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I am 28 and just left my job as a newspaper reporter to go back to graduate school. I have a stipend that will cover living expenses and tuition so I would like to beef up my retirement savings. I am going to rollover my 401k ($8,000) into a Vanguard IRA - probably target retirement 2050 or moderate life growth. I am a pretty hands-off investor. I also have about $11,000 in savings and would like to invest about 1/2 of that as well. I would like to keep about $5,000 for books, car repairs, medical expenses, etc. I have about $3,000 invested in the vanguard intermediate term bond index fund. I know diversity is important so I am going to ignore my father's advice to just put it all in the intermediate bond fund. I was thinking about $3,000 in a short-term bond fund and $3,000 in a long-term bond fund. Does that seem reasonable or am I missing something obvious? Do I need a more aggressive investment? My current 401k is 40 pct international, 30 pct midcap and 30 pct large cap and has done really well the last 3 years or so. Maybe a life strategy growth fund would balance out the more conservative bond investments? Any advice or suggestions?
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Aug 25, 2011 15:14
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What are your father's reasons for recommending intermediate term bonds and what are your reasons for dividing into short term and long term?
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Aug 25, 2011 16:02
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nelson posted:What are your father's reasons for recommending intermediate term bonds and what are your reasons for dividing into short term and long term? I believe he looks mostly at previous performance. If the economy beings to recover and interest rates rise it would be better to have short term bonds, right? But if things remain sluggish for awhile then long term bonds have less interest risk.
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Aug 25, 2011 16:08
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space pope posted:I believe he looks mostly at previous performance. You should invest in a Roth IRA while you have the earned income to contribute to it for the year. $5,000 would be a great start right now and you can do more in 4 months. It has been said so much it should be a trademark. Past performance is not a predictor of future success with equities. With Bonds it's written into the contract. We are at a 20 year bull market in bonds. How low can interest rates go? To paraphrase the bitcoin people, it's going to go up Up UP! They both hold risk, but the short term is less. If interest rates go up, you end up being ok in that you get your principle back plus everything you were guaranteed up front. However, with rates where they are, you aren't looking at an amazing return. What are you looking to invest for? If you are looking for retirement, 10% of the VFIFX is bonds. That means $800 bonds, plus your $3,000 you have in a bond fund. After potentially adding $5,000 in bonds you're looking at $8,800 vs $7,200 in equities or ~55%. Some people will tell you that 50% is a good amount in bonds. At 28, Do you agree? I don't know your risk tolerance. At 28, if all you are doing is investing for retirement, I think you can afford to be much more aggressive.
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Aug 25, 2011 18:17
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I have a very unique question that may require someone who works for a custodian to answer. I have a client who is a conservator for her grandmother who has dementia. This woman has $615,000 in assets and the court is requiring that she (the conservator on behalf of the grandmother) either put up a $2k/yr surety bond, or deposit the money in a bank/investment account. The latter definitely is the preferred choice, but the court is requiring that the custodian sign a letter (that the court will provide) stating that they will not release any of the assets in the account without a court order. I've already touched base with Schwab, and after escalation they said that is not something that they do. Does anyone have any experience with this sort of thing? Is there a name for this type of account (aside from the ambiguous Restricted Account)? Just looking for some direction. Thanks!
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Aug 25, 2011 18:25
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I'm a student and won't have income this year; however, I have money in savings and would like to invest it. Is it possible to set up an IRA account without actually having income, or do I need to put it in something else?
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Aug 25, 2011 22:49
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penisclaw posted:I'm a student and won't have income this year; however, I have money in savings and would like to invest it. Is it possible to set up an IRA account without actually having income, or do I need to put it in something else? You need earned income to contribute to an IRA.
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Aug 25, 2011 23:00
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KennyG posted:You should invest in a Roth IRA while you have the earned income to contribute to it for the year. $5,000 would be a great start right now and you can do more in 4 months. My dad's retirement account lost a lot of money (like everyone else) and I guess all his complaining has rubbed off on me. When I first began contributing to my employers 401k several years ago, I was very aggressive. However, in the last few months it lost about 10 pct of its value so I guess that has made me more cautious. How about keeping the $3,000 in intermediate bonds, rollover my 401k into the target retirement, put $3,000 into the emerging markets stock index and $3,000 into an international fund. Now should the rollover convert to a Roth IRA or just put the additional $6,000 emerging/international contribution in a Roth or both? Would I pay a lot of taxes on that this year?
