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I'm glad Cathy that your are making progress but your comment about diversification shows that you still need some more time to sink in these concepts and fine tune the expectations. Also, diverse opinions on this board is probably creating confusion.
In my humble opinion, your expectations is not in sync with the reality. Again, IMHO, the advise given to your earlier in the FA board regarding for watching the daily movements of funds is not helping.
I will link to a PDF document. I am sure I have linked to an earlier version of this document when your first came about and ask for advice. I hope you did then but the document is updated every year and the data includes many bear markets, declines and crashes, high inflation, etc. including this past 2008, 2009 market calamity.
I strongly suggest you print and read it with some calm time where you will not get interruption. It does clearly show how diversification over time benefit portfolios even though when you look at daily movements it seems like there is no signficiant benefit.
Also note that if you examine the individual asset classes alone the risk of the portfolio is higher but at the portfolio level the risk is muted but it is not eliminated.
The best way to get exposure to various asset classes are through low cost index funds. But, most people cannot deal with pure individual asset class volatility of index funds so I do recommend balanced/asset allocation funds which prevents short term panics and provide psychological relief.
Now, if you would like to see the year to year performance of this portfolio (at different equity/bond levels)
You can look at various equity/bond mixes and find out which one meets your needs. The data extends to 1970 but you can calculate recent performance yourself easily. It also does have an additional 1% fee taken from each year. This data is longer than most other data presented here.
Also keep in mind, the bond portion of this portfolio is the types of bonds that are NOT favored in this environment. Really, government bonds are rarely favored in any environment if you look back except for market panics/declines.
You have the choice of trying to get higher return on bonds by using riskier bonds but you will not get desired diversification benefits to the same extend and occasionally see all of your assets including your bonds are declining in the portfolio yet bonds will probably decline at a slower rate.
There is one thing that is not included in those charts. It is the risk of active management. When you take active management risk, you are never sure if the manager will be able to deliver the past returns again. It is a bet that adds another layer of uncertainty.
Thank you for your follow-up and links, Investor. I have printed and saved both. In Nov, 2009, I printed out Merriman's "the Perfect Portfolio" (probably your link also) with a note to myself "READ SOON!". Put it on top of my "Read Next Free Chance" pile - and it's still there. I don't know what happens to the time... lots of "to do's" involving my Mom, busiest spring gardening chores, etc., but 5 months since I printed that?! I find as I get older that time flies by faster than those old movies where pages of calendar flew off to show time change.
I'm still not sure what you mean about my expectations not being in sync with reality, but am grateful for all the time you've already spent on these responses so don't want to ask for any further clarification. But if you do find some spare time in the next few weeks where you could give me some specifics on exactly which funds I've mentioned are inappropriate for my overall portfolio goals for my Mom and/or me, I would certainly welcome it.
Thanks, Hank, for your input and examples of funds. I like RPSIX - have added that to my "check out further" test Portfolio.
I may have confused everyone with my comments. I am responsible for only a few of my Mom's investment Portfolios - but also all investments for my husband and me. My Mom is almost 90, has lots of other Trusts that provide income which I have no control over, so my main interest is in keeping enough cash and low volatility investments I do have control over so I can ensure at least 3 years of income for her even under the worst market conditions and/or major chance in her health. Since a large proportion of Mom's other trusts have very high equity percentage, I'm trying to balance that out by going very conservative on the ones I can control.
My husband and I hopefully have a much longer time horizon before we may need to withdraw anything from our investments (10-20 years, and likely not even then since the legacy from my Mom's trusts will likely be turned over).
But what I am trying to accomplish in BOTH cases is to create portfolios which are balanced towards conservative. So that would include a small percentage of higher risk equities and international that I am expecting higher downsides in bad markets. I just want enough investments that can make minimal amounts even in bad markets to at least have the overall portfolios end with minimal losses during a long down period.
Since we don't need to have our investments do anything more than try and keep up with inflation, I don't see any reason to create higher risk portfolios. If we did need stronger growth, then I definitely would go with your (and Investor's) higher equity to bond proportion expecting that to gain more over the long-term.
Thank you for starting an interesting thread that generated 30+ thoughtful responses from so many people. We need more threads like that IMHO.
While it might seem respondents are "giving", in truth we get more than we give as the process causes us to evaluate/challenge our own assumptions. I'll reread all the comments in this thread to make sure I haven't overlooked any valuable insights.
Great discussion all around. I wish I had more time to post a lengthier response.
