A gone fishing portfolio is a portfolio of just a few stocks which should weather the ups and downs of the market fairly well while only rebalancing twice a year. We recommend a gone-fishing portfolio for people who are just getting started with investing. For people with more invested assets or who are in or near retirement, we recommend professional management. For that reason, our calculators do not make recommendations beyond age 70.
Our standard gone-fishing portfolio can be used at any custodian. The custodian-specific portfolios try to use securities which have no transaction fee at the particular custodian. For investors who are just getting started, even small transaction costs can be prohibitive.
If you are just getting started with investing and have not yet selected a custodian, we recommend Vanguard.
This year, our different gone fishing portfolios based on which custodian hosts your accounts are:
A Review of 2018 Returns
Each year, we use the Age 40 Asset Allocation (85.4% stocks and 14.6% bonds) for performance comparison. During 2018, these gone-fishing portfolios had a return of:
- -8.59% for the TD Ameritrade portfolio (Expense ratio of 0.23%)
- -9.80% for the Default portfolio (Expense ratio of 0.19%)
- -10.21% for the Fidelity portfolio (Expense ratio of 0.11%)
- -10.51% for the Vanguard portfolio (Expense ratio of 0.22%)
- -11.51% for the Schwab portfolio (Expense ratio of 0.19%)
- -11.67% for the eTrade portfolio (Expense ratio of 0.28%)
It is normal that the different implementations of similar investment strategies have returns that vary across a 2.92% range. Differences in the funds that are selected produce random differences in each return of the year. Additionally, we purposefully limit the number of positions we allow in a Gone-Fishing portfolio. If one custodian doesn’t have some low cost fund selections, we may include other categories useful in portfolio construction. Those differences add up into the small amount of variability between the portfolios.
For comparison, here are the returns over the past year for various indeces:
- -4.38% for the all-stock S&P 500 Index
- -7.09% for the more appropriate 15% Stability / 85% Appreciation benchmark
- -8.93% for the MSCI All Country World Index
Asset allocation means you always have something to complain about. The worst performing asset category this year was Energy as represented in the Default portfolio by Vanguard Energy ETF (VDE) with a return of -19.96%. Low energy prices pulled down the returns of all of the portfolios with Energy funds.
That means that the Marotta 2018 TD Ameritrade Gone-Fishing Portfolio did better than the all of the other portfolios because TD Ameritrade did not have a commision-free energy fund with an expense ratio under 0.40%. This lack of an energy choice accidentally benefited the portfolio for the one year. Obviously if energy does well in 2019 the TD Ameritrade portfolio would under perform the others. After a no transaction fee list change at TD Ameritrade, we added the SPDR S&P Global Natural Resources ETF (GNR) with an expense ratio of 0.40% to the 2019 TD Ameritrade portfolio.
On the other end of the spectrum, the category with the best return in our Default Portfolio was U.S. Bonds as represented by Schwab US Aggregate Bond ETF (SCHZ) with a return down only -0.03%.
For most of the Gone-Fishing Portfolios, all the funds had negative returns for 2018. The Fidelity portfolio is the one exception.
While most of the bond funds were just slightly below a 0% return, the iShares Core U.S. Aggregate Bond ETF (AGG) in the Fidelity portfolio saw a 0.10% return, just slightly above 0%, and then the iShares Core International Aggregate Bond ETF (IAGG) saw a 3.38% return, surprisingly high for the year.
Also, our Fidelity portfolio is the only portfolio with sector allocations to technology and health care represented. Its healthcare fund, Fidelity MSCI Health Care Index ETF (FHLC), received a 5.53% return for the year and its technology fund, Fidelity MSCI Information Technology Index ETF (FTEC), had a return that was down only -0.37%.
You would think that with these positive returns the Fidelity portfolio would have performed the best, but it did not. The Fidelity portfolio had the second worst performing emerging markets fund and the worst performing small cap value fund, pulling down its overall return to the middle of the pack.
Foreign Bonds Analysis
I reviewed the returns of each portfolio’s foreign bond choice because of the poor return of the Invesco Emerging Markets Sovereign Debt Portfolio (PCY) during 2018. I found that the 3- and 5-year returns of PCY were comparable to Vanguard Emerging Markets Government Bond ETF (VWOB). We prefer VWOB because it is hedged to the U.S. dollar and because of its lower expense ratio.
