So with some guidance from y'all I've put together portfolios for my sister, myself and fiancee. They should hold for a while, at least until the end of the quarter checkup. Other than making sure all hell doesn't break loose (Ukraine/Syria/Libya going up in (more) flames, China credit crisis, or what have you) and possibly scouting out new funds - possibly a real estate fund (wealthfront and betterment seem to think its a good idea) or a sky might be falling fund for when that seems necessary - what do I do now?
Comments
As to sky is falling fund, they have their uses but not as an add-on fund to your portfolio. It needs to be part of your portfolio allocation strategy. The problem is that if you allocate a lot, you will underperforming over all and may not meet the goals set up for the portfolio. If you don't allocate enough, it won't make much difference in returns other than perhaps psychologically. So, it will have to be planned into the overall portfolio for your volatility/return expectations.
1. What are some of the "sky is falling fund" choices out there? I'm not familiar with these. Can you name a handful of them?
2. What is your assessment of the valuation of REIT funds now, with respect to a value investor proposition of, Is this a good value, or an acceptable one? For example, I don't know how to value REIT mutual funds, but last time I checked, the Price/Forward Earnings ratio of REIT funds was sky high. I can't seem to access Morningstar right now to get some data. Just got on Yahoo Finance: says that VNQ has a TTM P/E of 38. If perhaps P/E is not a good valuation measure for REIT funds, then what is, and are REITS overvalued, undervalued, or about right, as an asset class?
The only thing I would call a "sky is falling" fund (although given that some people call anything not absolute cheerleading negative, maybe some people have a different definition) is a bear market fund. I do think that a l/s fund is appealing, especially those that have a higher degree of flexibility in terms of various asset classes - Marketfield remains a primary example, although the less expensive original/grandfathered shares are closed.
@JohnChisum How do Real Estate funds compare with global real estate funds. Is there a reason to favor one or the other?
@Scott I'm reluctant to go into bear market funds since it seems like doubling down on assuming I can market time. Betting once is enough for me. I also have little knowledge of real estate atm.
Bigger picture I was more thinking of how much time and attention to devote to following the investments/markets and where what time I do spend would be most profitably used.
Regarding your question on Global versus plain real estate funds; The obvious answer is the global one. I felt that gave me a better diversified real estate investment. But your question is valid. Some real estate funds are very specific in what they buy. Some lean towards unconstrained, a little bit of everything. Besides the global part, the fund I bought invests in many sectors of real estate.
I bought this fund at inception and one reason I liked it is the exposure to other parts of the world where real estate is used as a back up investment. It is called land banking. As an example, many countries have a pay as you go health system. Families who have accumulated properties over time can use these for payment or sell to get cash for emergencies. In addition, many countries in Asia are being proactive in preventing a bubble from forming. Singapore and Hong Kong are the two best examples. So rather than putting all my real estate eggs in the US real estate market which has been doing well as of late, a global fund gives better diversification.
In the US, I like the big mall operators like Westfield. (Australian actually) As the shopping experience starts to transform away from strip malls and towards lifestyle malls we will see new construction. The US is a bit behind in this concept. Take for example a large mall with high rise condos, office towers, and hotels etc all attached to the mall.
I hope I answered your question.
Congrats. May I ask what the final decisions were?
With foreign REITs, if you look at VNQI or RWO you'll notice about 70% of them are Asian based. If you own a Matthews Asia fund, for instance, or any number of EM funds, you may already have significant exposure to the class. That may help with your decision.
That to me is highly interesting in terms of the amount of people stuck at the airport for one reason or another who, inevitably, wander to a store or restaurant.
Westfield also has tech arm Westfield Labs, which is researching how to merge tech with shopping.
I'd also go with global RE vs us-centric. Some of the Asian REITs I think are very appealing having come down quite a bit lately. There are a few I've considered, such as TheLink REIT, which has, among other things, a ton of parking garages in space-constrained Hong Kong. That's completely understandable and I wouldn't recommend market timing or a bear market fund. I would recommend a l/s fund. I was more saying that what some people's definition of a "sky is falling" fund may differ noticeably.
