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"A new approach to a 60/40 portfolio"
Old 11-29-2017, 07:46 AM   #1
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"A new approach to a 60/40 portfolio"

I read an interesting article on the 60/40 portfolio by Craig Israelsen and have linked it below. It makes a good argument for more than 1 diversifier for US stocks.

https://www.financial-planning.com/n...0-40-portfolio

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Old 11-29-2017, 08:10 AM   #2
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Meh. There are some interesting numbers in the article, but he makes some dubious statements/suggestions. IMO, 60/40 means 60% equities, 40% fixed income.
  • he assumes the 60 is US equities only
  • he doesn't seem to consider the 40 to necessarily be fixed income
  • some of his examples result in 100% equities, which is definitely not a 60/40 portfolio
  • he considers total return as the end goal, instead of lower volatility
Such an article could actually be dangerous to a novice investor.
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Old 11-29-2017, 08:35 AM   #3
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Originally Posted by mrfeh View Post
Meh. There are some interesting numbers in the article, but he makes some dubious statements/suggestions. IMO, 60/40 means 60% equities, 40% fixed income.
  • he assumes the 60 is US equities only
  • he doesn't seem to consider the 40 to necessarily be fixed income
  • some of his examples result in 100% equities, which is definitely not a 60/40 portfolio
  • he considers total return as the end goal, instead of lower volatility
Such an article could actually be dangerous to a novice investor.
Did we read the same article?

"Which of these 11 asset classes was the best partner when teamed with large-cap stocks over the past 15 years? The answer depends on your goal: do you want lower volatility or enhanced performance?"

I think he was letting the reader decide what was best for their own situation.
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Old 11-29-2017, 09:12 AM   #4
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Interesting article and useful statistics.
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Old 11-29-2017, 10:57 AM   #5
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Quote:
Originally Posted by mrfeh View Post
Meh. There are some interesting numbers in the article, but he makes some dubious statements/suggestions....
+1

For one, I don't think of the 60% as solely U.S. Large cap equities... I think of it as stocks... so both large cap and extended market domestic equities and international equities as well... so that interpretational difference lowers his 11 potential partners to 7 (eliminating small-cap US stock, mid-cap US stock, developed non-US stock and emerging stock).

Secondly, the purpose of the other 40% is to reduce volatility... so the prime candidates are the 4 choices with low correlation to stock.... namely, in order: US bonds, US cash, US TIPS and non-US bonds.

The remaining 3 are just not attractive to me and hard to find low-cost funds (excluding REITs).
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Old 11-29-2017, 11:21 AM   #6
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Originally Posted by pb4uski View Post
+1

For one, I don't think of the 60% as solely U.S. Large cap equities... I think of it as stocks... so both large cap and extended market domestic equities and international equities as well... so that interpretational difference lowers his 11 potential partners to 7 (eliminating small-cap US stock, mid-cap US stock, developed non-US stock and emerging stock).

Secondly, the purpose of the other 40% is to reduce volatility... so the prime candidates are the 4 choices with low correlation to stock.... namely, in order: US bonds, US cash, US TIPS and non-US bonds.

The remaining 3 are just not attractive to me and hard to find low-cost funds (excluding REITs).
He is making the point that there can be some diversification in the equity side that will reduce volatility over Large Cap US stocks. That is why he starts with 60% large cap US as an example.

Use of equities with less correlation to Large cap US is an advantage, and he makes that point.

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Old 11-29-2017, 11:30 AM   #7
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Under his thinking the other stock components are additive rather than a reallocation of the 60% and would result in more than 60% in equities

I agree with the notion of including extended market and international, but the notion that those are not already part of the 60% and that the 60% is all US large-cap is probably from the stone ages. While I concede that the Trinity Study was based on the S&P 500 for stocks and investment-grade corporate bonds, it has been common practice to include mid-cap, small-cap and international stocks as part of the 60% in equities for diversification benefits for a long time.
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Old 11-29-2017, 11:38 AM   #8
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Not a new approach. It's the same ol' old same Seven-Twelve approach that C. Israelsen and others have been putting out there for years and years. There are equivalent, but cheaper, simpler ways to achieve similar results. Move along. Nothing to see here.
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Old 11-29-2017, 11:51 AM   #9
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Quote:
Originally Posted by mrfeh View Post
Meh. There are some interesting numbers in the article, but he makes some dubious statements/suggestions. ...
Agreed. He starts with the false premise that the 60% has to be in large cap US stocks. This is a sector bet, so it's not surprising that he might need to find other bets he can make on the 40% side to mitigate the downside of making this silly bet.

However, if the 60% were diversified into all US stocks and all international stocks in a 70/30 up to a 50/50 ratio, his portfolio becomes much more solid.

He also misses the point of the 40% side, which is to be low risk. Why would one put money on the safe side and then immediately go looking for volatility and risk? Commodities ?!!?! It doesn't make sense.

Regarding TIPS he just plain doesn't understand the basics. For most of his 15 year history period we have been in a very unusual interest rate environment. To project anything bond-related from this is to not understand reality. We have a bundle of 2% of 26 TIPS that were up as much as 50% after 2008 and are still up about 35%. Great fun, but not something that it makes sense to project. From his picture, he's an old guy. He should know better.
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