Long Term Investing

The Krypto Fund is the name that I use for all our long term investments: IRAs, 401Ks, and all long term, taxable accounts. On February 10, 2007 I first described how it is managed in this blog, and have written about its style a few other times. From recent comments, obviously I need to repeat and update this management style.

For 2010, the Krypto Fund is up about 12% year-to-date - pretty good compared to the averages & hedge fund averages. Krypto Fund contains almost all index funds in different asset classes. I use canonical allocation percentages and manage around those benchmarks. I do adjust them as I age.

The canonical allocations NOW are this:
25% US stocks,
20% foreign stocks,
15% real estate funds,
25% fixed income bonds,
5% inflation-protected bonds,
5% gold & silver,
5% cash.

Since I think inflation protected bonds and fixed income bonds are greatly overvalued in bubble regions, the actual allocations NOW are 20% fixed income bonds, 0% inflation protected bonds and 15% cash with other asset classes at canonical percentages.

I use a spreadsheet to compute the asset class %'s, usually weekly based on Friday's prices.

US stock funds are Vanguard Total Market Fund, the corresponding exchange traded fund (ticker VTI), or the CREF Stock Account. [Mrs. Bunkerman was a scientist, so her retirement savings from work went to TIAA-CREF funds. Their "Stock Account" has some foreign stocks, so I reallocate these in the spreadsheet based on annual percentage components].

Foreign stocks are Vanguard Pacific Index, European Index and Emerging Markets Index Funds (& corresponding ETFs) - I allocate 1/3 of the total foreign stocks component to each, hence these are really 6.66% of total Krypto Fund each. Included here for total asset class calculations are the re-allocated CREF foreign stock amounts in correct proportions.

The real estate asset class is the Vanguard Real Estate Index Fund and the TIAA-CREF Real Estate Fund.

The fixed income bonds are the Vanguard Total Bond Market Index, various Long term municipal bonds, the TIAA traditional fixed income account, and the cash value of an old whole life insurance policy.

The inflation-protected bonds are Vanguard or TIAA-CREF inflation-protected bond funds, as appropriate.

Gold & silver are mostly American Eagle gold coins and silver bullion bars, plus ETFs for gold & silver (tickers are GLD and SLV, respectively), and the Vanguard Precious Metals Fund.

The Vanguard Real Estate Index Fund invests in REIT stocks, by the way, while the TIAA-CREF Real Estate Fund invests in actual buildings, etc., so they perform somewhat differently. Both are a bit leveraged, so I keep that asset class at 15%, rather than the 20% which would be appropriate for unleveraged real estate.

The spreadsheet computes the % size of each asset class each week. IF an asset class is more than 5% off its target percentage, I look to reallocate some funds to top it off if it's low or take some out if it's too large. For example, if the US stocks are over 26.25% of the total Krypto Fund, that's 5% off the target 25%. So I look to see what's low & move the excess 1.25% to other asset classes. One has to consider fund restrictions and taxes for frequent moves, but since we have multiple accounts, I have always been able to figure out a way to reallocate. See David Swenson's great book, "Unconventional Success" for a description of why this type of personal investing works well.

I have done long-term investing along this strategy for over 20 years. When I read his book, I was happy to see he agreed with me (joke haha) and I learned about the value of the inflation-protected bonds. So I added that asset class. I also recently became more aware of the leveraged in the real estate classes, so cut it back. I'm not perfect and continue to make changes as I see a need.

I also adjusted my rebalancing trigger to 5% from 10%, as I realized from his book I had been missing many good re-balancing opportunities with a 10% trigger. My percentages were pretty close to his, otherwise. Also, I have some gold & silver for many reasons.

On down moves, I make the re-allocations on the first 5%, BUT if another 5% adjustment is called for because of a down move, I wait awhile. Down moves can be fast & furious, and it's better to let the dust settle. This helped me alot in 2008 and 2009 to get more buying of stocks closer to the lows. In addition, for stocks, once the indices hit intermediate term highs, I make adjustments in them more frequently to keep the %'s close to canonical levels. This "buy-low, sell-high" and "sell high, buy low" intermediate term trading tactic lowers volatility and increases returns to help me stay fully invested at all times.

If some asset class is low, BUT is greatly overvalued, I put sale proceeds into cash as a buffer. Then when the low class readjusts to a more fair valuation, I buy it. This is the case with fixed income bonds and inflation-protected bonds now.

I love that name, The Krypto Fund. I like to think my dog, Krypto, pushes the computer key every week to do the reallocation. She accepts dog biscuits as payment. :-)

This investment methods works well: the Krypto Fund is at all time highs, even though the US stock market is almost 20% below its all time high. That buy-low, sell high and sell high, buy low asset allocation tactic worked well through the Panic of 2008 and the lows of 2009.

Word of the Day

"Quotidian" - adjective [$10]
Quotidian means something occurring daily.
Sentence: Krypto Fund rebalancing is NOT quotidian; I check it weekly, but often a month or more can pass before a change is made.