Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I saw the commentary made by Bespoke and it says the EEM low was made in Dec 2013. From what I can see elsewhere, the low was made in early Feb 2014. Am I missing something or did Bespoke have the incorrect date for the EEM low? I would like to think they data checkers before making their updates and posts on all their research.
Emerging markets are one of the sectors that I have been buying around the edges since this past summer, not quite a year now. My total return thus far has been a little better than seven percent since I opened the position and with my continued buying in baby steps as I averaged in. I am now one step away from building out the position. In addition, this is one of my low p/e ratio ventures. Thus far ... so good.
I give a good bit of credit for me opening this position to Ron Rowland's Invest With An Edge weekly newsletter. Emerging markets were at the bottom of the Global Edge for a good while and I took this as a contrian (out of favor and low p/e) move when I ventured into it.
In addition, my thinking is this is one way the small retail investor can succeed by not swimming with the sharks (High Frequency Trading Crowd) and that is to find out of favor themes, follow them, and then invest in them while they are out of favor and on the rebound.
I have provided a link to Mr. Rowland's site where you can view historical issues of the newsletter by clicking on the newsletter archives tab. Perhaps, you might discover some out of favor themes to follow and invest in should there be a fit for same within your own portfolio. You also might wish to view the Leadership Strategy tab as I have found this strategy to be of benefit too.
Year-to-date my portfolio is up 5.04% while the Lipper Balanced Index is up 3.89% and a fifty/fifty portfolio (stocks and bonds) is up, by my math, 4.82%.
@Old_skeet, your portfolio performance seems to be tracking the global balanced fund GBLAX, I suggested a while ago as the right benchmark for your extensive fund collection. Couldn't you just replace your 50+ funds and constant monitoring and buying with just one fund? Granted, it won't be as much fun to talk about...
There should be something available within their alphabet soup (the thing I don't like about American Century) amongst the Global Balanced or Capital Income Builder funds.
GLBLX or HCORX (if available at your broker) are good alternatives in this global allocation category.
In revisiting your suggestion to use American Funds Global Balanced Fund (GBLAX) I have again reviewed the fund and I am again responding to you as to why I feel it was/and is not a good fit. In the Growth & Income Area of my portfolio in its Global Hybrid sleeve I have three funds one of them being American Funds Capital Income Builder (CAIBX). It has close to a four percent yield and over the past three year performance period it has out performed Global Balanced. Again, CAIBX has about a 4% yield vs. GBLAX’s yield of about 1.6%. The sleeve itself generates a yield of about 4.5% on current valuation and well above that on amount invested at about 5.5%.
If I were to use only one fund it would not be any of the above but it would be LABFX which is a Lord Abbett fund. It has a yield of about four and one half percent and it style box distribution is more in line with that of my portfolio along with its asset allocation. Plus, my portfolio’s yield matches up better with it than the others as it kick off better than five percent yield on amount invested and a little above 4% on valuation. Again, your GBLAX form a yield stand point falls way short at only about 1.6%.
In relation to my portfolio … If it looks Biblical ... Well it is as it has four major areas of asset holdings just as there are four seasons usually found in most places on Earth (There are exceptions). They are the Cash Area, the Income Area, the Growth & Income Area, and the Growth Area. In keeping with there being twelve months in the year there are also twelve sleeves within my portfolio … and, in keeping with there being fifty two weeks in the year there are about that number of mutual fund position also within the portfolio. Thus far it has worked well for me and I plan to keep it configured as it is.
In my using of technical analysis … I do use it, but I have my codes set to proportion numbers that are found in the great cathedrals that have been constructed through time. These numbers are readily available to those that wish to do the research.
Again, Cman, I reject your candidate GBLAX to be used as an Index to benchmark my portfolio.
Seems people like to pick at Skeeter's portfolio of 50+ funds. I have even commented that that many funds becomes index-like. But what is most important in his defense is his consistent comment, "it has worked well for me". I think, most likely the multiple sleeve and fund system has a comforting, familiar, controlled aspect to it for old skeet. When you are comfortable steering your boat, you can take smaller controlled risks "around the edges" and keep that important sleep-at-night feeling.