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Aug 25, 2011 23:08
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If you have a low tolerance for risk, no matter your time horizon, you should be in lower risk investments. The market is littered with people who buy high and sell low because they ride their investments from the top all the way to the bottom, sell and wait until the market 'recovers' before they think it is stable enough to get back in. If you had $10,000 and invested it in the S&P index fund (VFINX for argument) on Aug 25, 2006 @119.59/share you would have had a peak of $143.93 as of Oct 12, 2007. With dividends that's $12,300.90 Say you sold March 6 of 2009 after  through the slide, you tried to hold on but just got sick of seeing the statements. That day it closed at $63.26, for 5,569.70. Depending on your math and your perspective your down almost $7,000 and the tax man says your down almost $5k. If you then bought back in when sentiment was improving and people were saying rosy things back on Feb 18 of this year (as many did), you'd have paid $123.99 and today with the shares closing at 107.10 you'd be down to $4,929... another 11%, total loss of 50%! If you held on the whole way through, with dividend reinvesting it would be worth $10,770 or up .7%. Yes, the intermediate bond fund is up 46% (~7%/yr) over the same period. But this is not a post about not having bonds but about knowing your risk tolerance so that you can stay the course. If you can't handle the ride, go to bonds. To your actual questions: A Roth IRA has an annual limit of $5,000 for your age. You can put that in this year and then January of next year, if you expect to show at least $1,000 in earned income you could put in another $1,000. You pay ordinary income tax on Roth IRA contributions; you will also pay ordinary income on a 401k rollover. Rolling over your 401k (into a Roth) would be like earning an extra $8,000 in income and taxing it. This is going to be less than $2,000 for you. You will likely have to supplement the rollover with your own income. This is the perfect time to make a Roth Contribution because your marginal rate is so low with only having made $28,000 and having student expenses plus deductions and credits, you will pay very little tax. The regular Roth IRA has no tax consequence (it's like buying $5,000 of frozen pizza) You use regular after tax dollars, and those dollars (and their offspring) will not be touched by the IRS until you take them out.
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Aug 26, 2011 00:49
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TraderStav posted:I have a very unique question that may require someone who works for a custodian to answer. I have a client who is a conservator for her grandmother who has dementia. This woman has $615,000 in assets and the court is requiring that she (the conservator on behalf of the grandmother) either put up a $2k/yr surety bond, or deposit the money in a bank/investment account. The latter definitely is the preferred choice, but the court is requiring that the custodian sign a letter (that the court will provide) stating that they will not release any of the assets in the account without a court order. I've already touched base with Schwab, and after escalation they said that is not something that they do. Where is the money held currently? What type of account is it in? What exactly are the circumstances surrounding the case? No custodian is going to hold funds from someone because they have dementia. Why are they in court currently? Having a court order dictating when funds can move is fairly normal (see QDROs/divorce decrees) but I wouldn't really be able to say without knowing why they're in court and where the funds are currently held
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Aug 26, 2011 02:44
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Just remember that bond funds can go down before you tie too much of your investment up in them. Also, according to an article I read in the Financial Times, the reason government bonds are doing so well despite the pathetic interest rates is companies buy them as a way to insure their money above the FDIC limit. You, presumably, don't have that particular problem.
