Un-slice and un-dice

[Rich_by_the_Bay]

Suppose I Bogleize my stock piece (~ 50% of total) by keeping only Total Market Index (~80%), Total International Index (<= 20%). I'd rebalance occasionally between stocks and bonds overall, and between the two stock index funds as well. I'm not looking for a value or small cap premium, just tracking.

I'm comfortable with the allocation overall but realize that I don't have much to play with in terms of rebalancing -- many of the low-correlation asset classes are lumped together in the umbrella index funds.

If I don't plan to sell off equities other than rebalancing for at least 10-12 years, should I care about not having more slices (but keeping the same overall allocation)?

 

[MasterBlaster]

Well Bernstein says that the more (uncorrelated) slices you have the better you'll do over the long run. Bogle says the best weighting is the market capitalization weighting.

Since pretty much every asset class has been correlated recently, I beleive that your Bogle-like approach will be just fine.

By the way, there will always be an optimal allocation for any market. However you'll never know it until afterward.

So allocate your portfolio and get on with your life.

 

[youbet]

I've been looking at the same idea Rich. If it weren't for the fact that I have significant unrealized cap gains in my current slice and dice portfilio and cringe at paying the taxes, I might have made the switch already. As it is, about one-third of my total equity allocation is VTSMX or VTI.

 

[Tiger]

I was considering the same portfolio but after watching the performance of various portfolios including Coffee House & Indexed I still prefer my S&D AA, performance and potential. In addition if TSM takes some big hits your concentration on it will be a big hurt and could take a long time to recover from.

 

[Jarhead*]

If I don't plan to sell off equities other than rebalancing for at least 10-12 years, should I care about not having more slices (but keeping the same overall allocation)?

Rich: You've effectively removed the "Fear" and "Greed" problem by having 10-12 years in income without touching equities.

If you believe, as I do, that equities, in the long haul, will out-perform most other passive investments, letting the big dogs run makes perfectly good sense.

Regarding your choice of "equities", would require a crystal ball into the future, but if your intention is to not end up with the highest net worth possible, but to live the way you are comfortable with, your plan sounds pretty solid to me.

 

[Rich_by_the_Bay]

I was considering the same portfolio but after watching the performance of various portfolios including Coffee House & Indexed I still prefer my S&D AA, performance and potential. In addition if TSM takes some big hits your concentration on it will be a big hurt and could take a long time to recover from.

Thanks, Tiger.

If the TSM takes some big hits, doesn't that mean that, well, almost everything took a hit? And on the other side, if 5 out of one's 9 slices selected slices take a big hit, wouldn't the TSM feel pretty good?

I get the feeling it's about eliminating market timing, so if you sit tight long enough, the two strategies may well converge (total return).

 

[yakers]

I like the question as I have pondered it as well. On the VG Diehards board there seems to be evidence that a S&D with correct rebalancing does better than TSM over time. But even if this is true it 1) May not hold true in the future, 2) an appropriate rebalance program needs to be implemented either periodicly or when an AA shifts out of the desired range by some predetermined percentage and 3) corelations seem to be decreasing in general.

My TSP (401K type) account has only large & small cap, total international, total bond and a stable value type fund, and Target Retirement funds made up of a mix of the other funds. I find these are simnple and effective choices and I just add other funds in my Roth or some after tax stock funds.

I don't think you can lose by your simple choice and it is easy to implement. It may be possible to improve a bit on it but it takes a plan, some work and it may not play out anyway. The stock/bond allocation is obviously the most important and you have enough time to ride out the inevitable market shifts. For me I would do what you are suggesting as it is a good plan and I really like a simple plan. In fact you could choose a target retirement fund and make it even easier.

 

[Rich_by_the_Bay]

For me I would do what you are suggesting as it is a good plan and I really like a simple plan. In fact you could choose a target retirement fund and make it even easier.

Good to hear.

I gotta keep my bonds and cash apart since I am ... shhhh - don't tell anyone... bucketizing. But that's a whole other story (it's also why I won't touch my stocks for 10-15 years).

 

[73ss454]

Buckets, did someone mention buckets?

Here we go again, let me tell you how I feel........

 

[donheff]

Rich - it has been fun watching your head scratching about AA since I am struggling with the same thing. I ended up in nearly the same place as you. I like VG TR funds for setting an initial allocation but realized I could get a better expense ratio by buying the underlying funds directly. Also, like you I plan to let most of the equities run for a long period so I am not interested in changing the bond/equity balance as rapidly as the TR. So I selected a TR I liked and bought the underlying funds. Tried to match the AA in my TSP funds as close as I could.

