Should tilters recommend tilting to beginners?
Should tilters recommend tilting to beginners?
On the occasion when I've been in a position to offer investing advice to beginner investors, I've recommended a portfolio closest to a Bogleheads three-fund portfolio given the choices available to the investor. This is the case even though I myself like to tilt to small-cap value, and even though I prefer intermediate treasuries to Total Bond Market. I do this to keep my recommendation as simple and conventional as possible.
Recently I've been helping my girlfriend of a few months with her 401(k). She has been very receptive to my advice -- one of the many reasons she is awesome. She has an outstanding 401(k) with many exceptionally low cost passively managed funds from Fidelity, Vanguard, DFA, and others. There are excellent options to tilt to small-cap value and intermediate treasuries. Even so, I recommended she go with a three-fund portfolio for the reasons above. She took my advice.
I'm wondering if this recommendation was a mistake. If I truly believe that a tilt to small-cap value and intermediate treasuries has a slightly higher expected risk-adjusted return than a three-fund portfolio, should I recommend it to beginners as well? I'm curious to hear from others who have been in this position.
Avi
Recently I've been helping my girlfriend of a few months with her 401(k). She has been very receptive to my advice -- one of the many reasons she is awesome. She has an outstanding 401(k) with many exceptionally low cost passively managed funds from Fidelity, Vanguard, DFA, and others. There are excellent options to tilt to small-cap value and intermediate treasuries. Even so, I recommended she go with a three-fund portfolio for the reasons above. She took my advice.
I'm wondering if this recommendation was a mistake. If I truly believe that a tilt to small-cap value and intermediate treasuries has a slightly higher expected risk-adjusted return than a three-fund portfolio, should I recommend it to beginners as well? I'm curious to hear from others who have been in this position.
Avi
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Re: Should tilters recommend tilting to beginners?
Well, of course only those who can see into the future can give you
a definitive answer, so we'll both wait to see what they say
a definitive answer, so we'll both wait to see what they say
Re: Should tilters recommend tilting to beginners?
There are different degrees of tilting. I think recommending an optional 2 or 3 funds to beginners is quite reasonable, but I would start with 3-fund in case their eyes glaze over.
Re: Should tilters recommend tilting to beginners?
I don't think anyone should tilt significantly away from the total market simply on the say-so of someone else.
Of course, one could suggest that no one should follow any investment plan at all based on nothing other than the say-so of someone else.
One could even say that no one should advise someone to invest in any way in particular without ensuring that the advisee understands the basis for the advice. It is likely that understanding the whys and wherefores of tilting will be a bigger project than understanding the whys and wherefores of a three fund portfolio.
Of course, one could suggest that no one should follow any investment plan at all based on nothing other than the say-so of someone else.
One could even say that no one should advise someone to invest in any way in particular without ensuring that the advisee understands the basis for the advice. It is likely that understanding the whys and wherefores of tilting will be a bigger project than understanding the whys and wherefores of a three fund portfolio.
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Re: Should tilters recommend tilting to beginners?
You should make sure they thoroughly understand the basics before you introduce refinements.
The surest way to know the future is when it becomes the past.
Re: Should tilters recommend tilting to beginners?
+1cheese_breath wrote:You should make sure they thoroughly understand the basics before you introduce refinements.
Completely agree, for most people I would even just recommend a target date index fund until they understand asset allocation. What good is a 3 fund portfolio if you will never rebalance and don't understand why you do?
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Re: Should tilters recommend tilting to beginners?
... for a g/f, and if I was asked, I'd recommend a Target date and forgetaboutit. Let the experts manage the contents. I used to get asked frequently, and I mean frequently. .. still get some inquiries and my answers are VG Target date.
Re: Should tilters recommend tilting to beginners?
+2cheese_breath wrote:You should make sure they thoroughly understand the basics before you introduce refinements.
Andy
Re: Should tilters recommend tilting to beginners?
+3, yeah, reducing costs, indexing and diversification. Those basics took some of us years to comprehend.Wagnerjb wrote:+2cheese_breath wrote:You should make sure they thoroughly understand the basics before you introduce refinements.