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Aug 26, 2011 05:59
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nelson posted:Also, according to an article I read in the Financial Times, the reason government bonds are doing so well despite the pathetic interest rates is companies buy them as a way to insure their money above the FDIC limit. Pretty much this, and there are no other options for banks or even countries. If you're China, where can you park $1T+ that's safe? Portugal? Ireland? Italy? Greece? Spain? I don't think so. The tell tale sign is when the Dow was taking it's biggest dips this months in what analysts called 'a flight to safety,' the treasury rates plummeted. Investors still feel, despite what S&P says, that the US debt is the safest debt out there. Now, at 2.25%, there really is nowhere to go but up. When that happens, pretty much all bond funds will go down (in price). KennyG fucked around with this message at 10:51 on Aug 26, 2011 |
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Aug 26, 2011 10:48
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Secret Sweater posted:Where is the money held currently? What type of account is it in? What exactly are the circumstances surrounding the case? No custodian is going to hold funds from someone because they have dementia. Why are they in court currently? The funds are currently held at a treasury bond custodian that the grandmother set up years before becoming incapacitated. Custodians routinely hold funds for the benefit of those who have guardians or conservators, this is not unusual. What is, is the requirement for this specific document that the court is requiring. I've got in touch with Scottrade and TradePMR, it is seeming like they will honor the courts request so my question may be moot, but I appreciate you taking the time to address my question. They are in probate court, it's simply a situation where someone is stepping in to care for someone who cannot care for them self.
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Aug 26, 2011 13:06
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There's this nifty-looking site I found called Index Funds Advisors, and they have a portfolio called Index Portfolio 80, which, although appearing at first to be similar to the Vanguard Retirement Date 2050 fund (it is about 60% US Stocks, 30% Intl Stocks, 10% Bonds), it has actually significantly outperformed the Vanguard 2050 fund. Most of the assets in that Index Portfolio 80 have cheap Vanguard index fund ETF cousins. Would it be folly to attempt to piece together a Vanguard ETF replica of that portfolio?
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Aug 26, 2011 13:07
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Dr. Gaius Baltar posted:There's this nifty-looking site I found called Index Funds Advisors, and they have a portfolio called Index Portfolio 80, which, although appearing at first to be similar to the Vanguard Retirement Date 2050 fund (it is about 60% US Stocks, 30% Intl Stocks, 10% Bonds), it has actually significantly outperformed the Vanguard 2050 fund. Absolutely not, you can customize your allocation and rebalance periodically to obtain that premium instead of waiting for the fund to do it. Managing a portfolio of index funds is not a difficult task in the least bit.
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Aug 26, 2011 13:12
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Dr. Gaius Baltar posted:There's this nifty-looking site I found called Index Funds Advisors, and they have a portfolio called Index Portfolio 80, which, although appearing at first to be similar to the Vanguard Retirement Date 2050 fund (it is about 60% US Stocks, 30% Intl Stocks, 10% Bonds), it has actually significantly outperformed the Vanguard 2050 fund. Past performance does not guarantee future results. Past performance does not guarantee future results. Past performance does not guarantee future results. Past performance does not guarantee future results. Past performance does not guarantee future results. Past performance does not guarantee future results. Past performance does not guarantee future results. If you do not have a good fundamental reason why you want to do follow their portfolio you shouldn't. And no, past performance is not a good reason why.
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Aug 26, 2011 13:15
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Dr. Gaius Baltar posted:There's this nifty-looking site I found called Index Funds Advisors, and they have a portfolio called Index Portfolio 80, which, although appearing at first to be similar to the Vanguard Retirement Date 2050 fund (it is about 60% US Stocks, 30% Intl Stocks, 10% Bonds), it has actually significantly outperformed the Vanguard 2050 fund. That is the Fama French 3-factor model in action... yes go ahead and do that with Vanguard ETF's (to the extent possible... no intl-small-value, no emerging-small, or emerging-value, and just use 1 or 2 fixed income funds) and you should have a very well diversified portfolio that is exposed to beta, small, and value risk factors. No guarantee it will outperform a broad based index approach but it is not a bad way to go.
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Aug 26, 2011 17:15
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TraderStav posted:The funds are currently held at a treasury bond custodian that the grandmother set up years before becoming incapacitated. Custodians routinely hold funds for the benefit of those who have guardians or conservators, this is not unusual. What is, is the requirement for this specific document that the court is requiring. I've got in touch with Scottrade and TradePMR, it is seeming like they will honor the courts request so my question may be moot, but I appreciate you taking the time to address my question. I am sure you can find many custodians who will agree to the arrangement. They have the means to do it (they have no choice but to comply with restrictions per a court order), but some custodians are becoming more averse to legal obligations. It is harder these days just to do signature guarantees or TOD/POD beneficiary arrangements, compared to in the past, so it has nothing to do with the "unusual" nature of your request. But you will get better luck with credit unions. They often handle these types of things.