Here are all of the foreign bond funds we use along with their expense ratio and recent returns:
|Symbol||Fund Name||Expense Ratio||1-Year Return||3-Year Return||5-Year Return||In Gone-Fishing Portfolio for|
|VWOB||Vanguard Emerging Markets Government Bond ETF||0.32%||-2.92%||4.96%||4.12%||Default|
|VGOVX/VGAVX||Vanguard Emerging Markets Government Bond Inv/Adm||0.49%||-3.01%||4.85%||4.19%||Vanguard|
|PCY||Invesco Emerging Markets Sovereign Debt Portfolio||0.50%||-6.15%||3.89%||4.60%||Schwab|
|EMB||iShares JP Morgan USD Emerging Markets Bond||0.40%||-5.47%||4.44%||4.07%||TD Ameritrade|
|IAGG||iShares Core International Aggregate Bond ETF||0.14%||3.38%||3.51%||—||Fidelity|
|EMCB||WisdomTree Emerging Markets Corp Bd ETF||0.60%||-3.08%||5.47%||2.66%||eTrade|
All of these funds are emerging market bond funds with the exception of iShares Core International Aggregate Bond ETF (IAGG). We believe that emerging market bond, although they may be more volatile and did not perform as well during 2018, will produce better returns over the longer term as seen in the 3-year comparisons against IAGG.
As a result, this year we did not make any changes to the foreign bond funds in our Gone-Fishing portfolios.
Foreign Developed Stock Analysis
The MSCI EAFE Index had a return of -13.79% for 2018. Meanwhile portfolios based on the EAFE Index performed slightly worse than the index:
- -14.56% Vanguard Developed Markets Index Fund Inv/Adm (VDVIX/VTMGX) part of the Vanguard portfolio
- -14.40% iShares Core MSCI Total International Stock ETF (IXUS) part of the eTrade portfolio
- -14.13% iShares Core MSCI EAFE ETF (IEFA) part of the Fidelity portfolio
We decided to swap IXUS out in favor of Vanguard FTSE Developed Markets ETF (VEA) in the eTrade portfolio. IXUS has an expense ratio of 0.10% while VEA has a lower expense ratio of 0.07%. In 2018, VEA had a return of -14.75%. Although VEA’s return was worse for 2018, this may simply be because small and mid cap performed worse than large cap and VEA with its 4,066 holdings probably pushed slightly more into small and mid cap than IXUS with its 3,513 holdings. Over longer periods of time, we would expect small and mid cap to perform better.
Freedom Investing in our Default Portfolio outperformed the EAFE Index averaging -11.22% with the following countries:
- -8.73% iShares Hong Kong ETF (EWH) part of the Default portfolio
- -9.19% iShares Switzerland ETF (EWL) part of the Default portfolio
- -11.33% iShares Singapore ETF (EWS) part of the Default portfolio
- -12.02% iShares MSCI Australia ETF (EWA) part of the Default portfolio
- -16.55% SPDR MSCI Canada StrategicFactors ETF (QCAN) part of the Schwab portfolio
Hong Kong, Sinagpore, Switzerland, and Australia were ranked “Free” by the Heritage Index of Economic Freedom. Taken together these countries performed better than the foreign index. QCAN (now ZCAN) is ranked just below the free category in “Mostly Free” and performed poorly as it contains a large segment of energy sector stocks.
The Schwab no-transaction fee selection required the use of a different set of countries and under performed the EAFE Index averaging -16.35% with the following countries:
- -13.73% SPDR MSCI United Kingdom StrategicFactors ETF (QGBR) part of the Schwab portfolio
- -16.55% SPDR MSCI Canada StrategicFactors ETF (QCAN) part of the Schwab portfolio
- -18.76% SPDR MSCI Germany StrategicFactors ETF (QDEU) part of the Schwab portfolio
These three countries were only ranked “Mostly Free” by the Heritage Index of Economic Freedom. Taken together these countries under-performed the foreign index during 2018.
The best foreign developed country return came from the TD Ameriprise portfolio which uses this fund:
- -10.38% SPDR MSCI EAFE StrategicFactors ETF (QEFA) part of the TD Ameriprise portfolio
Strategic factor SPDR funds use an index based on three factors: value, quality, and low volatility. Low volatility was the equity factor winner for 2018. The success of this particular fund (QEFA) shows the significant difference that factor investing can have on returns.
TD Ameritrade has two funds which could be used for Freedom Investing which last year had these returns:
- -8.73% iShares MSCI Hong Kong ETF (EWH)
- -9.19% iShares MSCI Switzerland Capped ETF (EWL)
While splitting the international allocation between these two funds would have increased returns in 2018, we would prefer being diversified among more than two different foreign developed countries. Even though TD Ameritrade had the best returns, we decided to change the foreign developed strategy to include a mix of half QEFA (the strategy EAFE und) and the other half divided between Switzerland (EWL) and Hong Kong (EWH) for 2019.
