Mammoth Hot Springs – Yellowstone National Park
Having just finished William J. Bernstein’s latest e-Book, simplicity is on my mind. Toward the very end of the book, Bernstein mentions that one can deviate from the three index portfolio by branching out to real estate, TIPs, etc. While the three index mutual funds (VTSMX, VGTSX, and VBMFX) or three index ETFs (VTI, VEA, and BND) certainly keep it simple, moving toward the Swensen Six Portfolio or even the Faber 10 provides a little more diversity.
Without going overboard in complexity, I tend to favor a portfolio mix that is closer to Swensen than the basic three advocated by Bernstein. I doubt Bernstein would have much disagreement with the following portfolio provided one follows The Golden Rule of Investing, keeps the asset classes in balance, and minimizes trades.
- U.S. Equities – 30% to 35% This is in line with recommendations from both Bernstein and David Swensen.
- Developed International Equities – 15% to 20% This is a little low for Bernstein, but in agreement with the Swensen Six.
- Emerging Markets – 5% to 10% When adding these international equities to Developed International Equities, we bring the international exposure into line with Bernstein and still agree with Swensen.
- Domestic Real Estate – 15% to 20% While Bernstein, in his simplified portfolio, does not allocate any percentage to REITs, he does in his longer books and he makes room for this asset class later in his recent e-Book. David Swensen definitely includes real estate in his Strategic Asset Allocation plan where he recommends holding 20%.
With 65% to 85% committed, where do we go with the final allocations? The unfilled asset classes I deem important, even with the simplest portfolios, are U.S. Bonds, International REITs, Cash, and International Bonds. Note that I leave out Commodities and Precious Metals in this portfolio.
- Cash – 1% Let’s quickly get cash out of the way. We always have some cash lying around and that is the reason for including this one percent. Done!
- Bonds – 5% to 30% The wide spread is to handle situations exactly as we are now experiencing. With interest rates very low, now is not the best time to invest 33% in either BND or VBMFX as recommended by Bernstein. Call it market timing if you will. I call it using your brain. For this bond exposure I spread the investments out over BND, BIV, LQD, JNK, TLT, and TIP. If one invests 5% in each of the above, we have our 30% exposure.
- International REITs – 5% to 10% I’m inclined to keep this asset class closer to 5%, particularly if one is holding close to 20% in Domestic REITs.
- International Bonds – 5% to 10% The same logic applies to International Bonds as to Domestic Bonds. Watch the interest rates, but keep some exposure.
While this is not a complex portfolio, it is not as simple as the 34/33/33 breakdown advocated by Bernstein. Look for this Strategic Asset Allocation (SAA) plan to be employed by Maxwell, Euclid, and Aristotle. Use this SAA plan and employ a downside risk model such as selling when an ETF either under-performs SHY or the price drops below its 195-Day Exponential Moving Average. Using these risk reduction models will keep one out of major bear markets, yet permit one to take advantage of bull markets.
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Lowell,
Maybe time for a “Thoreau” portfolio? Physics and physicists do not have the answer for every mortal decision. I’m a physicist with a psychologist father and spouse.
“I do believe in simplicity. It is astonishing as well as sad, how many trivial affairs even the wisest thinks he must attend to in a day; how singular an affair he thinks he must omit. When the mathematician would solve a difficult problem, he first frees the equation of all incumbrances, and reduces it to its simplest terms. So simplify the problem of life, distinguish the necessary and the real. Probe the earth to see where your main roots run. ”
― Henry David Thoreau
Robert,
I like the idea, particularly for a simple portfolio. However, I have a sufficient number to follow at this point.
Lowell
Lowell,
BTW we could not write the equations that created Bryce Canyon. The experience is simple. How do we measure the time, blips in our portfolio, such as today, take off our life, if we really worry about tomorrow and short term decisions in the 5th,6th,7th,8th whatever decade of our life?
Lowell,
“Sufficient” is then N + too many? Solve for N . . . Maybe N=1 or no more than 4. Just an idea but it might be helpful that for each portfolio “tweek” it would with renamed as something such as Einstein (b) or Einstein (c) since (yes it is really useful) each additional tweek gives us something to think about. But as Einstein himself reportedly said during one lecture or talk ” Everything Should Be Made as Simple as Possible, But Not Simpler” I tried to find the original Einstein portfolio but ended at a Dublin pub in February 2011 although the portfolio (original?) now shows an IRR from 6/30/08 of 10.8%. Could you do a blog/history of one of the early portfolios as Einstein and what would be the critical metrics if nothing had changed and also show what the tweeks were and why?
Robert
Robert,
Here is one of the early Einstein updates. Not the first. I’m not exactly sure when I started updating the various portfolios.
http://itawealthmanagement.com/einstein-portfolio-review-26-july-2012-2012-07-26/
As for tracking portfolio results, you may remember, as one of the early Platinum members, that I once tracked several portfolios using both the TLH Spreadsheet and a program called Captools. The Captools data went back into the mid-1990s for several portfolios. Unfortunately, Captools stopped supporting their program for the small investor and now only support an extremely expensive program. I maintained the program until I upgraded my computer and at that time the old Captool program would no longer run on the new machine. That is when I dropped the Captool data and now only maintain the TLH Spreadsheet data. Unfortunately, it does not go back quite as far.
Most frequently, portfolio “tweaks” are nothing more than subtle changes in the asset allocation plan. I have diminished the number of individual stocks held in the Curie and Newton over the years. One other change is the use of the Risk Reduction Model (sell when the price of the ETF drops below its 195-Day EMA). This was put into use several years ago. And now we are about one year into using SHY as a cutoff ETF. That goes back to shortly after The Feynman Study was completed by HedgeHunter.
These are some of the major changes I can think of. Of course there have been nearly no changes in the Schrodinger for 14 years. I still hold some of the original ETFs purchased back in late 2000 and early 2001.
Lowell
Lowell,
AAII Newsletter just had a brief article about Siegel’s new book “In his new fifth edition of “Stocks for the Long Run” (McGraw-Hill, 2014), Jeremy Siegel”. He does an study of the 200 dma from 1886 and finds it does somewhat less in return than buy and hold because of transaction losses in sideways markets. It does tend to keep one in extended bulls and out of major bears markets. I guess with transaction free ETFs they are comparable.
Bob W.
Bob W.,
Perhaps adding the SHY cutoff may help our results as this will keep many ETFs in the market longer.
In the Portfolio Performance results I am finding some interesting trends that I will address this morning in a post I am preparing.
Lowell