I need AA and MPT help

[MikeyInMarin]

I know that I am not comfortable/qualified to do my own market timing.

I understand what the concept of MPT is; what surprised me is that even the experts are all over the map. I looked at Fidelity vs Vanguard target-dated indexed-fund portfolios (e.g., 2025). I also tried out the Financial Guard mod conservative indexed-ETF AA. They are all very different AAs:
FG is 35% bonds & 12% cash, 33% stock, 20% alternate (REIT, commodities)
Vanguard is 67% stocks & 33% bonds (no cash)
Fidelity throws in commodities & has lower 10-yr returns

I don't understand why:

1) Do the target-dated funds (or an advisor like FG) implicitly do market timing without saying so?
2) None of them explain their reasoning; they just give an AA. How am I to choose amongst them?

Thanks

 

[Sunset]

How old (roughly) are you ?

Mutual funds might keep cash for 2 reasons:
- market timing
- redemptions (they don't want to be forced to sell if the market dives and people panic).

The key is really how old are you, and what is your other investments in ? as your AA should be a combination of everything (but not your house).

 

[Ready]

Periodic rebalancing is a form of market timing, but it is considered a disciplined approach, rather than just trying to guess where the market is. And target date funds predetermine how they will shift from stocks to bonds as the target date gets closer, so while this could also be considered market timing, it is again a disciplined form of timing, so it's generally considered to be a reasonable strategy.

Perhaps reading a book on intro to investments would be a good starting point for you?

 

[MikeyInMarin]

Sorry - I didn't state my facts. I am 57. I had hoped to retire @ 62, but I think that's optimistic, so I'll go with the standard 65/66. I chose 3 'indexed 2025-ish / moderate-conservative' portfolios. They all have the same retirement date and passive/indexed funds.

One is 33% stock; the others are 67% stock. Which is right?

1 is 12% cash & 12% TIPS. No other has cash; and would only have what a blended bond fund would have of TIPS.

I am confused.

 

[MikeyInMarin]

When I said 'which one is right?', my point wasn't for people to choose between them. It was:
Given that 3 presumably similarly targeted funds have such diametrically opposed AAs, why is that?

Also, a possible 'Mea culpa':
The 'financial guard' AA isn't really an apples-to-apples comparison. Their advice includes my non-qualified brokerage account that I use as partially as an 'emergency cash' account (though their advice had me leaving cash in one of my qualified accounts, which is sorta stupid, but they wouldn't know that).

 

[Sunset]

I would expect different companies to have different views on the funds, just like home builders have different homes for a family. If each fund was exactly the same, how would each be able to sell their fund to you ? By having a difference, they can pretend (or explain) why this difference is what makes their fund the best.

I cannot tell the future, so the safe bet would be to get all of them. Although personally I'd go with anything close to 60% stock especially if it had low fees.

 

[growerVon]

It is true that each investment company has its own secret sauce that informs their target date fund allocations. However, comparing Vanguard and Fidelity's 2025 funds I see they are pretty similar:
Vanguard's 2025 (VTTVX): 65.85% stocks, 34.15% bonds/short-term
Fidelity Freedom 2025 (FFEDX): 65.72% stocks, 34.28% bonds/short-term

Maybe you were thrown off by the "financial guard" plan/product you mentioned? Stick with the low-cost, index-based target date funds, IMO, and be suspicious of any target date fund that wants more than 0.2% in total expense ratios.

 

[DrRoy]

When I said 'which one is right?', my point wasn't for people to choose between them. It was:
Given that 3 presumably similarly targeted funds have such diametrically opposed AAs, why is that?

It is because there is not just one "right" answer. It is all a judgement call, and different people have different judgement. There are also varying levels of risk tolerance. You have to decide what is comfortable and appropriate for you.

 

[donheff]

Never paid much attention but if life cycle funds vary significantly that is a good reason to avoid them. You would have to learn enough to evaluate whether your company's fund had an AA that you like. But once you have gone that far you can put it together yourself with a few index funds and save a bit on ER.

 

[pb4uski]

When it comes to AA, there is no one right answer because the right answer is a product of the person's risk tolerance and financial needs and balancing the two. Some people are very risk-averse and even a 65% stock allocation which is pretty typical, would keep them up at night. Other people are risk-takers and the thought of a 40% stock portfolio makes them feel like they are suboptimizing.

IME, for someone your age an AA of somewhere between 70/30 and 40/60 would be typical and there will be outliers who are 100/0 and 0/100. As for me... I stay pretty close to what Vanguard recommends, but tilt it a bit to the aggressive side... my target AA is 60/34/6 stocks/fixed income/cash.

