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How many funds is the right number?

edited July 21 in Other Investing
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?
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Comments

  • edited July 21
    “To each his own, it’s all unknown.” Bob Dylan. 1970. Hank. You are an experienced investor and your allocation is what’s right for you at this stage of your life. I advise my affluent youngest daughter with her allocation and I always have to remind myself that asset allocation is so different for a 33 year old compared to a 75 year old. she has four funds and so do I but the mix is wildly different. Age matters.
  • edited July 21
    I really simplified this year from many to three plus some T-bills and cash. I'm totally in as an indexer in equities holding VOO and VONG for a little kick. I started comparing every new idea I had to VOO and few beat it so I said what the heck. Bonds I'm all in on PIMIX. Had its heyday and not always the best the last few years but good enough for my bond side and it's doing much better recently. ~7%+ last 12months. Asset allocation is more important to me than jumping around looking for the best fund.
  • I turn 70 this month, but have heirs in mind. I suppose I'm more aggressive than others would be at my age. Wife is almost 20 years younger. One grown son.

    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
  • How many funds is the right number?

    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 have the answer @hank. I just checked my Roth, 401k and T IRA accounts, which I try to manage as one portfolio, and the answer to your question is 15. 16 if you add cash that I group as treasuries, CDs and MM. No more, no less should be used!

    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.
  • msf
    edited July 21
    I put ten funds through Portfolio Visualizer to see how it would optimize such a portfolio.

    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.
  • edited July 21
    Excellent @msf. Thank you. And @MikeM - “I approve of this message.”:)

    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.
  • @MSF. Thanks for sharing your research. Great work.
  • edited July 22
    MikeM said:

    I have the answer @hank. I just checked my Roth, 401k and T IRA accounts, which I try to manage as one portfolio, and the answer to your question is 15. 16 if you add cash that I group as treasuries, CDs and MM. No more, no less should be used! / I'm being facetious. That just happens to be where I'm at. As you know it is totally up to the individual’s comfort level …

    @MikeM is right where I was up until about 12-15 months ago. Try as I might, I couldn’t seem to bring the total number of holdings (TOD, Roth & Traditional IRAs) below the 15-17 number. Each held a unique “spot” inside a diversified portfolio. So when a “spark inside my brain” led me to the 10/10 idea, it seemed like a giant leap forward. Now, however, it has been suggested that only 4 holdings might achieve similar benefits!
    Wonder of wonders. I am still processing this revelation!
  • edited July 22
    Obviously, there's no 'right' answer to this question, and probably only makes sense if you are a B&H investor.

    Additionally, an indexer will likely hold less than ten positions, anyway; maybe as few as one.
  • edited July 22
    Thanks @Charles. ISTM that at one time (maybe late 90s) Jack Bogle recommended that investors wanting just 1 fund use VTSAX (total stock market index fund) rather than an S&P 500 fund.

    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.
  • Rick Ferri says four funds,,, Bogleheads say three. As the dude would say” it’s just like your opinion man. “. And opinions are like something else that everyone has.
  • edited July 22
    i've got a bit of hodgepodge as I only have so many options in various accounts.

    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.
  • edited July 22
    I based my system loosely on 3 Buffet’s rules but adapted it to funds: Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1 and Rule 3: Diversification is a protection against ignorance. I added a fourth rule: momentum. I also liked Bogles' ideas of owning just 2-3 funds but changed it to 5 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.
  • The answer - 11 (prime number).
  • habsui said:

    The answer - 11 (prime number).

    Why stop at 11, 13, 17, and 19 are also prime numbers.
    But I like your Prime thing and why I have used 2,3 in the last several years and 5 for many years.

  • 3 or 4 or 5 just feels itchy and too concentrated for my own sensibilities. And my own Big Picture these days includes 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. I've been very patient with my regional bank stock through the rate-hiking cycle; now that one is producing. I let my winners run. I also have a couple of holdings which are like afterthoughts; not much money invested in them. If they get me more money, I'll be glad. DIVIDENDS matter more than they used to, too. But still being reinvested.
  • edited July 24
    @Crash You stated:
    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.
  • edited July 23
    habsui said:

    The answer - 11 (prime number).

    +1 / And I astutely avoid #13. (Have actually unloaded a fund or two before just to get the number below 13.) :)

  • catch22 said:

    @Crash You stated:
    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.

    That has been my operating assumption. Not just OEFs but CEFs and now ETFs are possible. ETFs have been around for quite a while, but they were not always there. Certainly not when I began investing.
  • edited July 24
    OK.

    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
  • I like @Charles answer
  • Charles, +1
  • Charles said:

    OK.

    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

    Where's 4 ?
  • msf
    edited July 24
    Crash said:

    catch22 said:

    @Crash You stated:
    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.

    That has been my operating assumption. Not just OEFs but CEFs and now ETFs are possible. ETFs have been around for quite a while, but they were not always there. Certainly not when I began investing.
    This has left me confused in a couple of ways.

    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.
  • edited July 24
    @Crash and @msf
    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.
  • @msf. @catch22

    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.
  • It sounds like you're in good shape - drawing modest spending cash from T-IRAs annually and owning no or little tax on those draws. From that perspective, conversions may indeed be just an added complication.

    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.
  • :). +1.
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