Need a DIY Portfolio? Here you go

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SuperMxyz said:   But was there any 30 year period where one was better off holding any bonds or fixed income than 100% stock?


As far as I know, in the history of the SP500 (or SP90), stocks win in all or almost all rolling 30 year periods over bonds.

But look beyond the U.S., and there is the example of the Japanese stock market. If you were a 100% stock investor there, you most certainty have lost to bonds. Who knows if something like that will happen to the U.S or not in the next 50 years.

gaffer said:   If you could mix and match from any of those firms (zero commissions), what would be the best combo? Looks like Schwab wins on lowest expense ratio, but Vanguard wins on liquidity and maybe Fidelity brings something else to the table. Does it even matter?
Schwab has a unique etf tool that depending your answers to a risk profile questionaire, it will then will devise a 6 0r 7 no commission low expense Schwab etf portfolio. After you specify the amount it will purchase the portfolio with one order.
I am not sure why Vanguard is more liquid. But Vanguard and Schwab appear to have the lowest expense ratios.

I believe treasury bills did beat the stock market from the low point for stocks in 2009.
In Japan the Nikkea stock index was over 40k and now it is 13k.

what happened to the American funds you used to tout on here as superior to index funds?

2stepsbehind said:   what happened to the American funds you used to tout on here as superior to index funds?

I still hold them and I still hold an index portfolio. This thread isn't about that. This is about index portfolios and index funds. There are probably people who hold a piece if Real Estate that may have done well. They can post about that in another thread. If they want to talk about CDs they can talk about that in a CD thread. In the end most all of us here hold something besides index funds. This thread is about a lazy portfolio and how to obtain that through various companies. It has evolved into talking about some different allocations for index portfolios

Not bills, but thirty year bonds did.

hudson4351 said:   psychtobe said:    No separate REITs and no separate commodities means less efficiency, too.

Could you elaborate on this point? How do REITs and commodities make a portfolio more efficient?

I believe the point is to separate these asset classes in a tax advantaged account. REITs and commodities, like most bonds, tend to be taxed at ordinary income rates.
More Bogleheads

minghi said:   I've a 401k with the employer with a fund named 2045 retirement something that I don't want to play around with and a roth ira that i self manage by trading stocks. Now, since the 401k is a low risk/low yield play, Is it advisable to buy a bunch of MLPs/REITs (high yield ones) using 50% balance of the roth ira and keep the remaining 50% aside to average any ones that fall 50% or more in the future? I know this is sounds like a very aggressive bet but am wondering how many of you have such an aggressive portfolio and if its been worth it so far.
Is your target date fund actually returning anything? I took the uber lazy approach and put all my 401k contributions into one of these when my company's provider first started offering it. A few years later my 401k balance had only grown roughly by the amount of my contributions and company match, so the target date fund managed to not lose or make anything, at a time that the market underwent major bumps but fared far better overall. Low risk / low yield indeed. It's like some of these fund managers are just putting the money in an ING account.

germanpope said:   Moving half of your portfolio out of equities in summer 2008 and then back in in the spring of 2009, could have paid for 1000 years of 1% expense ratio.

(studies have shown)


What percentage of actively managed funds did exactly that?

What percentage of actively managed funds did the opposite and increased equity holdings right before the crash?

(This is actually an honest question if anyone can answer it -- the answer could change my views on passive vs. active investing, because you're right that smart market timing can theoretically trump lower expense ratios. The question is whether it actually happens often enough.)

dbond79 said:   minghi said:   I've a 401k with the employer with a fund named 2045 retirement something that I don't want to play around with and a roth ira that i self manage by trading stocks. Now, since the 401k is a low risk/low yield play, Is it advisable to buy a bunch of MLPs/REITs (high yield ones) using 50% balance of the roth ira and keep the remaining 50% aside to average any ones that fall 50% or more in the future? I know this is sounds like a very aggressive bet but am wondering how many of you have such an aggressive portfolio and if its been worth it so far.
Is your target date fund actually returning anything? I took the uber lazy approach and put all my 401k contributions into one of these when my company's provider first started offering it. A few years later my 401k balance had only grown roughly by the amount of my contributions and company match, so the target date fund managed to not lose or make anything, at a time that the market underwent major bumps but fared far better overall. Low risk / low yield indeed. It's like some of these fund managers are just putting the money in an ING account.


