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Is This The Perfect Investment Portolio ?


  • Interesting. I need to watch out for confirmation-bias, and I don't have what he is recommending perfectly duplicated. But it makes sense, and my portfolio is ALSO "simple" yet diversified. No TIPS in my stash, and I am about 50/50 (equities) split between domestic and foreign.
  • Arend's style of writing makes this a bit hard to read but some points can be gleaned.
  • I think this portfolio makes good sense. Thanks Ted
  • I too am intrigued and may increase foreign REIT holdings (e.g.). And whew, I did backtest for my longterm FLPSX. YACKX, PRBLX, and GABSX since end 1997 and did see that they're extremely close or actually significantly exceed (FLPSX). At 67 though I cannot get too enthused about equities min-vol in general and natl resources.
  • I wonder if a position in high yield bonds might further diversify this portfolio? According to some , like Rick Ferri, high yield is a compelling component.
  • Roy
    edited June 2014
    Would be interesting to know the list of his actual funds used.
  • edited June 2014
    Guido said:

    I wonder if a position in high yield bonds might further diversify this portfolio? According to some , like Rick Ferri, high yield is a compelling component.

    @Guido: can you please provide a link or URL showing Rick Ferri's position that high yield is a compelling component? I read a lot of his articles, but haven't seen an article of his that elucidates his position on high yield bonds. I know he includes them in his recommended asset allocation.

    Excellent article. Ted, thanks for posting.

    I've looked and found that there are a whole spate of minimum volatility and low volatility funds out there.

    I would 'tone down' his inclusion of 30 year zero coupon Treasuries and 30 year TIPS. Could easily accomplish the same general portfolio using Treasuries and TIPS, but without the volatility that goes with 30 year Treasury bonds, especially 30 year zeros.

  • I think he talked about it in this book(see link) but I no longer have the book . I do remember his endorsement of 20% of a bond portfolio should be in High Yield Bond. If I remember correctly while Ferri is an indexer he did say to go managed in HY. I own a 10% position in PRHYX. The fund has done well consistently. Hope this helps
  • Thanks Guido
  • Depends on age and anticipated retirement age. 20 to 50 y.o. with retirement at 70 (probably the new normal for the younger generation): 10% short term bond and 10% high yield bond and remainder in stock funds. Would include mid-cap blend or value and/or small cap blend or value for this period of one's investing life (and might even extend it to retirement age)
    Age 50 and above: this distribution is logical, but I prefer ETFs that meet the criteria.
  • @STB65:
    Many financial planners and financial advisers will not use high yield bonds in the mix, as they behave more like stocks and not much like Treasuries. They don't diversify away stock risk. And reducing stock market risk and diversification is the reason they are using bonds in a portfolio. So take for example David Swensen, who wrote Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen (Aug 2, 2005). He goes into great detail about why he only recommends Treasury bonds in the bond allocation. He is the portfolio manager of the Yale endowment. Or Larry Swedroe, author of multiple books and articles. He will only use extremely high quality bonds in the bond allocation. Again, because junk bonds don't provide the diversification and risk reduction they are looking for. Take a look at how high yield bonds performed during the financial crisis of Oct 2007-March 9, 2009. Junk bonds performed like stocks, both on the way down and then on the way up after March 9, 2009.

    I have tremendous respect for Rick Ferri, who does include junk bonds in his allocation for clients, and also Larry Swedroe, who does not. And also for David Swensen, who, although I do not believe he has financial planning 'clients', wrote his book to advise the non-professional investor about how to construct their portfolios. David Swensen in his book recommends 15% in TIPS and 15% in Treasuries, 20% in REITS, the other 50% in globally diversified stocks (and he specifies the stock breakdown by US, developed foreign, and emerging mkt)
  • RJB 112

    You site some great men. I tend to agree that High yield tend to follow equities most of the time but just in case they decide not to, I have a small holding . It intrigues me to add investment classes that might help diversify a portfolio further.

  • Most of these portfolios have merit, if one sticks to them for a long period of time and does not get "rattled" during market downturns. I follow discussions on Bogleheads regarding suggested portfolio compositions of investment advisors such as Swedroe, Ferri and Swenson. These advisors offer excellent portfolio suggestions, with valid analysis to support them.

    The problem I have is the more I read about portfolio composition theory, the more I get confused. TIPs or not, high yield bonds or not are just two of the many active discussions. For a portion of my portfolio, I resolve these issues by purchasing target date funds. It is relatively easy to compare investment portfolio composition, risk and return, using data that has been audited (if that is the proper term) over long periods of time.
  • I think its safe to say that its best to keep things as simple as possible and as cheap as possible regardless if you prefer managed or index funds. Also diversification is important If you look at what Ted posted a while back:( , it clearing shows the importance of owning a little of everything. Definitely a case for diversification !

    If you get confused then you should follow John Bogle's advice. 3-4 buy and hold funds is all you need. While I know this site discusses mostly managed funds, its hard to dispute the data that index funds held in the right combination will outperform 70% of a managed fund portfolio. I struggle my self with the idea of indexing but the proof is in the performance numbers.