Never in the history of market day-traders’ has the obsession with so much massive, sophisticated, & powerful statistical machinery used by the brightest people on earth with such useless results.
Re: Should tilters recommend tilting to beginners?
I am going to make a guess that most people on this forum who "truly believe" that a small value tilt has a greater risk adjusted return can not quantify that return, do not know how long of a holding period may be required before any theoretical greater return is captured nor even what funds they need to own in order to capture that return and likely believe that past performance does not predict future performance although not really, in the case of tilting to small value.
I at one time owned Vanguards small cap value index fund thinking I knew about the above but I did not know. I do not know even now what the claimed extra return is. It seems to be a diminishing moving target only captured by very "valuey" funds and even then I am not sure the academics think that it is any thing other than risk, but .......I am sure that the marketers of this stuff will keep on selling it because they make money at it.
Why doesn't an efficient market eliminate this "extra" return, once the secret is out of the bag? If you know, then maybe recommending a tilt is a good idea.
I am never going to read or post anything about value again.......
jim
I at one time owned Vanguards small cap value index fund thinking I knew about the above but I did not know. I do not know even now what the claimed extra return is. It seems to be a diminishing moving target only captured by very "valuey" funds and even then I am not sure the academics think that it is any thing other than risk, but .......I am sure that the marketers of this stuff will keep on selling it because they make money at it.
Why doesn't an efficient market eliminate this "extra" return, once the secret is out of the bag? If you know, then maybe recommending a tilt is a good idea.
I am never going to read or post anything about value again.......
jim
Re: Should tilters recommend tilting to beginners?
I am not sure there is much room for experience in this game, when the length of one play is one's lifetime and little information gained during play has any predictive value. The decisions made on day 1 will determine a large part of the total outcome.
The real question then is whether or not tilting is a good idea for anyone.
I sense that you tilt but aren't quite sure about it, and don't want your girlfriend to blame you if in 30 years it turns out to have been a bad idea. I would let her make up her own mind.
The real question then is whether or not tilting is a good idea for anyone.
I sense that you tilt but aren't quite sure about it, and don't want your girlfriend to blame you if in 30 years it turns out to have been a bad idea. I would let her make up her own mind.
Last edited by hiddensee on Sat Mar 14, 2015 11:42 am, edited 1 time in total.
Re: Should tilters recommend tilting to beginners?
Good question.
Because not staying the course with a tilt is likely to negatively offset any benefit in expected risk adjusted return from tilting, and because staying the course requires an understanding of "the course", I never recommend tilting to beginners.
Because not staying the course with a tilt is likely to negatively offset any benefit in expected risk adjusted return from tilting, and because staying the course requires an understanding of "the course", I never recommend tilting to beginners.
Re: Should tilters recommend tilting to beginners?
+1.dbr wrote:I don't think anyone should tilt significantly away from the total market simply on the say-so of someone else.
Of course, one could suggest that no one should follow any investment plan at all based on nothing other than the say-so of someone else.
One could even say that no one should advise someone to invest in any way in particular without ensuring that the advisee understands the basis for the advice. It is likely that understanding the whys and wherefores of tilting will be a bigger project than understanding the whys and wherefores of a three fund portfolio.
Even though the gf is agreeing, it's not clear how well she understands and the understanding is what's most important - for all investors, not just beginners. She needs to be certain she has the basics down, including her tolerance for risk, before she moves beyond something like the three-fund portfolio.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Re: Should tilters recommend tilting to beginners?
Recommending a tilt is giving someone a fish. (Possibly a red herring...) As opposed to teaching them to fish.
John C. Bogle has said
Beyond the very basics, you have to say "it's your money, it's your future, it's your responsibility." Someone has to decide whether or not to tilt for themselves. If they want to read up on it and make an informed decision, fine. If not, they should not just blindly copy someone else's portfolio.
John C. Bogle has said
AndSuccessful investing involves doing just a few things right and avoiding serious mistakes.
