Sunday, February 22, 2009

ETF portfolio 2008 returns

2008 was an absolutely terrible year for all sorts of investments: the US stock market as measured by VTI returned -36.68%; developed foreign markets as measured by EFA returned -41.04%; and emerging markets as measured by VWO returned -52.47%. Bonds did much better: US investment grade bonds as measured by AGG returned 7.91%.

So how did you do last year? It's worth taking the effort to track your actual annual returns over time, and to compare those returns with standard indices. That gives you valuable insight into whether or not your investment strategy is any good. Perhaps you manage your own money by investing in individual stocks. Such tracking will then tell you whether your stock picking skills are up to the mark (I hope they are!). Or perhaps you're using a money manager. In that case, such tracking will tell you whether your money manager is worth the fees he or she is charging.

For my part, I've decided that my stock picking skills are not up to the mark, and that I'm not sure how to pick a money manager that's worth the fees. So I've been using a diversified portfolio of index ETFs (the actual portfolios are here). The only decision to be made in this strategy is how much risk you want to take on.

So how did these portfolios perform in 2008? Quite poorly, as one might expect. But the diversification between stocks and bonds did help---the more conservative portfolios lost less than the more aggressive ones. Here's a table summarizing the returns over the last 3 years:

ConservativeModerately conservativeModerately aggressiveAggressive

You can see more details on the returns in the various years here (including how the various components performed): 2008, 2007, 2006.

One final point about these portfolios and last year's terrible investment climate---there was lots of opportunity to do tax loss harvesting! The essential idea is to sell an ETF that is showing a significant loss (and there were plenty of such opportunities last year) and then buy it back after 30 days (to avoid a wash sale). In the interim, to make sure you continue to have the equivalent market exposure, you buy an alternate ETF that tracks a similar, but not the same, index (using an ETF that tracks the same index may fall foul of wash sale rules). When you do your taxes, the capital loss you incur with this sale can be used to offset other capital gains and up to $3,000 per year of ordinary income. The capital loss can be carried over to future years. I did some tax loss harvesting last year, so I think I'm set on capital gains for some time to come...:-)

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