Work Less Live More: Is his balanced portfolio still good?

[cute fuzzy bunny]

A split mix of wellington/wellesley is pretty cost efficient and pretty darn common. Its where I started when I quit buying individual stocks and went with funds.

For those who want a different graining of balance control, you can buy what amounts to the equity component of wellesley/wellington as a separate fund, managed by the same people (of course the holding amounts are a little different) and an intermediate bond fund and balance that way. Or buy a large cap value index and a short or intermediate bond index (or TIPS for that matter).

Alec did a bunch of analysis on the indexing option to show that there was no special 'magic' to wellesley/wellington other than convenience and reasonable pricing vs the index options. Performance can be tweaked with the two index options to simulate the returns of wellesley/wellington with a very small savings in ER.

[ESRBob]

Originally Posted by LOL!

Just saw this thread. Here is a study The Benefits of Low Correlation - Journal of Indexes on a 7-asset class retirement portfolio composed of Large US stocks, small US stocks, foreign stocks, intermediate bonds, cash, REITs, and commodities. Remarkably, Bob has it nailed in his post #14.

LOL
thx for posting this article -- just finished reading it and I think it does something important and new in quantifying the importance of low-volatility portfolios to retired investors who are drawing down their portfolios. Rather than just saying 'low volatility portfolios are good', though, it shows benefits in terms of reducing the maximum loss, and more importantly, showing how much longer it takes (and how much additional return you need) to restore portfolio to its original value after a loss when you are also withdrawing from the portfolio.

The star of this paper is the 7-sector fund which includes equal shares of Foreign and Domestic stocks and bonds along with cash, REITs and Commodities. Lowest volatility, highest return, lowest losses, fastest recovery. Not bad.

[Midpack]

For several years now, my portfolio has been built on what I read in Bernstein's Four Pillars of Investing. But this Low Correlation Portfolio article was fascinating to me. Only problem, so far I have found no way to add a "commodity" holding to my portfolio, I don't intend to trade directly but it would be nice to lower the correlation in my portfolio, especially now. I am seriously considering VGENX as the next best thing, but if you know of any commodity index funds (never even occured to me), thanks...

[LOL!]

Midpack, there is an entire asset allocation tutorial thread with info on where to find all the best places for the various asset classes including commodities: Asset allocation tutorial?
If you have questions after reading that thread, why not post a question in that thread?

[Midpack]

Originally Posted by LOL!

Midpack, there is an entire asset allocation tutorial thread with info on where to find all the best places for the various asset classes including commodities: Asset allocation tutorial?
If you have questions after reading that thread, why not post a question in that thread?

I'm new here so thanks for the redirect. Just read it and enjoyed it immensely, plenty for me to go research now...

[simple girl]

Originally Posted by ESRBob

Just saw this thread, and wanted to tell OP that I have updated the portfolio through end of 2006 in the new edition of Work Less Live More just released this month. If anything the portfolio looks better than ever. I'm still using it myself with no inclination to tweak. In rough outlines it is 40% equities (half international/half domestic) 40% bonds/CD/money market (again with a solid dollop in non-dollars) and 20% "Other" which includes commercial real estate, commodities, private equity, hedge funds, oil/gas (or anything else you can think of that is a credible asset class and won't correlate much with stocks or bonds). It is probably more applicable for people who are ER than those who are in accumulation mode, as it is a notch more conservative than you might want if you were still full-time employed and living off salary.

Hope this helps

Hi Bob!

We have your newest edition and are looking at gradually adjusting our portfolio to mirror the Sandwich Portfolio. We are still working and accumulating, though, so we thought we'd adjust the % to more equities and less bonds (adjusting the particular funds by an appropriate factor).

A few questions for you...curious why the % to foreign mid/small growth and emerging markets adds up to more than the % to foreign large. I've always kept less % in domestic small caps than large caps since they are more volatile. I'm sure there is some complicated mathematical story behind this that would go way above my head! Just curious.

