Another Financial Advisor Question

[OldShooter]

... Their approach is the maintain a balance across all sectors, using tactical weighting and rebalancing to maintain 10% in each sector as one sector outperforms. ...

Interesting. How many years of dollars-in-the-market (not backtesting) data do they have and how does it compare to simpler schemes?

I have a similar interest in DFA funds, so I set up a $100K test portfolio with a guy who can sell them and negotiated a 50bps fee. I'm settled in now to watch the test portfolio against other benchmarks for at least two years before trying to make a judgment. Really, 10 years is a better test period but that's pretty difficult when I'm already retirement age.

 

[LOL!]

My opinion of both Personal Capital and DFA is that you can do what they do all by yourself without paying their fees. And you can do it easily. They don't have any secret sauce to sell you.

Furthermore, DFA is a small-cap value tilt shop and small-cap value has suffered recently, so any DFA portfolio is probably trailing many other benchmarks. In fact, it trails so much that they had to have a "Managing Expectations" set of videos. I think I linked them before, but here they are again: https://www.bogleheads.org/forum/viewtopic.php?t=205911

 

[Texas Proud]

...and income taxes take another big chunk (25%). You are lucky to get half of it to spend.

Rarely does this happen.... I would bet that most do not pay 25% of their income in taxes...

I happen to pay zero right now.... and since being married never paid more than in the 15% bracket....

 

[RobbieB]

I have significant carryover capital losses from 2008-2009 that I have to use up still by offsetting realized capital gains.

Bummer dude. That must hurt.

Yeah that changes everything I'm sure. I lost 25 grand playing penny stocks when I was young and hoping to "get rich quick" and wrote it off at 3 grand a year for a long time. I don't do that anymore. Another reason I hired a FA, I suck at stock picking.

 

[FreeBear]

We can't afford to pay for an assets under management FA. We'd be 25% to 50% over budget. If I had a 2-3% WR, then having a AUM FA would be a consideration.

Still, I spend no more than 10-25 hours/year myself on FA stuff. I can't justify parting with a quarter (minimally) to half (realistically) of my current budget for 25 hrs of w*rk yearly. Honestly, though, I "enjoy" this stuff; I can see that many, maybe most, in the public don't.

It's funny that this FA threads can get pretty involved... How is "my guy" doing compared to somesuch... Is he "beating the market", whatever that means...

If I could understand all the discussions on such threads, then I probably woudn't need a FA. To be fair, I think a "paid by the hour", not AUM, would be a great idea, but I don't know where to find one, let alone a good one. Seems like most FA's are AUM sales guys.

Another perspective, some friends use an AUM FA, actually several FA's because they don't fully trust any of them! They can afford it though. There biggest puzzle is how to leave (or not leave!) their kids so much money that they become lazy bums. We are trying to help our friends spend more...

 

[OldShooter]

... DFA is a small-cap value tilt shop ...

Quite funny actually. You can do pretty much whatever you want with their Lego-style kit of funds. They also have a very good story on trading strategies. Both are why I'm interested.

But since you turn up your nose at small cap and value, what do you think of the CAPM, the Fama/French 3-factor model, and its wannabe successors?

And ... "recently?" What do you consider to be a period of time that is sufficient to judge an investment strategy?

 

[LOL!]

Quite funny actually. You can do pretty much whatever you want with their Lego-style kit of funds. They also have a very good story on trading strategies. Both are why I'm interested.

But since you turn up your nose at small cap and value, what do you think of the CAPM, the Fama/French 3-factor model, and its wannabe successors?

And ... "recently?" What do you consider to be a period of time that is sufficient to judge an investment strategy?

I don't turn up my nose at small-cap and value. My equity portfolio is about 50% small-cap and tilted to value and has been for years. This is why I can state that one can do it without DFA.

As for recently, the videos show trailing in 2015 for DFA. And in 2017, small-cap value DFSVX is up 3.31% through 11/17/2017 according to morningstar.com. Compare that to VTSAX (Vanguard Total Stock Market) with 16.73%.

But you tell me, please. What is the performance YTD of your $100K test DFA portfolio? And what is its asset allocation?

 

[CoolRich59]

... I did decide to fire my FA last week and am in the process of moving my $$ to Vanguard.

Heard from my (former) FA today:

Disappointed you've decided to leave
You were a valued client
Should you require assistance in the future
Blah, blah, blah

They also send their final invoice. Their "services" were paid quarterly in advance. This current quarter started Nov 1. I terminated on Nov. 15, but they deducted their fee for the full quarter.

So, I guess we're going to be having one more conversation, after all.

 

[Scrapr]

Heard from my (former) FA today:

Disappointed you've decided to leave
You were a valued client
Should you require assistance in the future
Blah, blah, blah

They also send their final invoice. Their "services" were paid quarterly in advance. This current quarter started Nov 1. I terminated on Nov. 15, but they deducted their fee for the full quarter.

