Re-balancing Index Portfolio (pseudo Permanent Portfolio) and Challenges

First, let me welcome 2 new subscribers to my blog since my last post 2 days ago. Thank you for joining us.

In this post, I will do a simple update of my index portfolio as there may be some interests on this since my last update was quite a while ago in Oct’17 for a Q3 look-back. You can click the Q3 review here.

In case some of you are not aware, I am trying to mimic a permanent portfolio here with an index portfolio (BUT customised to Warriortan’s preference :-))

(Click here – permanent portfolio – if you are interested to find out more)

I want to create a portfolio made up of index ETFs (and some unit trusts) that requires minimal maintenance, includes regular investment (only in SG Bond and STI ETFs), re-balances the portfolio only once every quarter  and still earns a decent return. The trade-off here is time against return. I only want to spend a few hours (the most) every quarter of the year on it and I can accept a single digit annual return. I think this is a fair return for the time spent. I have a fixed ratio of bonds-equities-gold-Reits exposures that I am interested to keep. I don’t choose individual stocks.

From Mar to Dec 2017, my index portfolio appreciated 7.3% in value (over cost) and gives 2.7% dividend yield (based on cost). This brings the total gain to 10.0% for the 9 months. Not spectacular but considering the little time I spent to manage this portfolio, the return is decent.

With the rally seen in many stock markets in the last quarter of 2017, my index portfolio became increasingly slewed towards equities and most significantly, Reits. Gold also climbed and as a result of all these, the % of bonds dropped. Details as follows:

As @ 31 Dec 2017,

1. Bond = 35% (down 4% from end Q3)
2. Equities = 40% (up 1%)
3. Gold = 5% (same)
4. Reits = 20% (up 3%)

My target ratios for these 4 asset classes in 2017 and now in 2018 remains the same at:

1. Bond = 40%
2. Equities = 40%
3. Gold = 5%
4. Reits = 15%

Clearly, the portfolio at end 2017 was too light on Bond and too heavy on Reits.

Going by the principles of permanent portfolio, I should immediately re-balance my index portfolio to my target ratios. I have 2 options to choose – buy more Bonds and Gold OR sell Reits, Equities and Gold. So, as some of you might have caught it in my earlier post this month …. YES, I have been buying Bond ETFs – specifically iShares J.P. Morgan USD Asia Credit Bond Index ETF and iShares Barclays USD Asia High Yield Bond Index ETF. Both are listed on SGX.

I chose the Buy option because I want this index portfolio to grow and increase in value over time. I don’t want to sell to decrease its value. Furthermore, doing 2 things seem to be easier than doing 3.

The ratios as of today stand at:

1. Bond = 39%
2. Equities = 38%
3. Gold = 5%
4. Reits = 18%

Close by not there yet 😦

I realised it was not easy to re-balance it to the desired ratio unless you do all the buy/sell transactions in one fell swoop. I took me a month already and still it is not to my targeted ratios yet (That’s the first challenge).

The second challenge was my reluctance to sell. The easiest was to sell Reits and that will pop up the Bonds and Equities immediately. But I really want to increase its value instead of reducing it. Maybe that’s a self-imposed challenge and maybe that’s the right approach. But I like to experiment with my approach for a while more – so, I will add more Equities and a little bit more of Bond to meet ~ 40% each in the coming weeks … dragging the re-balance process longer.

The third challenge I faced was that the value of my index portfolio is NOT big. Hence, I only need to make small transactions to re-balance it. But as most of you know, small value transaction attracts a corresponding high transaction expenses and that’s painful!

Furthermore, the fourth challenge is that re-balancing portfolio needs more capital ($$$) if I choose the Buy option and that’s a scarce resources …. I will review my decision not to use the “sell” option in the course of this year. (Cut me some slack … I am still learning)

But no matter what, I am determined to keep and grow this index portfolio. Will keep working on and hope I will have better news on this by April.

If you have any advice or experience to share, I welcome them wholeheartedly.

Till then, take care.

Warriortan