Trying to understand aggressive portfolio strategies?

[manlymatt83]

I converted to the Boglehead strategy about four years ago and never looked back. The only things you can control are expense ratios and your asset allocation, time in the market beats timing the market, etc. Lazy 3-fund portfolio = the best thing since sliced bread.

Do you rebalance those 3 funds?

 

[manlymatt83]

Lets break that down even further. http://www.efficientfrontier.com/ef/902/vgr.htm Small VALUE stocks tend to overperform, albeit at a higher risk. Small GROWTH stocks are both the most risky and the worst performers. You should have some small growth stocks, but don't overdo it. If there was anything to leave out of a portfolio, I would leave small growth out.

Wow, thanks for the awesome replies here. So if I'm shooting for an 80/20 split (for now), could I theoretically take 30% of the 80 in small cap value, and split the remaining 50% across entire market + international? That would be a little more aggressive than an 80/20 split while also perhaps slightly protecting against a sudden crash?

Speaking of which, what do you think of trailing stops of 10% just to protect against sudden moves even on ETFs? Or is that not worth it?

Don't put time and energy into that area. The difference is often so minor, and there is no way to really tell which will be better in the future, that you are better off focusing your time and energy into other investment decisions.

OK!

Gold is an okay way to diversify. Having gold is good in a portfolio. But, don't overdo it. You have roughly 30 years until retirement. If say 30 years ago, you invested $10,000 in gold, you would now have $31,632. Sounds great. Until you realize that if 30 years ago, you invested $10,000 in a general S&P500 tracking fund, then you would now have $207,899

Makes sense.

Keep your gold exposure under about 10% of your whole portfolio. In small quantities, gold is a great way to diversify and rebalance, but with too much, you will realize that the only way to make money with gold is to find a bigger sucker than you as gold doesn't have profits like companies do.

OK! Maybe 3 - 5% gold. Something, at least, of IAU/GLD.

Same comments as with gold. Have a REIT, but keep it to under ~10% of your portfolio. What is especially important is if you own your own home, to remember that the house value is part of your portfolio. With that in mind most homeowners are way, way, way over-invested in real estate. So adding a REIT on top of a house puts you even further into real estate. Real estate is great, but you can do so much better if you also invest in other stocks.

I don't own any real estate. I was thinking of throwing 10% of my portfolio into O, tbh. 30 years of constantly increasing dividends? Or would you go with an ETF?

Trident is certainly not aggressive and doesn't tend to do well over the long run. You have 30+ years until retirement, you do not need a conservative clunker like trident. $10,000 invested in trident 30 years ago would now be worth $128,200, but $10,000 invested in just a simple S&P500 tracking fund 30 years ago would be worth $207,899. Trident growth was about half that of just a simple fund. https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults

Interesting that Trident is conservative. To me, it looked like very high returns with very little max drawdown:

https://hellomoney.co/portfolio/d691b8-trident

9.36% annual return over the last 10 years with a max draw down of 10%? Beat the S&P. What am I missing? I'll trust you on this, though. My gut was to stay away from it.

Rebanancing is good, but it isn't as good as people claim it is. Pick a portfolio allocation that you want. Rebalance once a year, or even once every other year. Simple as that. This way you are forced to periodically sell high and use that money to buy low.

I will probably rebalance any time something is 5% out of whack.

With 30+ years until retirement, yes you want to be 80% to 90% stocks. Hoping for a stock crash is usually a loser's bet. You might do well with it, but in the long run, making that gamble has never paid off. Over 30 years, stock funds always go up. You also can rebalance with 100% stocks. You can rebalance between US and foreign stocks, rebalance with value vs growth stocks, rebalance with large vs small stocks, etc.

Gotcha! So 6-7 ETFs that make up a good diversification and I can rebalance. If I believe in the future of AI, I assume I could throw a tad more into something like BOTZ (maybe 1-2%) to try and lean in a direction I believe in?

Pick one of the lazy portfolios and forget about it. Or, I would suggest the Sheltered Sam portfolio here (since you are talking about a tax sheltered IRA): https://www.bogleheads.org/wiki/Talk:Slice_and_dice#2002_-_The_Four_Pillars_of_Investing_pp.265-273

Thanks! That's really helpful.