My take is skeeter gets his alpha with his "buying around the edges" and moving within his equity weighting range (40-60% I believe) based on his consistent monitoring of market valuations. I always tune in to what he is thinking.
Can it be done with 5, 10 or 20 funds? Maybe 1 fund? Most likely, in fact very likely. But 50+ funds works well for skeet.
Just another point to add; 50 funds without some diversification method would probably be a disaster. That portfolio would have no benchmark. But obviously Skeeter has a well defined system that "works well for him."
Keep the thoughts coming Skeeter. You are in balance with Feng shui
The number-of-funds question on this site seems like a matter of bedrock belief; I don't think anyone will convince anyone else.
But let me put a thought experiment out there. Obviously, your best possible strategy is to find the single best fund out there and put all your money in it, but step one, finding the single best fund, is hard to execute.
Yet there are a lot of funds that have consistently outperformed over the long run -- 528 great owls according to this site, including 58 that have outperformed over a twenty year period. If one were to choose 10 or 20 or 52 of those funds, might not one have a good chance of outperforming with lesser volatility? You aren't going to knock the ball out of the park with so many funds, but if you can get, say, an extra 1% a year, that would really add up over 20 years, and your risk from a single manager flaming out becomes minimal.
That seems to me to be what Skeet is doing: choosing a whole bunch of excellent funds and getting slight but steady outperformance with lower volatility. Am I right, Skeet?
I don't have the math to back this up, so cman or anyone else who wants to correct me, I will listen respectfully if you gently tell me why I'm off my rocker.
FWIW, I have 15 funds. Although 2/3 of my fund assets are in three (Bridgeway, Fairholme, and Primecap), so the others are kind of a hobby, I do think I have too many funds for my purposes. I intend to concentrate further as I go forward, but big capital gains are a pleasant reason for why that's tricky.
Thanks for your comments. My thoughts are there are safety in numbers. Years ago, I use to successfully bet the dogs. In the beginning I’d pick one dog to win and wager accordingly. Then I started to pick three dogs to win and my success increased. However, my greatest success came when I bet three dogs to win, place, or show. This is known as across the board betting as there are nine ways to win. After doing this I most always left the track with more money in my pocket than when I arrived; however, the reward was less than hitting it big. In addition, when I was a boy scout I learned fast that a canoe with two paddlers could usually out perform a canoe with one paddler and one with three paddlers often offered even more steady propulsion. Naturally, skill played a role in this.
I took this strategy to my portfolio in picking funds that historically had been category leaders and then throwing in a few that I felt were promising funds. With this, my sleeve investment system was formed. Besides, this conformed to my Christian up bringing. Hey what was there not to like … and, it has worked and served me well through the years.
And, if one of my funds falters as PASAX did last year within my Hybrid Income sleeve there are the other five funds within this sleeve to offer support and continue to propel the sleeve. This year PASAX is the third best performer within its sleeve so it paid by my thinking not to have scuttled it. So there seems to be some merit from my thinking and by my past experiences for what I am doing as it seems to smooth out the performance. And, yes … I feel buying around the “Edges” has added alpha.
For those that wish to run with only one fund or even a few that is their choice and I wish them well … but, I plan to keep on keeping-on with what I am doing.
Thanks again for making your comments … and, I hope my comments have answered your questions.
@old_skeet, I am confused by your use of yield to evaluate a world allocation fund for a fit. What does this have to do with benchmarking?
The idea of a benchmark is to see how your portfolio is doing relative to the benchmark as a relevant proxy for your portfolio and whether what you are doing is working or hurting and whether it is time/cost efficient.
You use the Lipper balanced index for this purpose not because this index has a good yield but you see it as a goal of a benchmark to compare your portfolio against. No doubt, it gives you great joy to beat it as you keep mentioning it.
But as I have expressed before, that is a flawed benchmark for your portfolio and gives a false sense of achievement, in my opinion. The risk of the latter is legitimizing an approach (market timing activity around the edges in your case) that can blow up in some market conditions at worst and just waste time actively managing the portfolio (not to be confused with using active funds) at best. It is dangerous to associate this "success" with strategies such as the Leadership strategy you keep linking to or using it as a contrary indicator and will mislead people. It is the latter that prompted me to write my response.