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Aug 26, 2011 17:28
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TraderStav posted:The funds are currently held at a treasury bond custodian that the grandmother set up years before becoming incapacitated. Custodians routinely hold funds for the benefit of those who have guardians or conservators, this is not unusual. What is, is the requirement for this specific document that the court is requiring. I've got in touch with Scottrade and TradePMR, it is seeming like they will honor the courts request so my question may be moot, but I appreciate you taking the time to address my question. Okay well to answer one question it's called a court ordered account. The executor requests funds from the court and the court would okay it and request it from the custodian. Most custodians shouldn't have any issue with any of this assuming all the paperwork is fine.
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Aug 26, 2011 17:46
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Thanks for the feedback. We plan to invest the account, so a credit union wouldn't work. But I feel good that I can find a custodian for this and having the right terminology helps.
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Aug 26, 2011 17:52
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Book recommendation time... for somewhat more advanced reading, Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen is a phenomenal book. I'm not quite finished with it (it is long) but it could be the best book on investing I have read. In fact, I can't think of a more important book. Far too many people make rash assumptions on risk and expected performance, without being familiar with the academic literature. Most of the recommended books on this forum for longterm investing are fairly dogmatic in the belief of efficient markets and low cost investing. This book gives a far more complete and balanced overview of the investment world, covers far more asset classes and strategies, is less US-biased, and is very up-to-date with the latest academic literature. It is also heavy reading (but no heavier than it needs to be) but well worth the effort.
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Aug 26, 2011 18:09
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Chin Strap posted:Past performance does not guarantee future results. Past performance does not guarantee future results. Past performance does not guarantee future results. Past performance does not guarantee future results. Past performance does not guarantee future results. Past performance does not guarantee future results. Past performance does not guarantee future results. I'm not actually sure what the current research on small/value premiums.
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Aug 26, 2011 18:31
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gvibes posted:FYI, the portfolio in question has a small cap and value tilt that the TR funds do not have. Never said the portfolio was bad, just he shouldn't go tilting small and value if he has no clue what that does. He literally said that he wanted to pick this portfolio because it beat out the vanguard TR funds in the past. That isn't a good way to think about things.
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Aug 26, 2011 18:33
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80k posted:Book recommendation time... for somewhat more advanced reading, Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen is a phenomenal book. I'm not quite finished with it (it is long) but it could be the best book on investing I have read. In fact, I can't think of a more important book. Far too many people make rash assumptions on risk and expected performance, without being familiar with the academic literature.
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Aug 26, 2011 19:04
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Chin Strap posted:Never said the portfolio was bad, just he shouldn't go tilting small and value if he has no clue what that does. He literally said that he wanted to pick this portfolio because it beat out the vanguard TR funds in the past. That isn't a good way to think about things.
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Aug 26, 2011 19:10
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80k posted:Book recommendation time... for somewhat more advanced reading, Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen is a phenomenal book. I'm not quite finished with it (it is long) but it could be the best book on investing I have read. In fact, I can't think of a more important book. Far too many people make rash assumptions on risk and expected performance, without being familiar with the academic literature. Yay! Kindle version Boo! $42... Is it one of the books that has lots of diagrams and exhibits so a hard cover may be better?