Perhaps your employer 401K is using the hidden fee magic, that combined with 1% or more fund fees really sucks the life out of your gains. Check extremely carefully the documents as they now have to put them into the official documents. Before they did not. Even still it will be broken out and expressed in an un-easy way to understand. Some employers pay nothing for the running of the 401K, instead the employees pay the admin costs of it without even knowing it.

dshibb said:   stanolshefski said:   So the simple Bogleheads' three-fund portfolio using a TIPS fund instead of Total Bond Market.

Pretty much and just watch the green roll in for this as well.

I could post a broad ETF with the ticker symbol SHIT and as long as it had an expense ratio under .15% it would get 50 green.


I wish I was in the business of issuing, trading, and managing SHIT.

Oddly enough, the ticker is available.

Just imagine, if someone asked, you could tell them, "I am in the business of buying and selling SHIT".

People keep using the word, efficient.

Does anyone have any papers that show what the efficiency frontier is?

E.g., if you don't own mid-caps, you won't be on the efficient frontier (that's my opinion, but I don't have papers, though someone does).

tolamapS said:   People keep using the word, efficient.

Does anyone have any papers that show what the efficiency frontier is?

E.g., if you don't own mid-caps, you won't be on the efficient frontier (that's my opinion, but I don't have papers, though someone does).
Some googling shows a Wikipedia article that discusses the concept of the Efficient Frontier.
To summarize and over simplify: "A combination of assets, i.e. a portfolio, is referred to as "efficient" if it has the best possible expected level of return for its level of risk"

Also, as Investopedia explains:
"The efficient frontier concept was introduced by Harry Markowitz in 1952 and is a cornerstone of modern portfolio theory"
The definition of Efficient Frontier is "A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return."

There is also an article on Market watch by Larry Swedroe that counterbalances the rightrousness of the Efficient Frontier model.

So you may be right about mid-caps but it will depend on your risk tolerance.

For more discussion on Efficient Frontier you might want to google the Boggleheads web site.

kboran said:   hudson4351 said:   psychtobe said:    No separate REITs and no separate commodities means less efficiency, too.

Could you elaborate on this point? How do REITs and commodities make a portfolio more efficient?

I believe the point is to separate these asset classes in a tax advantaged account. REITs and commodities, like most bonds, tend to be taxed at ordinary income rates.
More Bogleheads


There's that, so segregating your small value, REITS, and collectible a into an IRA for example, to minimize tax drag. But also because REITs and maybe commodities can have negative correlation with stocks, so they lower portfolio volatility without sacrificing expected return.

Personally I hold only market weight in REITs and commodities, through Total stock and total international stock indexes. I do tilt pretty significantly to both small and value, and almost half of my stocks are international.

I don't own TIPS, because I think a negative real yield before taxes out to twenty years is just plain shit.

mikef07 said:   CycloneFW said:   
Personally, I feel that NOBODY should EVER be 100% stocks. One could argue 80% vs 90%, but I feel one should never get to 100%. And that 10, 20, 25, whatever % not in equities will be in Fixed Income. Your choice on whether it's Bonds (including TIPS), CDs, Stable Value, etc.


Why? I do not hold any bonds and have no plans to unless my horizon changes (which it will someday). Bonds lower risk. If I am under my threshold for risk holding 100% equities why would I want to lower risk more? Furthermore as I just posted all equities being equal there has never been a 30 year period where holding the same equities as the equities portion + bonds has outperformed 100% equities.

I would love to hear a mathematical (statistical argument) that supports your position though.


Perhaps "NOBODY" was a too strong. But for the vast majority of people (maybe even the 90% from your Op), their real risk tolerance (what it is when it happens as opposed to what they "think" it is) is below the volatility and risk of a 100% equity portfolio. And given that, taking on the increased risk associated with moving from 80% to 100% doesn't yield significant gain in returns. And because you (maybe not you Mike, but the general you) may not be as strong willed during a downturn as you might think, doing the wrong thing at the wrong time.

Personally, I'm at 80% equities at age 30 and plan to move down to 60-70% for retirement.

More info on the Efficient Frontier of Stocks/Bonds:
http://www.bogleheads.org/forum/viewtopic.php?f=1&t=100467#p1453...
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=94557#p1361...

Efficient Frontier is one of those theoretical constructs that I just laugh at when I hear.

If you actually break that one down it's quite easy to see how silly of a notion it is.

mikeres said:   tolamapS said:   People keep using the word, efficient.

Does anyone have any papers that show what the efficiency frontier is?

