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 will never understand the long term buy and hold mindset in the major market indexes. The 15 year returns referenced for the S&P and AGG didn't look right to me. So I checked the returns through yesterday (the article was through 12/31/13) and they were pretty much spot-on. I just don't see how anyone over the past 15 years could have accumulated much of a nest egg with annualized returns of 4.34% (S&P) and 5.36% (AGG) Even junk bonds (WHIYX) handily beat those anemic returns with 7.88% annualized. Then again, with healthcare ala Ted's fave PRHSX and you would have accumulated a nice nest egg at an annualized 13.34%.
You are mixing up a few things here, buy and hold vs index funds vs diversification. They are all independent dimensions.
Both Ted and you are relatively active managers of your portfolio willing and able to monitor, buy and sell as the climate dictates. Such investors can afford not to be buy and forget (by definition), use focused funds than just indexes when necessary and not necessarily be well diversified at any point in time.
The people you don't understand are people who aren't active managers of their portfolio and don't want to be. For such people, the above statistic in retrospect doesn't make any sense or difference. They have to pick a portfolio allocation and stick to it more or less. The only way to have such a portfolio is to be well diversified within their risk tolerance. It would be foolish for them to concentrate on what has worked over the last X years because no one can guarantee what will work over the next X years. If such a portfolio doesn't perform as well as somr asset classes in retrospect (and there will always be such asset classes), then that is the price of insurance for being a passive manager of their portfolio, not a negative in my opinion. The point is that they do quite well but not necessarily beat the optimal allocation in retrospect.
What you and I both will probably never understand are the people that spend an awful lot of time in fund picking to add to their collection than spend that same time more productively in asset allocation that makes a much larger contribution to their portfolio performance.
Reply to @cman: >>> What you and I both will probably never understand are the people that spend an awful lot of time in fund picking to add to their collection than spend that same time more productively in asset allocation that makes a much larger contribution to their portfolio performance<<<<
Amen to that. This will probably offend most here but it's like the ones that have 25 or 30 funds and more and they are forever tweaking that by taking a percent or two off here or adding a percent or two on there. Overdiversification to the max and then such meaningless tweaking. That said, I do agree we are all different folks with different stokes here so whatever suits your fancy. But I would wager that the ones here who have been most proficient at accumulating their nest eggs are the ones that diversify the least.
I currently use ballast within my portfolio. So if I want to overweight equities I simply buy an index fund (or a diversified equity fund) thus moving money from the cash area to the equity area. Likewise, I can do the same to overweight fixed income by buying a fixed income index fund or a diversified bond fund.
In the cash area my allocation is investment cash ten percent, demand cash ten percent of which ballast cash being half of my demand cash. The ballast cash is targeted to be moved anywhere within the portfolio as I might choose to do so.
I think cash is a better ballast than either bonds or stocks.
This has worked well for me in the past and I think investors that are active within their portfolios might consider the use of ballast cash as a means to fund special investments as market conditions warrant.
Within commish-free ML brokerage, I regularly swing b/w AOA and AOK (check holdings and you will understand). By regularly I mean irregularly, ad-hoc. I wonder very much how AOK is going to do this year.
Reply to @Desota: Hi Desota and thank you for your many contributions to the board.
This topic of "best number" of funds is often discussed. You, Ted, and others have made persuasive arguments for owning only a few. In a discussion last August you suggested that one fund was the best number - provided it was appropriate for the investor. http://www.mutualfundobserver.com/discussions-3/#/discussion/comment/26666
I'm sure you've mentioned it before, but don't recall which fund you've chosen for yourself. Could you kindly mention it here? (Sounds like you're in your early 60s and use a high yielding dividend-paying equity fund, reinvesting the dividends.)
Reply to @Desota: Thanks a lot - and happy retirement to you. (Using all caps for CAIBX and AMECX should allow others to link directly to one of the trackers embedded here.)
Once upon a time, there was a little girl named Goldilocks. She went for a walk in the forest. Pretty soon, she came upon a house. She knocked and, when no one answered, she walked right in.
