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Achieving a good mix
Old 03-14-2006, 08:32 AM   #1
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Achieving a good mix

When I finally light my FIRE, I hope to have my investments sufficiently diversified as to type and style, that I can cherry pick whatever is "up" (or at least less "down") to feed my income buffer.

What categories of stock move independently of one another so that I can get there? Here is what I understand now (right or wrong):

Stocks v. Bonds
Small v. Large
Value v. Growth
Domestic v. Int'l
Emerging v other

Given that I cherish simplicity, how many buckets would you create in order to maximize the likelihood that at any point in time, there will probably be some bucket that is doing better than the pack and is ripe for the picking (ouch - talk about mixing metaphors!)?

Seems like a lot of potential for overlap, e.g. small cap can be growth or value, value can be large, mid or small cap, etc.

Or should I just to a total stock fund, a scoop of international and let the law of averages and "regression to the mean" do the rest?

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Re: Achieving a good mix
Old 03-14-2006, 08:55 AM   #2
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Re: Achieving a good mix

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Originally Posted by Rich_in_Tampa
Or should I just to a total stock fund, a scoop of international and let the law of averages and "regression to the mean" do the rest?

Restricting yourself to two asset classes (stocks, large domestic and large intl) doesn't sound that attractive to me. I would also include:

Domestic high grade bonds
Domestic junk bonds
foreign bonds
domestic small and mid caps
commodities
real estate

If you can find cost effective exposure to other stuff (timber, art, etc.), I'd do that too. If I ever have the time, I will start playing around with tax liens, for example.
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Re: Achieving a good mix
Old 03-14-2006, 09:06 AM   #3
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Re: Achieving a good mix

Brew -

I am no bond expert but aren't junk bonds good when we are experiening a drop in interest rates, i.e. best chances of being compensated for the risk? And vice versa on high grade? You mentioned you selectively choose your junk bond exposure, how do the rest of us play in this area - just a mututal fund? You have made it (in previous threads) sound like junk bonds are not a buy n' hold type investment, true?

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Re: Achieving a good mix
Old 03-14-2006, 09:06 AM   #4
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Re: Achieving a good mix

Sorry - I didn't ask my questions very well* .

My intent was not to restrict to 2 classes, but rather to identify any number of those classes which would achieve the goal of having something ready to harvest under most stock market scenarios.

So, for example, would having large and small cap index funds, intn'l fund plus a total bond fund come reasonably close to doing that? OR would having a growth, value, and international fund plus bonds do it? Hope that helps explain what I meant.

Really showing my ignorance here - thanks for any advice.
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Re: Achieving a good mix
Old 03-14-2006, 09:17 AM   #5
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Re: Achieving a good mix

Rich -

You can go on and on about splitting and dicing styles, market cap, etc.* It will continue to be debated and it usually comes down to personal preference.* I would rather slice and dice but remember you have to rebalance and keep track of the portfolio.* If you really want to keep it as simple as possible, I think a 6 asset class portfolio could provide you with plenty of diversification.* What goes in the 6 is entirely up to you - could be domestic stocks and bonds as a base + (a combo of more or less) REITs, large/small Intl stocks, emerging markets, gold, intl bonds, commodities, timber stocks and so forth.* Just keep in mind - you have to be comfortable with it and you have to be able to manage it.* *
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Re: Achieving a good mix
Old 03-14-2006, 09:22 AM   #6
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Re: Achieving a good mix

Quote:
Originally Posted by wildcat
Brew -

I am no bond expert but aren't junk bonds good when we are experiening a drop in interest rates, i.e. best chances of being compensated for the risk?* And vice versa on high grade?* You mentioned you selectively choose your junk bond exposure, how do the rest of us play in this area - just a mututal fund?* You have made it (in previous threads) sound like junk bonds are not a buy n' hold type investment, true?

This is yet another case of "do as I say, not as I do."

I think every investor should have a small allocation to junk. *Right now, with credit spreads so tight and even the crappiest crap getting strong bids, I think it is a lot smarter to stay in something like the Vanguard junk fund because it tends to stay in the higher quality stuff (BB, some better quality B stuff). *If we get a market like 2002-2003, it will be time to opportunistically buy more junk.

I buy some individual junk issues where I think there is a strong return possibility and/or a lot more safety than the yield or rating would suggest. *So I think a lot of the recently issued barely investment grade or just into junk reinsurer exchange-traded preferreds offer strong value. *I also think the preferreds of some of the mortgage REITS (like ANH, MFA, etc.) look attractive. *But I am very picky and don't care for much of what is available at current prices.
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Re: Achieving a good mix
Old 03-14-2006, 09:29 AM   #7
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Re: Achieving a good mix

All of 2% of portfolio - VG High yield Corp bought back in 2002-2003.