E.g., if you don't own mid-caps, you won't be on the efficient frontier (that's my opinion, but I don't have papers, though someone does).
Some googling shows a Wikipedia article that discusses the concept of the Efficient Frontier.
To summarize and over simplify: "A combination of assets, i.e. a portfolio, is referred to as "efficient" if it has the best possible expected level of return for its level of risk"

Also, as Investopedia explains:
"The efficient frontier concept was introduced by Harry Markowitz in 1952 and is a cornerstone of modern portfolio theory"
The definition of Efficient Frontier is "A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return."

There is also an article on Market watch by Larry Swedroe that counterbalances the rightrousness of the Efficient Frontier model.

So you may be right about mid-caps but it will depend on your risk tolerance.

For more discussion on Efficient Frontier you might want to google the Boggleheads web site.


I know what efficient means. I want proof that the above portfolio is efficient. And why should I believe that proof, i.e., who is the prover?

mikef07 said:   Why? I do not hold any bonds and have no plans to unless my horizon changes (which it will someday). Bonds lower risk. If I am under my threshold for risk holding 100% equities why would I want to lower risk more? Furthermore as I just posted all equities being equal there has never been a 30 year period where holding the same equities as the equities portion + bonds has outperformed 100% equities.


I don't have the evidence with me, but holding 60% equities, and then holding the *steepest* part of the yield curve with some leverage will beat your portfolio. This is why:

- if you only allocate 100% of your dollar notional, then yes, you have to balance risk vs return, and if you go after absolute returns, then throwing your money at the absolute riskiest stuff will help you achieve higher return than balancing x% stocsk, 100-x% bonds,

- however, considering there is a higher Sharpe ratio possibility using stocks and some specific bonds (from the steepest part of the curve), then your strategy would be beat with appropriate leverage,

- the same argument goes with value. More precisely, most investors prefer to get amplified return using high beta stocks. However, appropriately leveraging low-beta stocks will achieve better risk-return profile.

So with bonds, the portfolio would be something like this. Given $100K capital, this is what you do:

- $60K in stocks (the 60% is not exact, but close),
- then something like 150K in bonds using treasury futures from the steepest part of the curve.

The above portfolio has 50% dollar risk from equities, and 50% dollar risk from treasuries.

I think dshibb had a thread about this (there was Ray Dalio in title), and a FWF member made this exact recommendation, also stating that his portfolio has that construction.

The same story could be told about being 100% in stocks. Instead of being 100% in total stock market, it is better to invest, say, 120% of the notional in low-beta stocks. But this strategy is harder, because:

- you need to identify low beta stocks (value is a good proxy, but not exact),
- you need to find 120% leverage,
- you need to rotate.

Betting Against Beta paper from AQR capital management: http://pages.stern.nyu.edu/~lpederse/papers/BettingAgainstBeta.p...

tolamapS said:   mikef07 said:   Why? I do not hold any bonds and have no plans to unless my horizon changes (which it will someday). Bonds lower risk. If I am under my threshold for risk holding 100% equities why would I want to lower risk more? Furthermore as I just posted all equities being equal there has never been a 30 year period where holding the same equities as the equities portion + bonds has outperformed 100% equities.


I don't have the evidence with me, but holding 60% equities, and then holding the *steepest* part of the yield curve with some leverage will beat your portfolio. This is why:

- if you only allocate 100% of your dollar notional, then yes, you have to balance risk vs return, and if you go after absolute returns, then throwing your money at the absolute riskiest stuff will help you achieve higher return than balancing x% stocsk, 100-x% bonds,

- however, considering there is a higher Sharpe ratio possibility using stocks and some specific bonds (from the steepest part of the curve), then your strategy would be beat with appropriate leverage,

- the same argument goes with value. More precisely, most investors prefer to get amplified return using high beta stocks. However, appropriately leveraging low-beta stocks will achieve better risk-return profile.

So with bonds, the portfolio would be something like this. Given $100K capital, this is what you do:

- $60K in stocks (the 60% is not exact, but close),
- then something like 150K in bonds using treasury futures from the steepest part of the curve.

The above portfolio has 50% dollar risk from equities, and 50% dollar risk from treasuries.

I think dshibb had a thread about this (there was Ray Dalio in title), and a FWF member made this exact recommendation, also stating that his portfolio has that construction.

The same story could be told about being 100% in stocks. Instead of being 100% in total stock market, it is better to invest, say, 120% of the notional in low-beta stocks. But this strategy is harder, because:

- you need to identify low beta stocks (value is a good proxy, but not exact),
- you need to find 120% leverage,
- you need to rotate.

Betting Against Beta paper from AQR capital management: http://pages.stern.nyu.edu/~lpederse/papers/BettingAgainstBeta.p...