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Aug 26, 2011 19:22
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Chin Strap posted:Never said the portfolio was bad, just he shouldn't go tilting small and value if he has no clue what that does. He literally said that he wanted to pick this portfolio because it beat out the vanguard TR funds in the past. That isn't a good way to think about things. Well, I'm willing to be a bit more aggressive than the Vanguard Target Date 2050 fund. My understanding is that small cap and value stock indexes are a bit riskier, but have a bit higher potential reward. Is there something wrong with this line of reasoning? I'm just going over the idea in my head (and researching it further) to see if it's something that's worth pursuing. The returns on the Vanguard Total Stock Market Index Fund, at 2.74% annualized over 10 years, leave something to be desired, in my mind. Anyway, the IFA Index Portfolio 80 had 4.5% in an International Small Company Index, 2.7% in an Emerging Markets Value Index, and 3.6% in an Emerging Markets Small Cap Index. Vanguard doesn't provide these sorts of funds, so I allocated the missing Intl Small Company to Intl Large Cap Value and Intl Small Cap Value. I also allocated the missing Emerging Markets Value and Emerging Markets Small Cap to the Emerging Markets Index. So here's what I've come up with to best replicate it: VOO - S&P 500 Index ETF - 18% VTV - US Large Cap Value Index ETF - 18% VB - US Small Cap Index ETF - 9% VBR - US Small Cap Value Index ETF - 9% VNQ - US Real Estate Index ETF - 9% VTRIX - International Large Cap Value Fund - 11% (this is actively managed, not a passive index fund, and it's also a mutual fund, instead of an ETF, but it's the closest thing Vanguard has) VSS - International Small Cap Value Index ETF - 7% VWO - Emerging Markets Index ETF - 9% BND - Total Bond Market ETF - 10%
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Aug 26, 2011 21:03
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Dr. Gaius Baltar posted:Well, I'm willing to be a bit more aggressive than the Vanguard Target Date 2050 fund. My understanding is that small cap and value stock indexes are a bit riskier, but have a bit higher potential reward. Is there something wrong with this line of reasoning? There is a lot more to it than that. There are plenty of ways to increase risk and reward. Do you understand why small and value is a way many go to do so?
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Aug 26, 2011 21:22
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Chin Strap posted:There is a lot more to it than that. There are plenty of ways to increase risk and reward. Do you understand why small and value is a way many go to do so? I thought I did, from reading the Investopedia topics on small cap and value investing, but from the ominous tone of your posts, I take it that I have overlooked something. Do you have some recommended reading for me?
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Aug 26, 2011 21:45
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I understand that index funds are the standard recommendation here, but I think a lot of this is due to fees. I work for a life insurance company with an investment/fund management arm, which manages our employees' retirement savings for free. It's a decent-sized outfit with the dollar equivalent (we're UK-based) of around $250bn assets under management which has grown quite a bit in recent years so I'd like to think we're doing something right. We have a bunch of generic 'UK equity' 'US equity' 'Far East equity' etc actively-managed funds -- all with index equivalents -- available at no management charge. Essentially, I'm wondering if there are any good ways I can tell whether I should be investing in our actively-managed funds or the indices they use as benchmarks. As I say I'd like to think these high-paid guys who sit studying the market all day have some kind of insight or skill that makes people invest with us; probably not enough to justify the 1.5% we charge outsiders but surely they'd be able to beat a simple index in the longterm with no fees to worry about? Are there any statistics or formulae or anything I can look at to decide which is a better approach to take or does it come down to faith?
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Aug 26, 2011 22:07
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TraderStav posted:Yay! Kindle version It's not too heavy on diagrams and exhibits. Personally, I kinda want the Kindle version (i have the hardcover) because the book is too big to carry around and I would love to have it more accessible.