Historically you'll do far better doing that than anything you have proposed above. Investing is about your future. You want investing to be simple and boring. That way, you are almost guaranteed to have a great future. Do what Warren Buffet says to do: buy boring mutual funds. https://www.cnbc.com/2017/10/03/aft...fett-says-hed-wager-again-on-index-funds.html

Then I guess this is my only final question then. On seeking alpha, there's a company called VizMetrics (http://www.vizmetrics.com). They have portfolios that use 9 ETFs, pick the top 5, and rebalance monthly. You pay $15/mo for access to it, but the goal is to outperform the market a bit by rebalancing monthly and targeted ETFs that are outperforming. Is a strategy like this just simply not worth it? My other alternative if I ignore things like Trident/Permanent Portfolio would be to just follow what Personal Capital is recommending for me, which is:

* .5% Cash
* .8% International Bonds
* 2.2% US Bonds
* 25.8% International Stocks
* 60.2% US Stocks
* 10.5% Alternatives

Maybe that's the best bet?

 

[snoopy7548]

Do you rebalance those 3 funds?

Yeah, I'm actually probably due for a rebalance since it's been a couple of years. I would rebalance when my total allocation shifts by ~5%.

 

[dullard]

Wow, thanks for the awesome replies here. So if I'm shooting for an 80/20 split (for now), could I theoretically take 30% of the 80 in small cap value, and split the remaining 50% across entire market + international? That would be a little more aggressive than an 80/20 split while also perhaps slightly protecting against a sudden crash?

You are welcome. I think you have a very common and understandable fear about a sudden crash. Throwing in 20% bonds would help protect against a sudden crash. But it won't eliminate it. The problem with protecting against crashes is that it is really hard to do it right.
1) You need to recognize the crash early, but not pull the protection trigger on the numerous false crashes that regularly occur.
2) You need to wait out the crash and don't just jump back in as it is still falling.
3) You need to recognize that the crash is over before other people do.
4) You need the confidence to get back in before it rises again.
You might do well on one or two of those tasks. But can you do all 4? It is all or nothing, otherwise your protection will fail you.

Instead of worrying about crashes, try to embrace them. If you put in your max $5500 for 2017 and the market crashes to half its value the next day, you are out $2750. Sounds horrible. But, in the scheme of your retirement, a temporary $2750 loss on paper is nothing out of the millions of dollars that you intend to get by the time you retire.

Instead, that 50% stock market crash is a buying opportunity for you. Yes, you lost $2750. But, if you put your next year 2018 $5500 into it, then the stock market doubles to return to where it started, you just made your $2750 back on your 2017 chunk AND $5500 on your 2018 chunk. Total gain: $5500 on that stock market crash just buy buying regularly and holding. Since you are young a crash is the best thing possible for you (assuming it isn't such a bad crash that you lose your job).

If you are still worried about an imminent crash, then put $500 in a month (assuming you can with your brokerage) rather than $5500 in all at once. That way, you max loss is very small if it crashes right away.

Speaking of which, what do you think of trailing stops of 10% just to protect against sudden moves even on ETFs? Or is that not worth it?

I personally would not worry about crashes when starting out. Your balance is just too small. A paper crash when you have a few thousand dollars is painful, but meaningless. A crash when you are retired with millions of dollars is vitally important. Worry about crashes then when you are experienced and have something real to protect.

I don't own any real estate. I was thinking of throwing 10% of my portfolio into O, tbh. 30 years of constantly increasing dividends? Or would you go with an ETF?

I do not know enough to answer you there.

9.36% annual return over the last 10 years with a max draw down of 10%? Beat the S&P. What am I missing? I'll trust you on this, though. My gut was to stay away from it.

What you are missing is that gold has a massive peak in value every 30 to 50 years, then it plunges in value every 30 to 50 years (it happened in the great depression, the 1980s, and now the 2010s). That 10 year trend included one peak. If history repeats itself, that 10 year trend won't happen again for many years.

Then I guess this is my only final question then. On seeking alpha, there's a company called VizMetrics (http://www.vizmetrics.com). They have portfolios that use 9 ETFs, pick the top 5, and rebalance monthly. You pay $15/mo for access to it, but the goal is to outperform the market a bit by rebalancing monthly and targeted ETFs that are outperforming. Is a strategy like this just simply not worth it?

