Diversification: Finally doing its job.

[bobbyr]

I started this thread when it seemed like international equities were finally have a moment during the “anywhere but the U.S. trade.” Now they are currently face-planting with all other equities, maybe worse.

Let’s hear it for bonds? Anyone? Bueller…?

My Schwab guy had me rebalance recently...put about 13% in International (yikes) and 20% into bonds - (SWAGX, SPIB, and BSV) and currently holding a good bit in cash (22%) - we have 45% equities and just going to gulp and live with it. 66 years old, but don't anticipate needing that anytime soon. I guess I should move more into bonds out of my cash. I'm otherwise in line with the target.
I do have 401k in vanguard and recently (several weeks ago) moved it more heavily into bonds.

 

[steelyman]

I started this thread when it seemed like international equities were finally have a moment during the “anywhere but the U.S. trade.” Now they are currently face-planting with all other equities, maybe worse.

Let’s hear it for bonds? Anyone? Bueller…?

All my fixed income funds are in a traditional (tax-deferred) account (retirement portfolio). Things are pretty unbalanced in the current situation.

There are still months to go in the calendar year but it may be an opportunity to make a charitable donation. Lemons to lemonade.

 

[Koolau]

Anybody look at commodities? I only check PMs.

 

[Chuckanut]

Anybody look at commodities? I only check PMs.

Surely you jest.

 

[Koolau]

Surely you jest.

And don't call me Shirley!

 

[aja8888]

Anybody look at commodities? I only check PMs.

Yeah, I was thinking of going back to work as a crude oil futures trader rather than sit here making love to my stocks and fixed income.

 

[TickTock]

I started this thread when it seemed like international equities were finally have a moment during the “anywhere but the U.S. trade.” Now they are currently face-planting with all other equities, maybe worse.

VTSAX -13.94% YTD
VTIAX -1.92% YTD

So on a relative basis, international is still looking good in 2025. What will happen in the future? I dunno.

 

[imjustawarrior]

VTIAX has been a dog for the last 15 years. It would be nice if it did something positive.

 

[twirler]

I won't copy/paste my entire previous post from another thread Opinion on International or Global Funds , but I will summarize.

• S&P500 and EAFE each have >a decade run of outperforming the other.
• Over 50 years, (1970-2019) S&P500 total returns were 8.82% and EAFE 9.13%

Interesting time period you choose. Now try doing the same thing looking forward *eyeroll

 

[TickTock]

That was the longest time period I could find.

I have no idea what the markets are going to do over the next 1, 10, or 50 years. That's why I have a diversified portfolio that's designed to do 'well' over a 'wide variety' of market conditions.

Why the eyeroll?

 

[Markola]

Yahoo! Finance says that 12% of S&P 500 companies have reported Q1 earnings. So far this year, the trend of underperformance by American stocks seems to be intact.

Vanguard’s Total US Stock Market Index ETF (VTI) is at -10.55% year to date.

European stocks are at +10.21% ytd for the Vanguard FTSE Europe ETF (VEUSX).

That’s nearly a 21 point spread.

Vanguard Pacific Stock Index (VPADX) is +1.72 ytd, about a 12 point spread.

There’s not much difference in domestic vs. international bonds.

 

[SteveTX]

Yahoo! Finance says that 12% of S&P 500 companies have reported Q1 earnings. So far this year, the trend of underperformance by American stocks seems to be intact.

Vanguard’s Total US Stock Market Index ETF (VTI) is at -10.55% year to date.

European stocks are at +10.21% ytd for the Vanguard FTSE Europe ETF (VEUSX).

That’s nearly a 21 point spread.

Vanguard Pacific Stock Index (VPADX) is +1.72 ytd, about a 12 point spread.

There’s not much difference in domestic vs. international bonds.

May be worth adding, the weakening US dollar contributed about 7% of that outperformance.

 

[CalBird]

My brief is the diversification only helps reduce volatility. It doesn’t improve long term performance. I could be wrong.

 

[TickTock]

Diversification and rebalancing can (not necessarily will) reduce risk-adjusted returns. Lower volatility is particularly important in portfolios with regular withdrawals - this is sequence of returns risk.

The way to best long term performance is to figure out, in advance, which asset classes will have best/worst returns over the next considered time period and then invest / short them, possibly using leverage.

 

[Markola]

^^^ I won’t attempt to do that, thanks. I just want something to zig while another part zags. After years of waiting, it is happening this year, so far, as of 4/20.

 

[CalBird]

There is no free lunch. You gain some, you lose some. Diversification lower the volatility so you can sleep better. You pay the benefit by giving up some long term returns, kind of like paying insurance premiums.

