SIMPLIFYING my strategy .... (slice n dice vs....)

[hotwired]

Hi all,

I am in the process of deciding whether to stick with a more active “slice and dice” investing style or pick an “easy to manage” small (4-6) fund / etf collection and stick with it. I am a “heady” investor, meaning I’m constantly reading and wondering …. Is this the best strategy? Oh, here’s a new one that makes sense, is this it? Every new “style” or strategy makes me want to try it out … but I’m also not a “workaholic” and I don’t enjoy hours of fundamental analysis other than using screens. I enjoy the IDEA of complex strategies but I tend not to stick with them. But my greatest fear is getting 20 years down the road and finding that either A.) all the hours I spent screwing around with spreadsheets made me an extra 1% a year (or lost!) OR … by following strategy “B” instead of “A” I could’ve earned 9% points more per year!

I think my personality is best suited for a regular, simple strategy using 4-6 funds. An “ivy league” tactical asset allocation type of deal, perhaps, or even a Gerald Appel “beat the market 3 months at a time” type of strategy. (Sam Stoval’s “There’s always a bull market somewhere” strategy runs a close second) Based on what I know about my personality, I need JUST a little “hands on” to keep me involved and interested. Too much and I’ll probably lose interest and get sloppy. Too little and I’ll be chomping at the bit to do something …. And any action that springs from “bit chomping” tends to be impulsive and counter productive. (in my experience)

I know the “Boglehead” type of strategy does well enough, in fact beating most other strategies. BUT … I have seen tremendous back tested results with some of the tactical asset models, which usually revolve around selecting a few asset classes and moving in and out of them when they cross their 10 month moving averages. This doesn’t beat the market by a huge margin but greatly reduces drawdown.

I should mention we have 49 rental apartments that we manage ourselves. I should probably consider this our “income” and therefore stay more heavily invested in stocks, but I pay attention to some of these indicators (websites like dshort.com that follow the ivy league type investing strategies) that are currently indicating an upcoming downturn in stocks. I don’t think market timing works in general, but it does appear that valuation and momentum indicators do hold some merit. They may not be perfect but they appear to alert you when “stuff is expensive” (or cheap) (valuation) and people are starting to figure out that stuff is expensive (or cheap) (momentum).


One important fact about my current "collection" - I don't tend to track it's performance very well. It's hard to see the forest for the trees...


My current mix is below. I THINK I have too many eggs!! My “ALT” (alternative) are things like merger and arbitrage funds, private equity, timber (CUT), broad based commodities fund, and small bets now and then like RRPIX, DIG, DUG, etc. (bets on interest rates or price of oil). I also have a good portion in lending club and prosper (peer to peer lending) where we’ve had a 7.75-9.25% total return over 3 years. So even though my “ALT” is 29%, it’s a pretty conservative ALT

TOTAL US STOCK

23%

TOTAL INT STOCK

18%

TOTAL US BOND

23%

TOTAL INT BOND

1%

TOTAL REIT

4%

TOTAL ALT

29%

CASH

2%

TOTAL

100%

And the actual holdings, all 1-3% of my portfolio, roughly (all are either in my SIMPLE plan or ROTH)

US Bond / Income
GNMA Fund Investor Shares
Short-Term Investment-Grade Fund Investor Shares
Inflation-Protected Securities Fund Investor Shares
AMERICAN CAP AGY CORP COM
PIMCO INCOME STRATEGY FD II

International Bond
ISHARES TR JPMORGAN USD EMERGING MKTS BD FD
WISDOMTREE TR GLOBAL EX US UTILITY FUND

US Stock
Windsor Fund Investor Shares
Dividend Growth Fund
Total Stock Market Index Fund Investor Shares
Strategic Small-Cap Equity Fund
Small-Cap Value Index Fund
ROYCE VALUE TR INC
SIRIUS XM RADIO INC COM