REITS are often valued by FFO (Funds From Operations) rather than P/E.
@Scott Very interesting to hear about their new directions.
One of my concerns as I looked at the US-centric RE funds was that they seemed to primarily own the same things just in different percentages. I find myself concerned about how large the US market is in terms of active management offering any advantage. This was actually what led me to finding TVRVX and Third Avenue's active share measurements as mentioned by David in the latest commentary.
In terms of market timing, my general approach for the near future is to follow the recession watch section of the Quant Corner section in Jeff Miller's weekly blog posts oldprof.typepad.com. It is well enough explained that I can understand and believe in it. Also only focuses on large downsides rather than corrections, so it is not overly finicky for my longer term view.
@mrdarcey the final decisions were to make the following allocation goals:
My Port: comfortable with more volatility, but conscious of downside risk
sleeve 1: Core
MOAT 31.5% (I'd like to think of this as a proxy for VIG but with more upside.)
FMIJX 13.5%
DLTNX 5%
sleeve 2: Variable allocation
ARTGX 20%
GPEOX 10%
ARTWX 10%
PRHSX 10% Had FBIOX, but moved here over valuation concerns in Jan. This lost less recently so thats at least something.
Fiancee's: less comfortable with volatility
sleeve 1: Core, also constrained by 457 account
VTIVX 40%
sleeve 2:
BWLIX 10%
OAKLX 10% This and BWLIX are somewhat volatile, hoping holding both calms that a bit
FMIJX 10%
ARTGX 15%
SFGIX 7.5% (was planning on DREGX here, but too volatile for her)
GPROX 7.5%
Sister: Some focus on ESG/SRI concerns, concerned about maximizing growth
sleeve 1: Core
PRBLX 35%
OAKIX 15%
sleeve 2: Variable Allocation
ARTGX 25%
DRESX 10%
GPROX 15%
I opened holdings in ARTGX in every one of these as my current place where I can hold equity when I'm concerned about market conditions, not a sky is falling allocation, but somewhat better downside performance I hope. My benchmark for everything is VFIFX as we all expect to retire around 2050 and all holdings are in retirement portfolios. This mostly passive index seemed like a good proxy for a benchmark. I've tried to tilt things towards international, value, small-cap and EM in a general sense.
If you are planning to actively manage this portfolio as conditions change then that might be OK, otherwise you might land up disappointed when asset class leadership changes and the funds you picked now may start to lag.
Congratulations on deciding to decide. You certainly do not suffer from analysis paralysis. That’s great.
From Shakespeare’s King Henry V, the “Once More unto the Breach” speech offers a useful one-line lesson: “Stiffen the sinews, summon up the blood”.
You have done your research; you have made your choices. Now have the courage to stay the course. There is little to benefit, and much to compromise with constant jiggling at the fringes of an asset allocation. Be firm in your convictions. As songwriter, horse aficionado Jon Stewart wrote: “Let the Big Horse Run”. That’s solid advice.
External events are forever threatening the health of a portfolio. It directly costs money and indirectly costs opportunity penalties to protect(?) against these uncertainties. Be cautious in over-committing to this uncertain insurance. History shows that the markets are hugely resilient to exogenous disruptions, and early recoveries are extremely rapid so that reaction time is challenged. Given your three plus decade investment time horizon, I suspect this protection should NOT be a high priority item.
The fact that you, your fiancée, and your sister all have portfolios at your tender ages speaks well of your savings habits. Again, a hardy congratulations to all. Save even more, since savings are the only totally reliable way to sweeten the retirement pot. On a very personal level, co-habitation and eating-in do magic to enhance a savings rate.
Craft a careful benchmark to score the success of each portfolio. But there is no need to measure too frequently since that encourages dissatisfaction and dabbling. I might score quarterly, but only react annually if required. Rebalancing improves end performance, but also need not be done with a fine pen. Allow some slack in the top-tier asset allocation dislocations, perhaps on the order of 5%, before adjusting.
Market timing doesn’t work, except for rare individuals. On an infrequent basis, I do review broad indicators that are suggestive of market strength and potential weakness.
