Recently, I have made a major change in my approach to investing. I originally followed John Bogle’s advice to invest in just one fund: the Total Stock Market index (TSM). However, as I was searching for a good a method to withdraw funds during retirement, I discovered the shortcomings to TSM.
I now recognize that slicing TSM into its component parts (large-cap growth, large-cap value, small-cap growth, small-cap value), would better serve the retiree when withdrawing funds to meet current living expenses. This new approach is called ‘slice and dice’. I explain ‘slice and dice’ in greater detail here and here.
(Updated 7/13/03)
This month I will be buying Nuveen California Quality Income Municipal Fund (NUC), another closed-end municipal bond fund. You may download my recently updated Excel file. Or you may view it here.
(Updated 6/11/03)
A few months ago, I wrote about closed-end California municipal bond funds. If you’re not familiar with closed-end municipal bond funds, this article will provide some explanation. Although I sold my bond funds, I've been doing more research. And found that I overlooked two important factors where the state's general obligations are concerned.
The first factor is that the top 10 holdings of a fund are listed in reports such as Morningstar or the fund’s own annual and semi-annual reports. Often times, none of the top holdings (individually) make up more than 5% of the fund.
The second factor is that the quality rating (AAA, AA, etc) is also listed in these reports. I found some funds which have only a small percentage (under 25%) in securities with a quality rating under AA. With a rating of A, the state’s general obligations would not be a major holding.
After this research, I have become much more comfortable and confident owning closed-end California municipal bond funds. The question becomes how does one choose one of these funds? Currently, there are 36 such funds available.
I have selected the following criteria:
1) volatility
2) quality rating
3) call schedule
4) yield
It would be too long to explain the details of my sort process. To put it simply, only funds that are in the top third of the above four categories are candidates for purchase. You may download my Excel spreadsheet that I recently generated. The bottom line? I chose to purchase Van Kampen California Quality Municipal Trust (VQC). To create a diversified portfolio, I will buy 5 more funds during the next 6 months.
(Updated 4/23/03)
According to this article, the State of California is making preparations to issue IOUs if the legislature is unable to resolve the budget crisis.
Will the state be issuing IOUs instead of dividends on their bonds? Dunno. And I’m not waiting to find out. Not taking any chances, I sold my California municipal bond funds today.
And so this ends my involvement with closed-end California municipal bond funds. Maybe after this crisis is resolved, I will take another look.
(Updated 3/13/03)
It’s been a while since I posted an update. But I haven’t altered my strategy in the last several months. However, today I felt compelled to make a shift in my outlook. During this bear market, I have been letting my stock holdings drift with the decline in the market. Normal strategy is to rebalance regularly, usually once a year. But I’ve been very cautious to allocate a greater amount to stocks.
I follow Bob Brinker. Earlier this week, Brinker made call to return cash reserves to stocks. I was a bit reluctant to do so at first. But today, the market rally strongly. I take this to be a positive sign. Plus there were other market timers who made buy recommendations as told by this article.
Now I generally shun market timing. But I do let it help me decide when to feed more cash into stocks. Right now, my allocation is 33/67 (stocks/fixed). So I have plenty of room to make a shift. So my new strategy is to resume dollar cost averaging and buy on the dips.
New topic: closed-end municipal bond funds. Last year, I started buying these funds. But I wanted to make sure that the income was tax-exempt. Well, I received my tax statement from my brokerage firm. And sure enough, they are. So I’m pleased. And the yields are pleasing, too.
(Updated 8/1/02)
July's severe market swoon has me rethinking my investment strategy. As I wrote here about asset allocation, I decided to alter my asset allocation parameters. Instead of being a 60/40 stock/fixed income investor, I will be a more conservative 50/50 investor.
My current asset allocation stands at 45/55. This even milder mix was due to the shrinking of my stock holdings caused by the markets decline and some selling to get a good nights sleep. O.K. I admit I was scared by the sell off.
But I didn't panic out. I'm still in the game. The market will recover some day (sooner I hope). I won't touch my stock/income allocation. I'll just allow the stock part to rise up naturally to achieve my new 50/50 target mix.
(Updated 5/8/02)
I have now completed my dollar-cost average program of bringing my asset allocation to my target mix of 54% stocks and 46% fixed income. I decided to do a little fine tuning with my stock mix. My 401(k) stock fund is the S&P 500 index. To get more mid-cap exposure, I will be buying some MDY in my taxable account. Like the exchange traded fund SPY for the large-cap S&P 500 index, MDY is an exchange traded fund for the mid-cap S&P 400 index.
