SIMPLE vs. COMPLEX

[hotwired]

Quick background: 48 years old, retiring (sort of) at 53. Own 3 businesses, inc. lawn care, web design and 48 rental units. Most of our portfolio is with our financial advisor who uses a G/I mix with about a 50/50 split stock bond (though he might throw in a bit of commodity or REIT from time to time.) I manage our SIMPLE's and ROTHS and that is what my question is about:

For years I've been battling inside between surrendering to a simple "rules based" investment strategy and a second strategy, which is simply expanding a little: 15-18 funds, diversifying a bit more, adding some "alternative" funds (Int'l RE, domestic RE, Limited pships, etc.) - the problem is, I find the 15-18 fund approach a little too much work. I don't manage it impeccable. (i.e. I like the tactical asset allocation approach but simply don't take enough time to watch every position's 300 day moving average) and rebalancing is really a bear.

So I think what I need to discover is the answer to 2 questions: A.) Is there a way to do significantly better than doing a 5-6 fund rules based asset allocation using Vanguard funds and B.) if there IS a way, am I THE MAN for the job? In other words, even if I fiind a metod that will give me 12% a year vs. 8% a year, am I likely to do the work needed to make that 12% possibility a reality?

I'm wondering if this post brings up any thoughts with any of you? Have any of you had similar internal battles? did you find answers? If you surrendered to simplicity, did the "itch to be creative" drive you nuts

Thanks so much'!
Ken

 

[pb4uski]

I surrendered to simplicity. I focus more on AA and little on fund picking and mostly go with low cost, no load index funds. I have better things to do with my time.

While I would like to get down to 4-5 funds, one for each asset class (domestic equity, international equity, domestic fixed income, international fixed income and cash equivalents) in reality I end up with more.

Have you considered Wellington or Wellesley or Star fund for your SIMPLE? They are low cost and do the rebalancing for you.

 

[2B]

I doubt you will routinely achieve 12% with any method. Achieving 8% with a balanced portfolio is more reasonable but may prove difficult with present interest rates. You might be able to achieve any historical return you want by cherry picking returns and time periods but it's not likely to routinely be there in the future.

I suggest you educate yourself, get rid of your FA and create a simple portfolio of index funds at your selected asset allocation.

I suggest two books. The first is Andrew Hallam's Millionaire Teacher (very simple) and William Bernstein's Investor Manifesto (slightly more involved).

If you turn yourself over to index investing, you will not have to follow a pile of managed funds' moving averages or any other useless measures. You can rebalance annually and spend less than half an hour doing it. Read the books mentioned above and you will hopefully understand that buying managed funds and using a FA is just contributing to feeding Wall Street. All it accomplishes is achieving a lower return for you.

I personally only have six funds. Three of these are the same basic asset class because of my 401k in SERP plans. When retired, I'll quickly transition to four funds (all Vanguard) and a CD ladder for my fixed income.

 

[jerome len]

I recently had some experience with family members that have trusts invested by the pro staff at Vanguard. They put the trusts in a total of 5 funds.......saying that if you have way more you really don't change the outcome much. Your rate of return and risk will be much more affected by your percent of stocks vs. bonds. If you want to manage, it's simple until your age (I'm talking about late 70 or 80) affects your decisions. Smart to be with Vanguard and index funds......you'll do well.

 

[Midpack]

From everything I've read over the past 20 years, most people (90+% of the broad population) could be best served by a portfolio of 3-10 low expense index funds. More funds may provide better results, but only slightly better.

I'd suggest you read The Four Pillars of Investing or The Investors Manifesto both by Dr William Bernstein for more insight. And have you looked at the various lazy portfolios, they typically provide solid returns, a good balance of risk (volatility) vs return, with little fuss or fanfare. You choose an asset allocation stocks:bonds and then fill in stock and bond funds from there. Vanguard and DFA Funds are very popular choices, but other brokerages may have equivalents (and many have higher cost imposters, buyer beware).

http://www.bogleheads.org/wiki/Lazy_portfolios

 

[ERD50]

.... if I find a method that will give me 12% a year vs. 8% a year, am I likely to do the work needed to make that 12% possibility a reality? ...

If you find any method that doesn't entail too much added risk, that could increase returns by 4% points (a 50% boost over your 8% return), then please share!

That's a tall order. I suspect that careful slice and dice might get you an extra 1% over time, or maybe 1% less. It's not clear anyone can consistently beat the averages.

I'm still amazed that a very wide range of AA provides the same historical success rates in FIRECalc. Some other test and papers have shown re-balancing to have little to no effect. Things seem to go in cycles over 30-40 years, and it all seems to have averaged out.

-ERD50

 

[Onward]

Is there a way to do significantly better than doing a 5-6 fund rules based asset allocation using Vanguard funds

I seriously doubt it.

 

[rayvt]

am I likely to do the work needed to make that 12% possibility a reality?

If you have to ask that question, the answer is automatically "No."

William Bernstein: "If money management is not enjoyable, then a lousy job inevitably results, and, unfortunately, most people enjoy finance about as much as they do root canal work."

 

[Lsbcal]

...(snip)...
So I think what I need to discover is the answer to 2 questions: A.) Is there a way to do significantly better than doing a 5-6 fund rules based asset allocation using Vanguard funds and B.) if there IS a way, am I THE MAN for the job? In other words, even if I fiind a metod that will give me 12% a year vs. 8% a year, am I likely to do the work needed to make that 12% possibility a reality?

I'm wondering if this post brings up any thoughts with any of you? Have any of you had similar internal battles? did you find answers? If you surrendered to simplicity, did the "itch to be creative" drive you nuts
...

Don't let anyone tell you what you should be doing. We all have to take responsibility for success ... and failure. That will make us stronger. Will it make us wealthier?

For me, my methods are complex and would seem unusual (bizarre?) to many investors. I've used a lot of good thoughts from various investment sources including this board and Bogleheads. Out of the complex methods comes just about 5 actual positions in equities: US large, US mid, US small and maybe international large, international mid/small. All this is done using Vanguard indexed etf's. So 3 to 5 etf's in each account we control.

I just mention this because if you have the interest then going your own route can possibly work. But we never know what is around the next economic bend so we never know quite if we are doing the right thing.

Buy and hold using index funds or just investing in Wellington or Wellesley is an easy way out and maybe will be best for most (all?) of us.

 

[Animorph]

I do the complex portfolio, though it is just buy and hold with triggered rebalancing. No way can I expect an extra 4%/year out of it. I'd be happy with 1% from rebalancing. With a spreadsheet and/or Quicken and without trying to make any tactical timing moves it's not too time consuming, but enough to keep me interested.

 

[hotwired]

@ERD50, I was only using the 4% premium as an example. The more I think about it the more I think maybe having a simplified SYSTEM as well as portfolio might suit me. System as in including some common sense ideologies like "don't have long term bonds as your biggest bond position when rates are at all time lows" etc. Of course one wrong move and I fall off the fence into the land of "complicated and sloppy!" haha!

 

[Midpack]

http://www.early-retirement.org/forums/f28/simplifying-my-strategy-slice-n-dice-vs-61667.html

 

[easysurfer]

I like simple. A index here, an index there and rebalancing.