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"The following is excerpted from William Bernstein’s recently published book, Rational Expectations: Asset Allocation for Investing Adults (Investing for Adults), which is available from the link accompanying this article...."
@tigerman3: Here's Dr. Bill's haystack portfolio. Note his 6.90% return trailed the S&P 500 index buy 1.58% over the 10 yr. time frame. Further, he lost his bet with Bob Young in an active passive contest. It only proves the world can use good doctors. Regards, Ted http://www.marketwatch.com/lazyportfolio/portfolio/bernsteins-smart-money
@Bitzer: You bring up an very interesting question, you don't have to be a MD. or for that matter a PHD. to know that over time stocks outperform bond. Therefore an allocation of 40% bonds is way overdone. How about his 25% No Brainer ? Regards, Ted http://www.marketwatch.com/lazyportfolio/portfolio/bernsteins-no-brainer
Yes, stocks have outperformed bonds in the past, but it's anyone's guess as to whether that will continue to be the case.
My point is that a 100% or even a 75% stocks portfolio isn't for everyone and Dr Bernstein's 60% stocks portfolio shouldn't be judged against a 100% stocks (S&P 500) portfolio.
"My point is that a 100% or even a 75% stocks portfolio isn't for everyone and Dr Bernstein's 60% stocks portfolio shouldn't be judged against a 100% stocks (S&P 500) portfolio."
Exactly. The so called "financial experts" at Marketwatch do not comprehend this. One should also know that this is the same outlet that was reporting the price of gold in barrels. We had a good laugh on that one.
Comparing is more of a ego trip than anything else.
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
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.
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.
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.
Apparently also in this new book, Rational Expectations, he presents his 'forecast' for future performance by asset class. Would be nice to see that. Something along the lines of what GMO does, although I don't know if he goes out 7 years like GMO does, or has chosen some other time frame.
Also, he recently came out with a booklet called something like "If You Can", where he presents the three fund portfolio [Vanguard Total Stock Market; Vanguard Total International Stock Index, and Vanguard Total Bond Market Index fund] as a simple and effective way to invest for retirement, especially if you are new to the workforce.
Comments
Regards,
Ted
http://www.marketwatch.com/lazyportfolio/portfolio/bernsteins-smart-money
Bob Young's Website;
http://customer.wcta.net/roberty/INTRO.html
The Final Result Of The Pony Express Contest:
http://customer.wcta.net/roberty/fr-set-pe.html
Regards,
Ted
http://www.marketwatch.com/lazyportfolio/portfolio/bernsteins-no-brainer
Yes, stocks have outperformed bonds in the past, but it's anyone's guess as to whether that will continue to be the case.
My point is that a 100% or even a 75% stocks portfolio isn't for everyone and Dr Bernstein's 60% stocks portfolio shouldn't be judged against a 100% stocks (S&P 500) portfolio.
Exactly. The so called "financial experts" at Marketwatch do not comprehend this. One should also know that this is the same outlet that was reporting the price of gold in barrels. We had a good laugh on that one.
Comparing is more of a ego trip than anything else.
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
I seem to remember he builds in value somewhere in the more complex portfolios, but I could be wrong.
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.
Apparently also in this new book, Rational Expectations, he presents his 'forecast' for future performance by asset class. Would be nice to see that. Something along the lines of what GMO does, although I don't know if he goes out 7 years like GMO does, or has chosen some other time frame.
Also, he recently came out with a booklet called something like "If You Can", where he presents the three fund portfolio [Vanguard Total Stock Market; Vanguard Total International Stock Index, and Vanguard Total Bond Market Index fund] as a simple and effective way to invest for retirement, especially if you are new to the workforce.