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November 11, 2009


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A diversified portfolio is always better, I agree.

And of course, hindsight is the best!

That seemed like a very long-winded way of saying a portfolio with stocks and bonds will have more stable returns than a portfolio of only stocks...

Paul --

Yes, I think you summarized it quite nicely. ;-)

Well, actually the article was saying that rather than buying the S&P500 index, it's better to invest in a diverse set of asset classes. Many people might be comfortable simply investing in the S&P 500, because that's an index, right?, and index funds are good. But the S&P 500 represents the largest companies, and it's capitalization-weighted, which makes it even worse.

So buy a diverse set of mutual funds.

Actually, the article was saying rather than buying a diverse set of mutual funds, split the stock component 50/50 between the US and the rest of the world.

How many people in the US are really willing to do that?

I personally think the bond component should also include foreign bonds.

Nice. What about those of us that are just starting out and cant get into Vanguard? Are there equivalents of the funds at say Schwab? I know they just lowered their minimums to $100 and dropped the expense ratios for several of their index funds. What say you?

Aaron --

I'm sure there are similar funds at Schwab. Call/email them and ask what their comparative funds are to those listed above.

If you pick the years where the stock market is down, a diversified portfolio with lots of bonds performs well, but if you pick the years where the stock market is up 30%, stocks look good. Predicting this in advance is otherwise known as timing the market.

Overall, it's a decent article. I guess I could nitpick about certain issues such as comparing short-term market performance versus long-term inflationary rate rather than an equivalent short term one, or the lack of thesis for the "downward pressure of the Dollar", which understandably, might have required a lot more writing. By the way, the following article from Kiplinger may be of some interest as a counter-point.

But the crux of the issue is to make sure you have a balanced, diversified portfolio right? If so, I definitely agree with that. Short of valuations (if you're the likes of Peter Lynch or Warren Buffett), proper diversification is ideal path for most.

That being said, if you want static diversification, something like the Vanguard Wellsley fund can give you that, with a basic 60% stock /40% bond spread. One fund. One low cost. Simple.

However, I think diversification should also factor in target horizon (such as, when do you plan on retiring), because the asset allocation really should be rebalanced more and more conservatively as time goes by. A 20 year old may have the time to take a lot more risk than a 60 year old. Also, their accrued balance is likely to be very different as well. All of these things have to be accounted for when planning one's asset allocation.

Fortunately, Vanguard's Target Retirement fund (in a tax-deferred account) is a simple, passive strategy that takes all this into account, and offers it all in a single, low cost fund. To be clear, it's something called a Fund of Funds (FoFs), so it's an age-based arbitrary asset allocation that also includes Vanguard Total Bond Market, a Vanguard International Fund, and even Vanguard Emerging Market funds. So, it's very well-rounded. Rebalance is also automatically done for you (every 5 years).

Unless someone has something very specific in mind and has the knowledge to manually slice and dice, I typically recommend to just stick with Target Retirement. One could easily do a lot worse.

Wow. You beat the market over 12 months? Call the news outlets....

thanks, if you use Monte carlo simulation for that, have you included your transaction cost and slippage cost when you calculate return? if yes, that's great.

"Wow. You beat the market over 12 months? Call the news outlets...."

LOL. Yes, lots of people beat the market during last 12 months. I beat market for the past 22 months... My 401K ROI for the period starting with end of 2007 is -8.8% (as of yesterday). For the year, I am probably up. The rest of my assets did even better.

Amusingly, my ESPP stock beat both S&P and the portfolio above. It's actually up for the past 2 years. $127.19 as of this moment vs around $109 in December 2007 (when I sold a little) and just shy of brief 2008 high of $130 (but this was a brief spike only). Doesn't mean everyone should put money in my employer stock or any single stock that did well this year - it is still risky, even though it's hard to regret one's wrong decisions if they turn out for the better.

"Downward pressure on the U.S. dollar has continued in recent months. So we are still strongly advocating portfolios that hold a significant percentage of assets denominated in other currencies. These assets include foreign and emerging stocks, foreign bonds and hard asset stocks. "
What about US multi-nationals? They also profit from low dollar.

My mom use to have a saying....something about egg's and a basket..mmmmm

billyjobob - I agree it's not a good idea which is why I am gradually reducing my exposure. But this was not the point.

I just pointed out that that beating the market over the period of last 12 months doesn't mean the strategy is good. Yes you could beat the market because of good strategy but also because of luck. For me, keeping almost half of my 401K in bonds/stable value given my age and retirement plans was a good strategy and it paid off. At the same time keeping a large percentage of my investible assets in one stock (even of a well known, old, large, international IT corporation with lots of cash and that benefits greatly from low dollar) is a bad idea. Incidentally, it's not all eggs in one basket, more like 10% of eggs (if I include home equity) or 17% if I count just investible assets or about a third if I count only taxable accounts. But it is still way too much, which is why I am gradually reducing the exposure. Lots of it are capital gains... This is beside the point, though, the point is 12 months is too short a period to talk about strategy success.

This shows the power of asset allocation and rebalancing.

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