This has been tossed around & debated before. But it’s Sunday and the board is a bit slow. We all learn / evolve as investors. In addition, aging may affect our approach. My approach today is different than 5, 10, 20 years ago. Yours probably is too. About a year ago I simplified things by moving to a 10 fund equally weighted portfolio (with regular rebalancing). I expect it to be diversified enough to experience down years no greater than 7-10% or bear market losses no greater than 20%. It hasn’t yet been tested. I add / reduce risk as desired by swapping out funds. When using individual stocks, 3 combined typically count as one 10% weighting. Right now I’m underweight equities at 37% of portfolio. A more normal weighting would be 40-45%.
- 10% Cash / cash alts
- 10% Balanced (domestic)
- 10% Balanced (global)
- 10% Long-short (fund A)
- 10% Long-short (fund B)
-10% Global infrastructure
- 10% Arbitrage income
- 10% Investment grade bond (5+ year duration)
- 10% Investment grade bond (1-3 year duration)
- 10% Risk premia (PRPFX)
That comes to 10 positions. I can add / reduce risk by exiting one position and substituting a more aggressive or conservative one. The advantage of 10 as I see it is simplicity. I’ve considered cutting back to 8 or even 5. If 8 positions, each would count 12.5%. If 5, each would equal 20%.
PS - Feel free to criticize this. It won’t deter me, but might be enlightening or even amusing. Has anyone tried something similar?
Comments
I don't want to add any more positions. Including "cash," I'm already at 11. Market right now is overbought, so I'm growing cash.
I want my funds to give me diversification. More and more, dividends matter to me. I want at least a 3% yield. Some of my stuff offers quite a bit higher yield. My single stocks (there are 4) give me sector exposure:
1) Regional bank. 5.4% of total.
2) Telecom, media. 1.59% of total.
3) oil/gas midstream. 5.49% of total.
4) oil/gas pipe manufacturer. 1.06% of total.
...So, the single stocks are at about 13% of total.
"K.I.S.S." it. After transferring out of BRUFX, we put my wife's IRA $$$ into a conservative allocation fund: WBALX.
In my own IRA, there are 4 funds. Two are junk bonds. I do keep a sharp eye on how they behave, but they both are the most un-volatile holdings I own right now.
There is a tiny amount in the Fallen Angels ETF. FALN.
Cash 4
Domestic stocks 47
Foreign stocks 6
Bonds 40
"other" 3
I’m guessing that the answer might depend on how you generate/acquire money for current annual spending, and how you choose to mitigate risk among those choices.
I'm being facetious. That just happens to be where I'm at. As you know it is totally up to the individuals comfort level. I try to follow a rule though that says less than 5%, why bother... which I regularly break. But that's just me.
Some of your categories are easy to understand. Others are not so well defined (and Lipper and M* can differ as well). I took my best shot and picked some suitable (or not so suitable) representatives:
Long/Short: Hull Tactical US HTUS and AQR Long/Short QLENX.
Arbitrage Income: JPMorgan Equity Premium Income JEPAX.
M* calls this "derivative income". Lipper call it "options arbitrage". I don't know whether covered calls were what you had in mind with arbitrage income. Perhaps you were thinking of merger arbitrage, e.g. MERFX. These are "event driven" funds according to both Lipper and M*.
The easy stuff (index funds where possible):
Cash: Blackrock Ultra Short ICSH - Portfolio Visualizer doesn't like to optimize with true cash
Balanced (domestic): Vanguard Balanced Index VBIAX
Balanced (global) : Vanguard Lifestrategy Moderate Growth VSMGX - a fund of index funds, 60/40 domestic/foreign, overlayed on a traditional 60/40 stock/bond allocation
Global Infrastructure: Lazard Global Listed Infrastructure GLIFX
IG Bond (5+ yr): Vanguard Total Bond Index VBTLX
IG Bond (1-3 yr): Vanguard Short-Term Bond Index VBIRX
Risk Premia: Permanent Portfolio PRPFX
I optimized by asking for the greatest annual return that would still allow max drawdown to be kept under 10%.