The alpha as @MikeM suggests may exist only because of the benchmark chosen or actually negative compared to the suggested benchmarks. This is not very different from the numerous articles on lazy portfolios all of which try to establish legitimacy by stating how they beat S&P 500 which is the wrong benchmark for them. Using Lipper balanced index is not as bad but also flawed for the type of diversification you have. In the same way, use of the average over all active funds is flawed for its use to make assertions about active funds in general.
The number of funds has nothing to do with it other than the amount of time and attention one has to spend tending it for dubious advantage.
Your portfolio is behaving like a good world allocation fund because of its diversification and your playing with it may even be helping in making up somewhat for the disadvantages of over-diversification.
You have mentioned using AC Capital Income builder as one of your funds which I had mentioned as another candidate for a benchmark. It is the same thing as saying your entire portfolio is behaving the same way as just this one fund. It doesn't really matter much which one of the suggested benchmark you choose for that purpose. The differences between them in total return is not practically significant given the market variability. But all of them point to the same thing regarding the behavior of your portfolio.
As to using just one fund in practice, it is the extreme opposite of using some 50+ funds and was suggested as a contrast.
@expatsp has the correct observation regarding idiosyncratic fund risk... to some extent. However, not as much of a concern in funds like the AC ones suggested because of the large team structure but if one were concerned, one could diversify between the couple of funds suggested. But there is no free lunch. It is at the cost of lowering the performance to somewhere between their individual performances just to get rid of a small idiosyncratic risk unless you were betting on volatile and eccentric managers. This may be a reasonable compromise in "small doses" but hard to rationalize 50+ funds for that reason.
Actively managing the portfolio can lower volatility by smart allocation choices primarily in prolonged bear markets. But this has nothing to do with the number of funds used. You can do this with a few funds as with a multitude. It is actually easier in the former to avoid upsetting the overall balance. Consider the extreme of selling part of a single fund portfolio to reduce beta exposure as opposed to which and how many of your funds you want to cut down without losing balance.
This is truly interesting to me, this thread. I'm holding 13 funds. Lucky 13, eh? Almost two-thirds of my total are in 3 funds, though. Sounds a lot like expatsp. (MAPIX, PRWCX and PRESX.) I use small positions to feed larger, supposedly more solid, conservative positions. (TRAMX--- running a bit cooler, very recently--- will feed PRWCX, and MAINX will feed MAFSX or MAPIX.) But MAPIX is still busy doing well, AND making my ark top-heavy! Should I be glad or sad? Yes, I think. Yes.
LABFX seems to be a better fit as it more closely mirrors the portfolio than either CAIBX or GBLAX according to the portfolio's Instant Xray as more than 80% of the portfolio's assets are domestic. Therefore, a domestic hybrid type fund seems to be a better fit over a global hybrid type fund as a benchmark. Staying within the American Funds family leads me to AMECX or ABALX. These funds seem to be also benchmarked against a moderate risk allocation by M*. Where yield comes into play by my thinking is that certain types of assets generate income more so than others. Therefore, in using only one fund as a benchmark I feel it is important to use one that has close to same yield generation as well as similar asset classes and styles as the portfolio. This leads me back to LABFX. In this way, it is easier to determine if alpha has been added. I believe that alpha has been added but measuring it might be another matter for debate by only using a single fund. This can be done though by simply taking the portfolio's return percentages and comparing them against those of the single fund if used as a benchmark or the more widely used moderate risk allocation. Doing this shows the portfolio added alpha. I am sure you will want to debate this method as you seem to be of that type and not willing to accept an average as a benchmark which the moderate risk allocation seems to be.
I wonder? Can you show me where a single broad based mutual fund (other than an index fund) has been used as a benchmark by someone other than maybe yourself? In all the reports that I have reviewed it seems that CAIBX, GBLAX and even LABFX along with AMECX and ABALX are all benchmarked against a moderate risk allocation. With this, perhaps moderate risk allocation should be the portfolio's benchmark and not a single fund itself! Anyway, this is my thinking and this takes us full circle and me back to the Lipper Balanced Index as it seems to be comprised from many leading balanced type funds just as the moderate risk allocation is molded.