I appreciate the theoretical information, but I think most of us here want the actual information. In the end the choices I (and others) would make would be to hold what I currently hold in equities as the equities portion of my portfolio.

For example the last 10 years would have returned 10%. So regardless of what allocation my equities portion was it would have returned 10% (assuming my weighting of each index fund inside the equities portion was the same). Therefore for any portfolio that holds any bonds over the last 10 years, to beat 10%, those bonds would have had to return over 10% (by definition and using basic math). I have no clue if there are any bonds from any part of the curve that have returned that, but based on what I know there are not. Therefore any bond holdings in my portfolio would have lowered returns (and risk BTW)
.


I do see the mistake I made though. It does not necessarily mean that 100% equities would always beat the same equities + bonds. Depends on the performance of the equities obviously. SO I guess the true answer is it depends on what you held as your equities portion.

Ok, Mike, point taken. Here is very specific info:

http://www.fatwallet.com/forums/finance/1256712/m17558912/#m1755...

tolamapS said:   Ok, Mike, point taken. Here is very specific info:

http://www.fatwallet.com/forums/finance/1256712/m17558912/#m1755...


Thanks. Makes sense since the bonds outperformed the stocks during that period. Definitely see my mistake. All depends on what the bonds do and what the stocks do. I, unfortunately, made the mistake of assuming the bonds always underperformed the stocks without thinking the stock holdings can vary drastically.

Would I adjust this at all if I were younger (I'm not) or more tolerant of risk?

psychtobe said:   But also because REITs and maybe commodities can have negative correlation with stocks, so they lower portfolio volatility without sacrificing expected return.


Given the above quote, why do you not hold any REIT/commodity funds, based on this quote:

psychtobe said:   
Personally I hold only market weight in REITs and commodities, through Total stock and total international stock indexes. I do tilt pretty significantly to both small and value, and almost half of my stocks are international.

raringvt said:   gaffer said:   If you could mix and match from any of those firms (zero commissions), what would be the best combo? Looks like Schwab wins on lowest expense ratio, but Vanguard wins on liquidity and maybe Fidelity brings something else to the table. Does it even matter?

I think that's what they did in the Ameritrade account--picked the optimal mixed portfolio.


Tried to research my own question... Wealthfront is tilting towards using high liquidity vs expense ratios when they came up with their own combos. While Schwab ekes out a tiny win on the expense ratio vs Vanguard, but for liquidity...Vanguard wins handily.

hudson4351 said:   psychtobe said:   But also because REITs and maybe commodities can have negative correlation with stocks, so they lower portfolio volatility without sacrificing expected return.


Given the above quote, why do you not hold any REIT/commodity funds, based on this quote:

psychtobe said:   
Personally I hold only market weight in REITs and commodities, through Total stock and total international stock indexes. I do tilt pretty significantly to both small and value, and almost half of my stocks are international.


Just a personal preference. I already own real estate in my primary residence, so I don't desire to be 'more overweight.' Also, I'm not as convinced of the long term diversification benefits of these two asset classes as I am of small and value. There's also just the preference not to have more funds than I already have. So I give up a little bit of efficiency in exchange for simplicity.

How is it a DIY, Do It Yourself, if someone else has chosen the funds and ratios? Call it an "instant" or "pre-managed" or "Cool", or as they do, "Lazy", but I don't think it is accurate to call it DIY.

psychtobe said:   hudson4351 said:   psychtobe said:   But also because REITs and maybe commodities can have negative correlation with stocks, so they lower portfolio volatility without sacrificing expected return.


Given the above quote, why do you not hold any REIT/commodity funds, based on this quote:

psychtobe said:   
Personally I hold only market weight in REITs and commodities, through Total stock and total international stock indexes. I do tilt pretty significantly to both small and value, and almost half of my stocks are international.


Just a personal preference. I already own real estate in my primary residence, so I don't desire to be 'more overweight.' Also, I'm not as convinced of the long term diversification benefits of these two asset classes as I am of small and value. There's also just the preference not to have more funds than I already have. So I give up a little bit of efficiency in exchange for simplicity.


Which Vanguard fund(s) do you use for the small/value tilt?

mactv said:   How is it a DIY, Do It Yourself, if someone else has chosen the funds and ratios? Call it an "instant" or "pre-managed" or "Cool", or as they do, "Lazy", but I don't think it is accurate to call it DIY.

1) Step 1. You have to buy
2) You have to decide how much to buy.

I have a recipe at home. Someone else has chosen the ingredients. If I go buy the ingredients and make the final product I did it myself.

gaffer said:   raringvt said:   gaffer said:   If you could mix and match from any of those firms (zero commissions), what would be the best combo? Looks like Schwab wins on lowest expense ratio, but Vanguard wins on liquidity and maybe Fidelity brings something else to the table. Does it even matter?