International Stock
International Value Fund
Total International Stock Index Fund Investor Shares
FTSE All-World ex-US Small-Cap Index Fund Investor Shares
ISHARES INC MSCI JAPAN INDEX FD
ISHARES INC MSCI MALAYSIA FREE INDEX FD
JAPAN SMALLER CAPITALIZATION FD INC

Real Estate
REIT Index Fund Investor Shares
Global ex-U.S. Real Estate Index Fund Investor Shares

Alternative
ARBITRAGE FUND CLASS R
GUGGENHM TIMBER ETF
ADVISORSHARES TR ACTIVE BEAR ETF
LINN ENERGY LLC UNIT REPSTG LTD LIABILITY CO INTS
MERGER FUND
POWERSHARES EXCHANGE TRADED FDS TST LISTED PRIVATE EQUITY PO
SVENSK EXPORTKREDIT AKTIEBOLAGET ETN ELEMENTS (ROGERS INTL T
PROSHARES TR SHORT 20+ YR TREASURY
MARKET VECTORS ETF TR VIETNAM ETF

[Midpack]

Your "collection" is way more "diverse" than I'd want to manage, just too many funds, as it appears you realize. Any fund that's less than 5% of your overall portfolio isn't going to have a measurable effect on the total, so I wouldn't bother with owning 1-3% of any one fund. YMMV

As for whether it's worth the effort you put in, why not compare your actual results to the actual results of any of the lazy portfolios WITH comparable equity:bond allocations (has to be similar AA to be a meaningful comparison). That would give you a basis to decide if the extra effort is worth it to you. http://www.marketwatch.com/lazyportfolio these have varying numbers of funds.

Two days ago I posted my own 11 fund portfolio performance here vs an equivalent 3-fund lazy portfolio from 2003 thru 2011 if that's of any interest.

[Animorph]

I have a slice and dice portfolio with about as many funds you have. Sounds like maybe one difference is that my AA, by fund, is relatively fixed, so it's pretty much buy and hold and rebalance. The exception is that I create a cash allocation when the portfolio is doing better than expected and can reinvest that cash in a bear market. That tends to buffer my retirement spending. That does give me something to do occasionally, but in the absence of a rebalance trigger (15%, but you could set it really small for more action) or new market highs or lows, there's not much to do. It certainly wouldn't die if I ignored it for a year. I've made my fund selections, so I'm not actively seeking new funds unless some new corner of the market opens and fits my AA. No single country funds or anything I have to keep a special eye on. I don't think the number of funds is much of a concern if you keep your maintenance simple.

[LOL!]

The slice-and-dice portfolios that I have seen are usually small-cap- and value-tilted as shown on web sites like Paul Merriman's FundAdvice.com - Home , Hebner's Index Funds - DFA Advisors - DFA Funds - Dimensional Fund Advisors Approved, and places like assetbuilder.com .

But one can simplify these multi-fund portfolios to a simple 4-6 fund portfolio of just
US Total Stock Market Index
Int'l Total Stock Market Index
US Small-cap value index
Int'l Small cap index
plus some bond funds like TotalUSBond, and TIPS.

With these funds one can achieve the same Morningstar 9-box style grid as the more complicated portfolios and even the more complicated "lazy portfolios".

However, in the past year the 3-fund US Total, Int'l Total, and USTotal Bond have been kicking butt over the small-cap and value tilted portfolios. Also any portfolio with more international in it has not done as well as portfolios with less international in them.

So one can simplify and still have a small-cap- and value-tilted "slice-and-dice" portfolio. And that's what I do. I rebalance based on the 9-box style grid and not based on the percentages of any individual fund in my portfolio.

[pb4uski]

Quote:

Originally Posted by Midpack Your "collection" is way more "diverse" than I'd want to manage, just too many funds, as it appears you realize. Any fund that's less than 5% of your overall portfolio isn't going to have a measurable effect on the total, so I wouldn't bother with owning 1-3% of any one fund. YMMV.........

