Maximizing portfolio return with very low risk

[brewer12345]

Brewer, Probably past performance is useful predictor. *What I'm saying is that it should be weighted more towards the last 20 or 30 years and that the relative confidence I would have in it's ability to predict is not as high as many suppose. *In addition that are a number of other indexes that probably have more current value as predictors.

I don't think of one year as a unique events, but there are unique eras in history. *I've often read that since our investments survived events liker Pearl Harbor, you assume they will also survive terrorism or running out of cheap oil. *These do have a vague common thread, but are "false analogies". *Each is a unique event in history.

When you compare volitility of bank products to stocks, the risk is there, but the degree of risk is not the same. *How many years did it take for the market to recover from the depression. *How many stock crashes where the market declined 25 % or more have occured. * Has this happened with bonds? *

Understanding history is important to understanding the future. *Books like "The Four Pillars", remain books by people with vested interests inspite of the convincing work. *There are equally as reputable investment advisors "ei Thau) who are not gung ho on stocks. *Consider the alternatives.

I hate to even come close to putting words in your mouth, but you are pretty near the 4 most expensive words in the english language: "this time its different." I get very uncomfortable when I see anyone even heading in this direction and I have made an awful lot of money (and avoided losing a lot) by betting against those suggesting that things are different now. I don't think that I will ever convince you that it would be unwise to consider the history of the equity (or any) market as the main indicator of the future, so I am content to let the matter drop.

What I am saying re: bank products is that you are accepting a very significant risk in return for avoiding stock market volatility. Bank products typically struggle to keep up with inflation, especially after taxes. Inflation is just about certain death for a retirement portfolio, particularly if the retiree lives longer than they expect. As this is the case, it seems to me that you can't possibly expect to make it on a savings account portfolio unless you are willing to massively overfund your retirement. If you don't like the equity market, then you need to find something else that will help you beat inflation.

I think that everyone should think for themselves on these matters, but it is worth reading the opinions and research of those who have devoted a graet deal of time and effort into their works on the subject. I may not entirely buy the efficient market hypothesis, but I gain an awful lot by understanding it and getting what I can from the very high quality thought that went into it (on the part of people who are a lot smarter than I am).

As for just holding equities, I would regard that as follish for a retiree. One of the least controversial implications of the Markowitz theory (efficient frontier) is that you get better risk-adjusted returns by broadening the number of unique, uncoreelated asset classes that you have to choose from. IOW, throw in at least a dab of almost everything and you get more milk for less moo. To this end, I have been diversifying away from US equities into commodities and foreign equity. I will be adding foreign bonds as well. I also intentionally bought STON because I expect that its returns will be pretty uncorrelated with the US equity market. If I can figure out a cost efficient way to add dollops of other asset classes, I will do so. Anyone know of a way to add art and antiques without direct investment? Is there some sort of fund? What other asset classes can anyone think of (aside from RE)?

[Roger_R]

Brewer, thanks for the exchange. *There are indeed some things I'd have trouble convincing on. *I have what I consider a balanced portfolio that includes some equities. *I know it has it's spot. *I think the general assessment of equity risk is underestimated. *It doesn't sound like I've swayed you on this. * In the end, one of us, both of us, or niether of us will be right. *I hope it's both.

[ESRBob]

*I also intentionally bought STON because I expect that its returns will be pretty uncorrelated with the US equity market. *If I can figure out a cost efficient way to add dollops of other asset classes, I will do so. *Anyone know of a way to add art and antiques without direct investment? *Is there some sort of fund? *What other asset classes can anyone think of (aside from RE)?

Brewer,
Can't seem to find what STON does -- is it giving you true access to another asset class? The only time I found a 'stock' (as opposed to a fund) which seemed worth owning for its pure diversification was Plum Creek Timber, (PCL) a REIT that owns, manages and harvests timberland, something that the Commodities funds don't seem to give exposure to.

ESRBob

[Hyperborea]

Can't seem to find what STON does -- is it giving you true access to another asset class?

People are dying to get in on this one. They operate cemeteries.

http://finance.yahoo.com/q?s=ston

[BUM]

People are dying to get in on this one. *They operate cemeteries.

http://finance.yahoo.com/q?s=ston

I wonder if they offer Christmas gift certificates?

[soupcxan]

Anyone know of a way to add art and antiques without direct investment? *Is there some sort of fund?

Not quite what you're looking for...but getting closer.

http://www.wholesale.abnamro.com/who...t_08092004.asp

London, 8 September 2004


ABN AMRO launches Art Investment Advisory group

New service enables private banks to offer art investment services to clients

ABN AMRO announces the creation of an Art Investment Advisory group, which will provide the Private Banking sector with a wide range of art investment services that can be offered to their clients.