At the table in the kitchen, there were three mutual fund portfolios. Goldilocks was interested. She examined the funds from Junkster-bears portfolio.
"This portfolio is too hot!" she exclaimed.
So, she tasted the portfolio from skeeter-bear.
"This portfolio is too cold," she said
So, she tasted the last bowl of porridge, err, portfolio.
"Ahhh, this porridge portfolio is just right," she said happily and she ate it all up.
Of course, the last portfolio bowl was that of MikeM-bear. 12 funds is just right.
Reply to @AndyJ: Cool. I have never had anyone other than family look into that advice. Be sure to check out AOR and AOM too (same holdings, different blends, and be sure to ignore the etf naming and concentrate on the proportions). I have one retired family member who decided, for convenience and idiot-simplicity, simply to swing quarterly between AOR and AOK (maybe it was AOM) for her cashflow withdrawal, depending only on which was higher. Can't get simpler than that.
After failing 3 times to post on this theme (wouldn't accept the post) , I'll just add the last line: Is it possible that a 50/50 combo of a floating rate loan fund and a high yield fund in the same fund family (for simplicity) would out-perform a managed or index bond fund?
I'm very reluctant to put money in bond funds, but I do have bond funds. I think an all equities is way too risky. On the other hand who wants to hold cash or short term bonds for a guaranteed loss?
This has led me to ponder the wisdom of investing in flexible funds who are known to vary their allocations based on their outlook. IVWIX, FPACX, FNCTX and other absolute value funds. I think they might do better @ allocation adjusting than I would.
Appreciate comments on this theory of managing investments.
Without knowing either your percentage allocation or what bond funds you hold.....
You noted: " On the other hand who wants to hold cash or short term bonds for a guaranteed loss?"
>>> Cash, yes; likely a guaranted loss relative to inflation. Bonds, well; the pure name is too faceted to "guarantee" a loss, although very short durations may have a more difficult time with returns relative to inflation.
You noted: "This has led me to ponder the wisdom of investing in flexible funds who are known to vary their allocations based on their outlook. IVWIX, FPACX, FCNTX and other absolute value funds. I think they might do better @ allocation adjusting than I would."
>>> I have not reviewed the first two funds you note above; but FCNTX is pure equity (.02% bonds), but I wouldn't consider the fund, a flexible fund, except in the equity arena.
You don't want 100% equities and this is understandable; and you also don't want cash or short duration bonds; also understandable.
I suspect your choices, aside from you own equity choices is to allocate the "other" money to a very good multisector bond fund for the bonds and cash; or allocate to a conservative,moderate or balanced allocation fund and let the manager(s) sort out the bond portions for you.
Our bond ballast (we seldom hold any pure money market cash) goes to a fund like PONDX / PIMIX. If we feel more monies need to rotate to equity areas, well sell some or all of a given bond fund.
Reply to @davidrmoran: Yeah, that's roughly the kind of approach I was thinking of, so it would be the mechanical, mostly hands-off part of the overall portfolio. They're kind of light on foreign (light on foreign stocks, essentially no foreign bonds), so we'd probably make up the difference either in the rest of the portfolio or also stick some GAL or another more global holding in the rollover account.
Catch, thanks for your sharing your ideas. I'm doing some of all of what you suggest. In the process have accumulated far more funds then makes sense. I recognize that some of these absolute funds are strictly equity funds, such as FCNTX. I thought that rather than hold and equity and bonds fund or balanced funds I might get a better result from some of these equity flexible funds together with allocation funds which might hold other asset classes, but which would in practice be more wide ranging than traditional balanced funds such as FAPCX.
Comments
Both Ted and you are relatively active managers of your portfolio willing and able to monitor, buy and sell as the climate dictates. Such investors can afford not to be buy and forget (by definition), use focused funds than just indexes when necessary and not necessarily be well diversified at any point in time.
