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Old 10-19-2013, 11:25 AM   #21
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... one could just say "what would I invest in if I didn't choose one of those managed funds - how would it do w/o any extra tweaking?" In some ways, that is a better comp, as in both cases, the investor isn't doing any extra work.

It's back to the age-old question - does active management pay?
I think we agree that it's a 2-part question: what does "balance" itself bring to the table, and what does "active" get you?

A balance portfolio will have less volatility. But over the longer term, we would expect to get less return relative to 100% stock. Or is it so?

I am too lazy now to show a chart from Morningstar, where I compared the performance of Wellesley to VFINX (S&P500) from 1980 to the present time. Why 1980? That was the date that I started my full-time career, and had extra income to invest. It was also the start of the 2-decade long bull market.

Again, anybody can go to Morningstar to make a plot for himself, but as I recall, Wellesley trailed the pure equity portfolio in 1980-2000, but then made up for it in the 2000-2012 (the lost decade for stock), and ended up roughly about the same after 30 years. That's impressive!

A patient investor would get rewarded. But in real life can one sit on his hands for 20 years, while his brother kept bragging about his hot stocks? It is tough!

And then, I was looking at two portfolios that were not added to, nor withdrawn from for 32 years. During the accumulation phase or the spending down phase, the results would not be the same. We need to remind ourselves of that too!

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To my eye, D&C Bal tracks much closer to SPY than Wellesley, with what appears to be a slight lag and bit less upside volatility (look at the last half of 2007). Wellesley appear to pull ahead of them all, with less volatility. Even if I eyeball the Target Retirement fund with a tilt towards SPY, it does not pull it up that much.

The profile on D&C Bal says they can vary stocks from 25% to 75%. That seems like a lot of latitude to come up with something that tracks so close to SPY.
That took me by surprise too, to see their bond component does nothing to damp out the volatility.
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Old 10-19-2013, 01:31 PM   #22
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I had to revisit Morningstar web site to make the VFINX vs Wellesley plot to see again for myself. And I have a correction to make.

Wellesley only trailed the S&P index in the decade of 1990-2000. Here's the relative performance, if one invested $10K on 9/30/1980, then reinvested all dividends and cap gains. The exact dates were all on 9/30, the way Morningstar presented the results.

YearS&PWellesley
1980$10K$10K
1990$35.6K$36.7K
2000$208.4K$137.4K
2013$309.3K$352.4K

Again, these are 2 static portfolios. If you add or withdraw from the account during the 3 decades, your mileage will vary significantly.
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Old 10-19-2013, 06:59 PM   #23
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I believe you can increase your chances of success with actively managed funds by doing some screening for size, expenses, level of diversification & yes - even past performance.

However, you also get some lemons.

Over the years, I have had some active funds that have performed well - better than their relevant indexes - and they're still in my portfolio.

But I have had quite a few (way more than the ones I kept) that performed well for a while and then started trailing the indexes - sometimes, by a big margin. And those are not in my portfolio any more - and a few don't even exist.

So now, rather than take a chance, I only select index funds when I have the need to add a new fund.
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Old 10-19-2013, 08:16 PM   #24
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BIG APOLOGY!!!

Due to old age, or probably onset of dementia, I showed the performance of Wellington MF rather than Wellesley in the table in the earlier post.

A corrected table will be posted, along with some other info.
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Old 10-19-2013, 08:59 PM   #25
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Wellesley has low fees for an actively managed fund. Would it be a stand out if you have to pay 1.5% rather than 0.18%?
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Old 10-19-2013, 09:15 PM   #26
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I have redone the earlier work of looking up past performance on Morningstar. This time, I believe I got the numbers written down correctly for VFINX (S&P), Wellesley, and Wellington.

I did not use the Admiral shares for the latter 2, because one (or both?) did not exist in 1980. I was able to get the data to line up with Jan 1st of each decade. That will make it easier to compare data with another table that follows.

Looking at the table, we can see that during the boom tech stock decade of 1990-2000, any investor that held any bond would get pummeled by one who was 100% in stock. That's of course not surprising. But what I did not know was that Wellesley trailed behind by a huge amount. Same with Wellington, but to a lesser extent due to Wellesley holding 40% stock, vs. Wellington with 60% stock.

Since 2000, these two MFs made up their losses, due to the performance of fixed income assets.

