ETF Reliable Portfolio: 2022 Update & 2023 Investment Outlook

On November 12, 2021, we introduced ETF Reliable Retirement Portfolio (hereafter, ETFRRP) in conjunction with the marketplace service of Hoya Capital Income Builder (hereafter, HCIB).

For tracking purposes, the official The portfolio start date was November 9, 2021. The purchase price used was the previous day’s November 8, 2021 closing price. You have determined $500,000 as the opening price for your hypothetical portfolio. A great median value as representative of investors who have subscribed to services such as HCIB.

On October 4, 2022, I provided an update to my portfolio for Q3 2022. I called this update “the quarter where everything fell apart.”I wrote in Charlie Birello’s tweet that his classic 60/40 portfolio of US stocks/bonds was fell 21% year-to-date through Q3 2022, the second worst year on record (since 1931). Sadly, ETFRRP performed slightly worse than this benchmark in Q3.

However, the simple fact remains that ETFRRP underperformed this highly relevant index. Simply put, What you can call the other asset classes that I have included in the portfolio — international stocks, real estate and gold — all had very difficult quarters..

See the article above for the theory behind initial portfolio construction, and a full explanation of opening balances and positions. However, the next section briefly outlines key data points and concepts to lay the groundwork for the performance updates that are ultimately the subject of this article.

Portfolio structure and themes

Based on our 2022 investment outlook from several credible sources, here are the key themes that have driven our portfolio construction:

• Bias towards value stocks in the US – Recently, a relatively small subset of U.S. growth stocks has significantly outperformed virtually all other asset classes. Value stocks may offer a better risk/reward profile going forward, according to various analyses.
• U.S. stock returns may be only marginally higher than bonds – Striking a balance between risk and reward is worth considering, especially for retirees. I’m trying to find this balance in my portfolio.
• Great growth opportunities can come from outside the US – Vanguard’s mid-2021 update forecasts that eurozone stocks could outperform their US peers by about 0.5%. The range is 2.9% – 4.9% instead of 2.4% – 4.4%. Emerging markets also offered more potential, albeit with higher volatility and risk.

The table below reproduces the Exchange Traded Funds (“ETFs”) included in the Portfolio. However, weighting is specific to Hoya Capital Income Builder subscribers.

Broadly speaking, the portfolio consists of five asset classes:

1. US stocks
2. foreign stocks
3. Bonds/Tips
4. real estate
5. Money.

In conclusion for this section, although high dividend levels were not the primary focus of this portfolio, 9 of the 14 dividend-producing ETFs pay monthly and the remaining 5 pay quarterly. Of course, the two gold-backed ETFs do not pay dividends.

Q4 2022 & FULL YEAR UPDATE: WHERE RUBBER MEETS THE ROAD

The chart below provides a comprehensive overview of the ETFRRP’s performance compared to the major US market averages.

For full-year updates, we use the portfolio start date of November 18, 2021. Due to the short interval between this date and his December 31st, we did not issue a report for December 31st, 2021, so we do not know the exact starting number for 2022. Ironically, the market was fairly flat between those two points, so the numbers we’re reporting here are likely to be very close to the full 2022 report.

Simply put, as you can see, this fairly conservative portfolio had a strong fourth quarter. 7.98% gain. this is, Overall loss for the year is 12.18%, in contrast to the 18.66% YTD loss reported in Q3. We can accurately report that the portfolio dividend for calendar year 2022 was $13,006, or an overall dividend yield of 2.60%.

Since this is aimed at a balanced portfolio, we used the Portfolio Visualizer as a benchmark for our evaluation. Vanguard Balance Index, represented by mutual funds such as Vanguard Balanced Index Fund Admiral Shares (VBIAX). In our analysis, we included and flagged all dividends for reinvestment. We will introduce the results centering on Q4.

If you look carefully at the above, based on my Q3 starting point of $406,677, the final value calculated by Portfolio Visualizer is about $400 lower than my actual. During the quarter, I executed some minor rebalancing deals and some small profitable trade premonitions. This explains that the actual results are slightly better than those shown here.

What’s the point? ETFRRP’s outperformance in Q4 more than made up for its underperformance in Q3 when measured against the same index.Really very happy.

Then the same exercises for the period since its inception.