Like Youbet, I have some mixed taxable funds I would like to simplify but I am concerned about the gains. I am moving them intact to Vanguard and will scratch my head some more about the gains issues.

 

[Rich_by_the_Bay]

Rich - it has been fun watching your head scratching about AA since I am struggling with the same thing. I ended up in nearly the same place as you.

Hey, my job is to entertain . I have noted that you and I are on parallel tracks with this one. I'm trying lots of possibilities on for size in the final year or so (?) pre-retirement. The more I learn (mostly here but also reading) the simpler an AA I want.

There is a lot of counterintuitive stuff you have to get over when you do this. For example, rebalancing seems to me like it "should" carry a premium, but in fact I'm not convinced of that -- it just stabilizes your AA over time (if there is a premium, it must be small and dependent on historic data-mining). Same with value and small cap tilting - historically a good idea but even the likes of Bogle aren't sure it will stay that way going forward -- just market timing with long cycles, perhaps.

Where do you stand these days, Don?

 

[Olav23]

If the TSM takes some big hits, doesn't that mean that, well, almost everything took a hit? And on the other side, if 5 out of one's 9 slices selected slices take a big hit, wouldn't the TSM feel pretty good?

I get the feeling it's about eliminating market timing, so if you sit tight long enough, the two strategies may well converge (total return).

I would imagine if VTSMX took a big hit, with the recent correlation, many asset classes would take a hit. But if it was specifically a hit to larger companies, you would be better with a slice/dice weighting small and value. This is, of course, if you believe the value/small premium will continue to exist.

Also, if you aren't the type who will dilligently re-balance quarterly/yearly/whatever, you are probably better off with the total market, since your initial allocations are getting closer to the total market anyway... (winners getting to be a larger % of the portfolio and losers becoming a smaller %)

Is this a correct theory?


Vanguard Total Stock Mkt Idx VTSMX

From morningstar:

Average Mkt Cap $Mil 28,112

Market Capitalization % of Portfolio
Giant 40.92
Large 31.34
Medium 19.53
Small 6.11
Micro 2.11

 

[Cb]

Between Bernstein and Swedroe and Ferri's books and internet activity, and TrevH's 35 & 80 year S&D vs TSM analysis I'm convinced S&D is the way to go, especially if you can do it using funds with very low ERs like Admiral funds or ETF's, and the majority of your portfolio is in tax-favored accounts. I've got to think squeezing out just a little more return and/or a little less Std Dev can only help.

I posted an inquiry on the Diehards board this morning looking for a link to Norb Schenkler's little study on the relationship between Returns & Std Dev with repsect to SWR.

http://www.diehards.org/forum/viewtopic.php?t=2394

Cb 8)

 

[Rich_by_the_Bay]

But if it was specifically a hit to larger companies, you would be better with a slice/dice weighting small and value. This is, of course, if you believe the value/small premium will continue to exist.

And there's the rub. It's speculating on the value/small premium. Could go the other way, too.

Also, if you aren't the type who will dilligently re-balance quarterly/yearly/whatever, you are probably better off with the total market, since your initial allocations are getting closer to the total market anyway... (winners getting to be a larger % of the portfolio and losers becoming a smaller %)

Rebalancing diligence aside, TSM is a valid concept: there is by definition no tilt. By overweighting anything, you are making a long term market play. Not saying this is wrong or worse, just that that's what it is.

I lack strategic motivation or skill to beat the market. Maybe some can do so consistently, but apparently not many. OTOH, I don't want to lag the market longterm either. Just want my piece of the pie, I guess.

Slice and dice does offer a perhaps false sense that you are selling the winners. Problem is that those winners you just sold may have grown even faster in the next 6 months after you sell them, and the losers you spared may drop farther. Letting them all just sit there apparently gives comparable returns over time.

So, I'm back to rebalancing only to keep the AA on track once in a while (maybe when 10% out of whack), and I'm thinking can do that with minimal slices.

 

[cute fuzzy bunny]

I unsliced right into target retirement funds.

I'm starting to think that now that everyone knows about this slicing and dicing stuff and obscure asset classes, and everyone can buy into things like commodities and foreign bonds by trading an etf...that maybe they'll perform a lot differently in the future and the correlation stuff wont be as useful.

 

[unclemick]

If I may interject my totally unscientific chickenheartedness theorm here - heavily dependant on the Norwegian widow and Bear Bryant - two legendary investment guru's - by the end of this year will have completed my 14th year of ER, now armed with sgeeee's Curmudegeon certificate:

1. Target Retirement - 12/31 take the larger of the end of year distribution(the Norwegian widow's current yield) or Gummy's 5% variable and put in Prime MM for the coming year depending on how I feel - agile, mobile and hostile wise(Bear Bryant).