I'll check back in by Sunday evening to see if you have made a response to my latest comments. And, even if you have, I still plan to run with the Lipper Balanced Index as my benchmark as it is a widely followed and acknowledged index that is used by many and is easily referenced through the WSJ.
Know this, Old_Skeet plans to keep on keeping-on and staying on my investment course. You will just have to accept it or continue to try to shoot holes in my thinking as you seem to keep trying to do ... All to no avail. And, I don't plan to keep dialogue going with you about this. The sleeve system allows for the number of funds and the amout or each held used as a mechanism to adjust the allocation of the sleeve within the portfolio. It's a neat system which spreads the risk and its allocation of assets many ways and by choosing many category leading funds it has produced good returns through the years. It has indeed worked well for me; and, I ... again ... plan to keep on keeping-on my investment course.
Now you opened the door, so-to-speak, and asked a question as to why I did not just buy one fund? I have answered you in many words. You keep talking around the real question you asked as I have too. Now, I'll answer the question ... and, in short words. My thinking, as a retail investor, is that by putting the total value of my portfolio to work in only one fund, that being an indexed or even a broad asset based fund, for more than one reason, would just be plain foolish on my part if I were to do this. I have no plans, or desire, what-so-ever to own just one fund. You are now welcome to make the final comment.
@old_skeet, separate out the benchmark issue from the use of a single fund.
Regarding a benchmark, typically it is an index IF one is available. For example, if you were focusing entirely on domestic, you would use either S&P 500 for large caps or total market for multi cap, etc. The index is like a fund not an average of some or all funds in that category. Averages are very bad metrics to use statistically unless used carefully paying attention to variance. The bad example is the use of average across all funds from indexologists to make a case against all active funds. Lipper index suffers from this, not to mention the bias in its allocation given its composition based on size.
The right benchmark for an active fund with a flexible allocation is an index if it exists that covers ALL asset classes used in the fund not the primary category because the fund manager can easily cheat and regularly do. But that is how the industry is where managers are trying to generate AUM in a competitive space. A personal benchmark is different. There is no need to hoodwink anybody or delude oneself, so one can be more honest about it.
The broader the mandate, more difficult it is to find a suitable candidate of course.
Active fund managers have always tried to justify "alpha" using a benchmark and in most cases, you can trace the performance to reaching outside the benchmark either in risk or in allocation. Using midcaps in large cap funds for example. Your arguments are exactly this as if you were hypothetically running a fund of funds.
Problem is that they can be really underperforming relative to the allocation they have chosen and yet look good. If your allocation is really like LABFX, then this is a case in point. LABFX is a terrible fund in generating average returns but taking higher than average risk according to M* data. So, if your portfolio is representative of that you are actually underperforming for the risk taken and the benchmark you are using is masking that.
The reason I picked GBLAX is because it is not taking outsized bets in any one area like LABFX in junk bonds, has low volatility and a consistent performance so far and can use any of the asset classes if and when justified. IF I had to pick just one fund, something like that would be my choice and so makes a good performance benchmark if I were to do otherwise. But if I were to use a benchmark like active managers to convince others of my performance, I would pick one I can beat.
Assuming your goal is to measure your own performance for your sake rather than use it to trumpet one's might, that should be of concern to you. But I am not sure how much thought you have given it as to what would be a good benchmark since you keep flipping rationale between averages, yields, portfolio x-ray, etc. If your goal is just to look good on a forum and derive pleasure from it, then it doesn't really matter whether the benchmark is a good one or not just as it isn't for an active manager that needs to look good in the competitive market.
Playing around the edges is a self-delusional tool. Have talked about this in earlier conversation with @davidrmoran. Use my play money portfolio for that purpose but have no illusions that it makes any meaningful difference to overall performance unless it is significant enough to make a meaningful loss if one were wrong about it. That is just math.
