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Clearly, Not Everyone Is Getting Rich Off The Stock Market

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Well, the NY Fed was out today with its Quarterly Report on Household Debt and Credit for Q4 2017. Clearly, Americans are in a lot of debt. Take a look. Just a couple of quick hits from the report. Total U.S. household debt rose $193 billion in the 4th quarter, to a new all-time peak of $13.15 trillion. That's 17.9% above the most recent trough in Q2 2013. Broken down by segment, what do you suppose was the largest gain in percentage terms? Credit cards, with a 3.2% increase. In the picture above, the widening gap represented by the red arrows reflects the fact that non-housing debt is rising at a faster pace than housing debt. Here's what's troubling about that. Below is a picture of the stock market, as represented by the S&P 500 index, over that same period; from the most recent credit trough in Q2 2013 to the end of 2017. And thus, the title of this article. Over that period, the S&P 500 index rose by 75%; from roughly 1,600 to 2,800. Apparently, ho
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Is Simpler Always Better?

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A quick thought for today.

Regular readers will know that, in general, I am in favor of relatively simple portfolios, constructed with low-cost, quality ETFs.

I just completed building The ETF Monkey Millennial Model Portfolio for Seeking Alpha. This portfolio is comprised of 7 ETFs, covering U.S. stocks, foreign stocks, REITS and bonds.

I received this comment from a reader:
The proposed portfolio is overly complicated. Why don't you simplify the above to 90% VT + 10% AGG or 90% VTI + 10% AGG? Slicing and dicing may look cool. But it promotes more rebalancing which creates more trading and thus more costs.
While I am in favor of simple portfolios, there are on occasions valid reasons to use two (or three) ETFs when it could be argued that one would do.

Let me give a simple example from this portfolio. Instead of using the Vanguard FTSE All-World ex-US ETF (VEU) for the portion of the portfolio dedicated to foreign stocks, I used a combination of the Vanguard FTSE Developed Markets ETF (VEA) and the Vanguard FTSE Emerging Markets ETF (VWO).

In this case, I did it for two specific reasons. First, the ratio of emerging markets to developed markets is fixed in VEU. As shown here, it is 19.20%.


Since I was designing a portfolio for millennials, with a long time frame ahead of them and therefore a little higher tolerance for risk, I actually increased the relative allocation of emerging markets. Here are the asset allocations for the portfolio:



Look at the portion highlighted in green. You can see that, of the overall 35% allocated to foreign stocks, I allocated 8% of this to emerging markets. That's 22.86%, a little higher than the fixed allocation in VEU.

Additionally, developed and emerging markets don't always move in sync. By using 2 ETFs, I also have greater opportunities to rebalance the portfolio should there be a significant divergence in one of the asset classes.

Finally, the expense ratios are typically cheaper for developed market ETFs than emerging market ETFs. VEA comes in at .09%, VEU at .13% and VWO at .15%. If an investor wants to lean heavily in favor of developed foreign markets, with perhaps just a tiny allocation to emerging markets, this too can be a nice, albeit minor, benefit. 

In summary, I like simple portfolios. But there are also times when breaking things down may offer desirable benefits.

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