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Old 11-30-2007, 12:08 PM   #101
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That's cool. One problem I have when evaluating funds is that REITs appear as generic "financials" when I research their breakdowns by sector. REITs have sufficiently different behavior than other "financials" that I think they should have a breakout of their own. When a fund has 20% in "financials" I don't know how much of that is in REITs, generally.
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Old 11-30-2007, 12:08 PM   #102
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My problem space is smaller than yours because I try to use only Index funds. The only exceptions have been PCRIX & TBGVX. Now I just have to read on the Index construction methodology. I don't want to keep up with the managerial changes at Mutual funds etc. For the indices I try to figure out the Value Tilt & Small Tilt of the Index and go from there.

Looking at all the Mutual funds is too big of a problem space and at that point I might as well pick stocks and keep the 1%+ I am paying in ER! I know folks with ER less than 0.20 with a Slice and Dice Portfolio and I hope to get there at some point.
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Old 11-30-2007, 12:23 PM   #103
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Interesting. Thanks for the tip Alec!

Does anybody know of a site that comprehensively lists holdings for mutual funds/ETFs? I see Vanguard does for their funds, but am curious where to find this info for non-Vanguard funds.
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Old 11-30-2007, 03:24 PM   #104
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Does anybody know of a site that comprehensively lists holdings for mutual funds/ETFs? I see Vanguard does for their funds, but am curious where to find this info for non-Vanguard funds.
The SEC EDGAR database has this info.
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Old 12-01-2007, 04:48 PM   #105
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We’ve mentioned commodities as an asset class, but have not really written about them. Commodities (energy, oil, industrial metals, precious metals, agricultural products) have been mentioned in some of the links given in previous posts in this thread as a great diversifier. That is, they can have a good return, but not be correlated with equities and bonds. In years past, I think it was difficult to diversify into commodities because there were only a couple of funds that one could purchase back then with reasonable expense ratios and no loads. Nowadays there are several choices with the best appearing to be so-called collateralized commodity futures funds (CCFs).

Once again, Eric Haas’s web site altruistfa.com is the source of a list of possible funds to use in your portfolio and some more links and reading material:
Commodity Futures Funds
http://www.altruistfa.com/readingroomarticles.htm#Commodities

Here on the early retirement forums, it seems some folks use PCRIX, DBC and DJP in amounts very roughly around 5% of their total portfolio value. Like REITs, these funds should be held in non-taxable accounts.

The Diehards site had a recent thread on commodities as well: http://www.diehards.org/forum/viewtopic.php?t=8776
What I liked about this thread was Rick Ferri’s comment “Who needs a high cost direct investment in commodities when natural resource companies that a part of a low cost index fund earn those returns?” following by Larry Swedroe’s reply and the ensuing argument discussion.
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Tax loss harvesting
Old 12-02-2007, 10:29 AM   #106
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Tax loss harvesting

Before we get to rebalancing, I wanted to write a note about tax-loss-harvesting. This is a technique that is essential to good portfolio management, but also one that is often not practiced. The following discussion assumes all trades are in a taxable account. There is no tax-loss harvesting in tax-deferred or Roth accounts.

TLH is where you sell your losers in your taxable accounts to realize the capital loss and buy a similar investment with the proceeds or wait 31 days and buy the same investment. If you buy the same investment before 31 days has past, then you come up against the wash-sale rule which then defers the loss. In essence, your portfolio has the same asset allocation as before, as well as the same total value as before: things have not changed on the surface at all.

How does realizing a loss help you? This loss then appears on your Schedule D as a negative number and offsets any realized capital gains that you may have. If you have more realized losses than realized gains, then up to $3000 of the net loss can be subtracted from your adjusted gross income. Any net losses greater than $3000 get carried forward to the next year.

