Ben Stein's Recommended Portfolio -- Comments?

[Achiever51]

In the June 25 "special investor's issue" of Forture (the same one that has a feature on Nords), the "Questions for...Ben Stein" article includes Ben Stein's following portfolio AA recommendations:

"What I generally recommend for the noncash portion of your portfolio - and this has been unbelievably successful - is a mix of various index funds and exchange-traded funds [ETFs], with roughly
25 percent in an S&P 500 index fund from Vanguard or Fidelity;
25 percent in a Vanguard or Fidelity total stock market fund;
25 percent in EFA, which is an ETF for developed overseas markets;
15 percent in EEM, an emerging-markets ETF;
5 percent in ICF, the ETF for real estate investment trusts; and
5 percent in XLE, which would be your energy fund.

I'm not a big lover of bonds because I think the risks involved in buying long-term bonds are tremendous, and the payment from short-term bonds is trivial. That said, you should have 20 percent of your portfolio in cash. I would say if you can get 5 percent or more on your cash in a CD or savings account, go for it. That way, you have it to tide you over if you lose your job or your health worsens."

What do y'all think about his suggestions? Comments are welcome.

[Sam]

Sounds reasonable to me, until he said "you should have 20% of your portfolio in cash". Well, it adds up to 120%!

Anyway I think he's saying 20% cash, 80% equity. And the allocation of the 80% is (25, 25, 25, 15, 5, 5). Pretty good, but I don't think I want more than 10% cash.

[utrecht]

Quote:

Originally Posted by Achiever51 In the June 25 "special investor's issue" of Forture (the same one that has a feature on Nords), the "Questions for...Ben Stein" article includes Ben Stein's following portfolio AA recommendations: "What I generally recommend for the noncash portion of your portfolio - and this has been unbelievably successful - is a mix of various index funds and exchange-traded funds [ETFs], with roughly 25 percent in an S&P 500 index fund from Vanguard or Fidelity; 25 percent in a Vanguard or Fidelity total stock market fund; 25 percent in EFA, which is an ETF for developed overseas markets; 15 percent in EEM, an emerging-markets ETF; 5 percent in ICF, the ETF for real estate investment trusts; and 5 percent in XLE, which would be your energy fund. I'm not a big lover of bonds because I think the risks involved in buying long-term bonds are tremendous, and the payment from short-term bonds is trivial. That said, you should have 20 percent of your portfolio in cash. I would say if you can get 5 percent or more on your cash in a CD or savings account, go for it. That way, you have it to tide you over if you lose your job or your health worsens." What do y'all think about his suggestions? Comments are welcome.

Yes, I think its clear he meant these are the allocations for the stock portion of your portfolio. I dont think he added wrong. Thats alot of International exposure isnt it?

[mathjak107]

much to volatile for this stage of my life. my investment model is to get all the returns of the s&p 500 with less volatility. right now i do that with about 75% of the volitility. 40% in international would have my portfolio taking on more risk and swings.

[Anansi]

Quote:

Originally Posted by mathjak107 much to volatile for this stage of my life. my investment model is to get all the returns of the s&p 500 with less volatility. right now i do that with about 75% of the volitility. 40% in international would have my portfolio taking on more risk and swings.

Why more volitile? At least recently, the EFA has had about the same volitility as the S&P 500. It has just performed a lot better.

In any case, Ben's allocation looks fairly good to me, although I would actually have just a little more international than he recommends.

[ziggy29]

Quote:

Originally Posted by Achiever51 "What I generally recommend for the noncash portion of your portfolio - and this has been unbelievably successful - is a mix of various index funds and exchange-traded funds [ETFs], with roughly 25 percent in an S&P 500 index fund from Vanguard or Fidelity; 25 percent in a Vanguard or Fidelity total stock market fund; 25 percent in EFA, which is an ETF for developed overseas markets; 15 percent in EEM, an emerging-markets ETF; 5 percent in ICF, the ETF for real estate investment trusts; and 5 percent in XLE, which would be your energy fund. [I]I'm not a big lover of bonds because I think the risks involved in buying long-term bonds are tremendous, and the payment from short-term bonds is trivial.

I agree for sure that long term bonds aren't worth holding in an asset allocation; they carry rather puny additional returns over short-term bonds, with much more risk. Is Stein claiming that cash returns very nearly as much as short-term bonds?

