IRA for 2013

The IRA for 2013 went through a two-phased transition. I will try to walk through each transition in retrospective without adding any special treatment through hindsight.

Table 1. Allocations
Fund Weight Target
Legacy One 26% 0%
Legacy Two 2% 0%
Fixed Income 9% 10%
Dividend Aristocrats 51% 90%

I have used three services in the past year to guide my investment ideas. In addition, I have used my own ideas. I did drop two of the investment services. Let’s go through the reasons for dropping each service. The first service I will label Legacy Service One. This service invested without regard to macroeconomics. I will credit the service with being very upfront with that philosophy. It attracted me because I had seen too many services get caught up in trying to time the macro environment while also trying to get individual investments correct. The consequence could be an error in both forecasts and the portfolio looks terrible. I discovered that ignoring macroeconomics causes consequences when entire industries suffer and this service got caught up in multiple value traps. I participated in a few and ignored a few others. In the end, this was not going to continue working for me.

The second service I dropped followed macroeconomic trends but put their political bias on the forecast. They maintained very tight stop-loss targets on each stock and frequently got stopped out. I decided to drop them when they were not learning from their mistakes and maintained a forecast that was not supported by macroeconomic trends. For the stocks that remain, I’ll call these Legacy Service Two.

The service that remains has me invested exclusively in zero coupon bonds. My own ideas revolve around dividend investing and in particular looking for mis-pricing opportunities in the S&P Dividend Aristocrats group of equities.

Table 2. Annualized Returns
Fund Return
Legacy One 1.1%
Legacy Two 29.8%
Fixed Income -17.8%
Dividend Aristocrats 33.8%

While Table One shows the allocation between these four items, Table Two shows the annualized return of the four strategies. These returns are for the lifetime of each strategy. I didn’t break down the returns of each strategy for 2013. Instead, I just followed the entire account. For 2013, the return was 21.3% which is lower than the 29.6% return of the S&P 500.

After posting Table 2, I started wondering why I would drop the Legacy Service Two since that return looks good. To compare the service to the S&P 500 is to note the index has returned more than 60% during the same time period. Meanwhile, I am wondering why I continue to bother with the fixed income strategy. Since these are zero coupon bonds, they will always trade in a manner where they reach par at maturity. Because of that, there is always an upward pressure on price. Given the macroeconomic trends I expect over the first six months of 2014, I expect these bonds to move upward in price quite rapidly. That will be an interesting forecast to watch.

Meanwhile, the Dividend Aristocrats portion of the account is doing well but lagging behind the index. This is by design. After two strong years of price increases, I expect the index will have a down year in 2014. Dividend based investing should do better than the index in a down year. Again, another forecast that will bear watching.


Author: dmcnic

Educated as an economist, I now work as an Analytical Professional for a manufacturing firm. I have have a second job as a part-time lecturer at the University of Washington in Bothell. While all baseball interests me, the Mariners are my home town team. Married with one dog.

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