I see nothing particularly wrong with that concept. But you can rebalance yourself without paying a fee (note: frequent trading in a retirement account is frowned on, so monthly might get you into trouble). Also, stock market trends tend to last a couple of years. A particular stock, may rise continually for a few years, then drop for a few years. With monthly rebalancing you will be guaranteed to be selling that rising stock just as it starts to rise (missing out on the whole rise) and buying a clunker just as it starts to fall (getting the full fall). There is no right rebalancing period, but annual rebalancing or rebalancing when things are significantly out of whack is often suggested as it is simple, easy, and generally near the max return and minimum volatility (risk). Here is a paper, on page 8, where annual rebalancing had higher returns and less risk than monthly rebalancing: https://www.vanguard.com/pdf/icrpr.pdf Note too that no rebalancing at all had even higher returns, but the volatility (risk) was way worse with the no rebalancing method.

My other alternative if I ignore things like Trident/Permanent Portfolio would be to just follow what Personal Capital is recommending for me, which is:

* .5% Cash
* .8% International Bonds
* 2.2% US Bonds
* 25.8% International Stocks
* 60.2% US Stocks
* 10.5% Alternatives

Maybe that's the best bet?

I think that is a perfectly fine distribution. But, as you just starting out trying to get 0.5% or 0.8% of a tiny contribution seems to be a lot of effort for no real benefit. For example, 0.5% cash of your max $5500 IRA contribution is $27.50 in cash. It just seems pointless at the start to hold just $27.50 as a cash "investment".

 

[manlymatt83]

You are welcome. I think you have a very common and understandable fear about a sudden crash. Throwing in 20% bonds would help protect against a sudden crash. But it won't eliminate it. The problem with protecting against crashes is that it is really hard to do it right.
1) You need to recognize the crash early, but not pull the protection trigger on the numerous false crashes that regularly occur.
2) You need to wait out the crash and don't just jump back in as it is still falling.
3) You need to recognize that the crash is over before other people do.
4) You need the confidence to get back in before it rises again.
You might do well on one or two of those tasks. But can you do all 4? It is all or nothing, otherwise your protection will fail you.

Instead of worrying about crashes, try to embrace them. If you put in your max $5500 for 2017 and the market crashes to half its value the next day, you are out $2750. Sounds horrible. But, in the scheme of your retirement, a temporary $2750 loss on paper is nothing out of the millions of dollars that you intend to get by the time you retire.

Instead, that 50% stock market crash is a buying opportunity for you. Yes, you lost $2750. But, if you put your next year 2018 $5500 into it, then the stock market doubles to return to where it started, you just made your $2750 back on your 2017 chunk AND $5500 on your 2018 chunk. Total gain: $5500 on that stock market crash just buy buying regularly and holding. Since you are young a crash is the best thing possible for you (assuming it isn't such a bad crash that you lose your job).

If you are still worried about an imminent crash, then put $500 in a month (assuming you can with your brokerage) rather than $5500 in all at once. That way, you max loss is very small if it crashes right away.

I personally would not worry about crashes when starting out. Your balance is just too small. A paper crash when you have a few thousand dollars is painful, but meaningless. A crash when you are retired with millions of dollars is vitally important. Worry about crashes then when you are experienced and have something real to protect.

I do not know enough to answer you there.

What you are missing is that gold has a massive peak in value every 30 to 50 years, then it plunges in value every 30 to 50 years (it happened in the great depression, the 1980s, and now the 2010s). That 10 year trend included one peak. If history repeats itself, that 10 year trend won't happen again for many years.

I see nothing particularly wrong with that concept. But you can rebalance yourself without paying a fee (note: frequent trading in a retirement account is frowned on, so monthly might get you into trouble). Also, stock market trends tend to last a couple of years. A particular stock, may rise continually for a few years, then drop for a few years. With monthly rebalancing you will be guaranteed to be selling that rising stock just as it starts to rise (missing out on the whole rise) and buying a clunker just as it starts to fall (getting the full fall). There is no right rebalancing period, but annual rebalancing or rebalancing when things are significantly out of whack is often suggested as it is simple, easy, and generally near the max return and minimum volatility (risk). Here is a paper, on page 8, where annual rebalancing had higher returns and less risk than monthly rebalancing: https://www.vanguard.com/pdf/icrpr.pdf Note too that no rebalancing at all had even higher returns, but the volatility (risk) was way worse with the no rebalancing method.


I think that is a perfectly fine distribution. But, as you just starting out trying to get 0.5% or 0.8% of a tiny contribution seems to be a lot of effort for no real benefit. For example, 0.5% cash of your max $5500 IRA contribution is $27.50 in cash. It just seems pointless at the start to hold just $27.50 as a cash "investment".

Thank you so much! This answer was awesome, and very helpful. Appreciate you taking the time to write it all out.