Giving someone a basic, easy to understand recommendation that avoids serious mistakes is helpful. Serious mistakes would be not saving much; keeping 100% of your long-term retirement savings in a bank account; putting 100% of your money into one stock (or even a Jim-Cramer-endorsed supposedly "diversified" five-stock portfolio); putting your retirement money into twenty different load funds with >1% expense ratios based on an "advisor's" recommendation; etc.There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
Beyond the very basics, you have to say "it's your money, it's your future, it's your responsibility." Someone has to decide whether or not to tilt for themselves. If they want to read up on it and make an informed decision, fine. If not, they should not just blindly copy someone else's portfolio.
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Re: Should tilters recommend tilting to beginners?
I Never give advice. The 4th Law of Money.
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Re: Should tilters recommend tilting to beginners?
Behavior and sticking to the plan is as important as the plan (Asset allocation) itself.
So, it's appropriate to recommend portfolios that are more complex than your own or more simple than your own, since another investor may be more or less averse to complexity. If someone wants and can manage complexity, you might outline a more complex, tilted portfolio. If they feel overwhelmed by any investment complexity, you might recommend balanced funds in both taxable and tax advantaged and live with the tax inefficiency.
So, I think it's in fact irresponsible to recommend one's own investment asset allocation without taking in to account appetite for complexity.
So, it's appropriate to recommend portfolios that are more complex than your own or more simple than your own, since another investor may be more or less averse to complexity. If someone wants and can manage complexity, you might outline a more complex, tilted portfolio. If they feel overwhelmed by any investment complexity, you might recommend balanced funds in both taxable and tax advantaged and live with the tax inefficiency.
So, I think it's in fact irresponsible to recommend one's own investment asset allocation without taking in to account appetite for complexity.
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Re: Should tilters recommend tilting to beginners?
I'm also a tilter. Nobody's ever asked me for financial advice* but I'd recommend the three-fund portfolio while admitting that I use a riskier and more complicated system. The ball's in their court now: it they're interested they can ask for details.
* I've had to bite my tongue a few times, though.
* I've had to bite my tongue a few times, though.
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Re: Should tilters recommend tilting to beginners?
I tilt but I'm far from certain that I'm right.
I've advised a few people in real life, all novices, and have recommended Vanguard LifeStrategy (all in tax-advantaged) or had them work it out with Vanguard which recommended their standard 3-fund (this was before Vanguard added international bonds).
I would not recommend anything complicated to novices. Too easy to mess up.
So, I think you gave the gf good advice. Recommend she watch the 10 videos in the wiki to understand why.
I've advised a few people in real life, all novices, and have recommended Vanguard LifeStrategy (all in tax-advantaged) or had them work it out with Vanguard which recommended their standard 3-fund (this was before Vanguard added international bonds).
I would not recommend anything complicated to novices. Too easy to mess up.
So, I think you gave the gf good advice. Recommend she watch the 10 videos in the wiki to understand why.
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Re: Should tilters recommend tilting to beginners?
I was first introduced to whole schmear of things that undergird most of our collective wisdom here -- especially efficient frontier and expense ratios -- by a slice-and-dicer. If I remember correctly, he presented the core (what you could call the 3-fund approach) and the slice-and-dice approach as separable conceptually and evidentiarily. In my case I drank the slice/dice Kool-Aid, because that's what made sense to me as a I tried to digest all the evidence.
You are right to be asking the question, though. I think there is a quantum bump in complexity and uncertainty from 3-fund to slice/dice. I think an average person with an open mind could grasp the wisdom of the three-fund approach in about 5 minutes. But if you move beyond that to thinking about other asset classes -- REITs, small-value, value, mid-caps, emerging markets -- then I think the average investor needs more like a week to come to grips with it all. Not everyone wants to put in that week, and not everyone can put in a week and end up with a good choice. For some people, especially people who don't get enjoyment from reading forums like this one but rather have the distractions of real life limiting their focus, dumping all this extra information could make things worse.
You are right to be asking the question, though. I think there is a quantum bump in complexity and uncertainty from 3-fund to slice/dice. I think an average person with an open mind could grasp the wisdom of the three-fund approach in about 5 minutes. But if you move beyond that to thinking about other asset classes -- REITs, small-value, value, mid-caps, emerging markets -- then I think the average investor needs more like a week to come to grips with it all. Not everyone wants to put in that week, and not everyone can put in a week and end up with a good choice. For some people, especially people who don't get enjoyment from reading forums like this one but rather have the distractions of real life limiting their focus, dumping all this extra information could make things worse.