2. Chickenheartedness and a Curmudegeon certificate - the only way to fly.

Math - don't need no stinking math - I'm retired. Love FireCalc and handgrenades!


heh heh heh - I sense a long erudite thread coming on : :

 

[CCdaCE]

How about splittin' it up equally among value/growth, and market weighting between large, mid, small?

Say the market is 50% large, 30% mid, and 20% small (for round numbers) for equity.

So, 25% large value, 25% large growth, 15% mid value, 15% mid growth... etc. etc. That way you're not weighting growth vs. value.

Set up a spreadsheet to calculate when you should rebalance. Could do it once a quarter or when your spreadsheet says its out of wack.

What could it hurt? Takes you maybe a 4 hours a year after initial setup? Assuming it's all inside retirement accounts, etc.

Are you having trouble with figuring out whether it's worth it or trouble figuring out how to do it? This seems to be a reoccuring thread of yours. No offense. The last XX years have yielded slightly more return, but therein lies the crystal ball gazing. Yours is just as clear as mine. Rebalancing is the only free lunch, and I think there's more people coming to the table to eat, like CFB says.

Edit: I don't do slice/dice now, but I plan to with more $$$, since I wouldn't think correlations will stay so close to 1 forever.

-CC

 

[Olav23]

I also agree with others. Easier is usually better. If you don't have the acumen or the interest in micromanaging your portfolio, even to eak out a few points here and there, stick with easy. Total Stock/Total Bond. If you want even easier, target retirement.

One thing I keep in mind, as I age, my sense could go.

If you are overly sliced/diced, who will manage your portfolio? My wife certainly has no interest in even looking at her checking account balance, let alone knowing what an asset class is

 

[Tiger]

Olav,

My wife isn't interested in managing a portfolio so I have shown her how target retirement funds work and if I die before her then she should put all of our equity and bond funds into a target retirement fund and use the money market fund for emergency needs and dividends needed to supplement her income. I have also put this in writing and left it in our safe deposit box.

 

[Olav23]

Great thinking, Tiger! Also, make sure she understands that there might be tax-consequences. (if she doesn't already!) I guess if it is all in a tax-deferred accounts, that makes it simple.

 

[Rich_by_the_Bay]

Bernstein allows that there may have been a small premium in rebalancing between value and growth over the last 25 years but there's lots of "ifs" and maybe even a downside, depending on how often you do it. Neither he (nor Bogle) are predicting that the same will or will not occur moving forward.

In fact, Bernstein stays that the less variation of return among the rebalanced classes, the less the benefit of rebalancing -- with the trend toward increasing correlation it is possible that rebalancing may lose its small historic advantage altogether. Free lunch? Crystal ball.

 

[lazyday]

but realize that I don't have much to play with in terms of rebalancing -- many of the low-correlation asset classes are lumped together in the umbrella index funds.

If I don't plan to sell off equities other than rebalancing for at least 10-12 years, should I care about not having more slices (but keeping the same overall allocation)?

Swensen included a sample AA in his last book, which doesn't tilt to small or value, but still is sliced into different asset classes. U.S. stock, Fn developed stock, emerging markets, tips, nominal treasuries, and real estate.

I'd have a real hard time buying real estate at today's prices, but otherwise like his advice.


IMO, going under 20% non-U.S. for the whole portfolio might increase risk. I've got nothing against the U.S. stock market, but wouldn't want to put all my eggs there.

 

[Olav23]

You will go broke betting against America.. JP Morgan

 

[Rich_by_the_Bay]

IMO, going under 20% non-U.S. for the whole portfolio might increase risk. I've got nothing against the U.S. stock market, but wouldn't want to put all my eggs there.

Don't large "domestic" companies have about 30% of their sales in foreign markets these days? If you go 40% international, you may be more exposed to non-US markets than meets, the eye, no?

 

[calmloki]

....
I'd have a real hard time buying real estate at today's prices, but otherwise like his advice.
.... I've got nothing against the U.S. stock market, but wouldn't want to put all my eggs there.

Now there's my problem. Real estate is real high - but we've got plenty of it. The stock market is so high I hesitate to buy heavily. Seems like in inflationary times that "things" that one owns are better than paper. After the recent sale of a couple of our little rental houses we are 60.3% rental property, 20% cash (making 6% in FNBO and 6.15% in PenFed), 9.2% in secured real estate loans making 7-10%, 7.5% personal home, 3% stocks and bonds, and that's it. Much as I would like to participate in the 16% earnings heyday that so many of you seem to be enjoying I'ze a big chicken. 'Specially when I can stick cash in a bank and get 6%, which may even be more than inflation. I guess there's something to be said for not betting the farm when you aren't a poker player, right?