DblDoc
Thinks s/he gets paid by the post
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Whats your Bernstein index?
- Thread starter cute fuzzy bunny
- Start date
Another old post from the morningstar boards that I had saved and like to re-read often by Steve Dunn, a close friend of W Bernstein. I think this says everything that needs to be said on the topic. (Again highlighting my me)
-h
Order of importance
swdunn| 12-18-05 | 06:31 PM
As a rather sluggish slice and dice type, I think that issue versus going total stock market is way down the list of what is important in managing one's financial affairs. In order of priority, I would list what is important in the following order of priority:
1. How much you earn (the value of your human capital).
2. An intelligent insurance program.
3. Your savings rate.
4. Your allocation to stocks versus bonds.
5. Have a reasonable diversification to your portfolio (anything reasonable will do).
6. Rebalancing to manage risk.
7. Tax management.
8. International versus domestic
9. Value versus growth.
10. Small versus large.
11. Slice and dice.
After number 7, it just doesn't matter much IMO, for about 99% of investors. I say that as one who has watched the numbers pop up on my Quicken computer screen over the passing years. Some things matter a whole lot more than others as to what really influences those numbers.
This chit chat about who is the fairest of them all when choosing vehicles for slice and dice is really beside the point in the larger picture. The choice of slice and dice vehicles is largely rounding error. It doesn't make much difference.
What does make a difference? Your decision about how much to save, how much to spend, how much to spend on your home, how much term of life insurance to buy, your desires and strategy as to how to go about earning a living, the allocation choice between bonds and stocks (sometimes, the importance of that decision depends on when the choice is made), and perhaps, as a considerably lessor matter typcially, the degree of titling to value overall with the equity portion of the portfolio, whatever the slice and dice vehicle. To suggest that Vanguard Large Value is "bad" in this larger context kind of hits my funny bone.
Steve
-h
Order of importance
swdunn| 12-18-05 | 06:31 PM
As a rather sluggish slice and dice type, I think that issue versus going total stock market is way down the list of what is important in managing one's financial affairs. In order of priority, I would list what is important in the following order of priority:
1. How much you earn (the value of your human capital).
2. An intelligent insurance program.
3. Your savings rate.
4. Your allocation to stocks versus bonds.
5. Have a reasonable diversification to your portfolio (anything reasonable will do).
6. Rebalancing to manage risk.
7. Tax management.
8. International versus domestic
9. Value versus growth.
10. Small versus large.
11. Slice and dice.
After number 7, it just doesn't matter much IMO, for about 99% of investors. I say that as one who has watched the numbers pop up on my Quicken computer screen over the passing years. Some things matter a whole lot more than others as to what really influences those numbers.
This chit chat about who is the fairest of them all when choosing vehicles for slice and dice is really beside the point in the larger picture. The choice of slice and dice vehicles is largely rounding error. It doesn't make much difference.
What does make a difference? Your decision about how much to save, how much to spend, how much to spend on your home, how much term of life insurance to buy, your desires and strategy as to how to go about earning a living, the allocation choice between bonds and stocks (sometimes, the importance of that decision depends on when the choice is made), and perhaps, as a considerably lessor matter typcially, the degree of titling to value overall with the equity portion of the portfolio, whatever the slice and dice vehicle. To suggest that Vanguard Large Value is "bad" in this larger context kind of hits my funny bone.
Steve
Patrick
Full time employment: Posting here.
Hmm. In this article: have long been interested in using commodity futures as an asset class but until recently there has been no simple way to implement a, Raddr shows that 45% Small Cap Value and 55% Commodities allows a SWR of 7.1%, yet he states that "Certainly no rational person would retire with a portfolio split roughly equally between ScV and a commodity futures fund . . ."
Why not? If the expected return is better than other combos, why not invest that way?
What is so irrational about that portfolio if it is developed with the same analytical tools as the other more-popular portfolios?
REWahoo
Give me a museum and I'll fill it. (Picasso) Give
Could it be that the whiplash from volatility could kill you long before you ran out of money?
Why not? If the expected return is better than other combos, why not invest that way?
Because, "Past Performance is no guarantee for future results".
The problem with the obscure asset classes and their combinations is the fact that no one held those asset classes in large numbers previously. So we don't know for sure if the returns were because of something intrinsic to the asset class or the obscurity of the asset class. So always use common sense.