Re: Should tilters recommend tilting to beginners?
I would say yes. Some people intuitively get and like the idea of tilting and others don't. If they don't seem to like the idea, drop it.
Re: Should tilters recommend tilting to beginners?
See Bill Schultheis' The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On with Your LifeKyleAAA wrote:I would say yes. Some people intuitively get and like the idea of tilting and others don't. If they don't seem to like the idea, drop it.
10% large cap such as S&P 500
10% large cap value
10% small cap
10% small cap value
10% total international
10% REITs
40% total bond market
Paul
...and then Buffy staked Edward. The end.
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Re: Should tilters recommend tilting to beginners?
I am without words that don't involve a serious soap box.midareff wrote:... for a g/f ...
Re: Should tilters recommend tilting to beginners?
HongKonger wrote:I am without words that don't involve a serious soap box.midareff wrote:... for a g/f ...
LOL... could have been b/f but he designated the gender. I'll loan you my soap box, climb on and have at it.
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Re: Should tilters recommend tilting to beginners?
As a female with a pair bigger than a lot of males I have met, I can assure you, I have no need to borrow. And if I want bigger, I'll get my power tools out and build one for myself. But thank you all the samemidareff wrote:HongKonger wrote:I am without words that don't involve a serious soap box.midareff wrote:... for a g/f ...
LOL... could have been b/f but he designated the gender. I'll loan you my soap box, climb on and have at it.
Re: Should tilters recommend tilting to beginners?
A female with a "pair" is my favorite category of your gender. The "loan" offer wasn't gender directed, but since you have your own power tools feel free to create if my offer was offensive.HongKonger wrote:As a female with a pair bigger than a lot of males I have met, I can assure you, I have no need to borrow. And if I want bigger, I'll get my power tools out and build one for myself. But thank you all the samemidareff wrote:HongKonger wrote:I am without words that don't involve a serious soap box.midareff wrote:... for a g/f ...
LOL... could have been b/f but he designated the gender. I'll loan you my soap box, climb on and have at it.
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Re: Should tilters recommend tilting to beginners?
Stepping back a step, I note that investors early in the learning curve often pick allocations they will later regret. For me, this was tilting, but others make different mistakes.
I encourage a portfolio that is likely to age gracefully as your knowledge goes up. A reasonable asset mix of two funds split between TSM and TBM/an intermediate treasury fund/an intermediate muni fund/bank CDs can be turned into a tilted pirtfolio without being locked in to specialized funds with cap gains. Life strategy, on the other hand, may put them in a harder to roll out position.
While I like three fund, I think of it as optional, as you are asking two decisions - equity/FI and domestic/foreign.
A big windfall is different, as you will not accumulate enough to offseta poor decision.
I encourage a portfolio that is likely to age gracefully as your knowledge goes up. A reasonable asset mix of two funds split between TSM and TBM/an intermediate treasury fund/an intermediate muni fund/bank CDs can be turned into a tilted pirtfolio without being locked in to specialized funds with cap gains. Life strategy, on the other hand, may put them in a harder to roll out position.
While I like three fund, I think of it as optional, as you are asking two decisions - equity/FI and domestic/foreign.
A big windfall is different, as you will not accumulate enough to offseta poor decision.
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Re: Should tilters recommend tilting to beginners?
My personal portfolio has a small and value tilt with some REITs and junk bonds.AviN wrote:Even so, I recommended she go with a three-fund portfolio for the reasons above. She took my advice. I'm wondering if this recommendation was a mistake. If I truly believe that a tilt to small-cap value and intermediate treasuries has a slightly higher expected risk-adjusted return than a three-fund portfolio, should I recommend it to beginners as well? I'm curious to hear from others who have been in this position.
But I am also a "professional" investment advisor (in that occasionally there is someone foolish enough to pay me to help them choose a portfolio, heaven help them!). For the vast majority of my clients, I recommend a three or four fund portfolio (depending on what they may have access to in workplace accounts, for example). If I could go back in time 15 years, I would perhaps advise myself to do the same.
