Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Re: Diversification Sweet Spot
Old 11-07-2006, 09:21 AM   #21
 
Posts: n/a
Re: Diversification Sweet Spot

Quote:
Originally Posted by Rich_in_Tampa
Yep. It's virtually all sheltered at this point for better or worse.

Funny thing happens during discussions of asset allocation: the simple plans seem to develop "diversification creep." Everyone likes simplicity but before long each of us wants to add just one more sector to round it out. Next thing you know, there are 7-8 funds and it begins to feel like slice-and-dice.
Berstein points out in four pillars, that no matter what you decide your portfoilo should be, it is important to stick with it. If you keep tweaking it, you will lose out in the benefits of holding and rebalancing. (i.e. - human nature adding sectors when they are hot, or getting rid iof them when they are cold)

He points this out many, many times when discussing portfoilo allocation - "It's not as important what your portfoilo mix is over the long term, but whether you stick to it"
__________________
  Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Diversification Sweet Spot
Old 11-07-2006, 09:30 AM   #22
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,446
Re: Diversification Sweet Spot

Quote:
Originally Posted by Rich_in_Tampa
Funny thing happens during discussions of asset allocation: the simple plans seem to develop "diversification creep." Everyone likes simplicity but before long each of us wants to add just one more sector to round it out. Next thing you know, there are 7-8 funds and it begins to feel like slice-and-dice.
Yep! I really notice that. Every 3 years there seems to be a new "must have" asset class and I see people shifting things around to make room for a wee bit of this or that. But after a while - 5% here, 3% there, you start to wonder how it can be worth it. The more slices, the more work.

Maybe people get caught tweaking because they think somehow they can "optimize" their portfolio. I don't think the point should be to optimize (I don't think you really can), I think the point is to figure out the simplest thing that is "good enough", stick to that, and go on with the rest of your life.

Audrey
__________________

__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is online now   Reply With Quote
Re: Diversification Sweet Spot
Old 11-07-2006, 09:30 AM   #23
Thinks s/he gets paid by the post
wildcat's Avatar
 
Join Date: Feb 2005
Location: Lou-evil
Posts: 2,025
Re: Diversification Sweet Spot

Quote:
Everyone likes simplicity but before long each of us wants to add just one more sector to round it out
That's because most of us watch too much CNBC.
__________________
"These walls are kind of funny. First you hate 'em, then you get used to 'em. Enough time passes, gets so you depend on them"
wildcat is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-07-2006, 01:10 PM   #24
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Dawg52's Avatar
 
Join Date: Feb 2005
Location: Central MS/Orange Beach, AL
Posts: 7,431
Re: Diversification Sweet Spot

Quote:
Originally Posted by Rich_in_Tampa
Funny thing happens during discussions of asset allocation: the simple plans seem to develop "diversification creep." Everyone likes simplicity but before long each of us wants to add just one more sector to round it out. Next thing you know, there are 7-8 funds and it begins to feel like slice-and-dice.
Yeah, that is why I'm liking the Vandguard Target funds more and more. It gives you a slice and dice approach with just one fund, but automatically rebalances to a more conservative style as you grow older. The only problem I have is 75% of my portfolio is in my taxable account. In order to convert over, I'm gonna have to sell what I have and pay capital gain taxes.
__________________
Retired 3/31/2007@52
Full time wuss.......
Dawg52 is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-07-2006, 01:28 PM   #25
Thinks s/he gets paid by the post
 
Join Date: Jul 2003
Location: Pasadena CA
Posts: 2,695
Re: Diversification Sweet Spot

Quote:
Originally Posted by Cut-Throat
Berstein points out in four pillars, that no matter what you decide your portfoilo should be, it is important to stick with it. If you keep tweaking it, you will lose out in the benefits of holding and rebalancing. (i.e. - human nature adding sectors when they are hot, or getting rid iof them when they are cold)

He points this out many, many times when discussing portfoilo allocation - "It's not as important what your portfoilo mix is over the long term, but whether you stick to it"
Maintaining Vs Tweaking the AA

Seriously good issue. I am frequently tempted to tweak the AA as new asset classes or funds become available. My basic fund in a tax deferred target retirement fund of funds made up of S&P500, small cap, total bond, and total intl indexes and a stable value fund. That covers everything. But hay! what about REITs? Then I discover emerging markets. Then unhedged foreign bonds. What about Canadian energy trusts? Oh, yeah, precious metals, will that be hold gold itself or producer stock? Oil, energy, commodities?