A recent Vanguard study demonstrated that CAPE and the older P/E ratios do correlate with market performance at roughly the 0.43 and 0.38 levels, respectively. You might want to keep watching these numbers as the best signal of a market’s directional change. The government debt/GDP ratio and the composite Dividend Yield also showed lower, but positive correlations with market performance. Surprisingly, GDP Growth and Trend Earnings Growth did not. Choose your own poison, but keep it simple and non-time consuming.
Almost finally, and most importantly, take a vacation and relax. You’ve earned it. In fact, since you’ve done such a competent job in your portfolio designs, feel confident and free to multiply that vacation time by a factor of ten before getting back to actively monitoring the markets. And please do not worry day-to-day excursions. Tune out the daily seers. The fortunetellers main by-product is worry and unwarranted trading.
Keep your education growing. My personal favorite sources are financial books and peer reviewed academic papers. I always have a book open and read daily. There are several recommendations on this website and MFOers often contribute their current reading list also.
I must remind you that I am not a financial advisor. I am purely an amateur and self-educated in this arena, so buyer beware.
You have done a superb job. You will be a wealthy man when you reach your retirement age.
The Very Best Wishes.
Could you elaborate?
It is strange that I make comments about volatility, yet have some very focused funds (OAKLX, MOAT) that may lead to higher volatility and historically have . The volatility control is designed to play out in the second sleeve. My first sleeve is designed to anchor half of my portfolio in a "benchmark based" (here VFIFX) allocation through a "lower cost" set of funds that require minimal intervention from me. MOAT, is on probation, but looks promising to me (looking backwards by examining WMW, which follows the same index) and is cheap(er). If the expenses of commissions becomes too great, or it's volatility is more than I can handle I will likely replace it with either a total (US) market index, OAKMX, or VDIGX.
The role of VTIVX as a core fund is highly situational (457 constraints), where FMIJX and BWLIX or OAKLX might become part of that core sleeve at some future point. I'm still articulating to myself exactly how those overlapping accounts and positions interact. My sister and my fiancee will also each get a bond fund (RNDLX/OSTIX/RSIVX are all on my radar) at some future point when the benchmark's allocation (half of the 10% in VFIFX) and the buying minimums (Fido increased them frustratingly) line up.
Volatility control in my mind is focused on the choices made by allocations in the second sleeve. In particular, looking at PRHSX in my portfolio with a mind to the near future of medical advances and boomers aging, but lots of related uncertainty. Or in looking at ARTWX versus GPROX in terms of focus or GPEOX versus DRESX and SFGIX in EM markets and wagering that small EM lends itself better to active management, that DRESX can continue "winning-by-not-losing" to quote David's profile, and that SFGIX is also staunchly sober (for EM).
I do expect asset class leadership to change, but I also hope that for whichever reason, the tendency for small-caps and value stocks to have slight premiums continues to hold over the very long term. Mostly I plan on holding these funds in varying %s for the next 7 years or so, rebalancing out of winners and being a bit sensitive about macro fundamentals to determine risk exposure.
@cman Let me know if this clarifies things at all. If you feel I'm making fundamental errors here I respect your daily contributions here and will followup on your thoughts.
I also appreciate the varied advice, direction and general wisdom that this board contains. I would have made dramatically different, and almost definitely worse, choices in the absence of this daily riot of ideas. Each of your perspectives are nuanced and interesting (if not always expressed as such) and have given me much to consider in making my decisions. There is more than one way to skin this cat, and the implications of the choices I'm making is much clearer to me than it would have been otherwise. I agree in part that I should take a break from this, but find it hard to find a similarly stimulating group elsewhere. Thank you again everyone.
For example, The first sentence phrase "minimal intervention" is contradicted by your thoughts in the rest of the paragraph. You need to rethink what a "core" is and what you want in it, if you want to avoid churning.
My suggestion is to make your plan and strategy conceptually simple and sound first before getting to fund selection. The latter activity is always a huge distraction to planning.
As you have said there are many ways to skin a cat and many right plans but simplicity and soundness should be a necessity.
To conceptually simplify your current framework, one way to look at your sleeves is to consider the first sleeve as a diversified portfolio whose asset allocation you control and the second sleeve as a diversified portfolio where you outsource the allocation to fund managers and allocate between them to get sufficient coverage.