Anything with bonds drops out. Arbitrage income (at least as I've used it) and infrastructure also drop out. Cash serves as ballast - the lower the desired volatility, the greater the cash allocation. When shooting for a 10% drawdown, cash also drops out - that ballast isn't needed.
In short, with these ten funds as your potential universe, only four funds are needed - the two long/short funds, PRPFX, and cash if ballast is required.
With such a simple portfolio, it's not hard to read the efficient frontier graph in the Portfolio Visualizer output.
- Until you get up to an 11% std dev (i.e. if you want less volatile portfolios), little HTUS is used. Allow more volatility, and the amount of HTUS shoots up quickly.
- The optimal portfolio starts with 100% cash for 0% volatility, and cash decreases along a straight line until the allowed volatility reaches 11%. At that point, the cash allocation is down to zero.
- The other two funds, QLENX and PRPFX together make up the remainder of the portfolio.
Here's the PV link. You can play with it yourself to swap out funds, adjust objectives, etc.If one wants to maximize Sharpe ratio, one gets a lower return than optimizing for 10% max drawdown. But that comes with much reduced volatility. To achieve this low volatility result, one has to use cash for nearly half the portfolio.
The 4 fund portfolio @msf outlines seems workable. With the current 10% cash and 10% short-term bond positions, I’m already close to the hypothetical 25% cash his model suggests. I oversimplified the long bond position. It’s actually a corporate BBB grade CEF with 25% leverage. A bit of a “hot dog” that could possibly help offset a severe decline in equities (if accompanied by falling rates).
My commitment to the 2 bond funds is the weakest of the lot. If the CEF does well near term I’d move that into a more stable OEF or ETF of similar duration. I’d sell all / part of the short-term bond fund to add to equities in the event of a market sell-off. Don’t like to speculate on return, but the inherent risks in the portfolio wouldn’t be worth taking if it couldn’t best nominal cash returns by an average of 2 or 3 percentage points longer term.
Thanks for the P/V link. I haven’t played with it yet but surely will.
Wonder of wonders. I am still processing this revelation!
Additionally, an indexer will likely hold less than ten positions, anyway; maybe as few as one.
Not to praise or promote James Stack’s InvesTech Research. Folks can do their own research as to its worth. But as a current subscriber I decided to do a count of his fund recommendations. I found that his currently posted ”Model Portfolio” includes a cash position plus 9 funds. Unlike my 10/10 portfolio, Stack’s picks are not equally weighted. An interesting coincidence nonetheless.
HSA - its at one place and use ETF's (I use an IShares allocation etf)
Roths - these are 7 funds in total (my FIL opened my wifes first IRA a long time ago and there are 2 funds (VWUSX and OAKIX) that i've just left in there. the rest are vanguard index, avantis (were DFA at where I had access to them)
401k - 3 funds (2 are a mutual fund version of 2 of the IRA funds)
I have a traditional IRA as well that largely consists of 2 PIMCO stocksplus funds.
I used the above until 2018 and changed. I realized I only have 2-3 great ideas (funds) at any moment.
It doesn't matter if you have 2 or 10 accounts, 100 funds to select from, or 10K+. You are in control of how many funds you own.
But I like your Prime thing and why I have used 2,3 in the last several years and 5 for many years.
NOT adding to the IRA, because the "contributions" would be non-deductible. So, I'm focused on the taxable side, and there is much more freedom of choice over there, too
Are you suggesting that your 'taxable' Schwab account(s) have more investment choices vs a T or Roth IRA account?
Thank you.
Take 2.
1 if you're a purest.
2 if you're a traditionalist.
3 if you're an experimentalist.
5 if you're a conformist.
