Work Less Live More: Is his balanced portfolio still good?

[simple girl]

Just saw this thread, and wanted to tell OP that I have updated the portfolio through end of 2006 in the new edition of Work Less Live More just released this month. If anything the portfolio looks better than ever. I'm still using it myself with no inclination to tweak. In rough outlines it is 40% equities (half international/half domestic) 40% bonds/CD/money market (again with a solid dollop in non-dollars) and 20% "Other" which includes commercial real estate, commodities, private equity, hedge funds, oil/gas (or anything else you can think of that is a credible asset class and won't correlate much with stocks or bonds). It is probably more applicable for people who are ER than those who are in accumulation mode, as it is a notch more conservative than you might want if you were still full-time employed and living off salary.

Hope this helps

Hi Bob!

We have your newest edition and are looking at gradually adjusting our portfolio to mirror the Sandwich Portfolio. We are still working and accumulating, though, so we thought we'd adjust the % to more equities and less bonds (adjusting the particular funds by an appropriate factor).

A few questions for you...curious why the % to foreign mid/small growth and emerging markets adds up to more than the % to foreign large. I've always kept less % in domestic small caps than large caps since they are more volatile. I'm sure there is some complicated mathematical story behind this that would go way above my head! Just curious.

Also, I'm looking for a substitute for VINEX since it is closed to new investors...unless there is some way I can get in to it that i'm not aware of? (we have both an IRA with Vanguard, BTW) We also have an IRA with T. Rowe Price so I'm looking at TRP International Discovery (T. Rowe Price International Discovery Report (PRIDX) | Snapshot), but it's expense ratio hurts (1.24%). What do you think of it? (Others opinions welcome as well)

At some point we made add a little commodities, etc. to get closer to the full Rational Investing Portfolio.

 

[Ed_The_Gypsy]

Long ago, I found several uncorrelated assets. The problem saw that some of them had lousy returns (e.g., cash). I tried to choose a mix with reasonable returns and reasonable lack of correlation. OK so far. We shall see how they perform during this downdraft.

 

[ESRBob]

Midpack
There are definitely commodity index funds and ETFs out there and well worth a look if you're ready to add commodities to your portfolio. You'll find your decision generally boils down to a balancing act between fees, access to the funds themselves and track record. You might look at QRAAX, PCRIX and at ETFs: DBC or GSG, GSP or DJP. Vanguard Energy is a good fund but that is not all the commodity universe.

Simple Girl
Glad you got the new book -- did you get the workbook or the V2 update of WLLM? If its the workbook, you can see your profile on Page 12 -- You became Sue and Sean -- hope you like the names!

As for the allocations, nothing too mathematically complex to understand -- the 'efficient frontier' models cranked out these blends as offering the better risk/reward profiles, within certain boundaries. I think intuitively the reason is that the International Large is pretty tightly correlated with US Large, (.68 correlation coefficient) and so did not offer as much diversification as the international small or emerging markets stocks do (.24 and .25 correlation coefficients) -- in other words, owning USLarge and International Large is not all that different historically. Still, the small stocks carry risks, for sure! As for volatility, though -- remember to think in terms of the whole portfolio -- if you have an asset class less-correlated or even ideally negatively correlated with the main parts of the portfolio, even if volatile, it can reduce the overall portfolio volatility. Paradoxical but powerful concept -- it will have an evening/dampening effect overall even though it is itself not stable.
(If you're keen, the table of correlation coefficients is on page 117 of the workbook -- I had to fight with the publisher for months to include it, but I feel strongly that it is the only way to develop a solid intuition about this sort of blended portfolio to reduce volatility approach to investing.)

But any asset class, no matter how uncorrelated to the portfolio, has to have a decent return or it will not pull its weight. That is why heavily cash portfolios don't cut it. (Sadly! If we could all live on 1 or 2% SWRs this whole area of ER finance would be moot and we'd all just have big bond or money market accounts...)

As for an alternative to VINEX, it's been really frustrating to have all those good funds close in recent years, but PRIDX looks good. If you want to look into DFA Funds DISVX and DFISX, you can see about getting into a lower-cost fee-only advisor such as Cardiff Park, Malvern Capital or Evanson who can get you access but it may still not be worth it when you look at the overall fee picture.

 

[simple girl]

Simple Girl
Glad you got the new book -- did you get the workbook or the V2 update of WLLM? If its the workbook, you can see your profile on Page 12 -- You became Sue and Sean -- hope you like the names!

Yes, we got the workbook, too - but hadn't started on it yet...I see now where we are...thanks!

As for the allocations, nothing too mathematically complex to understand -- the 'efficient frontier' models cranked out these blends as offering the better risk/reward profiles, within certain boundaries. I think intuitively the reason is that the International Large is pretty tightly correlated with US Large, (.68 correlation coefficient) and so did not offer as much diversification as the international small or emerging markets stocks do (.24 and .25 correlation coefficients) -- in other words, owning USLarge and International Large is not all that different historically. Still, the small stocks carry risks, for sure! As for volatility, though -- remember to think in terms of the whole portfolio -- if you have an asset class less-correlated or even ideally negatively correlated with the main parts of the portfolio, even if volatile, it can reduce the overall portfolio volatility. Paradoxical but powerful concept -- it will have an evening/dampening effect overall even though it is itself not stable.
(If you're keen, the table of correlation coefficients is on page 117 of the workbook -- I had to fight with the publisher for months to include it, but I feel strongly that it is the only way to develop a solid intuition about this sort of blended portfolio to reduce volatility approach to investing.)

Thanks for the explanation, it helps!