How do I measure the cost impact of all this tweaking when it is done to creat a new improved AA. Is there really a cost for these changes or does it result in improved returns?
__________________
T.S. Eliot:
Old men ought to be explorers
yakers is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-07-2006, 02:00 PM   #26
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Re: Diversification Sweet Spot

Quote:
Originally Posted by DOG52
Yeah, that is why I'm liking the Vandguard Target funds more and more. It gives you a slice and dice approach with just one fund, but automatically rebalances to a more conservative style as you grow older. The only problem I have is 75% of my portfolio is in my taxable account. In order to convert over, I'm gonna have to sell what I have and pay capital gain taxes.
Yeah, I have a little experiment going. In my daughter's custodial account, the money is invested in SWBGX. Pretty basic, boring balanced fund. In the rest of my accounts, I am at ~8% GIM, ~8% DJP, 10% bonds and CDs and the rest is in individual equities and options run for max total return without taking too much risk. We'll see who wins out over the long haul.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-07-2006, 09:09 PM   #27
Recycles dryer sheets
 
Join Date: Apr 2006
Posts: 147
Re: Diversification Sweet Spot

My Version of KISS

50% Vanguard Star
50% Vanguard Wellesley
2 years laddered CDS.

Rebalence once per year

Live life.
__________________
Hydroman is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-07-2006, 10:00 PM   #28
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,614
Re: Diversification Sweet Spot

Quote:
Originally Posted by DOG52
Yeah, that is why I'm liking the Vandguard Target funds more and more. It gives you a slice and dice approach with just one fund, but automatically rebalances to a more conservative style as you grow older. The only problem I have is 75% of my portfolio is in my taxable account. In order to convert over, I'm gonna have to sell what I have and pay capital gain taxes.
On a related note: If someone is thinking he/she might want to move funds to other investments, it might make sense to start selling them now while capital gains still enjoy favorable tax treatment. That expires in 2010, and, though we still have one more election before then, I think there's a fair chance that the rate on capital gains will revert to individual's earned income rate (which I think may also see some rate increases).
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Re: Diversification Sweet Spot
Old 11-07-2006, 10:12 PM   #29
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,318
Re: Diversification Sweet Spot

Yikes, SamClem,
Do you really think capgains could go all the way up to ordinary income rates? Even back in the bad old days they were capped out at (if I remember correctly) 28%.

Rich, I responded too quickly to Red-y's allocation (comes from being away from the board for 2 months!) Although I do like the overall allocations between stock, bond and 'other', he is only 5% in US Stocks, with no small cap or value tilts, which is pretty extreme.

I think you guys are right about diversification creep, though. Once you start looking into things it is hard not to want to add a little soupcon of this and a chunk of that, and before you know it, your asset class counts are up there again. I am not sure that this makes things particularly much harder to manage, though: if they are all pretty much in mutual funds, then the annual rebalancing is still just a few hours work once a year or so. Keeping track of stuff is automatic on one of the consolidated services on the web. I also have a messy desk, though. Maybe I just don't mind a little chaos in certain areas. :
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
ESRBob is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-08-2006, 11:34 AM   #30
Recycles dryer sheets
 
Join Date: Dec 2003
Posts: 51
Re: Diversification Sweet Spot

Ahem, a couple of clarifications...Red-y is not, strictly speaking, a "he" .

