Changing Asset Allocations
When I heard the news earlier this week of a possible referendum in Greece about the EU bailout and austerity plan, I entered a new limit order to sell our VEU shares (all world stock index except U.S.) if the share price dropped by 6%. It did and all of our shares were automatically sold. As I said earlier, I have had it with the volatility and general lack of benefit from owning this foreign stock ETF.
- Over the past 12 months, VEU is down 12.65%
- Over past 5 years, VEU is down 16.28%.
- There is no anti-correlation benefit, e.g., the price movements of VEU and VTI (U.S. stock market index) shares are tracking very closely, with VEU sadly showing both lower highs and lower lows.
In other words, what is there to like about holding VEU? Where is it headed over the next few years, with Europe in continual “who will be the first to default” turmoil?
Is the “you must have foreign equity exposure” rule of thumb really just another retirement planning “rule of dumb”?
I am 60 years old. I’m not waiting indefinitely for some light at the end of the foreign stock market tunnel.
After the the limit order triggered, I started researching and thinking about what to do with the resulting cash. I gave some consideration to buying one of the new specialized “retirement income funds” from PIMCO. I ultimately decided against it but I will revisit this again soon.
I also tried to buy some individual TIPS bonds on the secondary market but the prices were not attractive.
Instead, I bought a TIPS ETF from PIMCO: LTPZ This particular TIPS fund focuses on the longer maturity bonds, with an average maturity of almost 20 years. This adds some additional interest rate risk but according to the Fed, interest rates aren’t going anywhere anytime soon.
What appealed to me about LTPZ is its steady performance that is not correlated to movements of U.S. stock indexes. The fund is up 21.2% YTD, 12.7% over the past year, and has a 15.4 % annualized return since inception. The distribution yield is 3.30% while the expense ratio is only 0.20%.
We are now even more heavily weighted in inflation protected investments. Part of me thinks this is a bad idea but the actual numbers say something else. Core inflation is on the rise, which will make TIPS more valuable. I just need to keep a close eye on interest rate trends as compared to inflation trends. I will also put in a limit order on this holding to protect our position against a dramatic events.
So far so good this week as LTPZ is up 0.66% just since we bought it.
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