So losses can be extremely valuable. You should be thinking: “What??!! I’ve lost money and you call that valuable?” Here’s how it can work:

If you have sold investments at a gain, you will have to pay capital gains taxes on any net realized gain. Even if you are a buy-and-hold investor, your mutual funds may pay out a distribution with capital gain on which you are taxed. If the gains are short term, they are taxed at your ordinary income tax rate. If gains are long term, they are taxed at a more favorable long term capital gains tax rate. But if you can offset these gains with losses on other investment sales, then you will have no net gain and thus pay no taxes. Here’s an example:
Buy $10,000 of DLS in June. Sell for $9,000 in Aug realizing a $1,000 loss. Buy $9,000 of GWX which promptly goes up 11% to be valued at $10,000. If you sold GWX now, you would have no net capital gain or loss and owe no taxes. But you keep GWX and now a negative $1,000 appears on your tax return. If you are in the 33% marginal income tax bracket, you will have saved $330 in taxes. Now eventually, you will sell GWX and book the $1000 gain, but it will be taxed at the long term cap gains rate (currently 15%). In the meantime, you have what looks like a $1000 interest-free loan from the IRS. Where else can you get an 18% return on an interest-free loan?

So some rules of thumb:
  • Always look for tax-loss harvesting opportunities. Good days to investigate are those “worst days in months” announced from time to time by the news media.
  • Look at your portfolio in the Nov-Dec time frame and see if you have tax-loss harvesting opportunities.
  • Look at every investment or “lot” you have purchased in the previous 12 months. If you have a loser, you should probably sell it before it becomes a long term loss. This rule helps with the behavioral finance trap of loss aversion as well. Example: You bought GWX in August, so be sure to look at your GWX holdings next July before they become a long-term holding.
  • In order to minimize time out of the market, you should try to buy a similar (but not substantially identical) investment the same time you sell. For example: GWX for DLS.
  • It’s more valuable to use your losses to offset ordinary income, but even offsetting LT capital gains is beneficial. TLH can be used to offset those pesky mutual fund short-term gains found in the end-of-year distributions.
  • When buying an investment, always have in mind an alternate that you would use for TLH. The alternate would be something that you would want to hold a long time. If you sell the first investment to realize a loss and buy the alternate, there would be no benefit if you sold the alternate at a gain 31-days later and repurchased the first investment. So you have to be comfortable with your alternate.
Some links:
http://www.fpanet.org/journal/articles/2006_Issues/jfp0206-art9.cfm
http://www.fa-mag.com/past_issues.php?id_content=3&idArticle=1338&source =etf&idPastIssue=114
http://www.diehards.org/forum/viewtopic.php?t=8643

Have you ever wondered why the trading volume is huge on those days that the market drops substantially? If you are a buy-and-holder, you make be snickering at those folks who are selling at the bottom. In reality, those are the smart folks doing tax-loss harvesting!
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Step-by step tutorial in portfolio optimization with examples
Old 12-05-2007, 05:32 AM   #107
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Step-by step tutorial in portfolio optimization with examples

I am interested in step-by step tutorial in portfolio optimization with examples.
Any help?
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Old 12-05-2007, 08:59 AM   #108
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What do you mean by portfolio optimization? If you mean find the highest return for a given risk/volatility number or find the lowest risk/volatility number for a given return, then I believe you are working on an exercise in futility. The reason is that you will be using past data to predict future returns or in other words: data mining.

What I have experienced is that a wide range of asset allocations will generate the same return for about the same risk level. That is, there are many solutions to the problem. Also one's individual actions on tax-loss harvesting, rebalancing, when you put new money to work, when you withdraw money will overwhelm any differences in a set of results.

So I think the rest of this thread will help you decide on an optimal portfolio strategy. What do you think is missing?

Any other comments or opinions?

PS: Nice article about perfectionism in the NYTimes: http://www.nytimes.com/2007/12/04/health/04mind.html
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Old 12-05-2007, 09:05 AM   #109
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What do you mean by portfolio optimization? If you mean find the highest return for a given risk/volatility number or find the lowest risk/volatility number for a given return, then I believe you are working on an exercise in futility. The reason is that you will be using past data to predict future returns or in other words: data mining.

