How Did the Bucket Portfolios Hold Up in 2018?
Conservative was better and cash was king--for a change.
Conservative was better and cash was king.
Those are the biggest takeaways after a review of my various Bucket portfolios' performance for 2018. Whereas 2017 was a classic "risk-on environment," the opposite scenario prevailed last year. Stocks performed for much of the year, especially in the third quarter, only to suffer punishing losses in November and December. Safety prevailed on the bond side, too, with short-term, high-quality bonds holding up best.
Similarly, my model portfolios underwent a turnabout in 2018 from the year prior. Whereas the Aggressive Mutual Fund and ETF portfolios, which feature equity allocations of at least 50%, fared best in 2017's rally, the equity-heavy Aggressive portfolios lagged their bond-heavier Moderate and Conservative counterparts last year. However, the fact that all of the portfolios have a sizable allocation to Vanguard Dividend Appreciation (VDADX) ((VIG) in the ETF portfolios), which outperformed the broad U.S equity market, helped mitigate further losses.
Last year was also the first year since the portfolios' launch that cash outperformed every other long-term holding in the portfolios. While high-quality bonds scored solid gains during the fourth quarter of last year, bonds suffered from interest-rate worries earlier in the year. Most bond funds ended the year right around where they started out, and lower-quality bond types generally lost ground.
Aggressive Bucket Portfolio (Mutual Funds)
8%: Fidelity Short-Term Bond (FSHBX)
10%: Harbor Bond (HABDX)
7%: Vanguard Short-Term Inflation-Protected Securities (VTAPX)
10%: Vanguard Wellesley Income (VWIAX)
10%: Vanguard Total Stock Market Index (VTSAX)
24%: Vanguard Dividend Appreciation (VDADX)
15%: American Funds International Growth & Income (IGIFX)
8%: Loomis Sayles Bond (LSBDX)
2018 Return: -3.38%
Moderate Bucket Portfolio (Mutual Funds)
10%: Fidelity Short-Term Bond
5%: Fidelity Floating Rate High Income ((FFRHX) )
15%: Harbor Bond
10%: Vanguard Short-Term Inflation-Protected Securities
5%: Vanguard Wellesley Income
10%: Vanguard Total Stock Market Index
20%: Vanguard Dividend Appreciation
10%: American Funds International Growth & Income
5%: Loomis Sayles Bond
2018 Return: -2.30%
Conservative Bucket Portfolio (Mutual Funds)
12%: Fidelity Short-Term Bond
5%: Fidelity Floating Rate High Income
20%: Harbor Bond
11%: Vanguard Short-Term Inflation-Protected Securities
5%: Vanguard Wellesley Income
23%: Vanguard Dividend Appreciation
7%: American Funds International Growth & Income
5%: Loomis Sayles Bond
2018 Return: -1.35%
Performance Recap: Cash and the more conservative bond positions--Fidelity Short-Term Bond and Vanguard Short-Term Inflation-Protected Securities--managed to post positive but still modest returns in 2018. Fidelity Floating Rate Income, which invests in senior loans with floating interest rates, also landed in the black for the year. (It appears in the Moderate and Conservative portfolios but not the Aggressive one.) On the equity side, one saving grace for all three portfolios was relatively strong performance from Vanguard Dividend Growth, the core U.S. equity holding. While it didn't escape losses, that fund's high-quality portfolio helped it best the S&P 500 by 2.5 percentage points last year. Vanguard Wellesley Income also enjoyed a solid year, relatively speaking, landing in the top 10% of allocation funds with similarly light equity weightings.
Portfolio Changes: The sole change to the portfolios occurred in August 2018, when I dropped Harbor International (HAINX) from the portfolio in favor of American Funds International Growth & Income. The advisor of Harbor funds switched Harbor International's management team following a streak of weak performance; new manager Marathon Asset Management initiated a raft of changes at the portfolio level, which led to a massive capital gains distribution. While the model portfolios are geared toward tax-deferred accounts, I opted to switch into a lower-drama international fund instead.
Aggressive Bucket Portfolio (ETFs)
7%: Vanguard Short-Term Bond ETF (BSV)
10%: Vanguard Short-Term Inflation-Protected Securities (VTIP)
13%: iShares Core Total USD Bond Market ETF (IUSB)
28%: Vanguard Dividend Appreciation Index ETF (VIG)
13%: Vanguard Total Stock Market ETF (VTI)
15%: Vanguard FTSE All-World ex-US ETF (VEU)
3%: Vanguard High-Yield Corporate (VWEHX)
3%: iShares JPM Morgan USD Emerging Markets Bond (EMB)
2018 Return: -3.37%
Moderate Bucket Portfolio (ETFs)
7.5%: Vanguard Short-Term Bond Index ETF
12.5%: Vanguard Short-Term TIPS ETF
7.5%: SPDR Blackstone / GSO Senior Loan ETF (SRLN)
15%: iShares Core Total USD Bond
22.5%: Vanguard Dividend Appreciation Index ETF
10%: Vanguard Total Stock Market ETF
10%: Vanguard FTSE All-World ex-US ETF
2.5%: Vanguard High-Yield Corporate
2.5%: iShares JP Morgan USD Em Markets Bond
2018 Return: -2.34%
Conservative Bucket Portfolio (ETFs)
13%: Vanguard Short-Term Bond ETF
15%: Vanguard Short-Term Inflation-Protected Securities
20%: iShares Core Total U.S. Bond Market
6%: SPDR Blackstone / GSO Senior Loan ETF
21%: Vanguard Dividend Appreciation ETF
7%: Vanguard FTSE All-World ex-US ETF
3%: Vanguard High-Yield Corporate Bond
3%: iShares JPMorgan USD Emerg Markets Bond
2018 Return: -1.28%
Performance Recap: The performance of these three portfolios closely mirrors that of their mutual fund counterparts. As with the mutual fund portfolios, the Conservative ETF bucket portfolio held up the best, losing roughly 1.3%. Meanwhile, the Aggressive portfolio, which features a 56% bond weighting, fared the worst. All three portfolios benefited from their exposure to Vanguard Dividend Growth, which outperformed the broad market last year. SPDR Blackstone/GSO Senior Loan, a floating-rate ETF, posted a small loss in 2018 even as Fidelity Floating Rate High Income, a position in the mutual fund portfolios, gained ground. While all floating-rate bond funds benefit from limited interest-rate sensitivity, the Fidelity fund is one of the most conservatively managed options in the category, and that was a plus in a tricky environment for corporate credits.
Portfolio Changes: None.
Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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