Hence, either one is just "playing" to look/feel good or one has committed enough to the idea that one is risking overall performance. In the latter case, one has to worry about the rationale for that commitment.
Your linking to strategies such as Ron Rowland for this purpose is misleading as I have said which is my main concern than what you do with your own portfolio. At some point in the past, you said you use his top few categories to adjust your allocation. Then you said recently that you used his bottom category as a contrarian indicator. These kinds of things work until they don't.
The problem is that you would not likely be the one to be writing about how they didn't work and your portfolio suffered when they don't in your frequent self-promotional posts. The latter is fine with me, not my place to say how you should derive satisfaction for yourself but pointing out that it is misleading others with selective bias. If you were to also post on how an idea didn't work when it didn't work, it would be useful and meaningful.
As to using just one fund, like I said, it is to set a contrast to using 50+ funds. I wouldn't do either for many practical reasons not just performance but if I had to pick between them I would pick the single fund any time than 50+.
I suspect the optimal would fall somewhere around 10-12 funds for most circumstances with some variance for sector bets or brokerage reasons.
Comments
I give a good bit of credit for me opening this position to Ron Rowland's Invest With An Edge weekly newsletter. Emerging markets were at the bottom of the Global Edge for a good while and I took this as a contrian (out of favor and low p/e) move when I ventured into it.
In addition, my thinking is this is one way the small retail investor can succeed by not swimming with the sharks (High Frequency Trading Crowd) and that is to find out of favor themes, follow them, and then invest in them while they are out of favor and on the rebound.
I have provided a link to Mr. Rowland's site where you can view historical issues of the newsletter by clicking on the newsletter archives tab. Perhaps, you might discover some out of favor themes to follow and invest in should there be a fit for same within your own portfolio. You also might wish to view the Leadership Strategy tab as I have found this strategy to be of benefit too.
http://investwithanedge.com/
Year-to-date my portfolio is up 5.04% while the Lipper Balanced Index is up 3.89% and a fifty/fifty portfolio (stocks and bonds) is up, by my math, 4.82%.
I wish all ... "Good Investing".
Old_Skeet
GLBLX or HCORX (if available at your broker) are good alternatives in this global allocation category.
In revisiting your suggestion to use American Funds Global Balanced Fund (GBLAX) I have again reviewed the fund and I am again responding to you as to why I feel it was/and is not a good fit. In the Growth & Income Area of my portfolio in its Global Hybrid sleeve I have three funds one of them being American Funds Capital Income Builder (CAIBX). It has close to a four percent yield and over the past three year performance period it has out performed Global Balanced. Again, CAIBX has about a 4% yield vs. GBLAX’s yield of about 1.6%. The sleeve itself generates a yield of about 4.5% on current valuation and well above that on amount invested at about 5.5%.
If I were to use only one fund it would not be any of the above but it would be LABFX which is a Lord Abbett fund. It has a yield of about four and one half percent and it style box distribution is more in line with that of my portfolio along with its asset allocation. Plus, my portfolio’s yield matches up better with it than the others as it kick off better than five percent yield on amount invested and a little above 4% on valuation. Again, your GBLAX form a yield stand point falls way short at only about 1.6%.
In relation to my portfolio … If it looks Biblical ... Well it is as it has four major areas of asset holdings just as there are four seasons usually found in most places on Earth (There are exceptions). They are the Cash Area, the Income Area, the Growth & Income Area, and the Growth Area. In keeping with there being twelve months in the year there are also twelve sleeves within my portfolio … and, in keeping with there being fifty two weeks in the year there are about that number of mutual fund position also within the portfolio. Thus far it has worked well for me and I plan to keep it configured as it is.
In my using of technical analysis … I do use it, but I have my codes set to proportion numbers that are found in the great cathedrals that have been constructed through time. These numbers are readily available to those that wish to do the research.
Again, Cman, I reject your candidate GBLAX to be used as an Index to benchmark my portfolio.
Respectfully,
Old_Skeet
My take is skeeter gets his alpha with his "buying around the edges" and moving within his equity weighting range (40-60% I believe) based on his consistent monitoring of market valuations. I always tune in to what he is thinking.