The 45%ScV and 55% Commodities might be appropriate for someone who has a Govt job, guaranteed health care and pension etc, and is trying to hit homeruns. There is a backstop saving them. For others the extra 2-3% returns might not be worth the leap of faith
-h
Patrick
Full time employment: Posting here.
Could it be that the whiplash from volatility could kill you long before you ran out of money?
The volatility doesn't appear to be that extreme: "The "sweet spot" on the efficient frontier is located at about 11-12% std. dev. This is where returns are highest with the lowest volatility."
DblDoc
Thinks s/he gets paid by the post
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Patrick - there is a big difference between the accumulation phase with long-term investment horizon and being retired and safely withdrawing from your portfolio. You are less concerned about overall total return and MUCH more concerned about low volatility, beating inflation and safely running out of money at about the time you slide into home plate...
DD
Patrick
Full time employment: Posting here.
Patrick - there is a big difference between the accumulation phase with long-term investment horizon and being retired and safely withdrawing from your portfolio. You are less concerned about overall total return and MUCH more concerned about low volatility, beating inflation and safely running out of money at about the time you slide into home plate...
DD
Agreed. However, Raddr's calculated SWR with this portfolio is 7.1% vs. 4-5% for the "traditional" portfolios. So this portfolio should be safer, no? You can take more out each year without the expectation of going broke. What's not to like?
OP
OP
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
That it might not work that way anymore and you'd lose all your money.
I think I've detected the disconnect. You're seeking get rich quick schemes with almost a sole focus on total return and no focus at all on volatility and potential loss. Many of the folks here are focused on how to not lose all their money in three days.
I think I've detected the disconnect. You're seeking get rich quick schemes with almost a sole focus on total return and no focus at all on volatility and potential loss. Many of the folks here are focused on how to not lose all their money in three days.
Garbage in, garbage out (GIGO).
Most of the historical data in the more rigorous retirement calculators is eight decades, and FIRECalc happens to go back 135 years. Yet the [-]explosives[/-] commodities & small-cap value data you're playing with has a much shorter history. Note that Raddr is using phrases like "The 5-year correlation coefficients (1957-2003)", and "First the bad news. I was able to find data for the CRB index (presumably spot prices, equal weighted?) dating back to the 1920's. Commodities helped little, if any, in the survival of 1929-era portfolios.", and "I think that this is a better reference period than the 1920's since we were on the gold standard then which favored deflation when the economy went bad. On the other hand, since we went to fiat currency in 1971 the economy has been fighting inflation." He also mentions that there's no real ScV index before 1993 but that he put something together from Fama & French's data.
We spend a lot of time arguing on this board about trying to use 135 years of FIRECalc historical data for 50-year retirements and whether a partial data run (less than a 50-year period) is valid. Monte Carlo is popular for its ability to synthesize more runs because it mixes the data up, but none of the calculators will predict future correlations.
It's possible that we have no idea what's going on because we don't have enough data. It's quite possible that going off the gold standard and using fiat currency will keep on doing great things for commodities. It's almost certain that the correlation between commodities and small-cap value will change in the future (as has the correlation between international & domestic stocks).
I'll point out that my ER is largely funded by a govt COLA'd annuity and that our high-equity ER portfolio has one of the board's highest tolerances for volatility. But, hey, you're young and you'll have plenty of working years to recover from GIGO.
You don't have to debate the subject with us. Send Raddr a PM on his board or post over there, where there are a number of guys who have studied this far more intensely than most of this board's posters.
gryffindor
Recycles dryer sheets
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Just reread Bernstein this week and used it to force me to take a relook at my portfolio results over last 7 years and compare it to multiple benchmarks. Always a good eye opening experience.
My major critique is that he tends to be limited in how he looks at asset classes. All you need to do is to look at David Swensen's long-term experience at Yale to see that a broader view at asset allocation (e.g., Relative value / hedge funds, timber, private equity ) reduces volatility and increases return.
Interesting when looking at the Asset Allocation book written in 7-8 years ago about how right he was in terms of relative attractiveness of different assets though.
My major critique is that he tends to be limited in how he looks at asset classes. All you need to do is to look at David Swensen's long-term experience at Yale to see that a broader view at asset allocation (e.g., Relative value / hedge funds, timber, private equity ) reduces volatility and increases return.
Interesting when looking at the Asset Allocation book written in 7-8 years ago about how right he was in terms of relative attractiveness of different assets though.
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