I think that's what they did in the Ameritrade account--picked the optimal mixed portfolio.


Tried to research my own question... Wealthfront is tilting towards using high liquidity vs expense ratios when they came up with their own combos. While Schwab ekes out a tiny win on the expense ratio vs Vanguard, but for liquidity...Vanguard wins handily.


one problem with schwab etfs in particular is the bid ask difference. Thus while the expense ratio can be lower, if you place a market order for one of their etfs you might pay a decent bit more than anticipated. i use schwab as my platform and primarily use schwab index funds/etfs.

dhodson said:   gaffer said:   raringvt said:   gaffer said:   If you could mix and match from any of those firms (zero commissions), what would be the best combo? Looks like Schwab wins on lowest expense ratio, but Vanguard wins on liquidity and maybe Fidelity brings something else to the table. Does it even matter?

I think that's what they did in the Ameritrade account--picked the optimal mixed portfolio.


Tried to research my own question... Wealthfront is tilting towards using high liquidity vs expense ratios when they came up with their own combos. While Schwab ekes out a tiny win on the expense ratio vs Vanguard, but for liquidity...Vanguard wins handily.


one problem with schwab etfs in particular is the bid ask difference. Thus while the expense ratio can be lower, if you place a market order for one of their etfs you might pay a decent bit more than anticipated. i use schwab as my platform and primarily use schwab index funds/etfs.

Today I search bid asked for schwab equity etf and the bid ask was between 1 to 5 cents most were 2 cents. Are there much better bid ask liquidity with vanguard? Do you worry about tracing errors?

What do you think about using the RAFI (tickerRF) for US large caps?

bump

Interesting concept. Here is another source for information:

http://www.bogleheads.org/wiki/Three-fund_portfolio 

In my opinion, this is a viable alternative for those seeking to earn market-like returns without paying "active" managers to over-trade and second-guess the market, usually to little or no benefit and always at greater cost. While most know active equity managers rarely outperform the S&P 500 index after expenses, most are unaware that - due to the fact that bonds trade in tighter ranges - active bond fund managers are even less successful relative to total bond market index funds. See http://www.rickferri.com/blog/investments/why-active-bond-funds-bomb/ .

As to the question about bond returns vs. stock returns, most would be surprised that for the last 12 years, bonds have significantly outperformed stocks. More surprisingly, for the last thirty years, total returns on the bond market have exceeded total returns on the S&P 500 Index. Google "bond vs stock returns" for evidence. I don't advocate big bond allocations at this stage as the next big move will likely be down, but don't underestimate the power of a slow, steady decline in interest rates.

cleanbeat said:   More surprisingly, for the last thirty years, total returns on the bond market have exceeded total returns on the S&P 500 Index. Google "bond vs stock returns" for evidence. I don't advocate big bond allocations at this stage as the next big move will likely be down, but don't underestimate the power of a slow, steady decline in interest rates.

This should not be true over the last 30 years. Plot VBMF vs. VFINX for all common history starting around 1986 to today and the SP500 fund wipes the floor with the total bond market fund.

Morningstar's charting does total return calcs that include dividend considerations.

Jahlapenoez said:   
cleanbeat said:   More surprisingly, for the last thirty years, total returns on the bond market have exceeded total returns on the S&P 500 Index. Google "bond vs stock returns" for evidence. I don't advocate big bond allocations at this stage as the next big move will likely be down, but don't underestimate the power of a slow, steady decline in interest rates.

This should not be true over the last 30 years. Plot VBMF vs. VFINX for all common history starting around 1986 to today and the SP500 fund wipes the floor with the total bond market fund.

Morningstar's charting does total return calcs that include dividend considerations.

You may be right; I'm having a hard time determining whether the charts I am looking at assume re-investment of distributions.  I will take a look at Morningstar.

Take a look at this chart from 1980 to 2010 (yes I know stocks have rallied since then, but it's surprising bonds kept up for thirty years): http://econompicdata.blogspot.com/2010_07_01_archive.html 

If you are comparing long bonds only, then yes mid 1980's through 2010 are similar performance because of the decline in stock prices.

Plot VUSTX instead of VBMFX against VFINX to see Long Treasury Bonds rather than the aggregate bond market.

I wouldn't normally suggest anyone load up on a heavy dose of long bonds for their fixed income allocation.  I personally would prefer to take stocks once you are past 15-20 years of maturity.



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