I just wanted to toss a few risk averse funds into the mix - AARFX and GABCX
AARFX (Or QASIX) Quaker Akros Absolute Return is a conservative long short fund. It is a fund that has returned about 2.19% annualized over the past five years. It lost about 2.89% in 2008 and gained 13.9% in 2009. So it is not going to hit home runs and its not going to promise positive returns in down markets. But it tries to chug along and get better upside capture than downside capture. It has a bunch of latitude but mostly invests in US stocks (long and short). It can be net long or net short, but is generally net long. They have a no load version available with some brokers (I think institutional shares at TD Ameritrade, load at most other places).
GABCX (or GADVX) Gabelli ABC - This is a unique total return fund. It has a very good manager in Mario Gabelli. It has a few different strategies, holds a bunch of cash equivalents, merger/arbitrage, and deep value. It can also invest in bonds and foreign investments.
Both are options that can potentially do well in rising rate environments b/c they don't have too much bond exposure. They are also both very focused on capital preservation.
Thanks for your input, Ooby. It will be interesting to see how these do in upcoming economy. But I try to stay away from load funds and I use WEFIX (Weitz Short-Intermediate) as my lowest volatility fund that I've never worried about. Also don't count on it for big returns, but it has 5.65% 3 year annualized and gained 2.29% in 2008 - also has lowish tax cost ratio. I would hope that this will still perform ok even in interest rate/inflation increases... but I'll find out soon enough.
Cathy, I think it is easier to see the benefits of diversification when looking at rolling returns - say 3 month, ytd, 1 yr, 3 yr, 5yr. I believe you are already doing this, but I think it is easier to see than when looking at daily NAV's being all green or all red.
You're absolutely right, Ooby. I would never make investment decisions on such short-term returns. By I learned quite a bit watching daily returns as to how each fund reacts during daily ups or downs as there is generally a consistency which helps me understand volatility a little better (along with the 3-10 year returns, standard deviations, etc. that I also check.
Kathy, Personally I have spent much time and research in my quest for a perfect portfolio. Obviously one does not exist however one can select a well diversified portfolio with low cost passive strategies. My suggest is one third in Wellington or Wellesley, one third in Faber's GTAA and one third in Harry Browne Permanent Portfolio (equal parts SHY, GLD, TLT and VTI or SPY). Heather
The question that investors need to ask themselves is do you want to target relative or absolute returns? If one is happy with relative returns and style box investing, perhaps you will be better off with a passive approach. I am no longer content with relative return victories. If the market is down 40% again at some point (a real possibility) I am not going to be satisfied that I am down 30%. Passive strategies are great in up markets because they produce positive returns. When I believe the wind is at our back and stocks and bonds are cheap again I will be happy to re-adopt a passive approach. All evidence is that the wind in going to be in our face in the years ahead (at least on a secular basis), not at our back. Further, style box, or relative return investing does not account for the notion that you could be entirely removed from an asset class, or invested in another. For example. let's say a large cap growth fund was down 5% when the market was down 2%. But at the same time, high yield bonds produced a return of +6%. Were you better off becuase you only lost 2% vs. 5%, or worse off because you missed out on +6%. A passive investor would argue that this is proof you can't beat the market. I would argue that you missed an opportunity.
One more thing I would like to point out is the definition of risk. Do you define risk in terms of volitility or loss of capital. I believe most individuals define risk as a loss of capital. They should also define it as a loss of purchasing power, but that is not easily comprehended by the typical investor. Let's say one invested with a concentrated stock manager that modestly trailed the index after 10 years, but didn't lose money in any year while the market had some significant down years. Without knowing the future, would you be more comfortable knowing that your manager was managing your downside even if it cost you modest returns in the end? It's like buying a put option on your index portfolio. Is it worth the cost of insurance to know your downside is limited? I would think most investors would say that the risk protection and peace of mind is worth the cost of a modest reduction in returns. And don't ever forget what happened in Japan (market down 75% after 20 years) or the US for 20 years after 1929. It can happen again and I am pretty sure Gene Fama will not be writing us a check to cover our losses if it does.
Sorry for my ramblings and hope they were somewhat clear. There is certainly more than one way to succeed as an investor. One's decisions become more significant each year that passes. The number gets bigger and there is one less year to accumulate assets. I think there are going to be some excellent opportunites with great risk/reward trade-offs in the years ahead and I want to protect my capital to take advantage if and when they do arise. The current market and economic imbalances are great. In economics, imbalances must be corrected. It can be gradual or abrupt (like 2008) but they must correct. I am not predicting a market crash, but the risks are elevated due to these imbalances. 60/40 portfolios will not hold up well in that environment (and imagine if it comes along with rising interest rates next time!). I am confident that Harry Browne's Permanent Portfolio will hold up relatively well however the following is what I will be investing in, although there will soon be a reduction to some of the Pimco funds due to their use of derivatives and better options.
