Is this enough diversity?

[Rich_by_the_Bay]

Is this enough diversity (stocks only - bonds are separate)? Looking for a sanity check and advice - simple is good for me:

Big Growth 20%
Big Value 20%
Small Growth 15%
Small Value 15%
International (blend of emerging and developed) 20%
REIT 10%

My understanding is that the objective is to maximize the likelihood that under a variety of market conditions, something is up, or at least less down than the pack. Problem with the "total market" index funds is that you can't cherry-pick as conditions warrant.

[Brat]

I like it for the equity side. Do you want any bond or income investments.

[brewer12345]

Seems reasonable, at least for the equity bit. I would suggest that you make sureyou have US bond, international bond and commodities exposure as well.

One quibble, though: if you are basically going for hald growth, half value, you might as well just pile into the indexes. It will amount to the same thing and likely be cheaper.

[Rich_by_the_Bay]

Quote:

Originally Posted by Brat I like it for the equity side. Do you want any bond or income investments.

That's what I meant by "Is this enough diversity (stocks only - bonds are separate)." Sorry if I wasn't clear. I'll have a separate portfolio for bonds, either total market or intermediates (muni or index depending on tax-treatment).

Thanks for the positive input.

[Rich_by_the_Bay]

Quote:

Originally Posted by brewer12345 One quibble, though: if you are basically going for hald growth, half value, you might as well just pile into the indexes. It will amount to the same thing and likely be cheaper.

Thanks for the feedback. Not sure I understand "you might as well just pile into the indexes." These will actually be indexed funds targeting their respective profiles. Are you referring to the total market index?

[brewer12345]

Quote:

Originally Posted by Rich_in_Tampa Thanks for the feedback. Not sure I understand "you might as well just pile into the indexes." These will actually be indexed funds targeting their respective profiles. Are you referring to the total market index?

What I mean is that the indexes are rougly evenly split between growth and value, so if you are going to end up evenly split anyway, you might as well just go for a cheaper index fund than muck about with making the splits yourself.

[Rich_by_the_Bay]

Quote:

Originally Posted by brewer12345 What I mean is that the indexes are rougly evenly split between growth and value, so if you are going to end up evenly split anyway, you might as well just go for a cheaper index fund than muck about with making the splits yourself.

OK.

My main reason is the ability to cherry pick the winners when it comes time to sweep from stocks into cash for expenses. The more global indices - even if up - force you to sell-off in whatever their designated blend might be. So if big growth is up and small growth is down, I would sell the former in preference to the latter.

Make sense?

[LOL!]

As long as you are slicing and dicing, did you intend for your international allocation to have international small cap value in it?

The idea of big + small with the exclusion of mid cap shows up in many places like Bernstein's books, Merriman's web site. Nevertheless, the mid-cap spdrs MDY have been one of our best investments over the last several years.

[Ed_The_Gypsy]

As I recall, gummy discovered that there was no point in having small growth in a portfolio. I have none because of that.

[Brat]

Gummy: bless retired math professors.

[sgeeeee]

Quote:

Originally Posted by Ed_The_Gypsy As I recall, gummy discovered that there was no point in having small growth in a portfolio.* I have none because of that.

If I remember correctly, gummy discovered that there had been no advantage to small growth in recent history. That's different.

There have been a number of recent investigations that indicate that correlation coefficients between most asset classes are volatile and change very rapidly and dramatically. Correlations in the past are no indication of correlations in the future.

[Nords]

Quote:

Originally Posted by Ed_The_Gypsy As I recall, gummy discovered that there was no point in having small growth in a portfolio.* I have none because of that.

I don't know who was first, but a few years ago Bernstein said that small growth has sucked for about seven decades.

We have one percent from a previous diversification philosophy that stopped as soon as I read "Four Pillars".* OTOH it's been gangbusters since early 2003.* If I looked at it again I'd probably move it over to small value at the next dip.

[sgeeeee]

Quote:

Originally Posted by Nords I don't know who was first, but a few years ago Bernstein said that small growth has sucked for about seven decades. We have one percent from a previous diversification philosophy that stopped as soon as I read "Four Pillars".* OTOH it's been gangbusters since early 2003.* If I looked at it again I'd probably move it over to small value at the next dip.

