William Bernstein Discusses Tilting Hey, rjb.
I get where you're coming from, but Bernstein was attempting to write a popular statistical model of a portfolio that would approach the Efficient Frontier, while claiming that, since you can't know future asset class performance, you can't know where the Efficient Frontier will lie. In order to do that, he looked at historical asset class performance and correlation. For foreign, since he's writing in the late 90s, the only thing he has long term data for is the EAFE. For small he uses the CRSP 9-10, which gets much farther into microcap territory than VTSMX.
When he starts talking about asset allocation in Chapter 5, he admits up front he is "an asset class junkie," and is willing to own "20 or 30" different asset classes. But the rub is that he wants everything to be a separate asset class. We have 15 years of hindsight and recency bias showing an across the board increase in correlations. For instance, Bernstein approaches bonds as a risk control tool, and assumes correlations of .777 between SC and the S&P 500, and .483 between the EAFE and the S&P 500. It's not so much that Bernstein doesn't want to use total market indices, but that doing so doesn't allow him to really make his broader point re: diversification because there is a lack of data. He ends up using the European stocks as a proxy for the EAFE because there wasn't a Vanguard DM fund yet.
The portfolio Ted points to, he calls the "Level-One Asset Palette," and he designs it for those who find "reading this book ... the equivalent of root canal work." Quickly after he presented it as his Lazy Portfolio. In the book he presents second level and third level "palettes," which include EM, Foreign smallcap, REITs, Natural Resource stocks, short term bonds, TIPS, foreign bonds, and valuation factors.
Not sure if that helps or not, but that's what I gather his reasoning is. Personally, if you're going for as much growth and diversification across 4 asset classes as you could easily get, I would think something like CRSP 9-10 (VB or VBR), foreign small (VSS), Real Assets (VNQ, RWO, VDE, or ALPS), and either an intermediate or hedged foreign bond fund (BND or BNDX) would be better. But some of those funds didn't exist 15 years ago.
Dividend Payers Attractive Again As Bond Yields Fall @ron,
@Catch22,
Calling LT treasuries "equity insurance" might have sent this discussion down the wrong path. Maybe a better analogy would be a portfolio shock absorber. LT Treasuries often out perform at times when equities underperform. Personally, an equity investor should expect a certain range of volatility. Bonds can help dampen and absorb some of the bigger equity bumps allowing an investor to stay "fully" invested.
Retirees recently have had to navigate through two market meltdown (catch22's term) over the last 1
5 years. If an investor held a portfolio consisting mainly of equities he/she would have two very large holes to fill.
To drive this point home visually I created a graph using a backtested portfolio tool which shows the impact these two meltdowns had on a 100% equity portfolio (ron's $
500,000) verses two other portfolios that incorporated a mix of LT bonds and equities.
Backtesting Portfolio Tool:"This online portfolio backtesting tool allows you to construct a portfolio based on the selected asset class allocation to analyze and backtest portfolio returns, risk characteristics (Sharpe ratio, Sortino ratio), standard deviation, annual returns and rolling returns."portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults
William Bernstein Discusses Tilting
His No Brainer Portfolio.......
Why has he limited the foreign stocks to Europe only?
And the 25% S&P 500 and 25% small cap index.....that's an unusual "tilt". Almost all the "tilters" tilt to small cap value
If I remember where he discusses this in the
Intelligent Asset Allocater, this is the simplest of his portfolios, and is designed for maximum diversification within 4 widely available asset classes. It was also subject to availability of Vanguard funds at the time, and I don't think they had a "Developed Markets" fund yet, only Europe and Asia/Pac. IIRC, he claims any foreign will capture most of the diversification benefits, so no EM exposure. He also treats SC as a separate class of stocks than LC. Essentially he's trying to prevent a simple way to capture multiple market movements for long term accumulators who don't want to spend time on portfolios, so isn't really worried about "tilting" per se.
I seem to remember he builds in value somewhere in the more complex portfolios, but I could be wrong.
If he wanted maximum diversification within 4 widely available asset classes, I find it odd he did not use the Vanguard Total International Stock Market Index fund. If this is for long term accumulators, what's wrong with adding in emerging markets, Pacific, etc, that you get in the total int'l fund. And a bit odd that he did not use the Vanguard Total Stock Market Index fund too, although that can be explained by his desire to use a separate small cap fund.
William Bernstein Discusses Tilting
His No Brainer Portfolio.......
Why has he limited the foreign stocks to Europe only?
And the 25% S&P 500 and 25% small cap index.....that's an unusual "tilt". Almost all the "tilters" tilt to small cap value
If I remember where he discusses this in the
Intelligent Asset Allocater, this is the simplest of his portfolios, and is designed for maximum diversification within 4 widely available asset classes. It was also subject to availability of Vanguard funds at the time, and I don't think they had a "Developed Markets" fund yet, only Europe and Asia/Pac. IIRC, he claims any foreign will capture most of the diversification benefits, so no EM exposure. He also treats SC as a separate class of stocks than LC. Essentially he's trying to prevent a simple way to capture multiple market movements for long term accumulators who don't want to spend time on portfolios, so isn't really worried about "tilting" per se.
I seem to remember he builds in value somewhere in the more complex portfolios, but I could be wrong.
Dividend Payers Attractive Again As Bond Yields Fall @bee @ronYou noted to bee: "Bee, I don't see it as equity insurance because how much are you going to buy if for example you have a $
500,000 or more equity holdings? Insurance is a premium you pay for protection. You might consider trying to cover some of a loss by buying, in your case EDV but that's not insurance. It's like a lot of these alternative funds. I could never invest enough to take a risk of betting and loosing."
Is there any reason to hold any bonds?
If one holds any bond funds, is this not a form of insurance against an equity melt?
Is not the answer to hold all equity and sell when one's downward pain point is reached; and place the monies into cash and wait for the next upward move?
Regards,
Catch
Dividend Payers Attractive Again As Bond Yields Fall I am one of the more aggressive yet most conservative on this board. As for SPLV from its closing high to its recent intraday low it declined 5.1%. I realize we are all different here and whatever suits our personality etc. and there is no right or wrong way. But at my age (or any age for that matter) I would be devastated to see a 5.1% decline in any of my positions. (actually would never allow that to happen via a trailing mental stop) And since I normally invest all or nothing, that would entail a 5.1% in my liquid net worth. We read all about the current rout in junk bonds, but the open end haven't come close to 5.1%. And then you have the junk munis that are up double digit this year and some of those (EIHYX) haven't had so much of a 1% decline along the way. Trend persistency and low volatility with little to no drawdown along the way is my preference for .........
Dividend Payers Attractive Again As Bond Yields Fall Bee, I don't see it as equity insurance because how much are you going to buy if for example you have a $500,000 or more equity holdings? Insurance is a premium you pay for protection. You might consider trying to cover some of a loss by buying, in your case EDV but that's not insurance. It's like a lot of these alternative funds. I could never invest enough to take a risk of betting and loosing.
William Bernstein Discusses Tilting
His No Brainer Portfolio.......
Why has he limited the foreign stocks to Europe only?
And the 2
5% S&P
500 and 2
5% small cap index.....that's an unusual "tilt". Almost all the "tilters" tilt to small cap value