Core Fixed Income 12%- FPA New Income (FPNIX) 6%- Franklin Adjustable Rate US Govt. (FAGZX)
Flexible Core 6%- Caldwell & Orkin 9%- Hussman Strategic Growth (HSGFX) 6.5%- FPA Crescent (FPACX) 6.0%-PIMCO Global Multi asset (PGAIX) 6.5%- Leuthold Core (LCORX) 5.0%- Pimco All Asset All authority (PAUIX)
Hedged Equity 6.0%- Gateway (GTEYX)
Market Neutral 5.0%-AQR Diversified Arbitrage (ADAIX) 5.0%- Driehaus Active Income 5.0%- AQR Managed Futures (AQMIX) 5.0%- Pimco Unconstrained (PFIUX)
Long Term Themes 2.0%- SSgA Emerging Markets. Recently reduced exposure to emerging markets
Opportunistic 4.0%- S&P 500 Dividend Aristocrats ETF 5.0%- Osterweis Strategic Income (OSTIX) 6.0%- Doubleline Total Return (DBLTX)
Comments
In my humble opinion, your expectations is not in sync with the reality. Again, IMHO, the advise given to your earlier in the FA board regarding for watching the daily movements of funds is not helping.
I will link to a PDF document. I am sure I have linked to an earlier version of this document when your first came about and ask for advice. I hope you did then but the document is updated every year and the data includes many bear markets, declines and crashes, high inflation, etc. including this past 2008, 2009 market calamity.
I strongly suggest you print and read it with some calm time where you will not get interruption. It does clearly show how diversification over time benefit portfolios even though when you look at daily movements it seems like there is no signficiant benefit.
http://www.merriman.com/PDFs/UltimateBuyAndHold.pdf
Also note that if you examine the individual asset classes alone the risk of the portfolio is higher but at the portfolio level the risk is muted but it is not eliminated.
The best way to get exposure to various asset classes are through low cost index funds. But, most people cannot deal with pure individual asset class volatility of index funds so I do recommend balanced/asset allocation funds which prevents short term panics and provide psychological relief.
Now, if you would like to see the year to year performance of this portfolio (at different equity/bond levels)
http://www.merriman.com/wp-content/uploads/2011/01/FineTuning2011.pdf
You can look at various equity/bond mixes and find out which one meets your needs. The data extends to 1970 but you can calculate recent performance yourself easily. It also does have an additional 1% fee taken from each year. This data is longer than most other data presented here.
Also keep in mind, the bond portion of this portfolio is the types of bonds that are NOT favored in this environment. Really, government bonds are rarely favored in any environment if you look back except for market panics/declines.
You have the choice of trying to get higher return on bonds by using riskier bonds but you will not get desired diversification benefits to the same extend and occasionally see all of your assets including your bonds are declining in the portfolio yet bonds will probably decline at a slower rate.
There is one thing that is not included in those charts. It is the risk of active management. When you take active management risk, you are never sure if the manager will be able to deliver the past returns again. It is a bet that adds another layer of uncertainty.
Anyway, good luck in your investing journey.
I'm still not sure what you mean about my expectations not being in sync with reality, but am grateful for all the time you've already spent on these responses so don't want to ask for any further clarification. But if you do find some spare time in the next few weeks where you could give me some specifics on exactly which funds I've mentioned are inappropriate for my overall portfolio goals for my Mom and/or me, I would certainly welcome it.
Thanks again, Investor!
Cathy
I may have confused everyone with my comments. I am responsible for only a few of my Mom's investment Portfolios - but also all investments for my husband and me. My Mom is almost 90, has lots of other Trusts that provide income which I have no control over, so my main interest is in keeping enough cash and low volatility investments I do have control over so I can ensure at least 3 years of income for her even under the worst market conditions and/or major chance in her health. Since a large proportion of Mom's other trusts have very high equity percentage, I'm trying to balance that out by going very conservative on the ones I can control.
My husband and I hopefully have a much longer time horizon before we may need to withdraw anything from our investments (10-20 years, and likely not even then since the legacy from my Mom's trusts will likely be turned over).
But what I am trying to accomplish in BOTH cases is to create portfolios which are balanced towards conservative. So that would include a small percentage of higher risk equities and international that I am expecting higher downsides in bad markets. I just want enough investments that can make minimal amounts even in bad markets to at least have the overall portfolios end with minimal losses during a long down period.
Since we don't need to have our investments do anything more than try and keep up with inflation, I don't see any reason to create higher risk portfolios. If we did need stronger growth, then I definitely would go with your (and Investor's) higher equity to bond proportion expecting that to gain more over the long-term.