So, I guess we're going to be having one more conversation, after all.

Who starts a quarter on Nov 01? That seems strange for a FA. I think retail stores are offset by a month to capture Christmas shopping in the 4th quarter. But a FA?

I had a big dollar CPA for 2 years. When I wanted out the third year he charged me an amount that was a full tax return fee to get some files sent over electronically. Was a couple thousand bucks.

 

[kcowan]

They also send their final invoice. Their "services" were paid quarterly in advance. This current quarter started Nov 1. I terminated on Nov. 15, but they deducted their fee for the full quarter.

I had a big dollar CPA for 2 years. When I wanted out the third year he charged me an amount that was a full tax return fee to get some files sent over electronically. Was a couple thousand bucks.

It seems that these FAs are money-grubbing leaches.

 

[pb4uski]

Buying the total US market is going to heavily weight you in Health, Tech, and Finance. Their approach is the maintain a balance across all sectors, using tactical weighting and rebalancing to maintain 10% in each sector as one sector outperforms. I know this would be some work to do, but they obviously robo adjust monthly.

They maintain a 10% allocation to alternatives in ETF's, majority REITS, Gold, and Energy/Food commodities. They used Hedged foreign bond ETF's for that allocation, and US bond ETF's for the balance.

Depending on their "tactical weighting and rebalancing" of sectors they are just making some sector bets/tilts that may or may not work out. I recall a few years ago I toyed with buying sector funds weighed by the S&P 500 stock market sectors for my equity allocation and then rebalancing the sectors periodically under a view that if rebalancing was beneficial between asset classes then it would be beneficial between equity sectors too because you are buying into poor performing sectors and selling off parts of sectors that have overperformed. My backtesting suggested that there was a minor benefit... but the added complexity was not worth the effort to me.

I am really skeptical of the benefit of a 10% allocation to alternatives, REITS, gold and energy/food commodities.

Your post is confusing... they use hedged foreign bonds ETFs for what allocation?

 

[Happyras]

I am really skeptical of the benefit of a 10% allocation to alternatives, REITS, gold and energy/food commodities.

Your post is confusing... they use hedged foreign bonds ETFs for what allocation?

Thanks for the feed back on your experience with sector balancing. Their allocation for me was 69.7% equities, and 18.9% bonds and 10.5% alternatives. They broke this down as follows;

Equities were 68.9% US/21.8% Developed F/8.3% EM Foreign

Bonds were 31.2% US Gov/31.2% US Corp/16.9% International

Alternatives 41.2% US RE/22.2% Gold/17.7 Int RE/11.3% Energy futures/4.6% Food/3% Metals

They do sector balancing with ETF's, and US stock allocation with some list of stocks they like.

I just got off the phone with my "free" advisor with Vanguard. He thinks my current allocation is very good, but advised to reduce equity exposure from the current 68% more towards 60%, and reduce my corporate bond and duration risk but selling VWENX and buying more VTBLX total bond index with more short duration treasuries.

This is much simpler to implement than a sector balance strategy, but I may play with it using https://www.portfoliovisualizer.com and VG etfs/mutual funds.

And I might add, I am not a great advocate for commodities or Gold but open to hearing from others that use such to reduce correlations and risk in equities. Most advisors are just salesman and not worth the ear time.

 

[mickeyd]

Rarely does this happen....

Unfortunately (or fortunately) it happens to me quite a bit.

 

[OldShooter]

I don't turn up my nose at small-cap and value. My equity portfolio is about 50% small-cap and tilted to value and has been for years.

OK I misunderstood.

This is why I can state that one can do it without DFA.

True, but good diversification across sectors and across countries would probably take 100+ stocks or using mutual funds. In the latter case, then, the issue is the FA fee for access to DFA. When I first considered this experiment I checked and found several that would provide access for a reasonable flat rate, though I don't remember details.

As for recently, the videos show trailing in 2015 for DFA. And in 2017, small-cap value DFSVX is up 3.31% through 11/17/2017 according to morningstar.com. Compare that to VTSAX (Vanguard Total Stock Market) with 16.73%.

Apples and Oranges. DFSVX is designated by DFA as a "component" fund intended to be used to tilt a more diversified portfolio. To compare it to the total market, pro or con, is to miss the point. Re performance, every dog has its day. This year has not been all that good for little dogs.

But you tell me, please. What is the performance YTD of your $100K test DFA portfolio? And what is its asset allocation?