The one lone 'idea' I haven't rolled up into Target Retirement 2015 yet. May wait.
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Re: Achieving a good mix
Old 03-14-2006, 09:46 AM   #8
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Re: Achieving a good mix

Gilette Edmunds book "retire early and live well on under a million dollars" had a decent, easy to read section on how many and which buckets made sense. IIRC, besides the usual stocks, bonds, and international stocks, he recommended energy, reits, and a few other things. His suggestions were to have at least 2-3 and ideally 4-5 buckets.

The problem with this is that correlation data isnt real current, nor are the studies. And what was the case 10-20 years ago might not be the case at all 10-20 years from now. There have been periods where everything did great, and periods where nothing worked.

My personal evolution has brought me to a couple of core total market/target retirement holdings, that I enhance with large and small cap value, and some junk as noted above via the vanguard fund.

Do note that an ER named Raddr who has his own board at raddr-pages.com has done some good looking through on the correlations and withdrawal rates. Last time I looked his best uncorrelated high returning mix was small cap value paired with a commodities fund like PCRIX. Hope you like the volatility on that one, but if you could stomach that, it was offering something over 6% SWR over 20 year test periods. Do note that PCRIX's basis of tips is being replaced with structured notes and that customers are leaving the fund at a good clip. And small cap value has had a very nice 5-10 year period behind us.

I guess the good news is that whatever you pick, as long as its not too heavily weighted to unusual or expensive funds and classes, and as long as you dont make it so complicated that you cant even measure how well you're doing, you'll find that you're right...wrong...right again...still right...really wrong...right again...fair to middling...and wrong...no...right...over time.
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Re: Achieving a good mix
Old 03-14-2006, 09:52 AM   #9
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Re: Achieving a good mix

Quote:
Originally Posted by Cute 'n Fuzzy Bunny
Do note that PCRIX's basis of tips is being replaced with structured notes
Can't let that one go. AFAIK, PCRIX will retain its TIPS exposure. They will just be housed "imside" the structured note.
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Re: Achieving a good mix
Old 03-14-2006, 09:56 AM   #10
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Re: Achieving a good mix

If you want a good introduction to asset classes and "what you should buy" pick up a copy of William Bernstein's "The Four Pillars of Investing". The book discusses different asset classes and the correlations between the different asset classes. Model portfolios are also presented that you may be able to use to develop your own asset allocation plan. Here's mine in a nutshell (9 funds):

Domestic:
Total US Market Index
Extended US Market Index
Value Index
Small Cap Index
Small Cap Value Index

International:
Total International Index
Pacific Index
Emerging Markets Index
International Value


Some areas are weighted more than others. I'm young, so no allocation to bonds for me. But you would probably want some of those.

William Bernstein is/was a neurosurgeon. Then he got interested in investing and wrote that book.
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Re: Achieving a good mix
Old 03-14-2006, 10:08 AM   #11
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Re: Achieving a good mix

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Originally Posted by brewer12345
Can't let that one go. AFAIK, PCRIX will retain its TIPS exposure. They will just be housed "imside" the structured note.
Point being, the fund may work differently, return differently, and be more expensive...intent of the comment being that past history is REALLY no predictor of anything with this fund. Although the changes might turn out to be not much at all.

Are you sure theres nothing else imside the notes besides tips?
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Re: Achieving a good mix
Old 03-14-2006, 10:17 AM   #12
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Re: Achieving a good mix

Quote:
Originally Posted by Cute 'n Fuzzy Bunny
Point being, the fund may work differently, return differently, and be more expensive...intent of the comment being that past history is REALLY no predictor of anything with this fund.* Although the changes might turn out to be not much at all.
Wrong. The fund will be almost exactly the same, except a smidge more expensive. What it was was a collection of assets. Now it will be a collection of the sale assets but in an IRS-approved box. The box is a legal fiction except for the frictional costs.

To give you an idea:

I had a life insurer client with treasury strips and crappy-crap junk bonds in such a box. The bonds had just about all defaulted, but the insurer refused to recognize the loss. That is, they refused to recognize ituntil their auditor and their regulator called "shenanigans!" on them.
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Re: Achieving a good mix
Old 03-14-2006, 10:33 AM   #13
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Re: Achieving a good mix

Mind telling me exactly what I said in the quote box above that is "wrong"? I say "the changes might turn out to be not much at all", and you say "wrong...the changes will be almost exactly the same".

Gimme a break.

Are you saying that the fund will always work exactly as it has, in the near to intermediate future? That its returns going forward will be the same as years past?

Remembering that the topic at hand is uncorrelated, diversified asset classes. I'm pointing out that going forward, commodities (and specifically this fund) may not be what they were in the past, which was uncorrelated to other asset classes and high returning.