Can it be done with 5, 10 or 20 funds? Maybe 1 fund? Most likely, in fact very likely. But 50+ funds works well for skeet.
Just another point to add; 50 funds without some diversification method would probably be a disaster. That portfolio would have no benchmark. But obviously Skeeter has a well defined system that "works well for him."
Keep the thoughts coming Skeeter. You are in balance with Feng shui
But let me put a thought experiment out there. Obviously, your best possible strategy is to find the single best fund out there and put all your money in it, but step one, finding the single best fund, is hard to execute.
Yet there are a lot of funds that have consistently outperformed over the long run -- 528 great owls according to this site, including 58 that have outperformed over a twenty year period. If one were to choose 10 or 20 or 52 of those funds, might not one have a good chance of outperforming with lesser volatility? You aren't going to knock the ball out of the park with so many funds, but if you can get, say, an extra 1% a year, that would really add up over 20 years, and your risk from a single manager flaming out becomes minimal.
That seems to me to be what Skeet is doing: choosing a whole bunch of excellent funds and getting slight but steady outperformance with lower volatility. Am I right, Skeet?
I don't have the math to back this up, so cman or anyone else who wants to correct me, I will listen respectfully if you gently tell me why I'm off my rocker.
FWIW, I have 15 funds. Although 2/3 of my fund assets are in three (Bridgeway, Fairholme, and Primecap), so the others are kind of a hobby, I do think I have too many funds for my purposes. I intend to concentrate further as I go forward, but big capital gains are a pleasant reason for why that's tricky.
Thanks for your comments. My thoughts are there are safety in numbers. Years ago, I use to successfully bet the dogs. In the beginning I’d pick one dog to win and wager accordingly. Then I started to pick three dogs to win and my success increased. However, my greatest success came when I bet three dogs to win, place, or show. This is known as across the board betting as there are nine ways to win. After doing this I most always left the track with more money in my pocket than when I arrived; however, the reward was less than hitting it big. In addition, when I was a boy scout I learned fast that a canoe with two paddlers could usually out perform a canoe with one paddler and one with three paddlers often offered even more steady propulsion. Naturally, skill played a role in this.
I took this strategy to my portfolio in picking funds that historically had been category leaders and then throwing in a few that I felt were promising funds. With this, my sleeve investment system was formed. Besides, this conformed to my Christian up bringing. Hey what was there not to like … and, it has worked and served me well through the years.
And, if one of my funds falters as PASAX did last year within my Hybrid Income sleeve there are the other five funds within this sleeve to offer support and continue to propel the sleeve. This year PASAX is the third best performer within its sleeve so it paid by my thinking not to have scuttled it. So there seems to be some merit from my thinking and by my past experiences for what I am doing as it seems to smooth out the performance. And, yes … I feel buying around the “Edges” has added alpha.
For those that wish to run with only one fund or even a few that is their choice and I wish them well … but, I plan to keep on keeping-on with what I am doing.
Thanks again for making your comments … and, I hope my comments have answered your questions.
Old_Skeet
The idea of a benchmark is to see how your portfolio is doing relative to the benchmark as a relevant proxy for your portfolio and whether what you are doing is working or hurting and whether it is time/cost efficient.
You use the Lipper balanced index for this purpose not because this index has a good yield but you see it as a goal of a benchmark to compare your portfolio against. No doubt, it gives you great joy to beat it as you keep mentioning it.
But as I have expressed before, that is a flawed benchmark for your portfolio and gives a false sense of achievement, in my opinion. The risk of the latter is legitimizing an approach (market timing activity around the edges in your case) that can blow up in some market conditions at worst and just waste time actively managing the portfolio (not to be confused with using active funds) at best. It is dangerous to associate this "success" with strategies such as the Leadership strategy you keep linking to or using it as a contrary indicator and will mislead people. It is the latter that prompted me to write my response.
The alpha as @MikeM suggests may exist only because of the benchmark chosen or actually negative compared to the suggested benchmarks. This is not very different from the numerous articles on lazy portfolios all of which try to establish legitimacy by stating how they beat S&P 500 which is the wrong benchmark for them. Using Lipper balanced index is not as bad but also flawed for the type of diversification you have. In the same way, use of the average over all active funds is flawed for its use to make assertions about active funds in general.