The summary is: A 3 fund portfolio is a very good recommendation for a "beginning investor" and/or a investor who is "just beginning". Bill Bernstein things so too: http://www.amazon.com/If-You-Can-Millen ... B00JCC5JKI
Neurosphere
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
Re: Should tilters recommend tilting to beginners?
Start with basics. Tell them the options, let them figure out what is best for them on their own. If interest in learning is low to non existent then a three fund or target fund is a great option.
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Re: Should tilters recommend tilting to beginners?
I am one to talk as I have a lot of things in my portfolio, let's say that I have tried a lot of things as an investor. I have freely admitted to doing a lot of un-Boglehead things but in general I am value oriented, keep an eye of expenses, and do very little trading. I mostly stuck with what I had because it is doing well enough and experiences of most often having my "sells" outperform the "buys" to replace them. I will say that the bulk of my new monies for investment have gone into index funds since 1999.
For a beginner, you want to keep things simple and understandable. A simple 3-5 fund portfolio is very good for beginners and very good for most everybody. Many advanced investors have tried a lot of things and then gone back to simplicity.
The problem with tilting is that the list of recommended asset classes keeps growing and there is a lot of conflicting arguments and data out there. Plus it has become a more and more popular strategy. Strategies have a way of not working so well when too many people adopt them. So keep it simple and understandable in the beginning, no need to confuse new investors. If later on as they learn more, they can branch out if they so choose.
I am a tilter myself but have no argument with the 3-5 fund portfolios.
For a beginner, you want to keep things simple and understandable. A simple 3-5 fund portfolio is very good for beginners and very good for most everybody. Many advanced investors have tried a lot of things and then gone back to simplicity.
The problem with tilting is that the list of recommended asset classes keeps growing and there is a lot of conflicting arguments and data out there. Plus it has become a more and more popular strategy. Strategies have a way of not working so well when too many people adopt them. So keep it simple and understandable in the beginning, no need to confuse new investors. If later on as they learn more, they can branch out if they so choose.
I am a tilter myself but have no argument with the 3-5 fund portfolios.
A fool and his money are good for business.
Re: Should tilters recommend tilting to beginners?
Have her read this string. She can take away her own conclusions and/or serve as a staring point for a conversation.
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
Re: Should tilters recommend tilting to beginners?
For a true beginner, as in starting at $0.00, I say no need to recommend tilting to anything. Nor is there any need to tilt to anything. How much is 5% of a few thousand dollars and what difference will it make anyway. I say just inform them of the basics, steer them in the direction of some books or learning areas of investing, and let them decide for themselves later on if tilting would work for them.
For a beginner that just inherited $1,000,000, there could be a reason to recommend a tilt here or there. It should still be something they read up on and decide for themselves though, IMO
For a beginner that just inherited $1,000,000, there could be a reason to recommend a tilt here or there. It should still be something they read up on and decide for themselves though, IMO
Re: Should tilters recommend tilting to beginners?
The Target Date fund in her 401(k) was something like 94% in risky assets. The asset allocation was unnecessarily complex as well and included commodities. The only thing good about it was the low expense ratio.EnjoyIt wrote:+1cheese_breath wrote:You should make sure they thoroughly understand the basics before you introduce refinements.
Completely agree, for most people I would even just recommend a target date index fund until they understand asset allocation. What good is a 3 fund portfolio if you will never rebalance and don't understand why you do?
Avi
Re: Should tilters recommend tilting to beginners?
Thanks everyone for the feedback.
Avi
Avi
Re: Should tilters recommend tilting to beginners?
no, they should recommend reading the wiki on this board and / or putting the cash into
something they can always tilt from if they would ever want or desire that sort of thing.
I am making the assumption that most beginners, like most folk that invest, do not want
to be involved in the complexity of maintaining a tilted account structure.
something they can always tilt from if they would ever want or desire that sort of thing.
I am making the assumption that most beginners, like most folk that invest, do not want
to be involved in the complexity of maintaining a tilted account structure.
Re: Should tilters recommend tilting to beginners?
