All-in-One Stock Funds or Slice and Dice Approach

[chinaco]

Has anyone come across articles of the benefits of slice and dice vs all in one approach.

A couple of examples (not depicting the bond part of the portfolio):

All-in-one Stock fund example:

• X% Total US Market
• Y% Total FTSE (ex US)

Slice and Dice example

• x% S&P 500
• y% Mid Cap 400
• z% Small Cap index
• w% European Index
• v% Pac Index
• u% Emerging Market Index

There are two scenarios:

• Accumulation (working and adding to investments)
• Distribution (selling and funding retirement)

It would appear to me that an all-in-one fund would be fine during accumulation assuming the % of stocks in each country and cap are acceptable. The Manager would rebalance to the allocations for stocks as each country and cap rises and falls.

During distribution it would seem that the slice and dice might have an advantage since you could sell up securities (that performed well at different parts of the business cycle). Where as an all-in-one fund would require you to sell a portion both good and poor performers at the time.


Anyone read any research on this or have thoughts?

 

[LOL!]

Every article I've read says that slice-and-dice will have higher performance. But that's a slice-and-dice that tilts to small cap and value. That's not the S&D you proposed.

If you have the same things in your portfolio whether in an all-in-one or a S&D portfolio, you are gonna get the same return except for perhaps a small extra return due to rebalancing.

If higher performance better? Maybe not. Maybe your "better" is simplicity as it is for many folks.

There are lots of articles linked in the asset allocation tutorial thread:
http://www.early-retirement.org/forums/f28/asset-allocation-tutorial-31324-2.html#post578722

 

[chinaco]

...
If higher performance better? Maybe not. Maybe your "better" is simplicity as it is for many folks.
..

Yes. the All-in-One is managed by someone else.

IMO - If one is not going to manage it an all-in-one balanced fund is probably the best bet.

You could be correct, unless one has a huge amount of money invested the difference in return is negligible in terms of $.

It would be interesting to see a back test on the results.

 

[travelover]

A couple advantages of slice and dice that I can think of:

Allows you to separate less tax efficient funds like bonds into tax deferred and more tax efficient funds like index funds into taxable.

Allows you to avoid selling equities in a down market, since bonds can be sold separately if you need the cash.

I think target funds are great for people who would otherwise do nothing, savings wise, for fear of not doing the right thing.

 

[Animorph]

Here's my most accessible reference:

FundAdvice.com - The ultimate buy-and-hold strategy- 2008 Update

Slice-and-dice gives you a chance to live off bonds only during market dips, and lets you chose your own allocations. The portfolio above is simple enough, but there is no one fund that implements it.

 

[haha]

During distribution it would seem that the slice and dice might have an advantage since you could sell up securities (that performed well at different parts of the business cycle). Where as an all-in-one fund would require you to sell a portion both good and poor performers at the time.

Anyone read any research on this or have thoughts?

You are very thorough Chinaco, please do this research and report back to this eagerly waiting board. I especially need to know which groups do well at which parts of the business cycle, and how to tell where we are in said cycle, so that I can adroitly switch around.

Ha

 

[chinaco]

...I especially need to know which groups do well at which parts of the business cycle, and how to tell where we are in said cycle, so that I can adroitly switch around.

Ha

I will leave the predicting to the pros...

If you are interested in that subject, there is information about general patterns of sectors that perform well at certain stages.

I was thinking of more of diversification and using conventional calendar or triggers (% out of balance) to rebalance (if -), take the gain for income (if +)

 

[FIREd]

During distribution it would seem that the slice and dice might have an advantage since you could sell up securities (that performed well at different parts of the business cycle). Where as an all-in-one fund would require you to sell a portion both good and poor performers at the time.


Anyone read any research on this or have thoughts?

The all-in-one fund would have also sold securities that performed well at different parts of the business cycle because such funds constantly rebalance. So if small caps outperform large caps, the fund would have sold the former and bought the latter.

The constant rebalancing is a concern for me though: 1) look at blend funds right now: they keep selling bonds to buy stocks and as the stock market gets lower and lower, so does what you thought was the "safe" part of your portfolio. So when you were counting on 10 years worth of expenses in fixed income, with a blend fund, you might be left with 7 or 8 years worth after the latest stock market drop... 2) What about momentum? If small caps are in favor because of where we are in the current business cycle, should you be selling them as soon as they start outperforming (all in one fund), or should you ride the momentum wave for a while and have a chance to sell closer to the crest (slice and dice)? 3) When you need the money, YOU decide what you want to sell with S&D, which can have many advantages...

I personally like the flexibility of slice and dice...

 

[yakers]

On the Vanguard diehards/Bogleheads board there are discussion like this. The conclusion by those disciplined enough to follow a S&D is that it will slightly outperform a balanced fund. And as stated earlier in this thread there are more options for tax efficiency and drawing down only bond funds in market declines. Still, DWs IRA is in Wellesley and my main fund is a target retirement fund. I am not happy but I am satisfied that I would not do any better with a S&D or any managed combination. Part of it is that I can explain Wellesley to my wife, I would not want to try to explain S&D in a difficult market.

 

[charlie]

I am with yakers on the wife thing. Personally I have come to the conclusion that slice and dice is better for a hands on investor during the accumulation phase for all the reasons given above.

However, for a 74 year old person like myself, well into the distribution phase, preservation of capital and a reliable income stream are far more important (IMHO).

I was in the slice and dice fold myself until the last year or so but my concern about leaving a complex portfolio for my wife (or myself for that matter) to manage if I were gone or incapacitated finally won out.

I have switched my taxable stuff to Vanguard's 5% Managed Payout Fund to take advantage of the tax loss and simplicity (reinvesting payout for now) and my IRA is in Wellesley Income, some inflation indexed bonds, a big CD at PenFed and a couple of REIT stocks (harmones not entirely dead). My strategy is to consolidate the IRA over time as the bonds mature into Wellesley or the Managed Payout Fund.

I think the automatic rebalancing of a balanced fund is especially important in a down market because, let's face it, most of us don't have the b***s (or smarts) to do it properly.

Cheers, and HAPPY THANKSGIVING!

charlie

 

[Lusitan]

I was in the slice and dice fold myself until the last year or so but my concern about leaving a complex portfolio for my wife (or myself for that matter) to manage if I were gone or incapacitated finally won out.
...
I think the automatic rebalancing of a balanced fund is especially important in a down market because, let's face it, most of us don't have the b***s (or smarts) to do it properly.

This is pretty much how I feel about it. Especially with this downturn, I don't know if I would have had the b*lls to rebalance properly. (My strategy lately has been to just try not to look at my accounts!)

I would also add that for young investors just starting out, the All-in-One option could perform better once you factor in the account maintenance fees that apply if you don't hold a minimum balance in each fund.

And for relatively young investors, the All-in-One option might provide a quicker route to Admiral shares (at least on Total Stock Market Index), which lowers the expense ration and again helps the bottom line.

For all of the above reasons, I have so far chosen to stick with the All-in-One approach. But as my stash grows and the Admiral Shares factor goes away, I might get into the slice-and-dice and just be clear in my instructions to my wife that when I kick the bucket she should go back to the All-in-One approach.

 

[chinaco]

I knew I had read this before... The effect of Reverse DCA when needing to sell.

Reverse Dollar Cost Averaging

 

[Spanky]

For simplicity, a single stock fund such as VT, a short-term bond, and a REIT fund will provide enough diversification without the burden of re-balancing.