Target retirement vs slice and dice

[donheff]

I have been thinking of moving most of our pre-tax portfolio into target retirement funds. I am essentially lazy and find financial analysis about as interesting as sports stats - which is very low for me. But I like the ideas behind slice and dice. Does the institutional re-balancing going on with target funds capture the "sell high" buy low" aspects of slice and dice to the extent that it is a wash? Or are you able to improve your probability of good returns with a DIY approach?

[audreyh1]

I think the "laziness" approach wins hands down. If you can invest it and forget it, you are much less likely to mess it up, "tweak", attempt market time, etc. Being able to forget about it is invaluable IMO. You can go on with your life and waste little energy "worrying" or "strategizing" about investments.

If I had to do it all over again I would take a much simpler one or two-fund approach rather than my current slice and dice. Even though I only take action once or twice a year, I still monitor on a monthly/quarterly basis. The temptation to "time" is horrendous - even with rebalancing.

I would expect the target funds are doing that rebalancing for you, which would gain the sell high, buy low benefits of slice and dice.

Audrey

[CybrMike]

With a larger portfolio, I prefer the control of being able to rebalance every couple years or more instead of every year. Keeps the tax man from getting his money until I say so.

But, it would definitely be simpler to have just one fund.

[lswswein]

Slice & Dice portfolio's are supposed to add somewhere between 1-3% according to Bernstien compared to Target Retiement or Total Mkt Funds. There is some potential to better manage taxes with S&D, but I think a lot of people do S&D more because they like reading and playing with S&D and also for the fact that it gives them something to do than because of any big advantage over set it and forget it Tgt Retirement funds.

So if you don't enjoy S&D, buy a Tgt Ret fund and forget it - Check out the Coffehouse Portfolio book.
-h

[cute fuzzy bunny]

Its probably to point out that the benefits of slice and dice are backtested using historic returns that were generated before lots of people did slice and dice and a lot of the asset classes were more obscure or not feasible to buy for the average investor.

Now that everybody knows about it and almost every reasonable asset class has a couple of funds and etf's...will the same sorts of returns be seen in the asset classes, or will it change to fit the larger # of investors?

[yakers]

I am borrowing this from a Morningstar board so I am assuming it is correct, it indicated that S&D does better than at least some structured balanced funds :
1981-2006
Growth of $10K & StDev

Balanced Fund:

60% 500 Index
40% InterTerm Bonds
Rebalanced Yearly

Ending value and SD:

$160,246.40 StDev 10.22

The Coffeehouse Portfolio:

10% 500 Index
10% Large Value
10% Small Blend
10% Small Value
10% REIT
10% EAFE
40% InterTerm Bonds

Ending Value and SD:

$182,735.90 StDev 8.93

Now I have not seen a VG, Fidelity or TSP target fund run through the same comparison, I expect the target funds to do better than a purely balanced fund but still may not match S&D.
But I have gone with a target fund in my TSP because 1) I do not have a 10 way S&D option, I only can choose from the 5 funds available although I could attempt a coffee house by including my Roth and setting up some after tax funds where I currently have some DRIP stocks. 2) the target retirement adjusts for a changing AA as I get older, it automatically resets to lower risk (& probable return). I don't have to rebalance 10 funds for that reason (as well as rebalancing because of fund performance)which might be complicated and maybe have transaction costs. 3) a target fund keeps me from the tendency to want to market time. I would have problems buying into REITs right now even though I know that is part of the coffee house AA.

So if you really have a lot of discipline and enjoy managing your investments then set up a 10 way S&D and there will probably be some reward for that. But if you want to save time and you are aware if you have a tendency to market time then just go with a target fund.

[Rich_by_the_Bay]

This is a good question which has been briefly discussed a while back, and is worth revisiting. I also read that there is a small premium for rebalancing but that over time it isn't that significant. I couldn't find good evidence because there are so many other variables, I suppose.

I found it hard to find a target fund that closely matched the asset allocation I hope to maintain. Some are closer than others, but most leave be feeling things like, "if only they had a little more international" or "I'd rather have more in small cap" etc. Not to say I'm right or wrong, but I do like to have the ability to set it up the way I think is best. So for me, a little slice and dice will work well. Maybe 6 or 7 funds would do it, so it's not an overwhelming portfolio.

Over time, I may choose to consolidate some of the slices, or even more to a target fund. But for now, I see no down side to a restrained slice and dice strategy if the bookkeeping isn't too onerous.

[cute fuzzy bunny]

The TR funds just add some foreign and a dab of emerging markets in some of the "later" funds, plus they use the Total Market index rather than the s&p 500.

Without a real analysis, I'd suggest that the large/small value and reit tilts brought the extra returns.

Which is pretty much the way i've gone - TR funds in both IRA and taxable, with small cap value in the ira and large cap value in the taxable, creating a value tilt...although i've gone far further than 10%. Had the reits but sold them last year when I couldnt explain the valuations.