 

[target2019]

When I said 'which one is right?', my point wasn't for people to choose between them. It was:
Given that 3 presumably similarly targeted funds have such diametrically opposed AAs, why is that?

Also, a possible 'Mea culpa':
The 'financial guard' AA isn't really an apples-to-apples comparison. Their advice includes my non-qualified brokerage account that I use as partially as an 'emergency cash' account (though their advice had me leaving cash in one of my qualified accounts, which is sorta stupid, but they wouldn't know that).

Part of your challenge is to define exactly what you see, and perhaps supply tickers or link to the company site.
It takes time on your part to do this, but is worth the effort.

What is financial guard? Is it a product of a big company, or something being actively marketed to you?

 

[MikeyInMarin]

The indexed 2025 funds: Vanguard (VTTVX - 7.79% 5-yr & 5.98 10-yr return) and Fidelity (FQIFX - 6.4% 5-yr return; I believe they used to have a commodity holding when I looked last year, but could be wrong). Their expense ratios are the same: .15%.

I have to agree that Financial Guard is the outlier. I found Financial Guard via this NY Times article "Inexpensive Advice for Index and Exchange-Traded Fund Investments":

http://www.nytimes.com/interactive/...-money&nl_art=8&nlid=801345&ref=headline&te=1

FG gives you quarterly-updated recommended AA's for $150/yr. I thought it was worth a try, but IMO it's AA is weird. Though maybe that's on me; I recall they claim their recommended AA has a 10-yr return of 7.x%, which is higher than the above 2025 funds.

My AA biases:

1) I consider commodities more of a gamble than an investment: my personal experience of failing at it, also the FG benchmark vanguard commodity fund's 30-yr return of 3.x%. The only alternative investment I like is REITs, and I do in fact hold some.

2) The bond market is so weird right now, I don't know what to do. The fed's discount rate can't go below 0 - I hope. I fear capital losses when interest rates do go up more than the "safe harbour" benefit when stocks go down. I read Mohamed El-Erian's book "The Only Game In Town" hoping to glean bond investment strategy. It's a good read, but it's mostly about global macro economics/politics. So my ad-hoc bond exposure is my 401k - 100% in Vanguard Wellington (the only non-indexed fund I own, because it seems to manage bonds & downturns well) and an intermediate bond fund in my cash account. Yep, that AA is not the 33% bond mix that the 2025 funds hold. The rest is US & international stock indexed funds. I am not comfortable with my current AA. It is ad-hoc!

So that's why I need help; my AA has a hole in it

Thanks

 

[pb4uski]

Below are my targets, which is basically a 60/40 AA but with a few twists adding in some emerging markets spice and a healthy dose of cash for liquidity and is probably more complex than it needs to be, but I'm retired and it adds a little fun to things.

Like you, I'm cautious of interest rate risk... I mitigate it by using CDs and target maturity bond ETFs from Guggenheim (Bulletshares) and BlackRock (iBonds). While the target maturity bond funds have interest rate risk, I know if I hold them to maturity as I intend to that I will get the par back (less any credit defaults of course, which hopefully will be none).

	Target
Domestic Equities	42%
International Equities	16%
Emerging Markets Equities	2%
Domestic Investment-Grade Bonds	22%
Domestic High-Yield Bonds	5%
International Bonds	6%
Emerging Market Bonds	1%
Cash	6%
	100%

 

[BooBoo]

Hi PB4uski,

Just curious what funds are you using for international bonds and emerging market bonds ?

Thanks,

Boo

 

[pb4uski]

VTABX and VGAVX... both index funds... I probably should shop around for a good, low-cost managed fund but just haven't bothered to yet since they are no huge parts of my allocation.

 

[target2019]

So that's why I need help; my AA has a hole in it

Thanks

If I needed help with my AA, I would present something like the attached picture, so that I defined where I am, what my AA is now, etc. Then others might see the "hole".

 

[COcheesehead]

Couple of key points: funds report their holdings after a certain period. So what you see as their current positions may be 6 months old.
Secondly, go to portfoliocharts.com and see how different asset classes interact to achieve the returns you want. You may be surprised at how alternative investments like REITS and gold can play into your portfolio.

 

[MikeyInMarin]

pb4uski: thank you very much for the 'target maturity bond ETFs' info. I didn't know such things exist. I will look into them.

Of the investments other than my 401k (100% Vanguard Wellington) which is 28% of my portfolio, my AA breakdown is:

3.3% intermediate bonds (in my emergency cash account)
60% US stock - modeled upon Vanguard's US total mkt fund (VTSAX)
22.9% developed Int non-US stock
5.4% emerging non-US stock
8.7% REIT

I feel I need to fill a non-stock hole (rebalance) - perhaps by the above bond ETFs.

Thanks all!