So, what's new? If you hold bonds to temper volatility, you are going to trail the market when the latter is hot. The converse is going to be true. One cannot have his cake and eat it too.

DateS&PWellesleyWellington
1/1980$10K$10K$10K
1/1990$48K$42K$47K
1/2000$254K$115K$154K
1/2010$229K$225K$280K
1/2012$269K$273K$322K


So far, other than the absolute returns, there has been no surprise. There has been a decade for stocks, followed by a decade for bonds, and depending on your AA, you either beat the S&P or trail it.

But to settle the score of whether you can do the same or better than the MF managers at Wellesley and Wellington, I used cFire, a retirement calculator, to test 2 do-it-yourself portfolios: one with 40% stock, and the other with 60%. This should be representative of an investor who would maintain his own AA by balancing between S&P index and a bond index fund.

I set the expense ratio to 0.1% annual fee. The calculator rebalances on Jan 1st each year, I believe. I set the WR to 0, so that the portfolio keeps growing by compounding. And following are the numbers.

DateS&PDIY40/60DIY60/40
1/1980$10K$10K$10K
1/1990$48K$32K$35K
1/2000$254K$91K$129K
1/2010$229K$129K$161K
1/2012$269K$146K$188K

Comparing this table to the one above, I would say that the managers of Wellington and Wellesley earned their keep!

PS. Morningstar shows amounts in nominal dollars. cFire, same as FIRECalc, shows amounts in 1980 dollars. Hence, I already looked up the cumulative inflation to correct for the dollar amounts in the 2nd table. In other words, all the amounts shown are in nominal dollars, at their respective indicated time.
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Old 10-20-2013, 07:26 AM   #27
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As far as I know,this is ALL of their equity funds, for as long as they have been in existence, and there have been no "mistakes" covered up.
Again, as far as I can tell, my returns have been the same as the published numbers.
The fact that they are promoting their track record, I don't take as a negative, just a fact. That this record goes back so far, seems to lend more credence to it.
They do echo some of the themes of indexing, saying that expenses make a difference. Their A class shares, which I own, although higher than most indexes, are well below mutual fund averages.
I've considered blowing the funds up and investing directly in individual equities to eliminate this expense, but it would be very hard to do competently, especially w/r/t small cap and international securities.
They don't use a single manager, nor is their style to use a committee. They divide the portfolio up among several different individual managers, lessening the risk of having either a star manager leave, or one manager totally screw up. They pay the managers based on long term performance versus the indexes and their peers, I believe.
The advisor that set the plan up always said that if he had to disappear for a decade and wanted to have his money looked after, this is the investment management company he would use.
I think you've made a very good case for sticking with the portfolio based on American funds. You did not pay the load, and even if you did, that would be done. The performance is another issue, but very complex to evaluate.

I had one int'l American fund in my 401K but went with the extremely low cost Developed Market and Emerging Markets generic index offerings (not American). To each his own.
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Old 10-20-2013, 10:03 AM   #28
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But to settle the score of whether you can do the same or better than the MF managers at Wellesley and Wellington, I used cFire, a retirement calculator, to test 2 do-it-yourself portfolios: one with 40% stock, and the other with 60%. This should be representative of an investor who would maintain his own AA by balancing between S&P index and a bond index fund.

I set the expense ratio to 0.1% annual fee. The calculator rebalances on Jan 1st each year, I believe. I set the WR to 0, so that the portfolio keeps growing by compounding. And following are the numbers.

Date S&P &nbspIY40/60 &nbspIY60/40
1/1980 $10K $10K $10K
1/1990 $48K $32K $35K
1/2000 $254K $91K $129K
1/2010 $229K $129K $161K
1/2012 $269K $146K $188K
Comparing this table to the one above, I would say that the managers of Wellington and Wellesley earned their keep!
NW, is it possible you've got an error somewhere? The underperformance level of the DIY portfolios seem suspiciously high. For example, at the end of the 1980-2000 period, the 60/40 investor had a total portfolio value that was less than 60% of that of the S&P investor (i.e. he would have been better off to have burned the 40% of the money rather than to have put it into bonds?) . Maybe dividends weren't invested in the DIY case, or one of the inflation conversions was not quite right?
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Old 10-20-2013, 10:59 AM   #29
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NW, is it possible you've got an error somewhere? The underperformance level of the DIY portfolios seem suspiciously high...
I will readily agree that the DYI performance is so disappointing, and needs looking further into.

