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Rational Investing Portfolio, Bob Clyatt
Old 04-10-2011, 12:48 PM   #1
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Rational Investing Portfolio, Bob Clyatt

Hello:

I am reading Bob Clyatt's book- Work Less, Live More (2005 edition). In the book, Clyatt recommends the Rational Investing Portfolio (RIP) as a way to maximize retirement portfolio earning and minimize retirement portfolio risk.

Clyatt states that between the period of 1988 to 2004, that very few years in those 16 had negative returns using the Rational Investing Portfolio and that, even subtracting fees, the down years during that period of time would have limited the worst year to just negative 1%.

Do you know how the Rational Investing Portfolio approach faired during the financial crisis of 2008/2009? Did a 75%stock/25%bond allocation fair better than the RIP approach during the financial crisis?

In the book Clyatt says that the RIP approach has an expected return based on historical results of 9.5% and a low volatility of 7.98%. This sounds great, if it is true.

Also, Clyatt refers to Dimensional Fund Advisor (DFA) funds that are suggested to create a RIP. Do you have experience with DFA funds? If not, and you use RIP, what do you use as a substitute for DFA funds?

Thanks for your advice.
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Old 04-10-2011, 01:48 PM   #2
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FIRECALC will allow you to model Bob Clyatt's spending model. And while I could not find how current the investment return data is (it may well include 2008, 2009 or even 2010 based on the copyright at the bottom), the Great Depression of the 1930's is definitely included and that was far worse than the more recent "Great Recession." So it's already been tested for worse.

Does anyone know how current the FIRECALC data is?
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Old 04-10-2011, 02:30 PM   #3
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I recall -- perhaps incorrectly -- that the RIP is a small-cap and value-tilted portfolio typical of DFA-style folks who use a Fama & French 3-factor model. Maybe you can post what the portfolio actually is?

If a FF3F portfolio, then you can see many such portfolios in the Madsinger monthly reports on Bogleheads: Here are a couple
Bogleheads :: View topic - madsinger monthly report (Jan 2011)
Bogleheads :: View topic - madsinger monthly report (March 2011)

Your job is to figure out which of the listed portfolios are FF3F portfolios.
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Old 04-10-2011, 02:57 PM   #4
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Originally Posted by LOL! View Post
I recall -- perhaps incorrectly -- that the RIP is a small-cap and value-tilted portfolio typical of DFA-style folks who use a Fama & French 3-factor model. Maybe you can post what the portfolio actually is?

If a FF3F portfolio, then you can see many such portfolios in the Madsinger monthly reports on Bogleheads: Here are a couple
Bogleheads :: View topic - madsinger monthly report (Jan 2011)
Bogleheads :: View topic - madsinger monthly report (March 2011)

Your job is to figure out which of the listed portfolios are FF3F portfolios.
I am not familiar with Fama & French 3-factor model. But here is the RIP portfolio from the book:

US Large Stocks Value Tilt 12%
US Small Stocks Value Tilt 8.5
International Large Stocks 5%
International Small Stocks 10%
Emerging Markets Stocks 6.5%
ST Corp Bonds/Money Market 4%
US Govt Bonds-Long 4%
Med-Term US Bonds 10%
Med Term Int Bonds 12%
GNMA Bonds 5%
High Yield Bonds 4%
Oil and Gas 3%
Market Neutral Hedge Fund 2%
Commodities 4%
Comm Real Estate 5%
Venture Cap/Private Equity 5%
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Old 04-10-2011, 03:47 PM   #5
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I'm completely biased in my analysis here, but I've had success with a couch potato portfolio of index funds. RIP looks way too complicated to keep an eye on overall asset allocation easily. I like DFA's idea that steady strategic investing, rather than tactical jumping about is the way to go.....but why do you need them to do that...and you can only buy their funds through financial advisers. More fees there. They are repackaging indexing, but saying hey we look for value too and like small caps.....you can do that with any low cost index fund company

I'm looking at ER in my early 50s and have done well rebalancing through a number of economic cycles. There have been some times when my nerve failed me but not often. I sold bonds all through the 2008 decline and bought stocks to keep me around 50/50. I've been selling stocks on the way up for the last 2 years and using the gains to pay down my mortgage. So my comments on RIP are:

1) Wow that's really slicing and dicing.
2) If DFA was a retail fund company ie selling to the public I would like it better, why do the hide behind those financial advisors.
3) Use broad index funds, it's simpler and cheaper.
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Old 04-10-2011, 04:01 PM   #6
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It is really difficult to judge portfolios like this one. I don't think anyone should try to use a portfolio found on the internet or in a book without trying to understand it. Also important is how one would interact with the portfolio in terms of rebalancing and withdrawals.

You might benefit from reading at least this: http://www.fundadvice.com/articles/b...-strategy.html
And there is the ol' Asset Allocation tutorial: Asset allocation tutorial?

There is something to be said for a simple portfolio. In Clyatt's portfolio all those different bond funds probably look great, but in aggregate would perform about the same as a Total Bond Market Index fund. However with the value funds and the small-cap funds, the RIP is a small-cap and value-tilted portfolio. I would not use it myself because it is too complicated.