My asset allocation includes lots of US and/or smaller companies in the energy and real estate sectors (VGENX, TAREX, FRIFX). However, I'm extremely bearish on the outlook for the US$. And since I'm retiring outside the US, not having a large US$ denominated portfolio is a way to hedge my currency exposure.
__________________
Red-y is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-08-2006, 12:00 PM   #31
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,614
Re: Diversification Sweet Spot

Quote:
Originally Posted by ESRBob
Yikes, SamClem,
Do you really think capgains could go all the way up to ordinary income rates? Even back in the bad old days they were capped out at (if I remember correctly) 28%.
Bob,
I suppose the re-institution of the old rules at the end of 2010 is more likely than a capless direct linkage to the ordinary income rate. However, I think the class warfare thang is going to heat up in the future, and we've talked at length here about the "challenges" of the Medicare program, SS, and the plain-old national debt. Given that, I think it would be easy for some politicians to score points by pushing for "equity" in tax treatment between capital gains and other income. "The fat cats . . . rich . . didn't earn this . . sweat of someone else's brow . . ." You get the idea. But, hey, I'm definitely in the minority on this--I even worry that the rules on Roth's might change depending on income (or even account balances).
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Re: Diversification Sweet Spot
Old 11-08-2006, 12:41 PM   #32
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,318
Re: Diversification Sweet Spot

SamClem -- thanks for the calibration -- I think there will be pressure, too, but maybe not to such a degree. There are enough billionaire Democrats around these days to ensure at least some slack for the asset owners!

Red-y - sorry about the gender bender! And if you're outside U.S. now and in retirement, I can see how your allocation makes more sense. I don't know that I'd single out US Stocks for bearishness, though. Seems that every single region and asset class is up this year. Oh well, we'll just ride this one out like all the other ups and downs, I guess.
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
ESRBob is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-08-2006, 03:09 PM   #33
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Re: Diversification Sweet Spot

"Diversification Sweet Spot"?

I'm not sure that this is "knowable" in any definitive sense. A lot of people put in a lot of time calculating the historic correlation of various asset classes. The problem is, correlations change pretty dramatically over time. So what was "optimal" over the past 10 or 20 years, may not be optimal going forward.

I don't have access to it at the moment, but I ran a correlation matrix for various asset classes looking back from 1999 and from 2006. In 2006 asset class returns are far more correlated then they were in 1999. It’s actually a pretty dramatic change over just seven years. So the optimal portfolio you would have put together in '99 is different than the one you would create in 2006. The big question, that no one knows the answer to, is what's the optimal portfolio from this point forward?

In view of the fact that we can’t definitively nail down the optimal mix, I don’t waste a lot of time trying to find the “sweet spot” asset allocation down to the nth percentile. Instead, a broad mix of large through small domestic and international equities sprinkled with some real estate and maybe commodities should suffice – kind of like your RONCO portfolio. And once set, I would try not to tamper with it.
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-08-2006, 04:13 PM   #34
Full time employment: Posting here.
bosco's Avatar
 
Join Date: Jul 2005
Posts: 987
Re: Diversification Sweet Spot

Quote:
Originally Posted by ESRBob
I don't know that I'd single out US Stocks for bearishness, though. Seems that every single region and asset class is up this year. Oh well, we'll just ride this one out like all the other ups and downs, I guess.
I'm guessing that Red-y's concern is not as much bearishness on US stocks per se as it is on US currency. For a person retiring in Canada, but with US investments, it's instructive to figure your annual returns in both US and Canadian dollars. Needless to say, valued in $Can, the return from the same portfolio is not nearly as attractive if you look at the last few years. Long-term it probably evens out.

However, the last couple years look a bit better if you look at real returns i.e. subtract the rate of inflation from the return figured in $US and do the same with the Canadian CPI.

I struggle with this issue myself since most of my portfolio is in US tax-deferred accounts but I plan to spend the money in Canada. I deal with it the same way--by overweighting international and underweighting US. Also, with healthy natural resources allocations. The Canadian dollar tends to move with oil and other natural resources.
__________________
I have an inferiority complex, but it's not a very good one.
bosco is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-08-2006, 08:55 PM   #35
Full time employment: Posting here.
 
