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Diversification the FireCalc way
Old 05-14-2010, 10:08 PM   #1
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Diversification the FireCalc way

According to FireCalc, a productive portfolio for my situation would consist of
10% US Micro Cap
15% US Small /Small Value
zero S&P 500 (it seems FireCalc has a negative bias to the S&P 500)
60% Large Value
15% 1 Month Treasury
Can anyone suggest a set of Vanguard funds that might achieve this mix?
Thanks
John
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Old 05-14-2010, 10:16 PM   #2
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I don't think FIRECalc is the best tool for portfolio optimization of the type you re doing. There are MVO tools out there that can do a more precise job. Also, the portfolio you've described would have little exposure to major elements of the market--and can be expected to underperform when those types of stocks do better. The portfolio is considerably underweighted in US growth stocks and has no international exposure. My own asset allocation also leans toward value stocks and small stocks, but I wouldn't feel very comfortable riding the allocation you've described.

A good tool for quickly seeing the contents of various funds (and your entire portfolio) in Morningstar's X-Ray feature. I think it might require signing up with Morningstar, but you can drop the subscription anytime you want after you build your allocation. It's very handy.

It's a good idea to build a portfolio based on how a similar mix of assets has done in the past, but don't ever think you're going to get a mix that does best in the future.
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Old 05-14-2010, 10:27 PM   #3
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Agree with samclem that's a scary looking asset allocation. It's worth using some other tools to evaluate longterm return and volatilty. You can find at morningstar and/or your brokarage account should have tools that demonstrate different results you would have received historically and use what you learn along with firecalc to develop your plan.
You might get some ideas reading LOL's thread on asset allocation just use the search function here.
Recommended reading list is good too. Four Pillars, Bogleheads guide, all about asset allocation, etc...
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Old 05-14-2010, 10:44 PM   #4
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Quote:
Originally Posted by samclem View Post
(snip)A good tool for quickly seeing the contents of various funds (and your entire portfolio) in Morningstar's X-Ray feature. I think it might require signing up with Morningstar, but you can drop the subscription anytime you want after you build your allocation. It's very handy.(snip)
No subscription needed to use the Instant Xray.

Visit the Asset Allocation Tutorial thread for info on how to sign up for free access to the Morningstar tools via T Rowe Price (free), and lots of info on how to select an asset allocation.
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Old 05-15-2010, 07:46 AM   #5
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This is basically data mining, which usually does not end well. Its not a bad idea to inform your choices based on the historical record (firecalc), but I think using it to entirely dive your allocation would be a bad idea.
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Old 05-15-2010, 08:01 AM   #6
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This is basically data mining, which usually does not end well. Its not a bad idea to inform your choices based on the historical record (firecalc), but I think using it to entirely dive your allocation would be a bad idea.
+1

Same too for any service, calculation, algorithm, book, etc that uses historic correlations to "optimize" an asset allocation. Neither historic performance nor historic correlations can be relied upon to any great degree.
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Old 05-15-2010, 08:05 AM   #7
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Neither historic performance nor historic correlations can be relied upon to any great degree.
Won't we have to wait until the future to know whether or not this is actually true?
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Old 05-15-2010, 11:00 AM   #8
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Reduce Risk: Portfolio Optimizer - Effective Diversification


If you are interested in what has happened in the past, this may be of use. Just remember that the future is unknown.

Cheers,

charlie
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