How this early retiree is coping with the stock market’s losses in 2018

clicks | 5 months ago | comments: discuss | tags: bitcoin

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I can’t predict the future, but 2018 was bad for the markets, and 2019 could be worse. If you’re a seasoned investor, you’ve seen this before.
The Dow Jones Industrial Average DJIA, +0.39% was in positive territory much of the year, but ended with a blowout. It lost about 3.6%, counting dividends, for 2018.
If you’re new to the game, it’s a good time to check your risk tolerance, and possibly add to your portfolio at cheaper prices.
If you’re a retiree living off assets, caution is advised. I’ve been in a defensive posture for years. Most of my investing life I’ve held a roughly 50/50 stock/bond asset allocation. And I usually hold several years worth of cash, plus conservative investments like gold, balanced funds, and government bonds.
But my very conservative and diversified retirement portfolio did slightly worse than the Dow this past year. Every single one of my holdings, save one plus cash, had a loss.
Am I worried? Read on for my annual portfolio performance report….
Current holdings My core portfolio holdings have not changed since last year. The allocations are slightly different, due to different growth rates. But it’s still a familiar picture of low-cost Vanguard funds:
Fund Symbol(s) Expense Ratio % of Portfolio 2018 Return Vanguard Wellesley Income VWINX / VWIAX 0.22%/0.15% 34.70% -2.49% Vanguard LifeStrategy Moderate Growth VSMGX 0.13% 19.90% -4.91% Vanguard FTSE Social Index Fund VFTSX 0.18% 13.40% -3.45% Vanguard Total International Stock Index VGTSX / VTIAX / VXUS 0.17%/0.11%/0.11% 7.20% -14.43% Vanguard Inflation-Protected Securities VIPSX / VAIPX 0.20%/0.10% 4.70% -1.39% Vanguard Intermediate-Term Treasury VFITX / VFIU X 0.20%/0.10% 4.00% 1.10% SPDR Gold Shares GLD 0.40% 4.70% -1.54% digital currencies 0.80% -52.30% cash 10.50% 0.40% OVERALL 0.13% -5.79% (Note: Multiple symbols are for Investor/Admiral/ETF shares. Portfolio percentages are as of Dec. 31, 2018. Annual returns are for my shares — generally the less-expensive Admiral or ETF shares. Overall return is not a weighted average of individual returns, because holdings changed slightly during the year, but is close.)
Overall, my portfolio is currently allocated 45% in stocks, 38% in bonds, 6% in gold and digital currencies, and 11% in cash.
Of the stocks, 30% is international (taking into account the actual reported international holdings in all of my funds, not just in those funds labeled “International”). I’ve been comfortable with a relatively large allocation to international as a diversification away from the U.S.’s potential long-term economic woes including debt. But I paid a price for it this year.
Though it has been my tradition, I was not able to completely eliminate one of my holdings this year. (In years past I eliminated all of my expensive actively managed holdings, and most of my specialty funds.) But at least I avoided adding any complexity or financial chores to my life with any new positions.
Cash This year, given the aging bull market, I wanted to ensure enough liquidity on hand for living expenses and buying opportunities. I sold a large position in the early fall, to build up my cash.
In the presence of rising interest rates, I finally made the effort to get higher returns from my cash via a Schwab Money Market Fund. (Details are in the blog post Getting Higher Returns on Your Cash .) Though I made those changes too late in the year to impact my cash return much, we’ll appreciate the higher income in years to come.
Mutual funds Early in the year I made a small IRA contribution, purchasing more Vanguard LifeStrategy Moderate Growth VSMGX, +0.52% It’s one of my go-to balanced funds . By sometime in my 60s I expect to finish consolidating all of our holdings into one or more of Vanguard’s balanced offerings, plus some annuities .
The position I sold from to replenish our cash reserves this fall was our Wellesley Income VWINX, +0.16% VWIAX, +0.17% in a taxable account. I first checked that we would remain securely in the first two tax brackets and pay no capital gains tax.
Though I have written in favor of Wellesley in my article on balanced funds , and still own a substantial position, I’ve grown disenchanted with the managers’ attempts to actively outguess the market. I liquidated about 15% of our position.
Vanguard More than 80% of our holdings remain at Vanguard. I’d prefer to diversify management companies, but don’t think it’s worth the cost in money or complexity. The wisdom of choosing Vanguard was reinforced again this year as the company continued to reduce its already extremely low expense ratios:
A couple of my Vanguard funds cut their expenses yet again: VSMGX by 0.01 percentage point and VFTSX by 0.02 percentage point. Additionally, Vanguard is about to add low-cost Admiral shares of their FTSE Social Index Fund.
These are nice bonuses from Vanguard that might get lost in the shuffle of an up market, but will appear much more important in lean years. Research and common sense continue to demonstrate t...