Insights on Simplifying the CHP

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Insights on Simplifying the CHP

Postby ivesjl » Tue Jan 08, 2013 7:32 pm

Hello,

The Coffeehouse Investor, by Bill Schultheis is a fantastic book, and his straightforward investing style is very appealing to me. I was curious what the effect would be of simplifying the domestic slices into the Total Stock Market (shown in the picture below). Does anyone have thoughts about simplifying the CHP to only 4 funds in this fashion?

If the image doesn't work the AA is as follows:

Total Stock Market = 40%
Total Bond Market = 40%
Total International Fund = 10%
REIT = 10%

Image
"Successful investing is all about common sense." | ~ John Bogle.
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Re: Insights on Simplifying the CHP

Postby livesoft » Tue Jan 08, 2013 7:35 pm

I see your 4 funds and raise you 1, for a total of 5 funds:
viewtopic.php?t=38374
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Insights on Simplifying the CHP

Postby sscritic » Tue Jan 08, 2013 7:37 pm

My CHP is not the same as your CHP.
http://www.youtube.com/watch?v=VYKdayl7BHM
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Re: Insights on Simplifying the CHP

Postby gkaplan » Tue Jan 08, 2013 8:18 pm

What does the California Highway Patrol have to do with investing?
Gordon
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Re: Insights on Simplifying the CHP

Postby ivesjl » Tue Jan 08, 2013 8:45 pm

Livesoft, there are quite a lot of portfolios listed on that thread. From what I gathered, the purpose of the thread was to explore a similar strategy (simplifying the FundAdvice portfolio). What 5 fund portfolio are you referring to?
"Successful investing is all about common sense." | ~ John Bogle.
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Re: Insights on Simplifying the CHP

Postby Calm Man » Tue Jan 08, 2013 8:46 pm

I negative raise you 2. At 10%, I would just let the REIT and internaitonal go. Then you are 50/50 Total stock market and bonds.
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Re: Insights on Simplifying the CHP

Postby livesoft » Tue Jan 08, 2013 9:20 pm

ivesjl wrote:Livesoft, there are quite a lot of portfolios listed on that thread. From what I gathered, the purpose of the thread was to explore a similar strategy (simplifying the FundAdvice portfolio). What 5 fund portfolio are you referring to?

Total US Stock Index
Total Int'l Stock Index
US SmallCap Value Index
Foreign Small Cap Index
Total Bond Index
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Insights on Simplifying the CHP

Postby ivesjl » Wed Jan 09, 2013 2:48 pm

Why do you place such a high percentage into small cap and international funds?
"Successful investing is all about common sense." | ~ John Bogle.
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Re: Insights on Simplifying the CHP

Postby pkcrafter » Wed Jan 09, 2013 4:09 pm

ivesjl, your proposed fund-

Total Stock Market = 40%
Total Bond Market = 40%
Total International Fund = 10%
REIT = 10%

-is known as Rick Ferri's Core Four. It is one step up from the basic three and it's a very good portfolio, but just one of many good portfolios. Percent international is always in debate as to whether you need it or not. I think it's a good diversifier and Vanguard has done a study which shows optimal allocation is between 20-40% of equity.

https://personal.vanguard.com/pdf/icriecr.pdf

Lifesoft's portfolio drops the REITs and adds more slice and dice instead of using total stock market and total international because small and value stocks can add a premium in returns.

The Coffee House portfolio slices even more by adding large value, small blend and small value. International is a bit lower than Vanguard recommends, and I'm not sure if small international was available when the CH was created, but today it might also hold small international.

It's pretty much an investor's preference as to how complex he/she wants to make the portfolio, Those premiums may not show up for long periods and there is something to be said for keeping things relatively simple. Slice/dice portfolios can be very effective if the investor can stay with them.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Insights on Simplifying the CHP

Postby ivesjl » Wed Jan 09, 2013 6:29 pm

pkcrafter, I don't know how I missed the connection between these two portfolios. The core four portfolio that I have seen previously was 80/20 (stocks/bonds) and it had a little too much volatility for me.

For anyone interested, here is an excellent thread by Rick Ferri himself: Core Four Portfolio Discussion

I went ahead and ran the 60/40 portfolio against the Coffehouse portfolio, and they have VERY, VERY similar returns, and volatility. In fact, the correlation of returns is almost 1. Of course this makes a lot of sense, but I appreciate you bringing this to my attention, pkcrafter. Here are the returns and holdings for the two portfolios we are discussing:

Image

"Successful investing is all about common sense."
~ John Bogle.
"Successful investing is all about common sense." | ~ John Bogle.
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