Here's the info for people to doublecheck my work. The financial calculator I used was cFIREsim, but I think you can coax the same info out of FIRECalc.

There are many web based inflation calculators. I usually use inflationdata.com, but it acted up yesterday. So, I used usinflationcalculator.com. The first lets me specify the month of the starting and ending years, so there's no confusion. The latter only allows the entry of years, and I have to assume that it computes whole year inflation.
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Old 10-20-2013, 11:00 AM   #30
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NW, is it possible you've got an error somewhere? The underperformance level of the DIY portfolios seem suspiciously high. For example, at the end of the 1980-2000 period, the 60/40 investor had a total portfolio value that was less than 60% of that of the S&P investor (i.e. he would have been better off to have burned the 40% of the money rather than to have put it into bonds?) . Maybe dividends weren't invested in the DIY case, or one of the inflation conversions was not quite right?
I agree. From 1/1980 to 1/2012 $10k in the Vanguard 500 fund grew to $268k and $10k in the Total Bond fund grew to $252k......wouldn't a 60/40 portfolio have grown to $261k?
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Old 10-20-2013, 11:06 AM   #31
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I agree. From 1/1980 to 1/2012 $10k in the Vanguard 500 fund grew to $268k and $10k in the Total Bond fund grew to $252k......wouldn't a 60/40 portfolio have grown to $261k?
If one puts a certain percentage into each, then never rebalances, then the end result would be easily computed.

If one trades between them, then it will be different, although intuitively, I would hope to be ahead, because I would be selling high, buying low. But that only works in case the market jumps up/down, not when it is trending for 10 years or more.

If stocks keep rising for 10 years like it did, and you keep selling it to buy bonds, by the time bonds turn around, you do not have as much money. In fact for the next 10 years, you would keep selling bond which was rising now. Rebalancing in a secular bull market works against you.
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Old 10-20-2013, 11:07 AM   #32
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I agree. From 1/1980 to 1/2012 $10k in the Vanguard 500 fund grew to $268k and $10k in the Total Bond fund grew to $252k......wouldn't a 60/40 portfolio have grown to $261k?
Not necessarily. Because of the annual rebalancing that NW was modeling it's not accurate to just do a ratio of the ending amounts. But no matter what, the 60/40 portfolio should have done better than if the "40" had been flushed down the toilet on day 1.
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Old 10-20-2013, 11:13 AM   #33
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If one puts a certain percentage into each, then never rebalances, then the end result would be easily computed.

If one trades between them, then it will be different, although intuitively, I would hope to be ahead, because I would be selling high, buying low. But that only works in case the market jumps up/down, not when it is trending for 10 years or more.

If stocks keep rising for 10 years like it did, and you keep selling it to buy bonds, by the time bonds turn around, you do not have as much money to buy it. In fact for the next 10 years, you would keep selling bond which was rising now. Rebalancing in a secular bull market works against you.
Sure I took a simplistic approach......but I can't believe that the performance of a 60/40 portfolio with rebalancing is as bad as NW-Bound indicates, there must be an error somewhere. If not it's a very persuasive argument against rebalancing.
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Old 10-20-2013, 11:34 AM   #34
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Sure I took a simplistic approach......but I can't believe that the performance of a 60/40 portfolio with rebalancing is as bad as NW-Bound indicates, there must be an error somewhere. If not it's a very persuasive argument against rebalancing.
In the past, I provided a link to an interview where Mr. Bogle said he "was not much of a rebalancer" for the same reason: you are selling out of a rising asset too soon.

About possible errors in the info I presented, they are quite possible. I named the web based tools that I used in a post above. If not I, the authors of these software might have made programming errors too.

Another way to check this is to get annual returns of index funds from Morningstar, then run a historical rebalanced portfolio using Excel. I am a bit too lazy to do that now.
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Old 10-20-2013, 11:46 AM   #35
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In the past, I provided a link to an interview where Mr. Bogle said he "was not much of a rebalancer" for the same reason: you are selling out of a rising asset too soon.

About possible errors in the info I presented, they are quite possible. I provided the web based tools that I used in a post above. If not I, the authors of these software might have made programming errors too.