  • @Guido I agree 100%, but would bump your 70% to something much higher, especially over longer periods of time. I use a variety of index ETFs and actively managed funds. Index ETFs for domestic holdings (including REITs) and actively managed funds for most everything else. Target date funds are in a separate subaccount.
  • DaveC said:
    @DaveC: Outstanding resource, thanks! A treasure trove.

  • MJG
    edited June 2014
    Hi Guys,

    First and most importantly, I like Brett Arends’ MarketWatch columns. He is well informed and mostly writes intelligent articles. But the referenced piece is not among his finest. It is arrogant, shortsighted, and pretentious. In competition with the Permanent Portfolio, I choose to call his the Pretentious Portfolio.

    Allow me to explain why.

    The perfect portfolio is a moving, dynamic target; it’s elusive because, in truth, it is an idealized concept. The theoretical Efficient Frontier line is not really a single, invariant line. It is actually a cloudy, murky zone that is constantly shifting. The zone migrates to address developing technologies, strong competition, evolving demographics, and emotions.

    One major factor in that dynamic behavior is that category correlation coefficients are not nearly constant. They frequently change, and sometimes quite violently and unexpectedly. The perfect portfolio today will most certainly not be the perfect portfolio tomorrow. My guesstimate is that if Arends were to revisit his forever portfolio a year from now, some obvious amendments would be required.

    Arends chosen time frame is rather limited. Fifteen years of back-testing is only a small fraction of the marketplace’s well documented history. Depending on how his portfolio was actually assembled, it could be a product of data mining.

    At the very least, the robustness of his perfect solution should be tested against other time periods. Also, I hope he has the courage to monitor its future performance. Many of these perfect solutions dissolve almost as quickly as the print in the reporting article dries.

    Arends portfolio is much more complex than his benchmarks which also seem to be very inappropriate as measurement yardsticks against the many components of the Arends discovery. This is yet another illustration of inappropriately selected straw-man benchmarks which were carefully chosen just to show superior rewards.

    The portfolio is not the S&P 500 and is not a 60/40 Balanced fund. To be of any value whatsoever, a comparative benchmark measurement must be made against a real equivalent. As used in the Arends article, the comparisons simply demonstrate the merits of broad category diversification when cobbling together a portfolio.

    Overall. I do endorse the fundamental logic and thinking that supports Arends’ construction. I simply take issue with his exaggerated claims and his short test time horizon. It is a Bridge to Far in claims and far to short in terms of data challenges. Usually, he’s better than that.

    As an aside, if you want to explore the transient character of correlation coefficients, the “buyupside” website offers an attractive, easy tool for that purpose. Just input different dates for two investment products, and see the resultant change in their correlation coefficient valuation. Here is the generic Link to the site and to the specific correlation coefficient tool Link, respectively:

    Huge changes in the correlation values are not uncommon. Remember, this is not an assignment. I don’t have that power or control. You do so as a learning lesson for your own benefit.

    My answer to the opening question is a firm NO. A perfect portfolio doesn’t exist, and if it did, it would be very transient.

    Best Wishes.
  • @MJG: Very nice website, thanks for posting.
    Lots of good stuff there.

    On another note, I'm looking for a website that has a calculator to calculate the total return of specific mutual funds from any start date to any end date. Do you know of any?

    For example, what was the total return of xyz mutual fund from January 15, 2012 to August 2, 2013
  • Ted said:
    @Ted: Yes, looks like it is. How did you find that jewel? Ted, can you get that calculator to work for you?
    I tried a few times, and nothing happens. And I have M* Premium membership too.

    Have an appointment.....will be back in 5+ hours to reply.....

  • Ted said:
    Can anybody get this mutual fund performance calculator to work?
    I've had no luck with it ever since Ted posted it.
    @Ted? Have you tried it?
  • rjb112: Yes, I just tried and had no success.
  • Thanks Ted
  • Ted said:

    rjb112: Yes, I just tried and had no success.

    I've got the reason this tool is not working for us. You're gonna love this one. Here's what Morningstar had to say about it:

    "Thank you for writing.

    Are you trying to use this tool for funds traded in Indian markets? This tool is from our Indian website, and only supports mutual funds listed in India.

    If you have any additional questions or comments, please don't hesitate to reply to this email and I will be happy to further assist you."

    Best Regards,

    Morningstar Support

  • This is NOT the perfect portfolio. He never even begins with the return he NEEDS. How can he hope to create a perfect portfolio when he doesn't know what he NEEDS? Major flawed concept. A perfect portfolio is a moving target and in reality is an allocation that allows an investor to achieve what is NEEDED with the least amount of volatility.
  • His definition is quite different, as he makes plain. Yours could be met with CDs for an investor with lower needs and a lot of money.
  • BobC said:

    A perfect portfolio is a moving target and in reality is an allocation that allows an investor to achieve what is NEEDED with the least amount of volatility.

    Peter Bernstein:
    "Risk-taking is an inevitable ingredient in investing, and in life, but never take a risk you do not have to take."

    I'm interpreting your "volatility" as PB's "risk".


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