Fidelity offers commission-free country-specific exchange traded funds. So for 2019, we are going to drop iShares Core MSCI EAFE ETF (IEFA) and blend a mix of these six countries with economic freedom:
- iShares MSCI Hong Kong ETF (EWH)
- iShares MSCI Singapore ETF (EWS)
- iShares MSCI Switzerland ETF (EWL)
- iShares MSCI Australia ETF (EWA)
- iShares MSCI Ireland ETF (EIRL)
While the use of these funds increases the average expense ratio, we use them in the anticipation that the countries high in economic freedom will perform better. This change increases the number of holdings in the Fidelity portfolio by four. In order to keep the number of holdings in the portfolio to a minimum, we are dropping the sector allocations to FTEC and FHLC from the Fidelity portfolio.
Emerging Market Funds Analysis
We use five different funds across our Gone-Fishing Portfolios. Each custodian has different funds available for no-transaction fee trading. I did a complete review of emerging market funds to determine which fund should be selected for our Default portfolio.
|Symbol||Fund Name||Expense Ratio||Inception Date||1-Year Return||3-Year Return||5-Year Return||Approximate Number of Holdings||In Gone-Fishing Portfolio for|
|VWO||Vanguard FTSE Emerging Markets ETF||0.14%||3/4/2005||-14.77%||7.93%||1.13%||4,601||Default and Vanguard|
|SCHE||Schwab Emerging Markets Equity ETF||0.13%||1/14/2010||-13.56%||9.04%||1.63%||918||Schwab|
|IEMG||iShares Core MSCI Emerging
|QEMM||SPDR MSCI Emerging Mkts
|XSOE||WisdomTree Emerging Markets ex-State-Owned Enterprises ETF||0.32%||12/10/2014||-18.59%||9.02%||—||1,926||eTrade|
All five funds moved in sync with one another. Although the differences between the returns may seem significant, we would consider them relatively small.
Returns over relatively recent time periods have favored large and growth while other factors such as small and value may provide a better chance of superior performance during other time periods. Since QEMM uses strategic factors, it probably tilted in the wrong direction for recent market movements. Additionally SCHE has about 918 holdings to approximate the index while VWO has about 4,601. Consequently it is reasonable to assume that VWO pushes into mid and small cap more than SCHE. Normally this might produce a better return, but since recent time periods have favored large cap stocks over mid and small cap stocks this is probably the reason why SCHE out performed VWO.
As a result of all of these analysis, we decided not to change the Default portfolio’s emerging market’s fund leaving it as VWO. The use of factors by QEMM may be worth their extra expense ratio over longer periods of time going forward, but we favor lower cost investing whenever in doubt. SCHE has performed better for the past 3 and 5 years, but with VWO you get a larger number of holdings and we believe that tilting smaller may be worth the extra basis point of expense ratio for long term returns. We have also changed the fund in the eTrade portfolio from XSOE to VWO.
Summary of Changes to 2019 Portfolios
Some of the SPDR Funds have changed their names and ticker symbols. SPDR MSCI Canada StrategicFactors ETF (QCAN), SPDR MSCI United Kingdom StrategicFactors ETF (QGBR), and SPDR MSCI Germany StrategicFactors ETF (QDEU) are now SPDR Solactive Canada ETF (ZCAN), SPDR Solactive United Kingdom ETF (ZGBR), and SPDR Solactive Germany ETF (ZDEU) respectively. These are name changes only.
In the Default portfolio, we are replaceing EWH with ZHOK. SPDR funds added a SPDR Solactive Hong Kong ETF (ZHOK) with an gross expense ratio of just 0.20% and a net expense ratio of 0.14%. Although the fund’s inception date is 09/18/2018, we are using this fund to replace iShares MSCI Hong Kong Index ETF (EWH) in the Default portfolio. EWH has a higher expense ratio of 0.48% and does not use factor investing.
In the Fidelity portfolio, we are replacing IEFA with a mix of EWH, EWS, ENZL, EWL, EWA, and EIRL. We are also removing allocations to FTEC and FHLC.
In the TD Ameritrade account, we are replacing QEFA with a mix of half QEFA and one quarter to EWL and EWH. And we are adding an allocation to GNR.
In the eTrade portfolio, we are replacing DES with VBR, IXUS with VEA, XSOE with VWO, and RYE with VDE. All of these changes move the eTrade portfolio closer to the Default portfolio.
There were no changes to the Vanguard portfolio.
Reminder: Stay the Course
The adjustments we made to the Gone-Fishing Portfolios are not based on last year’s negative returns. In fact many of the changes are despite last year’s returns. Each change is based on finding a better fund or mix of funds available at each custodian.
We have a saying, “It is always a good time to have a balanced portfolio.” While we almost had a Bear Market in 2018, we believe down markets are the times when it is most important to stay invested.
It is easy to get out of the markets when they look risky. They always look risky. But it is difficult to know when to get back in.
We believe that it is always better to be in the markets than trying to time the markets.
Photo by Adrian Infernus on Unsplash