The people you don't understand are people who aren't active managers of their portfolio and don't want to be. For such people, the above statistic in retrospect doesn't make any sense or difference. They have to pick a portfolio allocation and stick to it more or less. The only way to have such a portfolio is to be well diversified within their risk tolerance. It would be foolish for them to concentrate on what has worked over the last X years because no one can guarantee what will work over the next X years. If such a portfolio doesn't perform as well as somr asset classes in retrospect (and there will always be such asset classes), then that is the price of insurance for being a passive manager of their portfolio, not a negative in my opinion. The point is that they do quite well but not necessarily beat the optimal allocation in retrospect.
What you and I both will probably never understand are the people that spend an awful lot of time in fund picking to add to their collection than spend that same time more productively in asset allocation that makes a much larger contribution to their portfolio performance.
Amen to that. This will probably offend most here but it's like the ones that have 25 or 30 funds and more and they are forever tweaking that by taking a percent or two off here or adding a percent or two on there. Overdiversification to the max and then such meaningless tweaking. That said, I do agree we are all different folks with different stokes here so whatever suits your fancy. But I would wager that the ones here who have been most proficient at accumulating their nest eggs are the ones that diversify the least.
Regards,
Ted
Lets Have An Amen For Junkster:
In the cash area my allocation is investment cash ten percent, demand cash ten percent of which ballast cash being half of my demand cash. The ballast cash is targeted to be moved anywhere within the portfolio as I might choose to do so.
I think cash is a better ballast than either bonds or stocks.
This has worked well for me in the past and I think investors that are active within their portfolios might consider the use of ballast cash as a means to fund special investments as market conditions warrant.
Old_Skeet
This topic of "best number" of funds is often discussed. You, Ted, and others have made persuasive arguments for owning only a few. In a discussion last August you suggested that one fund was the best number - provided it was appropriate for the investor. http://www.mutualfundobserver.com/discussions-3/#/discussion/comment/26666
I'm sure you've mentioned it before, but don't recall which fund you've chosen for yourself. Could you kindly mention it here? (Sounds like you're in your early 60s and use a high yielding dividend-paying equity fund, reinvesting the dividends.)
Thanks
Regards
At the table in the kitchen, there were three mutual fund portfolios. Goldilocks was interested. She examined the funds from Junkster-bears portfolio.
"This portfolio is too hot!" she exclaimed.
So, she tasted the portfolio from skeeter-bear.
"This portfolio is too cold," she said
So, she tasted the last bowl of porridge, err, portfolio.
"Ahhh, this
porridgeportfolio is just right," she said happily and she ate it all up.Of course, the last portfolio bowl was that of MikeM-bear. 12 funds is just right.
Regards,
Ted
Goldilocks And The Three Bears:
This has led me to ponder the wisdom of investing in flexible funds who are known to vary their allocations based on their outlook. IVWIX, FPACX, FNCTX and other absolute value funds. I think they might do better @ allocation adjusting than I would.
Appreciate comments on this theory of managing investments.
Without knowing either your percentage allocation or what bond funds you hold.....
You noted: " On the other hand who wants to hold cash or short term bonds for a guaranteed loss?"
>>> Cash, yes; likely a guaranted loss relative to inflation. Bonds, well; the pure name is too faceted to "guarantee" a loss, although very short durations may have a more difficult time with returns relative to inflation.
You noted: "This has led me to ponder the wisdom of investing in flexible funds who are known to vary their allocations based on their outlook. IVWIX, FPACX, FCNTX and other absolute value funds. I think they might do better @ allocation adjusting than I would."
>>> I have not reviewed the first two funds you note above; but FCNTX is pure equity (.02% bonds), but I wouldn't consider the fund, a flexible fund, except in the equity arena.
You don't want 100% equities and this is understandable; and you also don't want cash or short duration bonds; also understandable.
I suspect your choices, aside from you own equity choices is to allocate the "other" money to a very good multisector bond fund for the bonds and cash; or allocate to a conservative,moderate or balanced allocation fund and let the manager(s) sort out the bond portions for you.
Our bond ballast (we seldom hold any pure money market cash) goes to a fund like PONDX / PIMIX. If we feel more monies need to rotate to equity areas, well sell some or all of a given bond fund.
Take care,
Catch
http://www.investopedia.com/terms/d/diworsification.asp