First, note that the closing balance of $438,583 calculated against ETFRRP in this exercise reflects a difference of only $180 from the fourth quarter exercise. In both cases, the results suggested by Portfolio Visualizer are in very good agreement with the actual results.

Secondly, I am very happy with the overall result. Between the additional asset classes I’ve included and what I would describe as a very modest amount of “active management” in terms of working a little trading instinct. ETFRRP outperforms the Vanguard Balanced Index not only in total return, but also in risk-adjusted metrics.

Rather than providing detailed breakdowns for each ETF, with the help of the GOOGLEFINANCE feature, we have put together a comprehensive spreadsheet with results by ETF for the fourth quarter and the full year. Please watch. After that, I will give you some brief comments.

With the exception of cash, essentially all asset classes experienced sharp declines in 2022. As I mentioned earlier, I called the Q3 update the “Quarter where it all fell apart.” Even gold, which was down sharply at that point, ended the year pretty evenly, starting a great rally in the fourth quarter.

In particular, interest rate sensitive asset classes have been disrupted. The four worst-performing ETFs in 2022, all down about 30%, were long-term government bonds and real estate.

But the message I always preach, to stay diversified, paid off nicely in the fourth quarter. As just one example, both in June and in December he wrote articles cautioning readers not to ignore the potential of foreign stocks. With that in mind, I can’t help but note that this was my best-performing sector in Q4, outperforming US equities overall.

One final comment before wrapping up this section. In mid-November, we increased the cash level of our portfolio to around 10%. In the past, I was almost fully invested across my asset classes of choice, typically with just 1-2% cash in my portfolio. However, I decided to give myself a little cushion based on my investment outlook for 2023, which I will present next.

Investment outlook for 2023

Before I go any further, I’d like to highlight a couple of past articles that I think are still very relevant today.

The first, On Intentional Asset Deflation and the Federal Reserve, was written in May 2022. We have summarized the research of Credit Suisse investment strategist Zoltan Pozar. In short, Pozsar was characterized by US household balance sheets swelled even more than equities by a breathtaking then-breathtaking increase. housing pricesWith that in mind, consider this short excerpt from an investment memo I’ve summarized.

Yields rise, stock prices fall, housing turn. (mine in italics)

The second article, The World Of 4,818 Faces An Uncertain Future, was written in August. In that article, we hypothesized that continued inflation combined with geopolitical shocks would make it difficult for the S&P 500 to recapture its all-time high of 4,818, which it reached on January 14, 2022.

In short, my view for 2023 is that investors, especially conservative investors, will do well to stay. Conservatively positioned and well diversified.

I’m not going to bombard you with tons of graphics, just a couple of very “big picture” comments.

First of all, Goldman Sachs (GS) here. In this chart, GS provides its view on the expected Fed Funds rate increase compared to what is currently priced in the market. As you can see, the market seems to be pricing about 0.75% cheaper than the GS. In other words, GS seems to take Jerome Powell’s “higher rates for longer” mantra very seriously.

Second, some very nice graphics I found from Vanguard.

Vanguard lists some broad asset groups along a scale that ranges from undervalued to overvalued, and where we think they are at the moment. At this point, you can quickly see that some other asset groups look “cheaper” than US equities.

In a recent memo to investors, Oaktree’s Howard Marks used the phrase “sea change.” I thought it captured the point in time I believe we are in. Over the past few years, low interest rates and massive economic stimulus have driven asset prices up with FOMO (fear of missing out) being the dominant driver. But now a sea change has occurred. A decent rate of return can be achieved from cash and short-term assets. This increases the return investors demand from the stock to adequately compensate for the additional risk they assume. As a result, it tends to depress the price of such stocks, or at least depress them.

What are some gists?

• Keep a reasonable portion of your portfolio in cash and take advantage of opportunities that may present themselves.
• Decent returns are very likely to be made from bonds, with the best risk/return profiles on the short end of the duration spectrum.
• Balance your equity investments between Global and U.S. according to Vanguard’s chart above

That is, as we said above, Conservatively positioned and well diversified.

I will stop for the time being. I hope this article has proved to be of some use, providing a perspective to consider. We would love to hear from you in the comments below!

Editor’s note: This article covers one or more microcap strains. Please be aware of the risks associated with these stocks.