Cathy
Thank you for starting an interesting thread that generated 30+ thoughtful responses from so many people. We need more threads like that IMHO.
While it might seem respondents are "giving", in truth we get more than we give as the process causes us to evaluate/challenge our own assumptions. I'll reread all the comments in this thread to make sure I haven't overlooked any valuable insights.
Thanks again, hank
I just wanted to toss a few risk averse funds into the mix - AARFX and GABCX
AARFX (Or QASIX) Quaker Akros Absolute Return is a conservative long short fund. It is a fund that has returned about 2.19% annualized over the past five years. It lost about 2.89% in 2008 and gained 13.9% in 2009. So it is not going to hit home runs and its not going to promise positive returns in down markets. But it tries to chug along and get better upside capture than downside capture. It has a bunch of latitude but mostly invests in US stocks (long and short). It can be net long or net short, but is generally net long. They have a no load version available with some brokers (I think institutional shares at TD Ameritrade, load at most other places).
GABCX (or GADVX) Gabelli ABC - This is a unique total return fund. It has a very good manager in Mario Gabelli. It has a few different strategies, holds a bunch of cash equivalents, merger/arbitrage, and deep value. It can also invest in bonds and foreign investments.
Both are options that can potentially do well in rising rate environments b/c they don't have too much bond exposure. They are also both very focused on capital preservation.
I think it is easier to see the benefits of diversification when looking at rolling returns - say 3 month, ytd, 1 yr, 3 yr, 5yr. I believe you are already doing this, but I think it is easier to see than when looking at daily NAV's being all green or all red.
All the best,
BY
Personally I have spent much time and research in my quest for a perfect portfolio. Obviously one does not exist however one can select a well diversified portfolio with low cost passive strategies. My suggest is one third in Wellington or Wellesley, one third in Faber's GTAA and one third in Harry Browne Permanent Portfolio (equal parts SHY, GLD, TLT and VTI or SPY). Heather
One more thing I would like to point out is the definition of risk. Do you define risk in terms of volitility or loss of capital. I believe most individuals define risk as a loss of capital. They should also define it as a loss of purchasing power, but that is not easily comprehended by the typical investor. Let's say one invested with a concentrated stock manager that modestly trailed the index after 10 years, but didn't lose money in any year while the market had some significant down years. Without knowing the future, would you be more comfortable knowing that your manager was managing your downside even if it cost you modest returns in the end? It's like buying a put option on your index portfolio. Is it worth the cost of insurance to know your downside is limited? I would think most investors would say that the risk protection and peace of mind is worth the cost of a modest reduction in returns. And don't ever forget what happened in Japan (market down 75% after 20 years) or the US for 20 years after 1929. It can happen again and I am pretty sure Gene Fama will not be writing us a check to cover our losses if it does.
Sorry for my ramblings and hope they were somewhat clear. There is certainly more than one way to succeed as an investor. One's decisions become more significant each year that passes. The number gets bigger and there is one less year to accumulate assets. I think there are going to be some excellent opportunites with great risk/reward trade-offs in the years ahead and I want to protect my capital to take advantage if and when they do arise. The current market and economic imbalances are great. In economics, imbalances must be corrected. It can be gradual or abrupt (like 2008) but they must correct. I am not predicting a market crash, but the risks are elevated due to these imbalances. 60/40 portfolios will not hold up well in that environment (and imagine if it comes along with rising interest rates next time!). I am confident that Harry Browne's Permanent Portfolio will hold up relatively well however the following is what I will be investing in, although there will soon be a reduction to some of the Pimco funds due to their use of derivatives and better options.
Core Fixed Income
12%- FPA New Income (FPNIX)
6%- Franklin Adjustable Rate US Govt. (FAGZX)
Flexible Core
6%- Caldwell & Orkin
9%- Hussman Strategic Growth (HSGFX)
6.5%- FPA Crescent (FPACX)
6.0%-PIMCO Global Multi asset (PGAIX)
6.5%- Leuthold Core (LCORX)
5.0%- Pimco All Asset All authority (PAUIX)
Hedged Equity
6.0%- Gateway (GTEYX)
Market Neutral
5.0%-AQR Diversified Arbitrage (ADAIX)
5.0%- Driehaus Active Income
5.0%- AQR Managed Futures (AQMIX)
5.0%- Pimco Unconstrained (PFIUX)
Long Term Themes
2.0%- SSgA Emerging Markets. Recently reduced exposure to
emerging markets
Opportunistic
4.0%- S&P 500 Dividend Aristocrats ETF
5.0%- Osterweis Strategic Income (OSTIX)
6.0%- Doubleline Total Return (DBLTX)