The number of funds has nothing to do with it other than the amount of time and attention one has to spend tending it for dubious advantage.
Your portfolio is behaving like a good world allocation fund because of its diversification and your playing with it may even be helping in making up somewhat for the disadvantages of over-diversification.
You have mentioned using AC Capital Income builder as one of your funds which I had mentioned as another candidate for a benchmark. It is the same thing as saying your entire portfolio is behaving the same way as just this one fund. It doesn't really matter much which one of the suggested benchmark you choose for that purpose. The differences between them in total return is not practically significant given the market variability. But all of them point to the same thing regarding the behavior of your portfolio.
As to using just one fund in practice, it is the extreme opposite of using some 50+ funds and was suggested as a contrast.
@expatsp has the correct observation regarding idiosyncratic fund risk... to some extent. However, not as much of a concern in funds like the AC ones suggested because of the large team structure but if one were concerned, one could diversify between the couple of funds suggested. But there is no free lunch. It is at the cost of lowering the performance to somewhere between their individual performances just to get rid of a small idiosyncratic risk unless you were betting on volatile and eccentric managers. This may be a reasonable compromise in "small doses" but hard to rationalize 50+ funds for that reason.
Actively managing the portfolio can lower volatility by smart allocation choices primarily in prolonged bear markets. But this has nothing to do with the number of funds used. You can do this with a few funds as with a multitude. It is actually easier in the former to avoid upsetting the overall balance. Consider the extreme of selling part of a single fund portfolio to reduce beta exposure as opposed to which and how many of your funds you want to cut down without losing balance.
LABFX seems to be a better fit as it more closely mirrors the portfolio than either CAIBX or GBLAX according to the portfolio's Instant Xray as more than 80% of the portfolio's assets are domestic. Therefore, a domestic hybrid type fund seems to be a better fit over a global hybrid type fund as a benchmark. Staying within the American Funds family leads me to AMECX or ABALX. These funds seem to be also benchmarked against a moderate risk allocation by M*. Where yield comes into play by my thinking is that certain types of assets generate income more so than others. Therefore, in using only one fund as a benchmark I feel it is important to use one that has close to same yield generation as well as similar asset classes and styles as the portfolio. This leads me back to LABFX. In this way, it is easier to determine if alpha has been added. I believe that alpha has been added but measuring it might be another matter for debate by only using a single fund. This can be done though by simply taking the portfolio's return percentages and comparing them against those of the single fund if used as a benchmark or the more widely used moderate risk allocation. Doing this shows the portfolio added alpha. I am sure you will want to debate this method as you seem to be of that type and not willing to accept an average as a benchmark which the moderate risk allocation seems to be.
I wonder? Can you show me where a single broad based mutual fund (other than an index fund) has been used as a benchmark by someone other than maybe yourself? In all the reports that I have reviewed it seems that CAIBX, GBLAX and even LABFX along with AMECX and ABALX are all benchmarked against a moderate risk allocation. With this, perhaps moderate risk allocation should be the portfolio's benchmark and not a single fund itself! Anyway, this is my thinking and this takes us full circle and me back to the Lipper Balanced Index as it seems to be comprised from many leading balanced type funds just as the moderate risk allocation is molded.
I'll check back in by Sunday evening to see if you have made a response to my latest comments. And, even if you have, I still plan to run with the Lipper Balanced Index as my benchmark as it is a widely followed and acknowledged index that is used by many and is easily referenced through the WSJ.
Know this, Old_Skeet plans to keep on keeping-on and staying on my investment course. You will just have to accept it or continue to try to shoot holes in my thinking as you seem to keep trying to do ... All to no avail. And, I don't plan to keep dialogue going with you about this. The sleeve system allows for the number of funds and the amout or each held used as a mechanism to adjust the allocation of the sleeve within the portfolio. It's a neat system which spreads the risk and its allocation of assets many ways and by choosing many category leading funds it has produced good returns through the years. It has indeed worked well for me; and, I ... again ... plan to keep on keeping-on my investment course.