 

[imjustawarrior]

My brief is the diversification only helps reduce volatility. It doesn’t improve long term performance. I could be wrong.

If I could only pick the winner, then I would not diversify, and I would be a gazillionaire. Since I can't pick only the winner, I diversify and take what the market gives.

Not diversifying is taking on uncompensated risk. In my mind that means gambling instead of investing.

I believe a diversified portfolio has better expected risk adjusted returns than an undiversified portfolio.

I am no expert in this area. I am sure someone smarter than I could explain modern portfolio theory better.

Then someone will say modern portfolio theory is bunk. I am not trying to open that can of worms.

 

[Markola]

5% gold diversifier would not be crazy, in addition to what I have. Of course, I wish my 2022 or earlier self had been clairvoyant.

 

[Stormy Kromer]

Anybody look at commodities? I only check PMs.

I have a fair amount of farmland which I rent out. My fortunes follow the fortunes of the farmers (God Bless them). I worried about the recent political stuff and that tariffs would kill US grain exports and commodities would tank. Commodity prices are up since then. I can't figure it out either.

Commodity markets are designed to give producers and buyers of commodities a way to protect upside and downside risks of these commodities. A chance to lock in a set price on the buy or sell side. It has it's place. Such as a cattle feeder wanting to lock in his feed prices, and his selling prices. It makes logic to lock in your input cost and selling costs. You'll make a living locking in a reasonable profit and commodity markets can assist with that. Speculators raise hell with this......They throw dice and bet on which way markets will go.

Watch Trading Places with Eddie Murphy and Dan Ackroyd sometime. Frozen Orange Juice prices...It broke the Dukes.

 

[Stormy Kromer]

Has anyone that you know ever bought and sold gold or silver for a profit ? I'm not talking about buy and hold and hope. Lots of folks have done that. My dad tried and held physical silver for many years and didn't get his money back. Decades later.

Has anyone used gold and silver to buy then sell and fund their retirement ?

 

[FD1000]

"Diversification is protection against ignorance," Buffett said. "It makes little sense if you know what you are doing." But he also said that 98% of people invest only in the SP500 which did better over a long term than other categories.
Diversification doesn't mean you have to own all categories such as growth, value, small cap, and mid cap, in the US and abroad. But that hasn't stopped many investors from owning 8-10-15 funds, keeping trading, and making less money. I decided more than 25 years ago to follow the money and let markets tell me where to invest. I used to own up to 5 funds, and now just 2-3 funds.
Started in 1995 to 2000: mostly SP500 + some SP500 growth. In 2000, I created the above.
2000-10: The SP500 lost money. I invested in Value, SC, and international
Since 2010: Stocks=US LC tilting growth to 2017. Since 2017 (retired in 2018) mostly in specialized bond OEFs + avoided all the meltdown (max loss from any last top under 1%).

The above shows that US LC dominated in 1995-2000 + 2010-24 while Value, SC, and international did well for 10 years. It's a proof that these are longer term cycles.

Here is an easy rule: if the SP500 does well, you must load. If the SP500 lags, you must diversify, starting with Value, SC, and international.
I know, you are going to ask, how do I know when to switch? You don't. How about looking at what the major categories have done in the last 4-8 months, twice per year, and deciding what to do? It's not science. You just do your best guesstimation, after several years, you get better. But, you will find pretty quickly it was a mistake to invest in international for 15 years. Remember, US LC value is a great option when the SP500 doesn't do well.
You also don't have to use all or nothing, you can play with only 30% of your portfolio.
I have never invested months in crazy, unique categories (gold, commodities, MLP, etc.), just wide-range funds. It amazing to me that someone who hardly trades starts trading in the craziest markets. You can't learn trading from an article; you actually have to trade, and only do it when you are good with years of proof.

 

[Stormy Kromer]

"Diversification is protection against ignorance," Buffett said. "It makes little sense if you know what you are doing." But he also said that 98% of people invest only in the SP500 which did better over a long term than other categories.
Diversification doesn't mean you have to own all categories such as growth, value, small cap, and mid cap, in the US and abroad. But that hasn't stopped many investors from owning 8-10-15 funds, keeping trading, and making less money. I decided more than 25 years ago to follow the money and let markets tell me where to invest. I used to own up to 5 funds, and now just 2-3 funds.
Started in 1995 to 2000: mostly SP500 + some SP500 growth. In 2000, I created the above.
2000-10: The SP500 lost money. I invested in Value, SC, and international
Since 2010: Stocks=US LC tilting growth to 2017. Since 2017 (retired in 2018) mostly in specialized bond OEFs + avoided all the meltdown (max loss from any last top under 1%).