Sure. Here is some E3Q YTD data from my test portfolio spreadsheet:


DFA 16.6%; DFQTX US Core Equity 50%, DFIEX Intl Core Equity 37%, DFCEX Emerging Markets Core 13%

Couch Potato 15.7%; 70% US Total Mkt, 30% Intl Total Market

ACWI All Cap 17.76%

Schwab Robot 14.9%

The Couch Potato is a no-rebalancing portfolio that I started on 12/31/2014 at 65% US, 35% Int. The "Schwab Robot" is a test that I have terminated because it junked up my records with like 15 funds and wasn't doing anything remotely interesting.

So, over this period that is too short to use for evaluation, the DFA portfolio (net of fees) essentially equaled your VTSAX but provided worldwide diversification. So I would say it "won" a meaningless race. I'll wait until it has run for a couple of years before I start projecting race results. YMMV of course.

 

[LOL!]

Sure. Here is some E3Q YTD data from my test portfolio spreadsheet:

DFA 16.6%; DFQTX US Core Equity 50%, DFIEX Intl Core Equity 37%, DFCEX Emerging Markets Core 13%

Thanks. For the above 100% equity portfolio, morningstar.com shows a 9-box style grid of
21-18-13
11-11-08
07-07-05

So only 52% large-caps which is a small-cap tilt along with a value tilt. Also, it is about 50:50 US:foreign equities. It is not dissimilar to my equity asset allocation without using DFA funds. My portfolio has slightly less large-caps though.

 

[OldShooter]

... So only 52% large-caps which is a small-cap tilt along with a value tilt. Also, it is about 50:50 US:foreign equities. ...

I've never checked but that is about what I would have expected. They make no secret about believing the three factor model and its current four-factor descendant.

The thing I wonder about though is, since we all know that small and value have outperformed over the long term, have these sectors now been bid up to the point where they won't be outperforming any more? So I am not interested in extreme tilts, aka concentrations.

 

[LOL!]

I've never checked but that is about what I would have expected. They make no secret about believing the three factor model and its current four-factor descendant.

The thing I wonder about though is, since we all know that small and value have outperformed over the long term, have these sectors now been bid up to the point where they won't be outperforming any more? So I am not interested in extreme tilts, aka concentrations.

Well we all know that past performance yada yada yada.

BTW, a 50:50 Total US:Total Int'l portfolio was up 17.8% through the 3rd quarter 2017 which is consistent with the ACWI return you noted. That is, the small-cap and value-tilt of the DFA portfolio was a drag on performance in 2017.

 

[OldShooter]

Well we all know that past performance yada yada yada.

BTW, a 50:50 Total US:Total Int'l portfolio was up 17.8% through the 3rd quarter 2017 which is consistent with the ACWI return you noted. That is, the small-cap and value-tilt of the DFA portfolio was a drag on performance in 2017.

Yes, per the original Sharpe paper that 50/50 portfolio should have missed the market average to the extent of its costs. If it did a little bit better, that just means that the mutual funds were, to a degree, holding stuff that was not in the ACWI. Not unusual.

Re performance in 2017 you and I seem to have a different view on timelines. I don't have the slightest interest (other than maybe curiosity) in such a short time interval. During any short time interval some sectors will outperform other sectors. Ho hum. Not news. Even waiting to judge until a full two years has passed is not statistically defensible. The signals are too noisy.

The flip side of the noisy signal problem is that it makes it very difficult to distinguish luck from skill. There are many, many opportunities to get lucky. Unfortunately there are very slightly more opportunities to lose. If you have read "Fooled by Randomness" you will remember that one of Taleb's themes is people who, having gotten lucky, conclude that they are geniuses. The parallel risk for most of us as investors is that we look at FAs and fund managers who have gotten lucky and cannot resist hoping that this indicates genius. Which it never does.

 

[LOL!]

I agree with you on all the noise stuff. I will say Taleb got lucky once and he has milked his one-time claim to fame for everything he can. I don't think there are any geniuses when it comes to investing.

Clearly, you don't have that much faith in DFA / Fama & French / Factors. Otherwise, you wouldn't have put only $100K into that bit of your portfolio. For myself, my entire portfolio is set up to basically follow a Fama & French style model, but I try to not fall too far behind something like the ACWI as well.

 

[OldShooter]

... Clearly, you don't have that much faith in DFA / Fama & French / Factors. Otherwise, you wouldn't have put only $100K into that bit of your portfolio. ...

Oh, absolutely correct. I have interest in the DFA approach, not faith. (It does seem to be kind of a cult, though.) That's why I hassled around to move $100K to an FA and to haggle him down to 50bps. Charts with lots of percentages are nice and as an engineer and physicist I can hardly argue against theory, but my best benchmarks are done with little test portfolios and real money. Hence, the $100K DFA experiment. The Schwab robot was from exactly the same philosophy. I ran that one for seven quarters before I decided the cost/benefit ratio was >1.0.

 

[Rustward]

<snip>
IIRC you were less than 20%....

I said that?

 

[Rustward]

i want my damn christmas card.