Working with Seymour Management (Seymour's), the independent fine art advisors and valuers, ABN AMRO will offer investment advice on the wide variety of art funds available in the market, as well as creating a Fund of Funds and, over time, its own ABN AMRO Art Fund. The Bank will also provide bespoke advice for those putting together or managing private collections and make available the full range of services to its own private banking clients.

Ariel Salama, Global Head, Private Banks at ABN AMRO's Wholesale Clients business, will head the group. He said: "High net worth individuals are increasingly looking to their banks for alternative investments such as art. However, for private banks to offer a comprehensive portfolio of art investment services requires a significant and ongoing financial commitment. Through ABN AMRO's Art Investment Advisory group, private banks will be able to offer these services, either on a white-labelled or syndicated basis."

Art is a maturing asset class; for many years it has been used as an anti-inflationary tool, offering long-term returns that compare favourably with those from equity and bond markets. Since 1950 art has returned between 11.5 and 12.5 per cent on a compound annual basis.

The bear market in equities and increasing uncertainty across global financial markets has led to a renewed focus upon art as a strong medium and even short-term investment. There are now around 20 Art Funds covering a wide spectrum of fields, with varying structures and degrees of liquidity. Returns are primarily made from the increasing value of the underlying assets held.

Spencer Ewen, Managing Director of Seymour Management, said: "ABN AMRO's global scale and investment knowledge, combined with Seymour Management's broad expertise and independence as art advisors will provide a compelling range of services in this exciting, growth area."

As with all investments, understanding the various complexities involved is vital. Due diligence would typically include considerations such as fund size, the expertise, reputation and access to the market of managers, the types and values of purchases, investment horizon and exit strategies.

Salama explained: "The importance of independence as well as expertise in the art market is crucial. Seymour's has a well-established reputation for providing impartial and objective advice and, with no links to dealerships or auction houses, makes an ideal partner for ABN AMRO in this area."

Part of the Bank's Financial Institutions and Public Sector (FIPS) coverage group, ABN AMRO's Private Banks team was created in September 2003 to provide a comprehensive range of products and services to private banks, including financial structures, equity and equity-related products. The group is already working with more than 80 clients globally.

Here's another article, only this seems to be more of a fractional art ownership program.

http://www.timesonline.co.uk/article...357363,00.html

[soupcxan]

Hey Brewer,
I hear you loud and clear. But I wonder if STON is truly uncorrelated with the US economy? I would think that if the market tanks, people will have less disposable income (and those with estates will be smaller as well). In this case, people would be less willing to drop $10k on a casket when a $200 pine box does the job. Maybe its just me but I view a lot of the products that the funeral homes sell as "luxury" items that could be eliminated if times were tough (agree that there will always be a demand for their core servce, not sure if that is enough to keep them growing).

Here's my list of asset classes and subcategories. I am building my portfolio towards some allocation of these, although I am not sure about the exact percentages I should be holding in each:

Equities
- US (small/large cap and growth/value)
- Intl (small/large cap and growth/value)
Bonds
- US (low/med/high quality)
- TIPS
- Intl (low/med/high quality)
Pseudo-Bonds
- I/EE Savings Bonds (can't decline in value)
Currencies
- Intl (satisfied with unhedged Intl bond fund)
Commodities
- Precious metals
- Others (oil, etc.)
Real Estate
- REIT (commercial and large residential)
- Personal owned property (single-family residential)

So if there are any suggestions on other low-correlation assets that I've missed, please clue me in.

To this end, I have been diversifying away from US equities into commodities and foreign equity. *I will be adding foreign bonds as well. *I also intentionally bought STON because I expect that its returns will be pretty uncorrelated with the US equity market. *If I can figure out a cost efficient way to add dollops of other asset classes, I will do so. What other asset classes can anyone think of (aside from RE)?

[brewer12345]

Soup: You've got everything I can think of that is readily available in a retail form. The only other things I can thing of are arbitrage strategy investments (like merger and convertible arbitrage, both of which can be accessed via funds), and maybe directly held investment real estate. I must say that I can't get away from the thought that the big allocation to savings bonds is basically just a drag on your portfolio and efforts to get to FIRE, but I suppose that we all need to be able to sleep at night. Just be sure to revisit your risk tolerance as you age and your financial picture changes.

On STON: The beauty of this company is that they mostly are NOT a funeral home operator. I personally find the funeral home business to be unattractive. It is, as many have pointed out, a discretionary expense. There is also a ton of competition, both from independents and from a couple off sleeping giants who could really turn up the heat if they got their acts together.