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Aug 26, 2011 22:22
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k3nn posted:I understand that index funds are the standard recommendation here, but I think a lot of this is due to fees. I work for a life insurance company with an investment/fund management arm, which manages our employees' retirement savings for free. It's a decent-sized outfit with the dollar equivalent (we're UK-based) of around $250bn assets under management which has grown quite a bit in recent years so I'd like to think we're doing something right. We have a bunch of generic 'UK equity' 'US equity' 'Far East equity' etc actively-managed funds -- all with index equivalents -- available at no management charge. Expenses != Fees Example A: Something Awful Index Fund, charges .2% annual management fee. They have next to no turn over because all they do is track the index. Expenses are therefore negligible. Call it .21%. Example B: Goon Active Fund, charges no management fee but has a large turn over, constantly buying and therefore investigating stocks. Flying analysts to corporate meetings, funding research, advertising, mailing those quarterly statements to shareholders. These are all expenses. With all that traffic (including paying those people who 'sit studying the market all day') it could easily surpass .21% ($525m on 250B). With $250B in management you may have >$1B in expenses across all funds, especially if you're the kind of outfit that charges investors 1.5% a year for the privilege of you managing their money. Read the fine print of that benefit program. It sounds to me like getting a 10% discount at the Bose store. When you invest in the Fidelity 2050 retirement fund they don't deduct .8% at the end of the year as a management fee. It comes out every day in the form of reduced returns. I doubt any fund with publicly traded assets is going to go through the trouble of removing the expense ratio from their employee investments. KennyG fucked around with this message at 02:40 on Aug 27, 2011 |
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Aug 27, 2011 02:36
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Always pay close attention to expenses on mutual funds. The broker dealer I work for has some managed products including one legacy product with a portfolio of Oppenheimer funds (some funds expense ratios are over 1%) and another product that's all passively managed VG funds with expense ratios of .06-.16 or something like that. The 1YR performance figures for the Oppy on a fairly aggressive portfolio is 28.25% before - 19.13% after fees. On our vanguard mix with the same portfolio 27.65% before - 25.57% after fees
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Aug 27, 2011 04:26
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Yesterday, Chin Strap was hinting at there being perils to value funds and small cap funds. I know the basics from googling for "value fund" and doing searches on investopedia. If there is more to it than can be explained there, could someone please recommend me a book on the subject (or provide me a link to other such educational material)? I already have "Unconventional Success", which 80k recommended, "The Only Guide You'll Ever Need for the Right Financial Plan", "Exchange Traded Funds for Dummies", and "Mutual Funds for Dummies, 6th edition", (which also deals with ETFs).
Dr. Gaius Baltar fucked around with this message at 20:57 on Aug 27, 2011 |
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Aug 27, 2011 19:38
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KennyG posted:
Those expense are part of the ER. It is the trading cost, like brokerage commissions and spreads and market-impact costs that are hidden. There are cases of "soft dollar" arrangements where inflated commissions are used as a way to hide some of the costs mentioned above but that is a different scenario. K3nn might have an interesting situation though more investigation is required to know for sure.
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Aug 27, 2011 20:22
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I just switched jobs and am looking to rollover my 401k funds at my old company that are with Prudential to Vanguard. I'm 26 years old, make around 90k a year, and have 40k in my 401k. Could someone point me to a good article or give me advice on the pros and cons of rolling it over into a traditional IRA vs Roth IRA? I have been looking but am not finding much that is detailed and up to date.
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Aug 28, 2011 20:39
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Boola posted:I just switched jobs and am looking to rollover my 401k funds at my old company that are with Prudential to Vanguard. I'm 26 years old, make around 90k a year, and have 40k in my 401k. Could someone point me to a good article or give me advice on the pros and cons of rolling it over into a traditional IRA vs Roth IRA? I have been looking but am not finding much that is detailed and up to date. The pros of a Traditional would be the simplicity. There is little you'd need to do. It would transfer over to Vanguard and that would be that. As for the Roth, the pros are that you would not have to pay taxes on the money it makes. At age 26 and assuming you aren't retiring for 35-40 years, that could be a lot of money. The cons would be that you'd have to pay taxes on whatever you converted to a Roth. The 401k money was taken pre-tax, so if you converted the money to a Roth, you'd have to treat it as income now. That could be a signifigant hit depending on how much money you have saved elsewhere to pay it and what your current tax rate is. You'll have to double check this, but I do believe they'll give you a 3-year window to pay taxes on conversions. But really it depends on your own financial situation. Lets say your $40,000 in a Roth earns 8% annually for the next 40 years. You'll make over $800,000 in tax free earnings. That will however cost you whatever taxes you would be paying on $40,000. Lets say that turns out to be $10,000. Is paying $10,000 right now (or over the course of 3 years) worth that savings in 40 years to you? You could also do both. Convert a portion of the 401k to a Roth and leave the rest in a traditional. Would cut down on the tax burden while offering some long term benefits at the same time.