Now you opened the door, so-to-speak, and asked a question as to why I did not just buy one fund? I have answered you in many words. You keep talking around the real question you asked as I have too. Now, I'll answer the question ... and, in short words. My thinking, as a retail investor, is that by putting the total value of my portfolio to work in only one fund, that being an indexed or even a broad asset based fund, for more than one reason, would just be plain foolish on my part if I were to do this. I have no plans, or desire, what-so-ever to own just one fund. You are now welcome to make the final comment.
Respectfully,
Old_Skeet
Regarding a benchmark, typically it is an index IF one is available. For example, if you were focusing entirely on domestic, you would use either S&P 500 for large caps or total market for multi cap, etc. The index is like a fund not an average of some or all funds in that category. Averages are very bad metrics to use statistically unless used carefully paying attention to variance. The bad example is the use of average across all funds from indexologists to make a case against all active funds. Lipper index suffers from this, not to mention the bias in its allocation given its composition based on size.
The right benchmark for an active fund with a flexible allocation is an index if it exists that covers ALL asset classes used in the fund not the primary category because the fund manager can easily cheat and regularly do. But that is how the industry is where managers are trying to generate AUM in a competitive space. A personal benchmark is different. There is no need to hoodwink anybody or delude oneself, so one can be more honest about it.
The broader the mandate, more difficult it is to find a suitable candidate of course.
Active fund managers have always tried to justify "alpha" using a benchmark and in most cases, you can trace the performance to reaching outside the benchmark either in risk or in allocation. Using midcaps in large cap funds for example. Your arguments are exactly this as if you were hypothetically running a fund of funds.
Problem is that they can be really underperforming relative to the allocation they have chosen and yet look good. If your allocation is really like LABFX, then this is a case in point. LABFX is a terrible fund in generating average returns but taking higher than average risk according to M* data. So, if your portfolio is representative of that you are actually underperforming for the risk taken and the benchmark you are using is masking that.
The reason I picked GBLAX is because it is not taking outsized bets in any one area like LABFX in junk bonds, has low volatility and a consistent performance so far and can use any of the asset classes if and when justified. IF I had to pick just one fund, something like that would be my choice and so makes a good performance benchmark if I were to do otherwise. But if I were to use a benchmark like active managers to convince others of my performance, I would pick one I can beat.
Assuming your goal is to measure your own performance for your sake rather than use it to trumpet one's might, that should be of concern to you. But I am not sure how much thought you have given it as to what would be a good benchmark since you keep flipping rationale between averages, yields, portfolio x-ray, etc. If your goal is just to look good on a forum and derive pleasure from it, then it doesn't really matter whether the benchmark is a good one or not just as it isn't for an active manager that needs to look good in the competitive market.
Playing around the edges is a self-delusional tool. Have talked about this in earlier conversation with @davidrmoran. Use my play money portfolio for that purpose but have no illusions that it makes any meaningful difference to overall performance unless it is significant enough to make a meaningful loss if one were wrong about it. That is just math.
Hence, either one is just "playing" to look/feel good or one has committed enough to the idea that one is risking overall performance. In the latter case, one has to worry about the rationale for that commitment.
Your linking to strategies such as Ron Rowland for this purpose is misleading as I have said which is my main concern than what you do with your own portfolio. At some point in the past, you said you use his top few categories to adjust your allocation. Then you said recently that you used his bottom category as a contrarian indicator. These kinds of things work until they don't.
The problem is that you would not likely be the one to be writing about how they didn't work and your portfolio suffered when they don't in your frequent self-promotional posts. The latter is fine with me, not my place to say how you should derive satisfaction for yourself but pointing out that it is misleading others with selective bias. If you were to also post on how an idea didn't work when it didn't work, it would be useful and meaningful.
As to using just one fund, like I said, it is to set a contrast to using 50+ funds. I wouldn't do either for many practical reasons not just performance but if I had to pick between them I would pick the single fund any time than 50+.
I suspect the optimal would fall somewhere around 10-12 funds for most circumstances with some variance for sector bets or brokerage reasons.