More than 5 funds, you should have your keys taken away.
c
There are somewhat esoteric investments that one can legally make in IRAs but are difficult to do in brokerage IRAs. Such as direct investing (not via an ETF) in a cryptocurrency. Some brokerages like Fidelity allow one to invest directly in cryptocurrency, but only in taxable accounts. FWIW, Schwab doesn't allow these investments even in taxable accounts. Of course Vanguard doesn't even allow investing via crypto ETFs.
But it doesn't sound like it was this kind of IRA investment limitation you had in mind. Is there some type of investment you'd like to have in an IRA today (not when you began investing) that you can't get?
Regarding contribution limitations: If you can't contribute directly to a Roth, you can do a partial Roth conversion. So long as your tax bracket now is not higher than it will be later, a conversion is equivalent to a contribution.
Thumbnail example:
$100 in T-IRA, $22 in taxable account, 22% bracket.
After-tax value: $78 in T-IRA + $22 in taxable account = $100 ($78 of which is in IRA)
With Roth conversion:
$100 in Roth, $0 in taxable account ($22 used to pay conversion tax).
After-tax value = $100 in IRA.
This effectively moves $22 from a taxable account (where earnings will be taxed yearly) to an IRA where growth is tax-free.
Even better is that while compensation is needed to contribute to an IRA (deductible or not), no compensation is needed to "contribute" to an IRA via Roth conversion.
I'll expand msf's comments to a spousal Roth IRA, if one meets the requirements; in that @Crash may have other options for available monies.
More information, as a starting point is HERE.
Pardon the thread drift.
Hello, guys. For several years after retirement, wifey's salary served to fund my T-IRA. We just chose to throw the $$$ into my IRA instead of hers. Mine is much more substantial. Then some life changes made funding ANY T-IRA impractical. Her IRA lives, and so does my own. Under current circumstances, converting to a Roth just seems like a needless complication. We grow the taxable side now, and I'm in the habit of taking X amount from my T-IRA in January each year. We owe no 1040 tax. When I get to age 72 in a couple of years, I'll continue with the same habit, taking out my RMD in January and I'll just redeploy the money, investing it on the taxable side. I expect that the RMDs will have to be bigger than the amount I'm currently taking each year in January, but I'm confident we'll still owe no 1040 tax.
When all our stuff (except her small T-IRA) was with TRP, we were limited to just their own funds. After switching everything to Schwab, the field is wide open. But I'm rather pleased, still, with my TRP selections, plus the Weitz fund that her T-IRA is in. So, no changes are expected or needed, until junk bonds turn South. Then that money will need a new home. I'm always looking for new prospects, and have some in mind, as needed. Our tax bracket will not be going UP, even after RMDs kick-in at 72. (Two more years.)
Your responses are much appreciated. The people on this MFO discussion board actually care. I do thank you.
I've spoken with enough people who prefer simplicity, so take the following nudge toward conversions as just a suggestion, perhaps not worth the effort as you say.
I expect that the RMDs will have to be bigger than the amount I'm currently taking each year in January, but I'm confident we'll still owe no 1040 tax.
Roth conversions now can reduce the size of those RMDs and keep more of the money tax-sheltered for longer. This may not matter to you since you don't expect to owe taxes either way.
But if you're thinking of leaving a legacy, it could matter to your heirs. They'll owe taxes on an inherited T-IRA as they withdraw money. They won't owe taxes on inherited taxable accounts (they get a step-up in basis), but all future earnings will be taxable to them. They won't owe taxes on inherited Roths and the money can continue growing tax free for up to ten years. Even longer for a spouse who inherits.
Each person's situation is different. The amount of money you might convert could be small enough that it's just not worth the hassle. In my case, some of my beneficiaries are nonresident aliens living where there is no tax treaty. They will be subject to 30% withholding. So I'm doing conversions over many years to reduce my T-IRAs.
Finally, the good news - you get another year (until age 73) before RMDs kick in.