+1 too many funds for my simple mind.

On tracking, I have all my portfolio (by purchase lot) in Quicken and automatically updated and priced so it is fairly easy to run customized reports of investment performance.

[Animorph]

Quote:

Originally Posted by LOL! The slice-and-dice portfolios that I have seen are usually small-cap- and value-tilted as shown on web sites like Paul Merriman's FundAdvice.com - Home , Hebner's Index Funds - DFA Advisors - DFA Funds - Dimensional Fund Advisors Approved, and places like assetbuilder.com . But one can simplify these multi-fund portfolios to a simple 4-6 fund portfolio of just US Total Stock Market Index Int'l Total Stock Market Index US Small-cap value index Int'l Small cap index plus some bond funds like TotalUSBond, and TIPS. With these funds one can achieve the same Morningstar 9-box style grid as the more complicated portfolios and even the more complicated "lazy portfolios". However, in the past year the 3-fund US Total, Int'l Total, and USTotal Bond have been kicking butt over the small-cap and value tilted portfolios. Also any portfolio with more international in it has not done as well as portfolios with less international in them. So one can simplify and still have a small-cap- and value-tilted "slice-and-dice" portfolio. And that's what I do. I rebalance based on the 9-box style grid and not based on the percentages of any individual fund in my portfolio.

But you give up the chance to rebalance when growth beats value, or EM goes crazy. Cap-weighted indexes just sort of let it ride. So, a little more work for a little more gain.

[teejayevans]

Quote:

Originally Posted by pb4uski +1 too many funds for my simple mind. On tracking, I have all my portfolio (by purchase lot) in Quicken and automatically updated and priced so it is fairly easy to run customized reports of investment performance.

I've got 18, across 2 different companies, so there is some duplication, funny, I never thought of it being that complicated. I use this tool called a computer, you might have heard of it
TJ

[Midpack]

Quote:

Originally Posted by teejayevans I've got 18, across 2 different companies, so there is some duplication, funny, I never thought of it being that complicated. I use this tool called a computer, you might have heard of it TJ

I agree...sorta. I'm holding 11 funds and it really doesn't take much effort to manage, I would think 18 would be about the same. To me it all comes down to returns, if you're getting better returns, lower volatility/less correlation and/or better tax efficiency with more funds than a simpler portfolio then it's worthwhile IMO. However, I would draw the line at a minimum holding of 5% of the total portfolio - below that has so little influence on the total results it's not worth it IMO.

I wouldn't expect to hold more funds, if anything I may simplify further as I age and become even more feeble minded. I can imagine getting down to 3-4 funds one day.

The real work was/is figuring out my asset allocation, choosing appropriate funds, reviewing performance vs benchmarks quarterly and rebalancing anything outside the 5/25 rule. All simple enough, but I sleep better at night having as much background knowledge about my holdings/portfolio - come what may.

[eytonxav]

With too many funds there is also the challenge of understanding and keeping up to ensure there is not too much overlap between the individual holdings held between funds.

[Animorph]

I've got everything in Quicken, but I use an Excel spreadsheet which automatically downloads web pages to get the prices and calculate the AA imbalances. Pretty easy once it is set up. It can be a real PITA when Yahoo changes page formats and I have to grab the prices from a different column or reformat to remove extra arrows or other weird characters. But their last change was free real-time prices, which was nice for when I'm looking for a specific price target.

[Animorph]

Quote:

Originally Posted by DFW_M5 With too many funds there is also the challenge of understanding and keeping up to ensure there is not too much overlap between the individual holdings held between funds.

I do have many active funds. If they all decide to pile into EM stocks or something that's fine with me. That's what I'm paying them for. I have at least a couple of global funds, which certainly invites some overlap. I allocate by fund, though I do select funds that are generally focused on specific market segments and invest roughly equal amounts to each segment. I'm not worried about overlap unless they make big changes in their investment style.