Maybe I'm mistaken about the gummy reference. I thought the small growth allocation issue was about correlation. The Bernstein article talks about SG index performance versus managed SG over 7 decades. That's a different problem than correlation to other asset classes.

[Nords]

Quote:

Originally Posted by sgeeeee The Bernstein article talks about SG index performance versus managed SG over 7 decades.* That's a different problem than correlation to other asset classes.* *

If SG was outperforming other asset classes then no one would care if it was correlated or not. The fact that it lags the other asset classes (shown on Bernstein's chart) while remaining somewhat or largely correlated makes it a laggard loser...

[sgeeeee]

Quote:

Originally Posted by Nords If SG was outperforming other asset classes then no one would care if it was correlated or not.* The fact that it lags the other asset classes (shown on Bernstein's chart) while remaining somewhat or largely correlated makes it a laggard loser...

Yeah. I get the point. An asset class can have 0 correlation with the rest of your portfolio, but if it always loses, who cares? But outperformance isn't required of an asset class to make it useful in a diversification strategy. Diversification is a way to reduce volatility, not improve performance.

[mb]

I recall Bernstein's comments on the underperformance of SG but perhaps someone can refresh my memory on what he advocates for a portfolio? Does he say that you should avoid SG completely?

I seem to recall that his model portfolios typically had a total small cap index fund containing both value and growth and then he added a SV fund to tilt things toward value?

MB

[Spanky]

Quote:

Originally Posted by sgeeeee Yeah. I get the point. An asset class can have 0 correlation with the rest of your portfolio, but if it always loses, who cares? But outperformance isn't required of an asset class to make it useful in a diversification strategy. Diversification is a way to reduce volatility, not improve performance.

I agree - the whole point of diversification is to reduce volatility.

[Ed_The_Gypsy]

OK, gummy's data was only from 1950-2000. See this link:
http://www.gummy-stuff.org/cut-chop.htm

I, too, have found wonderfully uncorrelated assets...that lost money. (Speaking of losing money, does anyone remember 44Wall? A randon thought--disregard.) Diversification does reduce volatility. But I want progress, not death. Like Calvin (of Calvin and Hobbes, my very favorite Protestant philosophers--the cartoons, not the old stuffed shirts), I want to go from peak to peak--no downs.

Quote:

Bernstein said that small growth has sucked for about seven decades.

If it's been dead for a 70 year period, I ain't interested--even if it wiggles once in a while.

[astromeria]

A little slice of data--

Small Value, Blend, and Growth indexes are up about the same amount over the past year and YTD. I bought a tiny (1%) position in IJT 6 months ago as a contrarian move, and it's up over 11% (I have much larger positions in SV and SB, of course). I bought it in my T-IRA, so it's easy to change my mind about it. Unfortunately I made other experiments in my taxable accounts that would result in huge taxable gains if I sold before DH retires. sigh. Like my father used to say, Too soon old, too late smart(!).

[ESRBob]

Quote:

Originally Posted by brewer12345 What I mean is that the indexes are rougly evenly split between growth and value, so if you are going to end up evenly split anyway, you might as well just go for a cheaper index fund than muck about with making the splits yourself.

brewer -- is this true? I thought I'd found that in, say, US Large, you might only consider 15% or so of that universe to be Value. Or are you saying Growth would be the same and the 70% in the middle would be just sort of a mishmash? In any case, I think it is worth being intentional about seeking value in value funds (and actively managed ones, at least at Vanguard, tend to outperform the value indexes over time by about 1%), and overweighting them to something closer to 40% or 50%. But would love to hear data and views that refute this course -- it would sure make life simpler!

I do know when I talk to my really smart finance friends (e.g. Terry Marsh at www.quantal.com) that they are saying the whole idea of small and value as factors is being questioned, and new nameless factors, generated as mathematical correlations of an individual stock with the movement of the index but not tied to anything you or I could understand as an 'attribute' of the stock, are the new holy grail