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Aug 29, 2011 02:28
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80k posted:I'd say read Swensen's Unconventional Success and Larry Swedroe's The Only Guide to a Winning Bond Strategy You'll Ever Need to understand how bonds balance equity risk. Remember to account for all risks, so if you have risks on the bond side, then you need to reduce equity to compensate. And vice versa... a safe bond portfolio allows you to take more equity risk. So that is why you do not need to burden yourself with all those bond risk factors (emerging debt risk, call risks, extension risks, credit risks). They do not diversify your portfolio in a meaningful way because they are so well correlated with equity risk that you can just build a diverse equity portfolio and balance it with a good short-term or intermediate-term bond index fund and TIPS fund from Vanguard. On a related note, I was reading Larry Swedroe's "The Only Guide to a Winning Investment Strategy You'll Ever Need", and in Chapter 7, the author talks about how you are able to reduce risk and increase returns by diversifying your portfolio. He starts out with 60% of his portfolio in an S&P 500 index and 40% in bonds, and with each layer of diversification that he adds onto his portfolio, International, US Small Company, US Value, and International Small and Value, he reduces the risk (reduces the annualized standard deviation and increases the sharpe ratio) of his portfolio, usually while increasing annualized returns. This is amazing. Is there a site out there that will let me input various ETFs, build a portfolio, and then see how diversification added to the annualized return while decreasing risk?
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Aug 29, 2011 23:24
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Dr. Gaius Baltar posted:On a related note, I was reading Larry Swedroe's "The Only Guide to a Winning Investment Strategy You'll Ever Need", and in Chapter 7, the author talks about how you are able to reduce risk and increase returns by diversifying your portfolio. He starts out with 60% of his portfolio in an S&P 500 index and 40% in bonds, and with each layer of diversification that he adds onto his portfolio, International, US Small Company, US Value, and International Small and Value, he reduces the risk (reduces the annualized standard deviation and increases the sharpe ratio) of his portfolio, usually while increasing annualized returns. First, don't get too excited. When an asset class reduces risk while increasing returns, you need to be skeptical as to whether it will continue. When an asset class adds a diversification bonus, investors should pay a premium, thus reducing returns. This is fundamental in asset pricing. And so an asset class that adds a diversification bonus while increasing returns suggests that there are behavioral reasons for outsized returns in the past. As investors catch on, the behavioral reasons for excess returns in value and small stocks would diminish, which creates an exaggerated effect in historical excess returns. Not only were the value and small risk factors rewarded, but the spread (relative valuation between broad market index and value stocks, for example) decreases, which can be considered a windfall gain in the small/value tilted portfolio. This is why past performance is so deceptive. Great example is emerging market bonds that previous had close to 10% risk premium over developed market bonds and are now around 3%... a huge windfall gain in addition to previously outsized risk premiums over the past couple of decades that makes past performance misleading and makes future returns permanently reduced. One reason I was adamant that you simplify your bond portfolio (your reasons for going there were based on past conditions that no longer apply). Your posts suggest extreme naivete in your understanding of investor returns (this is typical of even professional managers, so don't feel bad) and you need to take a step back and better understand what you are doing. You are doing great by the way... your past few posts also indicate you are willing to learn.
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Aug 30, 2011 01:08
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80k posted:First, don't get too excited. When an asset class reduces risk while increasing returns, you need to be skeptical as to whether it will continue. When an asset class adds a diversification bonus, investors should pay a premium, thus reducing returns. This is fundamental in asset pricing. And so an asset class that adds a diversification bonus while increasing returns suggests that there are behavioral reasons for outsized returns in the past. Diversification reducing returns whilst reducing risk seems like a fair tradeoff. Are there any calculators or other such tools that will guide me through reducing the risk in my portfolio through diversification, without too great a decrease in returns? Or is the whole concept flawed due to it being based on past information? I am taking a step back to better understand what I'm doing. I'm not going to make any important investment decisions until I can make fully informed ones. Maybe I'll make use of a Vanguard target 2050 fund until that happens, since people seem to recognize that as a simple and effective investment.
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Aug 30, 2011 02:03
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