What STON does is operate cemetaries, with a tiny fraction of their revenue coming from a few incidental funeral parlors. Cemetaries are a lot more resistant to competition and are pretty recession resistant. Another nice thing about them are that they come with "perpetual care trusts" and "merchandise trusts" required to be set up by law which throw off income regularly in order to pay for cemetary maintenance and future delivery of funeral goods and services. The main risks to STON are management rushing out and making dumb acquisitions (I think this is probably a pretty low risk) and a big shift from actual burials to cremations.

STON looks something like a REIT to me.

[Nords]

I would think that if the market tanks, people will have less disposable income (and those with estates will be smaller as well). In this case, people would be less willing to drop $10k on a casket when a $200 pine box does the job.

Have you ever shopped for a casket?

First, you're rarely spending your money. It's the dearly departed's funds, and you're not burying their checkbook with them.

Second, the funeral home guilts you to feel that you have to "do right" by the deceased. It's like handing your credit card to the new-car salesman and asking what you can get. The least expensive caskets are even painted in bright garish "preservatives" (day-glo green or red) to make them look extra hideous and drive you to the more expensive models. I'd like to see what CostCo's casket business is doing to this practice, but at least one "Affordable Casket Outlet" in our area is already out of business.

Third, even cremation urns cost an exhorbitant amount of money. Again the cardboard box is made to look flimsy & cheap.

If I end up dead in the hospital, I hope the medical school will take the carcass. And if I end up dead at home, we have a big lot with a huge compost pile...

But I agree that STON sounds like the ultimate REIT with the world's least-complaining customers.

[brewer12345]

But I agree that STON sounds like the ultimate REIT with the world's least-complaining customers.

Heh, and they don't exactly come around to re-negotiate the lease.

[soupcxan]

Hey Brewer,
I hear what you're saying...there's no question that I want to keep the older I-bonds that are currently at 5.7%, but I have about others that are at 3.8% and other EEs at 3.3%. I just can't bring myself to liquidate them and dump the proceeds in the market all at once...even DCA'ing over the course of a year seems risky. Do you really think it's a bad idea to hold onto them while I put my current savings (about 50% of gross income) into the market, and over the next 3 years end up with a more palatable mix of stocks/bonds (75/25) by increasing equities rather than decreasing bonds?

Soup: I must say that I can't get away from the thought that the big allocation to savings bonds is basically just a drag on your portfolio and efforts to get to FIRE, but I suppose that we all need to be able to sleep at night. Just be sure to revisit your risk tolerance as you age and your financial picture changes.

[charlie]

Excuse me for butting in but IMHO you should
keep your I-bonds/EE bonds and DCA into stocks
over the next 3 years with new money. That is
a much safer way to go since we are probably
going to go through a market correction during
that period of time.

Cheers,

Charlie

[brewer12345]

Hey Brewer,
I hear what you're saying...there's no question that I want to keep the $25k of older I-bonds that are currently at 5.7%, but I have about $25k that are at 3.8% and another $5k of EEs at 3.3%. I just can't bring myself to liquidate them and dump the proceeds in the market all at once...even DCA'ing over the course of a year seems risky. Do you really think it's a bad idea to hold onto them while I put my current savings (about 50% of gross income) into the market, and over the next 3 years end up with a more palatable mix of stocks/bonds (75/25) by increasing equities rather than decreasing bonds?

I strongly suspect that over the course of the next 25 years it won't make a whole lot of difference. Over the course of the next year or 5 years, it might. I think this really comes down to risk tolerance. I have a very different approach to investing than you do, so I'm not eager to make advice on something that, when you come down to it, has more to do with "sleep at night" than anything else.

[GoulashBrother]

I was just informed that my last day on the job is next month. I will be 55 in July so I can take an early retirement then but I have a problem that hopefully one of you can help me with.

I have about 200K in my 401K that I want to turn over into a mutual fund. In fact I want to put it all into Vanguard Health Care (VGHCX).

Just wondering what your opinion is on that and do you have any suggestions or comments.

Thanks!

I guess it kinda depends on what percentage the 200K is of the total nest egg. If it was only 5-10% I'd say no big deal. If it was over 25% then I'd say you were not diversified enough.

[unclemick]

Terrible idea - health care has been an outperformer the last ten years or so and is a prime candidate for revision to the mean.

Now as 15% or less of an overall balanced portfolio among asset classes - as gambling money

I guess it kinda depends on what percentage the 200K is of the total nest egg. If it was only 5-10% I'd say no big deal. If it was over 25% then I'd say you were not diversified enough.

[Spanky]

Terrible idea - health care has been an outperformer the last ten years or so and is a prime candidate for revision to the mean.

The health care has lost some steam recently but may pick up soon as demand for health care rises. The baby boomers who are retiring soon will require (or demand) health care.