What I have experienced is that a wide range of asset allocations will generate the same return for about the same risk level. That is, there are many solutions to the problem. Also one's individual actions on tax-loss harvesting, rebalancing, when you put new money to work, when you withdraw money will overwhelm any differences in a set of results.

So I think the rest of this thread will help you decide on an optimal portfolio strategy. What do you think is missing?

Any other comments or opinions?

PS: Nice article about perfectionism in the NYTimes: http://www.nytimes.com/2007/12/04/health/04mind.html
I agree there is not one optimum portfolio. The issue is whether the individual investor is comfortable with risks being taken.

Investing is not about eliminating risks, it is about managing risks.

Inflation risk
Return risk
Principal risk
Political risk
Currency risk
Interest rate risk

Not all the risks affect a person equally. Interest rate risk has little impact to me, being 34, and only having a 2% bond position right now. Currency risk is with international investing- I hold 25% in international funds. That is as much risk as I want to take with the US dollar. I am sure others here will suggest they are taking more risk with that, and probably getting higher returns than me. Right now anyway.
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Old 12-05-2007, 05:21 PM   #110
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lets not forget individual company risk too for those that buy individual stocks. one hickcup can send you spirling down 20-30% in one session
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Old 12-09-2007, 07:49 AM   #111
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What is this ‘rebalancing’ thing that has been mentioned several times in this thread?
In essence, it is a mechanical, unemotional way to force one to buy low and sell high while maintaining one's asset allocation.

Once you have set your asset allocation and written in down in terms of percent equities, percent fixed income, percent large cap, percent small cap, percent international, etc, you can examine your actual percentages periodically and see if they still match what you have written down as your desired percentages.

For example, if you start out with 60% stocks or equties and 40% bonds or fixed income and over the course of time, your equities have gone up 20% and your fixed income has gone up 5%, you would end up with an overall 14% gain (60 * 1.2 + 40 * 1.05) = 114. Your equities would now be at 72/114 or about 63% of your assets and your bonds would be at 37% of your assets. If you sell 3% of your total portfolio value out of equities and use that 3% to purchase fixed income, you will be back to a 60:40 asset allocation.

Let’s do another example also starting from 60:40. Suppose stocks drop 10% and bonds go up 5% (think what happened in the last few months). You now have (60 * 0.9 + 40 * 1.05) = 96 or an overall 4% loss. Your equities are now 56% of your portfolio and your bonds are 44%. If you sell 4% of your total portfolio value out of bonds and use that 4% to purchase equities, you will be back to a 60:40 asset allocation.

In both the examples, you have purchased the lower perform asset class while selling the higher performing asset class. You have sold high and bought low.

Discussion points: Is this rebalancing worth it in the long run? Does it actually help your portfolio? What about taxes from selling an asset with a gain? What about the effect of momentum? Is it possible to be trading or rebalancing too often? What do you do with new money such as contributions from salary, dividends and distributions? Are there differences in rebalancing techniques in the accumulation stage and in the withdrawal or retired stage?
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Old 12-09-2007, 09:12 AM   #112
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i rebalance based on years worth of money in my other buckets where i would draw my income not by years of gains . works well and never sells equities in a down year.
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Old 12-11-2007, 10:57 AM   #113
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I wanted to bring to your attention an outstanding report presented by Rodc over on the Diehards forum about slice-and-dice (small & value tilt) and TSM (total stock market) asset allocations:

Bogleheads :: View topic - Updated figures and results on slice and dice vs TSM
Quote:
Originally Posted by Rodc
One of the things I would like to be able to do is provide some guidance to a novice investor, someone who is not going to run off computing factor weights or want to get into what factor weights even mean. Note that to a naive investor each of the first three Slice and Dice portfolios achieves a similar apparent amount of loading, and as we have seen people often wonder which might be best. Very roughly and very naively:
Lots of food for thought in that thread. It's a MUST read!
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Old 12-11-2007, 06:50 PM   #114
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Hey LOL!. Thanks for all the info and for this AA tutorial.
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Old 12-16-2007, 10:12 AM   #115
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While poking around this morning, I found this nice link on rebalancing which fits in well with this thread: Tune Up Your Portfolio in Six Easy Steps - Morningstar The Short Answer

One might say there are 3 general ways of rebalancing which are really based on the "when" of rebalancing:
1. Rebalance with every new addition to the portfolio.
2. Rebalance at a set time every year: your birthday, January, etc.
3. Rebalance when certain percentage trigger points are reached, such as Larry Swedroe's 5/25 rule.

