I am targeting moderate fund portfolio allocation 60/40 and wondering if that makes sense to use DIY approach (building a portfolio from many funds) or invest everything in one of the best fund like VWELX or FPACX.
I would appreciate opinion of DIY investors who also target moderate portfolio allocation.
How your overall portfolio return compares with VWELX or FPACX and whether you can consistently outperform these funds.
Comments
Just a thought,
David
The main reason to not DIY is that you may screw up both your allocation and fund selection if you don't educate yourself and aren't disciplined about your investing.
So whether a DIY does better or worse than an allocation fund depends on the market conditions and whether they favored the strategy of the allocation fund in the time period and the investor doing the DIY, so you are likely to find opinions on both sides and you won't know which would apply to your case.
If you have more than $100k to invest and have the time and motivation to research and understand what you are investing in, I would recommend a DIY but keeping a close watch on a suitable allocation fund benchmark to see how you are doing and why which may expose certain weaknesses in your portfolio.
As your assets grow, you can create a bucket for allocation funds and have rest of the portfolio fill any gaps in diversification.
First thing you will learn is that just thinking 60/40 is misleading. One can construct a 60/40 equity/fixed income portfolio that is more conservative than a conservative allocation fund or one that is more aggressive than an aggressive allocation fund. Many DIYers make this mistake and think they are either geniuses or dunces relative to a poorly selected benchmark based on performance.
You should use any of the portfolio analysis tools to analyze your portfolio to get a good feeling for the overall volatility and beta exposure to ensure it meets your specs such as max drawdown in adverse conditions, behavior in up markets vs down markets, etc.
Portfolio allocation is not easy and a mostly ignored activity but the good news is that most people being sensible do just fine over a long time with a well diversified portfolio. With some education and tools, one can do very well especially in protecting capital, reducing drawdowns or volatility and with a little bit of luck overpeform significantly.
So, I guess if as you said, "the complexity of asset allocation is not a goal", I would at least give the bulk of the account to a couple good proven managers. You mentioned a few great ones and I would throw MAPOX and maybe the T. Rowe Price target date funds into the mix for consideration.
I'm on the same page as Cman. A couple of well managed balanced/allocation funds and maybe add a couple funds where you might be diversification-short, non-U.S. for instance, for greater diversification.
While a lot of us think of ourselves as DIY, I suspect it's quite often some combination of the two approaches. I have some funds which I juggle, rebalance or overweight/underweight from time to time. Others I've determined to allow to run pretty much untouched by my meddling fingers.
Disclaimer: I'm a conservative-moderate allocation investor who would have made considerably more money by putting everything into PRWCX 20 years ago and going fishing. However, as I think some have alluded to, that approach only works if you can keep hands-off over the entire period, trusting your manager(s) to do right through both thick & thin. Panic and run to cash after being whipsawed by markets or events and you've likely screwed the pooch.
I am a long standing member of the DIY clan, sometimes successful, sometimes not so successful.
One lesson that I have learned is that an essential element for improving the odds for successful investing is keeping it as simple as possible.
I’m certainly not the Lone Ranger in that belief. Henry David Thoreau said: “Our life is frittered away by detail. Simplify, simplify.” Leonardo da Vinci proclaimed that “Simplicity is the ultimate sophistication”. Finally, Albert Einstein cautioned: “Everything should be made as simple as possible, but not simpler.” I choose to position myself on the shoulders of these giants, including the acknowledgement that simplification does reach a limit.
The bulk of MFO readers have reached a similar conclusion. I suppose that is the primary reason why we invest in the mutual fund/ETF universe because it is an enormous simplification in contrast to assembling a diverse portfolio of individual equity and fixed income holdings.
To answer DavidV’s question requires a fuller understanding of his commitment to either an actively managed or passively managed mutual fund philosophy. His example funds suggest an actively managed program, but most of us, perhaps DavidV too, deploy a mixed strategy. The answer partially depends on the response to this binary decision.
If the current commitment is towards an actively managed mutual fund sleeve, then a shorter group of active funds is more likely to deliver positive Alpha, excess returns relative to a benchmark.
That observation is a direct output from Monte Carlo studies recently completed by Rick Ferri and Allan Roth. It results from the fact that most active funds fail to outdistance relative benchmarks, so adding more of a less than 50 % likely outcome mathematically reduces the odds of outperformance on a cumulative basis.
Here are the Links to the Ferri study and a summary of the Roth simulations:
http://www.rickferri.com/WhitePaper.pdf
http://www.forbes.com/2010/04/22/mutual-funds-etfs-active-management-personal-finance-indexer-ferri.html
Both studies demonstrate a dramatic falling of success probability (again defined as outshining an Index benchmark) as the number of active products are added to a portfolio. These results do not address the issue of the benefits of diversifying across asset classes, but rather show the shortcomings of adding extra active funds within a given group. Also, these studies did not explore the advantages of using a few screens, like lower expense ratios and lower trading frequency, to enhance the odds of selecting winning active fund managers. These tasks remain to be done.
On the other hand, there does not seem to be a downside disadvantage when adding passively managed funds to benefit from broad international diversification. Costs are minimized and the likelihood of market average outcomes are maximized.
The totally passive strategy minimizes stress levels, workload, and monitoring efforts. These are such attractive pluses that many investors, including even the outperformance zealots, include a mix of actively managed and Index-like products in their portfolios.
With a basic passive investment philosophy, a minimum of three Index holdings can grossly cover the waterfront. However, a more refined portfolio that includes between 7 and 10 Index holdings (REITs, small value oriented funds) can marginally enhance returns (order 2 %) while simultaneously, and most importantly, control risk by reducing portfolio volatility by perhaps 40 %. That reduction in volatility is particularly significant since it will encourage an investor to “stay the course” during stressful plunging markets.
To summarize: when choosing active fund positions within a category, more is definitely not better, and when selecting Index products, it doesn’t much matter except for the needed recognition that all Index products are NOT created equally.
I hope this posting is just a little helpful.
Best Regards.
>> I choose to position myself on the shoulders of these giants, including the acknowledgement that simplification does reach a limit.
That said,I bet that, like me, you do not have everything in one or two or three of the AOx ETFs, nor does anyone else here either. Talk about simplicity, and a 0.3% fee too, for a single ETF comprising in various proportions S&P 500, S&P midcap, S&P smallcap, EAFE ETF, emerging markets, total US bond, high-yield, short treasury, REIT ETF, and TIPS.
DavidV, you use the plural 'managers', but you read the article, right? It is not trading and timing but mere plurality.