Another way to check this is to get annual returns of index funds from Morningstar, then run a historical rebalanced portfolio using Excel. I am a bit too lazy to do that now.
What results do you get if you don't rebalance? It should be $261k from 1/1980 to 1/2012.

Edit....oops my numbers are wrong because the Vanguard Bond and 500 funds weren't around in 1980, overlaying them on Morningstar against Wellesley lead be wrong. Still I can't believe that a 60/40 portfolio would have performed so poorly from 1980 to 2012.
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Old 10-20-2013, 11:56 AM   #36
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In the past, I provided a link to an interview where Mr. Bogle said he "was not much of a rebalancer" for the same reason: you are selling out of a rising asset too soon.

About possible errors in the info I presented, they are quite possible. I named the web based tools that I used in a post above. If not I, the authors of these software might have made programming errors too.

Another way to check this is to get annual returns of index funds from Morningstar, then run a historical rebalanced portfolio using Excel. I am a bit too lazy to do that now.
I'm guessing that some of the problem is from mixing/matching different tools, inflation numbers, etc. I don't have time now either, but if we can get the growth numbers of the two indexes by themselves, divs/dist re-invested, and keep inflation out of it for any intermediate calculations, I think we have a good basis. We can then calc the straight 60/40 & 40/60 mixes from there.

With the strong 90's bull in this time-frame, I actually think that the rebalancing will hurt much more than most would assume.

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Old 10-20-2013, 12:26 PM   #37
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I'm guessing that some of the problem is from mixing/matching different tools, inflation numbers, etc. I don't have time now either, but if we can get the growth numbers of the two indexes by themselves, divs/dist re-invested, and keep inflation out of it for any intermediate calculations, I think we have a good basis. We can then calc the straight 60/40 & 40/60 mixes from there.
Aw, come on ERD50! It's about time someone else steps up and does some community service.

I remember a sign someone hung up at megacorp that read something like "It's something anyone could have done, but no one bothered to do it..." or something like that.

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With the strong 90's bull in this time-frame, I actually think that the rebalancing will hurt much more than most would assume.
Looking at the balanced portfolios vs the pure stock portfolio in the time frame of 1990 to 2000, one may notice the dismal performance at the end point after 10 years, and forgets that he has been selling his rising stocks for rebalancing in 1991, 1992, 1993, 1994, 1995, 1996, etc...

So, at the end of the boom period in 2000, he only has a few shares left.
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Old 10-20-2013, 12:58 PM   #38
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Aw, come on ERD50! It's about time someone else steps up and does some community service.
Hey, I may be too lazy to do real work, but I'm never too lazy to be a critic!

Everybody wants to be a sniper, nobody wants to be an infantryman.
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Old 10-20-2013, 01:12 PM   #39
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Hey, I may be too lazy to do real work, but I'm never too lazy to be a critic!

Everybody wants to be a sniper, nobody wants to be an infantryman.
Fine. That's usually the case.

Now, do I need to start another thread entitled "The case for not rebalancing"?

I searched and found the interview that I linked, where Bogle himself said rebalancing could hurt you.

It's here: Bogle on future returns.

A snippet of the transcript follow.
"Well, I am not basically a rebalancer. In the long run, rebalancing is going to cost you because the higher-yielding, the higher-returning, asset is going to get to be a bigger and bigger part of the portfolio, and if you suppress it by rebalancing, you will almost definitely have a lower return over the long run.

In the short run, that's something else, and I think if people want to rebalance, that's fine."
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Old 10-20-2013, 02:01 PM   #40
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Now, do I need to start another thread entitled "The case for not rebalancing"?
I
No, it's well known and understood that rebalancing, over time, lowers returns. The purpose of rebalancing is not to improve returns, it is to reduce portfolio volatility.
Rebalancing hurts returns because, in general, riskier assets (e.g. emerging market stocks) have higher returns than less risky assets (e.g. govt bonds). Since the riskier assets will be growing more (in general), a rebalancing investor is more often selling high-return assets to buy lower-return assets.
So, if an investor didn't care about volatility of the overall portfolio, he would never rebalance. Moreover, he would own only the very riskiest assets to begin with, since their expected return is higher. Most of us don't do that.

Jack's interview answer misses the point of rebalancing.
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