About the simplest I would go is to use Total Market Index funds, then add Small-Cap [value] funds to tilt to small cap and value. An example with 40% bonds:
20% Vanguard Short-term investment grade bond fund (VFSUX)
20% Vanguard Total Bond Market Index fund
15% Vanguard Total Stock Market Index Fund
15% Vanguard Small cap value index funds
15% Vanguard Total International Index Fund
15% Vanguard FTSE all-world ex-US Small Cap index fund.

No little 2%-5% allocations here and there. BTW, this is NOT my actual portfolio.

To compare portfolios, there is no simple way, but I would suggest that a Morningstar X-ray of the portfolio is a good start. If the 9-box style grid matches, the average market cap matches, and the percentages of US, foreign, bonds, cash matches, then the portfolios match in my judgement.
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Old 04-10-2011, 04:50 PM   #7
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I'm a great admirer of Bob Clyatt and think very highly of his book. The chapter on investing is particularly good. I did a lot of additional research on modern portfolio theory and DFA right after the book came out, and implemented the RIP portfolio because the backtested results and risk:reward ratio seemed ideal for my purposes.

During the 08/09 crisis we were down, "on paper," around 23%. Others with even more complicated slice-and-dice portfolios (Harvard and Yale endowments, for example) were down more. "Non-correlated" assets tend to correlate in a true crisis. Since then of course the equity markets have rallied, but not all of us (including yours truly) were able to buy and hold through all of the tumult.

There are a lot of good arguments for these sophisticated slice-and-dice portfolios with small cap and value tilts, but there is a lot of work involved in setting them up and maintaining the percentages. You can access DFA funds reasonably through firms like Evanson Asset Management or Scott Burn's Assetbuilder group, but I personally have wanted more downside protection in the event of a crisis and much more simplicity. For those purposes, it's hard to beat Harry Browne's Permanent Portfolio (NOT the mutual fund of the same name), which unlike the RIP actually had a positive return during the 08/09 market meltdown. There's a huge thread (a couple, actually) on the PP over at Bogleheads as well as a separate forum here:

Permanent Portfolio Discussion Forum - Index

Here's an interesting chart that covers the crisis years of 06-09 showing the total returns of many popular portfolios during the carnage:

Mad Money Machine Podcast and Blog
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Old 04-10-2011, 05:26 PM   #8
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For those purposes, it's hard to beat Harry Browne's Permanent Portfolio (NOT the mutual fund of the same name), which unlike the RIP actually had a positive return during the 08/09 market meltdown.
I've owned the Permanent Portfolio mutual fund for a few years and have been quite happy with it. I am curious as to why you suggest not holding that (I assume you prefer hand-constructing the allocation). Not saying I disagree, only that I'd like further comments.
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Old 04-10-2011, 05:48 PM   #9
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Hi steelyman,

PRPFX holds a different asset mix than Harry Browne recommended, has higher volatility and quite high expense ratios. That said, it is still an excellent mutual fund, but doesn't really compare to the real PP, which is very simple indeed to get into and to manage (you can do it with four ETF's if you like).

You can read more (MUCH more - I think this is a candidate for the longest Bogleheads thread of all time) here:

Bogleheads :: View topic - Updated Modification of Harry Browne Permanent Portfolio
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Old 04-10-2011, 05:54 PM   #10
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Interesting - thanks for the additional comments and the pointer. Guess I gots me some reading to do .
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Old 04-14-2011, 09:53 AM   #11
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Originally Posted by midnighter777 View Post
Do you know how the Rational Investing Portfolio approach faired during the financial crisis of 2008/2009? Did a 75%stock/25%bond allocation fair better than the RIP approach during the financial crisis?
Rational Investing Portfolio question

Bob said in that thread that the research firm charges him for each update, so he only updates the RIP when a new edition of the book is coming out. I don't know if Nolo has a new edition on the calendar yet.

Quote:
Originally Posted by midnighter777 View Post
Also, Clyatt refers to Dimensional Fund Advisor (DFA) funds that are suggested to create a RIP. Do you have experience with DFA funds? If not, and you use RIP, what do you use as a substitute for DFA funds?
Sorry, not a clue on this one, although you might be able to replicate some of their indices with ETFs.
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Old 04-14-2011, 10:10 AM   #12
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2) If DFA was a retail fund company ie selling to the public I would like it better, why do the hide behind those financial advisors.
How are they hiding behind financial advisors? They can pick any business model they want to have, right?

They have a unique way of investing and have been very successful. They do not want to sell loaded funds and they don't want to sell direct to the very same folks Vanguard markets to.

They are a niche product and I hope they stay that way.
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Old 04-14-2011, 12:10 PM   #13
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How are they hiding behind financial advisors? They can pick any business model they want to have, right?

They have a unique way of investing and have been very successful. They do not want to sell loaded funds and they don't want to sell direct to the very same folks Vanguard markets to.