This won't let you fit your opportunistic or sector bets like health care. You can think of creating a third sleeve for such funds where you can indulge your itch to actively meddle and change so you are not tempted to meddle with the other two. Keep that third sleeve at 10% or less.
The core portfolio is typically a set of funds with broad diversification and stable funds with a good long time record. There are choices from index funds to active funds so you can choose the volatility levels that you find comfortable. But what you do NOT want here are latest fad or narrow strategy or funds with very little history. You are primarily aiming for returns from sheer beta exposure alone via asset allocation.
There are several ways to create the asset allocation plan for this sleeve. Pick one. You can use online tools at Wealthfront or Betterment that suggest allocations (you don't have to take the funds or etfs suggested) for your circumstance as the starting step or you can take the typical slice and dice lazy portfolio templates with value and small allocations or you can use a benchmark fund to emulate. You will do fine with any of them.
The above gives allocation levels to different asset classes and makes sure that you are well diversified. You can then pick funds for those allocations that satisfy your volatility comfort. My preference here is just pure index funds but you can use a well regarded active fund in each category. You have done very well in keeping the number of funds minimal and not turning it into a kitchen sink. Keep that discipline.
If you pick a benchmark fund, my suggestion is to pick a world allocation fund than a target retirement fund which is juggling too many parameters including a glide slope. Following this to its logical extreme with funds that is selected without the overall allocation in mind has led you to a core with just large cap funds in your US allocation and a very narrow strategy (wide moat companies only). This will not work tne best in all economic conditions and you will be tempted to churn it when it isn't working.
Note that you can control overall volatility with allocation levels rather than picking asset classes sacrificing diversification.
Do the same thing with the second sleeve but instead of selecting an index or pure fund, select allocation funds that overall will satisfy the volatility levels you are comfortable with for each large bucket in that sleeve - domestic, international, bond, etc.
You can create a glide slope with a plan to move from aggressive to moderate to conservative allocation funds in your second sleeve over time and the relative allocation between the first and second sleeve moving allocation from first to second eventually landing up with just the second sleeve with conservative allocation funds.
You can use the third sleeve to play around with sector or other bets and put your health care fund there.
The above is just a guideline and is actually conceptually simpler than the many balls you are trying to juggle at the same time right now where you aren't sure of your fund choices. The same conceptual framework will work for all the three individual portfolios but you pick funds and allocation amounts for different volatility levels between them.
At the moment, I'm hoping to keep up enough on things that I can somewhat productively move allocations around, but my hope also was that these ranges of funds would provide me enough breadth that I could do that without leaving the small world I defined for myself. I have certainly not enjoyed the results of the last 3 months quite as much, but figure that is part of how it goes, and hope I can maintain that distance. My main concern with your suggestion is I feel like it would lead to acquiring a greater number of funds and hence more complexity.
Thank you for taking the time to elaborate on this, you've given me much to think about.
You should do whatever you feel comfortable with. These are all just guidelines.
You can, in theory, do this with the same number of funds - US total market index, international total market index, global bond index in core, US allocation, international allocation and global bond allocation in sleeve 2, healthcare in sleeve 3. It will be better diversified and you can go to the beach for a year and not look at it.
Having to revisit every 3 months and worrying about a fund lagging and replacing it, etc in a non-diversified portfolio is more complexity in my book. So is trying to balance volatility between multiple sleeves.
I don't like these broad indices because the market cap weighted allocation does not provide the best risk adjusted returns. So, you can choose an active fund replacement for each where you let the manager do allocations within them keeping the same number of funds or choose a more optimal portfolio with a few more funds. For example, core with a domestic large blend index domestic small blend index, developed market index and emerging market index, a domestic bond and an international bond index. Keep the other sleeves the same as above. That is 3 more funds total.
The good news is that all these portfolios including what you have now won't differ all that much in performance in reality. Market gyrations determine the results more than anything you can do for a given risk level at this level of effort. Some may require less maintenance and let you sleep better than others.
Just make sure you aren't churning funds. If you are, then there is a problem.