Join Date: Sep 2006
Posts: 608
Re: Diversification Sweet Spot

Quote:
Originally Posted by samclem
... it might make sense to start selling them now while capital gains still enjoy favorable tax treatment. That expires in 2010 ...
So, is it possible that all the profit-taking that will start occurring in 2008, as
people take advantage of the low capital-gains tax rates, will actually affect the
market ? Perhaps not, as all that selling is balanced by buying, as people turn
around and put the money right back into the market to maintain their
allocaton mixes ?

__________________
JohnEyles is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-09-2006, 10:45 AM   #36
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,614
Re: Diversification Sweet Spot

John,
I think, as you suggested, that it might be a net wash, if people behave rationally. The wild card would be a slightly down market with gloomy expectations--then folks might sell (assuming they still had cap gains to protect from taxes) and move to something else. So, any bad news could generate worse news.

The sales would generate short-term increases in federal tax revenues. Look for the headlines: "President credits revised policies and cooperation with new Congress for progress on the economy--deficit shrinks despite record new entitlement programs. Bush and Pelosi issue joint statement praising "the new Keynesian dynamic . . ."

Maybe the best way to make money on this is to buy stocks in brokerage houses, since they make money on all trades. On the other hand, since everyone knows this info, it is already priced into the stock--so never mind.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Re: Diversification Sweet Spot
Old 11-09-2006, 11:04 AM   #37
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Re: Diversification Sweet Spot

Quote:
Originally Posted by samclem
On the other hand, since everyone knows this info, it is already priced into the stock--so never mind.
That's correct across a bell curve and will certainly affect the index funds, but there's a lot of headroom under the bell curve's tails.

“I’d be a bum on the street with a tin cup if the markets were always efficient.”
-- Warren Buffett
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-09-2006, 06:23 PM   #38
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Re: Diversification Sweet Spot

Quote:
Originally Posted by Nords
That's correct across a bell curve and will certainly affect the index funds, but there's a lot of headroom under the bell curve's tails.

“I’d be a bum on the street with a tin cup if the markets were always efficient.”
-- Warren Buffett
But is it luck or skill that drives the result? Even a pure random walk would produce exceptional winners (Buffett, Lynch, Miller, Cohen, etc) and exceptional losers at the tails of the distribution. Who's to say that the guy who just flipped 50 heads in a row is not a really good coin flipper?
__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-09-2006, 08:48 PM   #39
Thinks s/he gets paid by the post
Spanky's Avatar
 
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,046
Re: Diversification Sweet Spot

Very, very simple: Vanguard Wellington.

R-squared (against Standard Index): 64
Standard Deviation: 9.42
Sharpe Ratio: 0.65
Mean Annual Return: 9.81

__________________
May we live in peace and harmony and be free from all human sufferings.
Spanky is offline   Reply With Quote
Re: Diversification Sweet Spot
Old 11-10-2006, 07:29 AM   #40
Full time employment: Posting here.
 
Join Date: Oct 2003
Posts: 961
Re: Diversification Sweet Spot

Quote:
Originally Posted by Spanky
Very, very simple: Vanguard Wellington.

R-squared (against Standard Index): 64
Standard Deviation: 9.42
Sharpe Ratio: 0.65
Mean Annual Return: 9.81

Spanky,

What are you saying? Do you really believe that Wellington Management added any value?

- Alec
__________________

__________________
ats5g is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Paradise - the best spot on earth janeeyre Travel Information 33 05-27-2007 06:04 PM
Global vs local diversification donheff FIRE and Money 2 04-28-2006 06:10 AM
When to pay capital gains for greater diversification bamsphd FIRE and Money 21 11-29-2005 01:15 PM
Painful Diversification yakers FIRE and Money 20 08-23-2005 11:58 AM
How much diversification is over-diversification? Olav23 FIRE and Money 15 07-26-2005 09:39 PM

 

 
All times are GMT -6. The time now is 05:04 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.