mar, 2016 09:33 am
@Robert Gentel,
The rebalancing is the key. I went back and looked at returns since 1990. I can't post the graph from work (blocked from photo sharing sites), it is pretty cool. Here is the overall result from 1/1/1990 to 3/1/2016 assuming you rebalance quarterly and using the S&P 500 and the Barclay's bond index. The Balance value is percent stocks/percent bonds.

Balance 26 Year Yield
100/0 7.06%
90/10 7.08%
80/20 7.07%
70/30 7.04%
60/40 6.99%
50/50 6.92%
0/100 6.26%

The more stocks you have, the higher the variability. In the heady days of the dot com bubble (1999), you'd have been kicking yourself for having any bonds at all, but by January of 2003, stocks were the worst performing of all these combinations. By late 2007, the all stock portfolio was once again the top performer (by a hair), but by the end of 2008, it was the worst again by a decent margin. It didn't move out of the cellar position until 2013 and is now in 3rd place.

If you do a fit to an exponential curve, here are the R^2 values - a good projection of volatility.
100/0 0.746
90/10 0.790
80/20 0.829
70/30 0.864
60/40 0.894
50/50 0.920
0/100 0.984

You can see that you are getting a lot more volatility for pretty much no additional long term return. Of course, someone could show you a chart of one of the great stock runs and say you should be entirely in stocks. Someone else could look at the crash of 2008 and say you'd have done better since 1990 if you'd owned entirely bonds, but my big takeaway is I can get pretty much the same returns with less risk with a mix and rebalancing.

I'll try to post the chart when I get home.

Robert Gentel
 
  0  
Reply Thu 31 Mar, 2016 11:48 am
@engineer,
So bonds can generate you returns over 6%? I thought it would typically be lower (I just bought my first ever bonds in the last few weeks).
engineer
 
  1  
Reply Thu 31 Mar, 2016 12:48 pm
@Robert Gentel,
Yes, although quality matters. The Barclay's index has a mix of mostly investment grade bonds and interest rates in the past have been significantly higher than they are today. If you throw in a few BBB+ and A rated bonds you can add to your rate. I can generally get around 6% with bonds and preferred stocks (which act a lot like bonds) without too much trouble.
Robert Gentel
 
  1  
Reply Thu 31 Mar, 2016 12:56 pm
@engineer,
I was (perhaps wishfully) targeting an 9% overall return rate. I thought bonds would be much lower but it sounds like something I should have a greater share of in my portfolio.

I wonder if the 10% or so of alternatives would be worth giving up vs taking it from the 85% stock portion.
engineer
 
  1  
Reply Thu 31 Mar, 2016 01:05 pm
@Robert Gentel,
It just depends on what year you are in. During the 90's you could have gotten 15+% on average in the stock market. During the 2000's, you would have gotten 1% (1% annual growth for TEN YEARS). Since 2010, we've been doing pretty well, but we're due for a slowdown. If interest rates go up, bonds will be more attractive and stocks less, but it's all a cycle and I can't predict the fed or the economy.
cicerone imposter
 
  0  
Reply Thu 31 Mar, 2016 01:12 pm
We have been investing from early in our marriage, and have invested 100% of it into funds. (I never believed in bonds or gold.) The idea was 1. stay in for the long term, and 2. funds are pretty safe investments, because they are 'managed.' I didn't want to invest the time to keep up with all the financial information to manage our own investments, but knew that our economy was good for the long term. If we didn't have confidence in our economy, there's nothing else.
We've looked at the long term performance of Vanguard, and found that they had one of the smallest fees, and best performance over the long term.
There have been many fear mongering about the US economy lately, but that doesn't bother me. Our economy is the strongest in the world, and we're still competitive in the world marketplace. Companies like Apple, Microsoft, the auto industry, and small businesses are doing well. We also have a healthy bank balance, and our home is worth over $1.5 million (bought for $50k). With Apple's construction of Campus 2 not far from where we live, demand for our home will only increase.
We have no money worries today.
0 Replies
 
Robert Gentel
 
  0  
Reply Thu 31 Mar, 2016 01:20 pm
@engineer,
What do you think of EDF and BNDX? Those are the two bond holdings that I used to meet my meager 3% target bond allocation.
Robert Gentel
 
  1  
Reply Thu 31 Mar, 2016 01:23 pm
@Robert Gentel,
Looks like VBMFX is the Vanguard one that indexes the Barclays Capital Aggregate Bond Index that I think it was that you are recommending.
engineer
 
  2  
Reply Thu 31 Mar, 2016 01:35 pm
@Robert Gentel,
All of those are tied to similar indices and would be fine. I do use VBMFX.
engineer
 
  2  
Reply Thu 31 Mar, 2016 01:40 pm
@engineer,
For grins and because I can't help crunching data once I've gone through the trouble of collecting it, here is what an investment of one dollar per quarter from 1/1/1990 to 4/1/2016 looks like with rebalancing (opposed to a single investment in 1990):

All Stock $244.87
90% Stock $246.21
80% Stock $246.75
70% Stock $246.52
60% Stock $245.53
50% Stock $243.80
All Bonds $225.41
Robert Gentel
 
  0  
Reply Thu 31 Mar, 2016 01:56 pm
@engineer,
Thanks!
0 Replies
 
Robert Gentel
 
  1  
Reply Thu 31 Mar, 2016 01:58 pm
@engineer,
Interesting, but now it's somewhat validating my 85% stock target allocation, that is where it performed the best in those numbers.
 

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