The above shows that US LC dominated in 1995-2000 + 2010-24 while Value, SC, and international did well for 10 years. It's a proof that these are longer term cycles.

Here is an easy rule: if the SP500 does well, you must load. If the SP500 lags, you must diversify, starting with Value, SC, and international.
I know, you are going to ask, how do I know when to switch? You don't. How about looking at what the major categories have done in the last 4-8 months, twice per year, and deciding what to do? It's not science. You just do your best guesstimation, after several years, you get better. But, you will find pretty quickly it was a mistake to invest in international for 15 years. Remember, US LC value is a great option when the SP500 doesn't do well.
You also don't have to use all or nothing, you can play with only 30% of your portfolio.
I have never invested months in crazy, unique categories (gold, commodities, MLP, etc.), just wide-range funds. It amazing to me that someone who hardly trades starts trading in the craziest markets. You can't learn trading from an article; you actually have to trade, and only do it when you are good with years of proof.

Wow. That was good.

I have known a good many people reach FI investing in equities. Just as many investing in real estate (mostly farmland). I have never known a person reach FI investing in crazy unique categories like (gold, commodities or MLP, etc.)

What I find even crazier is Financial Planners who have a "Diversified Portolio" that contains 90% stocks and bonds then the other about 5% gold, 3% natural resources and 2% something you never hear of. For the sake of diversification (organized confusion). Stop and think. If the 3% exposure had a huge gain say 30% a year, would you ever even notice the difference?

I think diversification is largely a smoke screen used by financial planners to buy their kool aid.

Oh, bonds aren't always the counter balance to stocks either. You can lose your back side on them too, without all the upside potential as stocks. Rant over.

 

[TickTock]

Diversification and rebalancing can (not necessarily will) reduce produce better risk-adjusted returns.

Fixed my previous post.

 

[Markola]

"Diversification is protection against ignorance," Buffett said. "It makes little sense if you know what you are doing." But he also said that 98% of people invest only in the SP500 which did better over a long term than other categories.
Diversification doesn't mean you have to own all categories such as growth, value, small cap, and mid cap, in the US and abroad. But that hasn't stopped many investors from owning 8-10-15 funds, keeping trading, and making less money. I decided more than 25 years ago to follow the money and let markets tell me where to invest. I used to own up to 5 funds, and now just 2-3 funds.
Started in 1995 to 2000: mostly SP500 + some SP500 growth. In 2000, I created the above.
2000-10: The SP500 lost money. I invested in Value, SC, and international
Since 2010: Stocks=US LC tilting growth to 2017. Since 2017 (retired in 2018) mostly in specialized bond OEFs + avoided all the meltdown (max loss from any last top under 1%).

The above shows that US LC dominated in 1995-2000 + 2010-24 while Value, SC, and international did well for 10 years. It's a proof that these are longer term cycles.

Here is an easy rule: if the SP500 does well, you must load. If the SP500 lags, you must diversify, starting with Value, SC, and international.
I know, you are going to ask, how do I know when to switch? You don't. How about looking at what the major categories have done in the last 4-8 months, twice per year, and deciding what to do? It's not science. You just do your best guesstimation, after several years, you get better. But, you will find pretty quickly it was a mistake to invest in international for 15 years. Remember, US LC value is a great option when the SP500 doesn't do well.
You also don't have to use all or nothing, you can play with only 30% of your portfolio.
I have never invested months in crazy, unique categories (gold, commodities, MLP, etc.), just wide-range funds. It amazing to me that someone who hardly trades starts trading in the craziest markets. You can't learn trading from an article; you actually have to trade, and only do it when you are good with years of proof.

If I understand you correctly, you invested in stocks while you were working, actively rotating through different S&P 500 segments. It sounds like it worked out for you, so congrats.

Then you went mostly specialized bond open ended funds when you retired in 2018.

I’m curious how 2022 fared for you? I was 50% bond index funds and, I have to say, it sucked and it set me back. As Stormy Kramer mentioned, one can lose their backside on them, too.

 

[Koolau]

Has anyone that you know ever bought and sold gold or silver for a profit ? I'm not talking about buy and hold and hope. Lots of folks have done that. My dad tried and held physical silver for many years and didn't get his money back. Decades later.

Has anyone used gold and silver to buy then sell and fund their retirement ?

I knew a guy who tried that in the 80s and lost his shirt. Another guy thought he could play the big Hunt Bros. silver run up and lost a bunch.

My feeling is that PMs are not for making money but rather for smoothing the ride within the AA.

I'm way up on PMs now, but have no intent to sell unless I decide that I'm too out of whack on my AA.