[hotwired]

thanks for your help.
I did forget to mention that I do tilt toward small co. / value slightly due to the belief that over any 20 year period, they will do the best. I think I need to pare down some, but perhaps I'm not quite as far off as I think I am. A little overlap isn't a complete disaster. My biggest "dislike" is that I can no longer explain to my "grandmother or a 5 year old" what I own and why" and I don't like that. I also don't know my "performance" as well as I should. I think for me, some simplification (but maybe not much) is in order. Sounds like I'm not quite as far out in left field as I thought...

[Lsbcal]

Our equity portfolio has 5 ETFs basically. 3 to cover the US capitalizations (large/mid/small and value/growth) and 2 to cover the International capitalizations group (large, midcap).

Right now everything is folded into only the 3 US slices.

If you can get public data going back some decades to develop a strategy, and if it backtests well, then maybe it will work going forward. If you are not willing to do the work or trust in your research, then my advice to anyone would be to select a simple Boglehead strategy and stick with it.

[unclemick]

IMHO - it's a hormone thing - there is no real cure for it if you are a male of the species.

Investing since 1966, the best I've been able to come up with since 2006(aka trying a vast variety of portfolio's 1966-2006) is Target Retirement 2015 for the money I need in retirement (going into my 19th year of ER) and for medical purposes - a few good stocks which can include ETF's and on occasion a mutual fund usually index.

Football season helps but resistance is futile when it comes to diddle, dabble, er whatever. So far I have avoided options and commodities but quelling hormones is ongoing. It gets easier as the clock ticks on.

heh heh heh - DRIP dividend stocks, pssst Wellesley, VG REIT Index, and others hopefully are past memories. Except for shifting a few deck chairs on the Titanic every once in while. Come-on football!

[hotwired]

Uncle Mick!
Just coming back and reading your post I got an "A ha" which explains why I get this horrible "death like" feeling every time I consider moving all my $ to a simple 3-4 fund allocation. I feel like I'm putting my sword away ...... ah, yes, well, I'll just have to fiddle and fumble as intelligently as I can muster!! Thanks for a great post.

[Greg V]

For me, a dozen funds/ETFs covers the required range of equity/fixed, large cap/small cap and domestic/foreign. Some are actively managed some index. Fewer funds/ETFs may be in my future...we'll see how the current strategy works out. I can relate to the urge to tinker with the machine when it's probably best to be hand's off if I chose the right AA to begin with. I rebalance annually and use that occasion to raise cash as needed. Seeing the other approaches to the same challenge in this thread is educational.

[kyounge1956]

Hotwired, may I suggest a reading of "What do I do when I get Stupid?" I don't know how old you are now, so maybe your portfolio is not too complex for your current level of financial competence. But what if it does become too much for you to manage as the years advance? Perhaps your liking for messing around with spreadsheets and for tweaking and modifying your portfolio could be satisfied by seeking out the "best" of the lazy portfolios (that is, best at meeting your personal requirements) and the optimal way (i.e. minimizing tax impacts etc) to transition from your current holdings to that "best" portfolio.

[easysurfer]

More doesn't always translate to better. With too many funds, it's difficult to get a good handle on what is overlap etc. I like to go with the total indexes and keep it simple and general that way.

[Lsbcal]

Just want to clarify I'm not suggesting complexity. Currently have 3 equity ETF's and 3 bond funds.

I thought the backtesting mention in this thread had to do with your setting (and understanding) your ultimate strategy, not picking the hotest thing. FWIW, I find Wellington quite hard to beat. If you choose something else then at least understand why you are doing that.

[kyounge1956]

Quote:

Originally Posted by easysurfer More doesn't always translate to better. With too many funds, it's difficult to get a good handle on what is overlap etc. (snip)

+1
entering all your holdings into the Morningstar instant portfolio Xray tool will show what your asset allocation actually is, especially whether you are holding more or less of some asset classes than might be obvious from the list of funds.