As an aside though, if its such an innocuous change, why did the issuer fight it tooth and nail, and why are the investors leaving the fund? I know there are a variety of possible reasons, but I'm guessing most people investing in something like this arent a bunch of know-nothing rubes...at least not for the most part...
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Re: Achieving a good mix
Old 03-14-2006, 10:35 AM   #14
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Re: Achieving a good mix

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bunch of know-nothing rubes...
Right... I don't own PCRIX!!

(Though I probably would if I could get it through my self-directed 401k brokerage account)
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Re: Achieving a good mix
Old 03-14-2006, 10:38 AM   #15
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Re: Achieving a good mix

Quote:
Originally Posted by Cute 'n Fuzzy Bunny

Are you saying that the fund will always work exactly as it has, in the near to intermediate future?* That its returns going forward will be the same as years past?
Yep. I am convinced this is the case.

Why are people leaving? Who knows. Maybe they never understood what they bought (not the first time...). Maybe they are taking money off the table after a big run-up. Maybe they are clueless rubes who are allowing media reports to spook them (would be my bet).

Wil any specific asset class perform in the future exactly as it has in the past? Of course not, but history is usually some guide.
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Re: Achieving a good mix
Old 03-14-2006, 10:38 AM   #16
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Re: Achieving a good mix

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if its such an innocuous change, why did the issuer fight it tooth and nail, and why are the investors leaving the fund?
See Saluki's explanation.

Quote:
I'm pointing out that going forward, commodities (and specifically this fund) may not be what they were in the past, which was uncorrelated to other asset classes and high returning.
Well, that can be the response to every asset allocation dilemna and would make our efforts to build solid portfolios worthless.
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Re: Achieving a good mix
Old 03-14-2006, 12:14 PM   #17
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Re: Achieving a good mix

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Originally Posted by brewer12345
Yep. I am convinced this is the case.

Will any specific asset class perform in the future exactly as it has in the past? Of course not
Please pick one.

Let me help a bit with what I think the problem is, because I'm not up for another 5 pages of why I'm wrong when I'm not.

Is it fair to say that asset classes that have been good returners and uncorrelated to other asset classes in the past may not be good returners (or as good of a returner) or uncorrelated (or as uncorrelated) to other asset classes during the investing term of an early retiree?

Because you're stuck on whether the fund will structurally be different and behave differently as a result of the substitution of the underlying leveraged asset class, and I dont care even a little bit about that. My point was, actually having read the thread and its topic, was that historically commodities and small cap value have provided a highly uncorrelated, high safe withdrawal rate, but that this may not be the case in the future

Is the bolded statement "wrong"? If so, will you explain how, so that I can compose my statements in the future to avoid nit picking?
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Re: Achieving a good mix
Old 03-14-2006, 12:25 PM   #18
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Re: Achieving a good mix

Quote:
Originally Posted by Cute 'n Fuzzy Bunny
My point was, actually having read the thread and its topic, was that historically commodities and small cap value have provided a highly uncorrelated, high safe withdrawal rate, but that this may not be the case in the future

Is the bolded statement "wrong"?* If so, will you explain how, so that I can compose my statements in the future to avoid nit picking?
No, I would have to agree with that, but I think it is a trivial point. You could say that about any mix of asset classes that get spat out of an optimizer as being the most wonderful thing since the dawn of time; its nothing specific to SCV and commodities. The best we can do is note past history and use the information in our portfolios. So i have a dollop of SCV and commodities in my portfolio, but it would be a fool's game to hold only those asset classes. But if the optimizer looked at some specific time period and said I could get a 12% SWR from Venezuelan Beaver Cheese Futures and Pez Dispensers (or t bills and the S&P 500), I'd be saying the same thing.
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Re: Achieving a good mix
Old 03-14-2006, 12:40 PM   #19
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Re: Achieving a good mix

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Originally Posted by brewer12345
12% SWR from Venezuelan Beaver Cheese Futures and Pez Dispensers.
Damn, thanks a lot, Brewer, another great unsuspected asset correlation ruined by publicity & performance chasers...

Excuse me while I enter a few quick sell orders.
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Re: Achieving a good mix
Old 03-14-2006, 12:43 PM   #20
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Re: Achieving a good mix

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Damn, thanks a lot, Brewer, another great unsuspected asset correlation ruined by publicity & performance chasers...

Excuse me while I enter a few quick sell orders.
You must not have seen Mad Money last night with Jim Cramer. He said the Venezuelan Beaver Cheese Futures and the Pez Dispensers are going up 300% in the next 2 months. Buy! Buy! Buy!

(disclaimer: 79% of my portfolio is in these two commodities).

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