They are a niche product and I hope they stay that way.
Sure they can use any business model they like, and we can choose whether or not to buy. Call me cynical, but reading recommendations of DFA funds by the same people that sell them doesn't fill me with confidence. Words like niche are often synonomous with expensive.
What exactly are the fees on the funds? and does DFA get any money from it's financial advisor network. If their fund model is sufficiently different and more successful than Vanguard's why not sell them retail.
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Old 04-14-2011, 12:25 PM   #14
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Sure they can use any business model they like, and we can choose whether or not to buy. Call me cynical, but reading recommendations of DFA funds by the same people that sell them doesn't fill me with confidence. Words like niche are often synonomous with expensive.
What exactly are the fees on the funds? and does DFA get any money from it's financial advisor network. If their fund model is sufficiently different and more successful than Vanguard's why not sell them retail.
Expense ratios on DFA funds are generally in the .15-.35 range. Advisors who sell DFA have to go to DFA "boot camp" which costs around $3500. Advisors can charge an fee on top of the expense ratio, but DFA does not define the range on that.

DFA does not get any money from the advisor network. DFA advisors do have to use DFA exclusively for their clients. Why are you so mad about DFA? Just keep your VG funds and be happy!
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Old 04-14-2011, 12:56 PM   #15
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Expense ratios on DFA funds are generally in the .15-.35 range. Advisors who sell DFA have to go to DFA "boot camp" which costs around $3500. Advisors can charge an fee on top of the expense ratio, but DFA does not define the range on that.

DFA does not get any money from the advisor network. DFA advisors do have to use DFA exclusively for their clients. Why are you so mad about DFA? Just keep your VG funds and be happy!
Interesting to know. Yes I'm happy with my Admiral Vanguard shares and I have the usual Boglehead mania about keeping fees low. Advisor fees and custodian transaction costs are what get me steamed as a little education and they could be avoided. Also DFA pushes low fees and then requires you to pay extra fees to buy them. This feels like "exclusivity as a sales strategy" and I hate exclusive clubs, jus my prejudice.

Why does DFA only offer their funds through advisors if they don't get anything financially out of it. The stated reason about keeping transactions low to keep costs down doesn't hold much water as vanguard does that well enough and sells directly to the investor.
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Old 04-14-2011, 05:32 PM   #16
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This kind of objection is hard for me to understand. If you want DFA, get an advisor and get DFA. If you are happy with Vanguard, don't get an advisor and stay happy with Vanguard.

Why expect the world to remake itself according to one person's wishes?

Surely there must some other things more worthy of being upset about?

Ha
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Old 04-14-2011, 05:49 PM   #17
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I hope Bob Clyatt will weigh in on this at some point, but FWIW I think DFA funds are just great if you have a portfolio that truly requires them. You can do a lot of what these funds do with ETFs and index funds from Vanguard and others, but for certain market segments (e.g. emerging market small cap, international value and small cap, some foreign bonds) DFA funds do a better job.

DFA and DFA advisors are targeting clients with $1M+ in assets and want nothing to do with active traders or market timers. Neither does Vanguard, but DFA is a lot more strict. Scott Burns, who I have a lot of respect for, has a good comparison of DFA vs. Vanguard funds and results at his site (assetbuilder.com), and the irrepressible John Greaney has several good articles on DFA advisor fees on his, starting with this gem:

Analyzing the 'high-fee' DFA-approved advisor's sales pitch.

In summary, if you have a big enough portfolio and are committed to a complex, precise, slice-and-dice approach DFA funds probably do make sense.
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Old 04-14-2011, 10:39 PM   #18
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This kind of objection is hard for me to understand. If you want DFA, get an advisor and get DFA. If you are happy with Vanguard, don't get an advisor and stay happy with Vanguard.
I'm just expressing my prejudices. I DIY using a couch potato broad index approach, a so slice and dice adviser based strategy just strikes me as overly complicated and expensive. Of course there are buyers out there for this approach and good luck to them.

However, DFA's stated reasons for only offering through advisers just don't sound sensible to me. DFA could offer it's funds to individuals and through advisers and impose high initial deposits to ensure the clients are high net worth. Trading limitations would keep costs down like at Vanguard. Actually maybe they are right, they couldn't keep the expenses down if they had to offer the more full service of Vanguard. They let the advisers deal with the investors as if they had to carry those costs as well as the trading costs their expense ratios wouldn't look as good.
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Old 04-17-2011, 11:15 AM   #19
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DFA advisors do have to use DFA exclusively for their clients.
As a long-standing client of a DFA advisor, I can assure you that isn't true. Yes, my funds are largely DFA, but not exclusively. Have a few VG's. Also have several ETF's.
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Old 04-17-2011, 11:26 AM   #20
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Why does DFA only offer their funds through advisors if they don't get anything financially out of it. The stated reason about keeping transactions low to keep costs down doesn't hold much water as vanguard does that well enough and sells directly to the investor.
DFA does more work in selecting the components of their funds than is necessary for index funds since they don't match index components and have slices of the market in some of their funds that aren't indexed. Net, I'd think their internal costs would be higher than for those funds that are true indexes. Issue is whether DFA's work is of value. I'm guessing VG has more sales costs in total/share than DFA does given the fewer DFA trades, but VG's total costs - sales + internal transactions + research - are still lower because of DFA's research & greater buying/selling. JMO.
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