Also, I'm looking for a substitute for VINEX since it is closed to new investors...unless there is some way I can get in to it that i'm not aware of? (we have both an IRA with Vanguard, BTW) We also have an IRA with T. Rowe Price so I'm looking at TRP International Discovery (T. Rowe Price International Discovery Report (PRIDX) | Snapshot), but it's expense ratio hurts (1.24%). What do you think of it? (Others opinions welcome as well)

At some point we made add a little commodities, etc. to get closer to the full Rational Investing Portfolio.

[Ed_The_Gypsy]

Long ago, I found several uncorrelated assets. The problem saw that some of them had lousy returns (e.g., cash). I tried to choose a mix with reasonable returns and reasonable lack of correlation. OK so far. We shall see how they perform during this downdraft.

[ESRBob]

Midpack
There are definitely commodity index funds and ETFs out there and well worth a look if you're ready to add commodities to your portfolio. You'll find your decision generally boils down to a balancing act between fees, access to the funds themselves and track record. You might look at QRAAX, PCRIX and at ETFs: DBC or GSG, GSP or DJP. Vanguard Energy is a good fund but that is not all the commodity universe.

Simple Girl
Glad you got the new book -- did you get the workbook or the V2 update of WLLM? If its the workbook, you can see your profile on Page 12 -- You became Sue and Sean -- hope you like the names!

As for the allocations, nothing too mathematically complex to understand -- the 'efficient frontier' models cranked out these blends as offering the better risk/reward profiles, within certain boundaries. I think intuitively the reason is that the International Large is pretty tightly correlated with US Large, (.68 correlation coefficient) and so did not offer as much diversification as the international small or emerging markets stocks do (.24 and .25 correlation coefficients) -- in other words, owning USLarge and International Large is not all that different historically. Still, the small stocks carry risks, for sure! As for volatility, though -- remember to think in terms of the whole portfolio -- if you have an asset class less-correlated or even ideally negatively correlated with the main parts of the portfolio, even if volatile, it can reduce the overall portfolio volatility. Paradoxical but powerful concept -- it will have an evening/dampening effect overall even though it is itself not stable.
(If you're keen, the table of correlation coefficients is on page 117 of the workbook -- I had to fight with the publisher for months to include it, but I feel strongly that it is the only way to develop a solid intuition about this sort of blended portfolio to reduce volatility approach to investing.)

But any asset class, no matter how uncorrelated to the portfolio, has to have a decent return or it will not pull its weight. That is why heavily cash portfolios don't cut it. (Sadly! If we could all live on 1 or 2% SWRs this whole area of ER finance would be moot and we'd all just have big bond or money market accounts...)

As for an alternative to VINEX, it's been really frustrating to have all those good funds close in recent years, but PRIDX looks good. If you want to look into DFA Funds DISVX and DFISX, you can see about getting into a lower-cost fee-only advisor such as Cardiff Park, Malvern Capital or Evanson who can get you access but it may still not be worth it when you look at the overall fee picture.

[simple girl]

Originally Posted by ESRBob

Simple Girl
Glad you got the new book -- did you get the workbook or the V2 update of WLLM? If its the workbook, you can see your profile on Page 12 -- You became Sue and Sean -- hope you like the names!

Yes, we got the workbook, too - but hadn't started on it yet...I see now where we are...thanks!

Originally Posted by ESRBob

As for the allocations, nothing too mathematically complex to understand -- the 'efficient frontier' models cranked out these blends as offering the better risk/reward profiles, within certain boundaries. I think intuitively the reason is that the International Large is pretty tightly correlated with US Large, (.68 correlation coefficient) and so did not offer as much diversification as the international small or emerging markets stocks do (.24 and .25 correlation coefficients) -- in other words, owning USLarge and International Large is not all that different historically. Still, the small stocks carry risks, for sure! As for volatility, though -- remember to think in terms of the whole portfolio -- if you have an asset class less-correlated or even ideally negatively correlated with the main parts of the portfolio, even if volatile, it can reduce the overall portfolio volatility. Paradoxical but powerful concept -- it will have an evening/dampening effect overall even though it is itself not stable.
(If you're keen, the table of correlation coefficients is on page 117 of the workbook -- I had to fight with the publisher for months to include it, but I feel strongly that it is the only way to develop a solid intuition about this sort of blended portfolio to reduce volatility approach to investing.)

Thanks for the explanation, it helps!