As for the equities: A total stock market fund is about 90% an S&P 500 / large cap index fund anyway. So the holdings in the S&P index fund and a total market fund overlap almost completely. I'd change that 50% to something like:

* 25% S&P 500 index fund
* 5% Russell 2000 index fund
* 10% mid cap index fund
* 5% large cap value fund
* 5% small cap value fund

This overweights smaller caps but it also reduces volatility because large caps and small caps don't always rise and fall in lockstep.

I think 15% in EEM may be a little too aggressive for some, though I do love it as part of an allocation (it's 6% of mine overall). I think 5% in REITs is a little low (I like closer to 10%), and I think the 5% in energy is a good call. I don't usually like sector plays in asset allocation, but I make small exceptions for energy/natural resources and precious metals, mostly because the nature of these sectors is such that they could often rise when the broad market falls, reducing losses.

His call for 40% of equities in foreign stocks is higher than most would recommend, but if you have little faith in the dollar, it might be warranted. Just remember that a heavy bet on international stocks is often a bearish bet on the dollar.

[mathjak107]

Quote:

Originally Posted by Anansi Why more volitile? At least recently, the EFA has had about the same volitility as the S&P 500. It has just performed a lot better. In any case, Ben's allocation looks fairly good to me, although I would actually have just a little more international than he recommends.

i show the index to have a beta of 1.30 compared to the s&p. thats 30% more volatile.

the managed international funds i use hover around 1.28. thats almost 30% higher than the s&p

[chinaco]

Assuming that most people are saving their pennies for retirement. Is Ben's Sage advice for those in the accumulation phase or drawn-down phase? Is he speaking to a 30 year old, a 40 year old, a 50 year old... 80 year old?

80(stock)/20(cash)... let's see. if we assume this is not someone's emergency fund. let's look at each point

20yr old - I would probably be more like 100% stock (equity, REIT, etc). Why hold cash when I will not need it for 35 - 45 years.
30 yr old - Why hold 20% cash when 20% bonds over time will no doubt out pace them. I will not need it for perhaps 25 - 35 years.
40 yr old - about the same as 30 unless I am approaching FIRE then I would be moving to 30% bonds.
50 yr old - I would be at 30% bonds.
60 yr old - 30% bonds and accumulating up to around 10% cash (60% stock)
70 year old --- you get the picture. More cash and bonds. the Basic academic advice.


Seems a bit of a blanket statement and a little market timing ish. He is being a parrot and repeating advice some bond managers. It seems to me that I read some bits of his book and he advocated timing. Is that true? What bothers me about this is that most people will not be successful at market timing! Even ala Ben Stien.


I do agree with some macro timing (Don't swim against the tide). For example why buy into a particular class of assets that you know are likely to fall. For example If small caps have had a fantastic run over the last 3 - 4 years and the PE is out of whack and the growth rate is way above where it should be using regression analysis... I will not be putting new money into the small cap index for a while. If I have money to deploy, it will be else where (something that is underperforming). That makes sense to me. I handle moving out of the asset through the rebalancing process if that class of asset has grown. In other words... I will try to leverage the ebb and flow of the market forces. When growth occurs by moving money out through rebalancing. When a class contracts, I will consider deploying new money. Since we are approaching ER, I doubt I will have much new money to deploy unless DW and I hit the lottery or inherit something.

My general response to Stein is... If the average person needs to to time bonds, use a known Mutual Fund Manager. We have PTTRX. This is what Gross is doing right now. The other Intermediate term bonds are in an index. Got all the bonds I need... and Gross has made sure I have more cash today than I would normally hold. Hope he is correct in his analysis and conclusion.

Since we are about 4.x years out, I am accumulating cash. I want to hit a 10% cash target in 4.x years. If all goes well and DW and I continue to be blessed with good paying jobs... we can do most (maybe all) of that with our earnings (We have 1.5% cash fund right now). I will be putting a minimum of 1.7% of the portfolio in cash each year via wages. Other cash will come from rebalancing. I suppose If we are lucky, we will be rebalancing some assets to cash.

[Anansi]

Quote:

Originally Posted by mathjak107 i show the index to have a beta of 1.30 compared to the s&p. thats 30% more volatile. the managed international funds i use hover around 1.28. thats almost 30% higher than the s&p

Since the S&P 500 defines beta, almost anything else is going to be higher or lower, but that means almost nothing by itself. What I question is why you consider volitility necessarily a bad thing? A stock or index that significantly out performs the S&P 500, like the EFA has, will have a higher beta. No matter how I look at it, I just can't see that as being a bad thing.