Roths are total international market to spruce up the foreign holdings in the TR funds.

So I think its possible to go with a core TR/LS holding and add some sectors that seem fairly or undervalued and keep it to 4-5 funds. Maybe not the whole benefits as previously seen on a S&D portfolio but maybe close enough.

[wabmester]

Quote:

Originally Posted by Rich_in_Tampa I also read that there is a small premium for rebalancing but that over time it isn't that significant. I couldn't find good evidence because there are so many other variables, I suppose.

Aww, doc, not again. You're an evidence-based sort-of-guy. Didn't we prove beyond a doubt that the rebalancing bonus is a math-error based myth?

If you have two asset classes with different expected returns (like stocks and bonds), rebalancing is always a losing proposition return-wise. It's obvious, isn't it? Letting the class with the higher expected return "run" will produce higher returns in the long run.

[cute fuzzy bunny]

Until it stops running.

I imagine that folks who kept rebalancing their stocks into bonds through the late 90's were a lot happier by 2002 than the people who didnt.

[wabmester]

Quote:

Originally Posted by Cute Fuzzy Bunny Until it stops running. I imagine that folks who kept rebalancing their stocks into bonds through the late 90's were a lot happier by 2002 than the people who didnt.

Right. It's a market timing technique with no basis in reality that will "work" in the years when the low-return asset class outperforms the high-return asset class. But it is always a losing game in the long run.

[Rich_by_the_Bay]

Quote:

Originally Posted by wab Didn't we prove beyond a doubt that the rebalancing bonus is a math-error based myth?

Beyond a doubt? Only in the accumulation phase.

Not so sure in the setting where you are making periodic withdrawals as your primary rebalancing scheme, and where you are rebalancing among assets with similar long term returns but low correlation. And that is exactly the situation many of us are or will be in after FIRE. I'm an agnostic there. Even Gummie wasn't willing to take on that one. (honest, I asked but he didn't bite).

At any rate, you did convince me that it is not significant return-wise and that rebalancing is essentially an exercise in maintaining your desired asset allocation.

[wabmester]

Quote:

Originally Posted by Rich_in_Tampa where you are rebalancing among assets with similar long term returns but low correlation.

I'll give you that one. There is a small theoretical bonus if you only rebalance only among asset classes with high volatility, similar returns, and low correlation.

[cute fuzzy bunny]

Quote:

Originally Posted by wab Right. It's a market timing technique with no basis in reality that will "work" in the years when the low-return asset class outperforms the high-return asset class. But it is always a losing game in the long run.

So i'm left pondering the upside of being bailed out when the market is drunk and something runs through the roof vs the downside of giving up perhaps a small bit of returns when an asset class is experiencing a few years of multiple excessive returns.

Maybe we're tapping on the reason why I made money in 2000, 2001 and 2002 while most people were losing it.

[wabmester]

Quote:

Originally Posted by Cute Fuzzy Bunny So i'm left pondering the upside of being bailed out when the market is drunk and something runs through the roof vs the downside of giving up perhaps a small bit of returns when an asset class is experiencing a few years of multiple excessive returns. Maybe we're tapping on the reason why I made money in 2000, 2001 and 2002 while most people were losing it.

Hey, I've also timed the market successfully (err, sometimes). And even when I'm wrong, I like to think market timing based on valuation or economic metrics is more likely to work than one based on random period rebalancing.

BTW, there's a good thread over at the diehards board on GMO. They predict future returns for several asset classes, and somebody back-tested their predictions and found that they were pretty good for the period studied. Go take a look at GMO's predictions for the next 7 years. And *then* rebalance.

[cute fuzzy bunny]

Who said anything about "random?"

Got a link to that diehards thread? Its not popping out at me.

[wabmester]

Quote:

Originally Posted by Cute Fuzzy Bunny Who said anything about "random?"

Most people do when they talk about rebalancing. I was sort of agreeing with you (first time for everything), but we both know that momentum is a factor in returns, so it's hard to guess when enough time has gone by with "outsized" returns.

[cute fuzzy bunny]

Hmm...I thought most people either rebalanced on a fixed schedule or waited for a particular class to become xx% out of "whack" before rebalancing it. Seems decidedly un-random to me.

But I'll take the tacit agreement on whatever it was we agreed on.

Note edit asking for the link to the diehards thread on the next 7 years market predictions. I like semi-fictional opinion Sort of like listening to the experts go on about who'll win the superbowl.

[wabmester]

Quote:

Originally Posted by Cute Fuzzy Bunny Hmm...I thought most people either rebalanced on a fixed schedule or waited for a particular class to become xx% out of "whack" before rebalancing it. Seems decidedly un-random to me.

To me, choosing an arbitrary fixed period or an arbitrary percentage-of-allocation is a random choice.

Here's the GMO thread:

link

GMO's site requires registration for the next 7 year prediction.

[cute fuzzy bunny]

Who said it was arbitrary?

Thanks for the link.

Registration? Looks like Haywood Jablowme will ride again...