However, a hazard is that rebalancing too often appears to be detrimental. Here is a link to a missive that is worthwhile reading: Evanson Asset Management - Asset Allocation Rebalancing and Long-Term Investment Return Information It references a paper in the Journal of Financial Planning: FPA Journal - Optimal Rebalancing Frequency for Bond/Stock Portfolios

Back to 'when' to rebalance:

If one contributes to their portfolio every paycheck or monthly or quarterly, then one can check their asset allocation and put the new money to work in the asset class that is underweighted from their written asset allocation plan. This is relatively simple to do now that you all have your portfolios set up in the M* portfolio tool and can easily "X-ray" it. This is also reasonably tax-efficient and you are not selling any investments to create a tax liability. This would be a classic buy undervalued securities or buy low strategy. It can be very difficult to be buying REITs now or small cap value. These asset classes have gone down the most in the past year.

Another method is to check whether rebalancing is needed based on some calendar date. I personally do not like this method because lots of opportunities can be missed in between. If something drops alot but goes back up before your 'rebalance date', then you may have missed a chance to buy low. However, I think this is certainly the simplist way.

Another method is to use trigger points. Swedroe advocates a 5/25 rule where one rebalances when as asset class percentage is changed by more than 5% of the total portfolio value or by more than 25% of its target value. Here's an example: You want 30% fixed income. So your target range is really 25% to 35% of fixed income for your total portfolio value. You do not need to rebalance if your fixed income percentage falls within this range. However, if your asset allocation calls for 12% fixed income, then a 7% to 19% range would be too large, since 25% of 12% is 3%, then the range would be 12% plus or minus 3% or 9% to 15% of fixed income.

With all the rebalancing that you might do, you should take taxes into account. You do not want to be creating a tax liability if you can avoid it. If you can't avoid it, you want to try to avoid short-term capital gains and get long-term capital gains. Rebalancing in a 401(k) or IRA has no tax consequences, so look at those accounts first.

Suppose you have equities in a taxable account and bonds in a tax-deferred account. If equities drop a lot in value, you need to rebalance: so you sell some bonds in the tax-deferred account and buy equities in the same account.

Suppose equities in a taxable account have gone way up. What do you do? You don't want to necessarily sell equities and pay capital gains taxes. And you don't have anymore room in tax-deferred for more fixed income. And maybe you aren't making any contributions to tax-deferred accounts anymore. I'll leave this as a homework problem

Homework: Present here on this thread, the last act of rebalancing that you did.
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Old 12-16-2007, 10:18 AM   #116
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i rebalance based on years worth of money in my other buckets where i would draw my income not by years of gains . works well and never sells equities in a down year.
But presumably, you sell equities in EVERY down year, in order to do some tax-loss harvesting, right?
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Old 12-16-2007, 11:14 AM   #117
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well you could do some tax loss swaps in down years , selecting similiar but not to similiar funds.
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Old 12-16-2007, 11:15 AM   #118
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time wise i think 2 years is about right to rebalance . trends usually continue more than a year
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Old 12-16-2007, 11:29 AM   #119
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Rebalancing across taxable and tax-deferred is difficult. As I haven't retired yet, I can't liquidate within the 401K or IRAs. I've taken profits in growth stocks in my Roth to set up a buy for hi-yield bond funds, small-cap value mutual fund, and additional position in REIT Index to reduce volatility and increase yields. I'll invest after the first of the year (post-dividend/capital gain payments and lower market shake-up, hopefully).

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Old 12-16-2007, 05:37 PM   #120
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LOL why should a fund like DBC be held in a non-taxable account? Isn't it just throwing off about 2% a year?
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