Also, I completed my research on California closed-end municipal bond funds. There are three important characteristics for selecting one of these funds: yield, trading volume and price range.
Yield: higher is better.
Trading volume: higher volume is better.
Price range: smaller price range is better.
Out of a list of 22 California closed-end municipal bond funds, 3 funds have a favorable combination of the characteristics I listed above. These three funds are Nuveen CA Quality Income Municipal (NUC), Nuveen CA Municipal Market Opportunity (NCO) and Nuveen CA Performance Plus Municipal (NCP).
Since I'm new to investing in California closed-end municipal bond funds, I want to wait and see my 1099-DIV statement for the 2002 tax year. My VCV fund has generated dividends for me and I want to make sure my brokerage statement treated the dividends as tax-exempt. I'll find out in January.
(Updated 3/12/02)
I follow a long-term asset allocation. My target mix is set for 62% stocks and 38% fixed income. The stock portion is well established. Based on reading such books as A Random Walk Down Wall Street by Burton Malkiel and Stocks for the Long Run by Jeremy Siegel, I place a substantial part of my stock holdings with broad-based index funds like the S&P 500 and the Total Market Index.
However, when it comes to the fixed income portion of my asset allocation, I am still learning. For several years, I've had nearly all of my fixed income assets in money market accounts. But with money market interest rates currently around 1% to 2%, I'm looking to diversify. I'm currently exploring five areas of fixed income investing: 5 year CDs, I-bonds, Ginnie Mae (GNMA) mutual funds, California Tax-Free mutual funds and closed-end municipal bond funds.
I have started with the CDs and I-bonds. I like CDs and I-bonds because the principal is fixed. I like CDs the best because the interest is specified for the life of the CD. In contrast, the interest rate of an I-bond is composed of two parts: a fixed rate that remains constant for the life of the I-bond and variable rate that is tied to inflation.
I have avoided bond funds because their principal value or NAV fluctuates inversely with interest rates. In theory, if you hold a bond fund for several years, these fluctuations will balance themselves out. In fact, if you reinvest the dividends of a bond fund, it acts like dollar-cost averaging. You'll buy more shares when the NAV drops and less shares when the NAV rises.
Nevertheless, I'm going to wait for a dip in NAV before I make my initial bond fund purchase. In fact, with interest rates anticipated to rise with the recovery in the economy, the NAV of the bond funds I've been monitoring have dropped a bit already this year.
I read about closed-end municipal bond funds in an article in the February 2002 issue of Money Magazine. These things seem very tricky. But they offer a very attractive rate: 6% federal and state tax free. The downside is that these things fluctuate more than ordinary bond funds. My strategy here would be to sell for a tax loss should the NAV be less than I paid for it at the end of the year.
After doing a little bit of research, I bought Van Kampen California Value Municipal Income Trust closed-end mutual fund [ticker: VCV]. There were some two dozen closed-end municipal bond mutual funds to choose from. I selected VCV based on its relative performance to the other closed-end municipal bond mutual funds and because there was a free research report at the Morningstar website.
(Updated 2/19/02)
My overall strategy is to set an asset allocation that would be 62% stocks and 38% in money market, CDs and I-Bonds during market peaks. If stocks decline, I choose not to rebalance. So my passive approach would allow the percentage in stocks to decline and the percentage in fixed income to rise. With the market down 28%, my theoretical asset allocation should be 55% stocks and 45% fixed income. However, last year I sold off most of my individual stocks and have yet to put all of the proceeds back into the market. So right now, my asset allocation is actually 50-50. Most of my stock market money is in index funds such as SPY, VTI and Fidelity's S&P 500 index fund.
I am working to raise my overall stock allocation to the 55-45 target mix. I do this one of two ways. First, I buy on dips. When the market declines 5%, I'll transfer 1% from fixed income to stocks. Otherwise if the market stays flat or rises for two months, then I will shift 1% from fixed income to stocks.
In my 401(k), I'm actually a little more aggressive. 75% of new money is buying the S&P 500 index and 25% is going into money market.
The above strategy is somewhat conservative for someone of my age and time horizon. But I do admit to want to "play" a bit. There's a historical market pattern that seems to occur during midterm Presidential election years. Major market bottoms have occurred during 1962, 1966, 1970, 1974, 1978, 1982, 1990, 1994 and 1998.
I follow Bob Brinker. And Brinker feels that there will be a major buying opportunity this year, a midterm Presidential election year. When Brinker gives his "buy" signal, I plan to shift money from fixed income to stocks and return to my fully invested 62-38 mix.