This is a great tiny on-line booklet (or Kindle) for the new investor. Perhaps your friend would be willing to read this to pick up some basic advice.neurosphere wrote: The summary is: A 3 fund portfolio is a very good recommendation for a "beginning investor" and/or a investor who is "just beginning". Bill Bernstein things so too: http://www.amazon.com/If-You-Can-Millen ... B00JCC5JKI
Neurosphere
Here it is on-line: http://www.etf.com/docs/IfYouCan.pdf
Re: Should tilters recommend tilting to beginners?
As a relative newbie I would recommend the basics such as passive vs active, expense ratio etc. Maybe not applicable with a g/f as you get more time to talk about it, but with most others it seems like money doesn't come up that often except for complaining that you don't have enough.
Roughly a year ago a new co-worker was eligible for the 401k and was asking what he should invest in. I got the opportunity to explain the boglehead position to him and 2 others. I got the following responses:
1. (the original) This is too hard, I am getting a financial adviser
2. Hmm that's interesting, I'll look into that
3. Wow, that's great, I am totally doing this.
I sent them all a link to the bogleheads wiki and the PBS frontline epidsode: "the retirement gamble"; and I would continue to recommend both!
Roughly a year ago a new co-worker was eligible for the 401k and was asking what he should invest in. I got the opportunity to explain the boglehead position to him and 2 others. I got the following responses:
1. (the original) This is too hard, I am getting a financial adviser
2. Hmm that's interesting, I'll look into that
3. Wow, that's great, I am totally doing this.
I sent them all a link to the bogleheads wiki and the PBS frontline epidsode: "the retirement gamble"; and I would continue to recommend both!
Re: Should tilters recommend tilting to beginners?
I direct new investors to target date funds and show them a calculator with compound growth with 1% extra in advisor fees vs. no fees. I also recommend a couple of books such as Swedroe's classic "The Only Winning Strategy...." A little knowledge about tilting is much more dangerous than no knowledge. If they take the initiative to read those books then they can be well informed to make their own decisions.
There are no guarantees, only probabilities.
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Re: Should tilters recommend tilting to beginners?
I see a lot of Bogleheads say 20% in international is good enough - some even say 0% is fine. Dramatic tilts toward US stocks. Personally I don't recommend tilting that severely, particularly for beginners.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
Re: Should tilters recommend tilting to beginners?
For tilting, the investor should have the experience to withstand the anxiety that can come with long periods of tracking error related to the tilt so as not to abandon the tilt during periods of underperformance.
If you are going to give any advice, I would say to keep it simple (no tilting).
When I first started investing, I started with a small cap tilt. As I learned more, I chose to abandon it in a strive toward simplicity.
If you are going to give any advice, I would say to keep it simple (no tilting).
When I first started investing, I started with a small cap tilt. As I learned more, I chose to abandon it in a strive toward simplicity.
cheers ... -Mark |
"Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau |
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Re: Should tilters recommend tilting to beginners?
I wouldn't recommend anything specific to anyone. I would suggest some reading (such as the wiki here, classic investing books, etc) and let folks make their own decision.
Re: Should tilters recommend tilting to beginners?
So one consideration is that even a three-fund portfolio has a substantial amount of tracking error in the sense that in the best case scenario, the index that a beginner hears about is the S&P 500. The Total Bond fund wont track this at all and the Total International fund will track this only to the degree that international stocks correlate with the S&P 500.avenger wrote:For tilting, the investor should have the experience to withstand the anxiety that can come with long periods of tracking error related to the tilt so as not to abandon the tilt during periods of underperformance.
If you are going to give any advice, I would say to keep it simple (no tilting).
When I first started investing, I started with a small cap tilt. As I learned more, I chose to abandon it in a strive toward simplicity.
Avi
Re: Should tilters recommend tilting to beginners?
So, one issue that I brought up that I didn't see explicitly addressed is the recommendation of intermediate treasuries rather than Total Bond. I referred to that as a "tilt" but maybe that confused the matter. Though 100% intermediate treasuries is less conventional and less diversified than Total Bond from a Boglehead perspective, there is a sense in that an intermediate treasury fund is easier to understand. To understand Total Bond, one must understand intermediate treasuries, mortgage backed securities, corporate bonds, what it means for a bond to be callable, etc.
Avi
Avi
Re: Should tilters recommend tilting to beginners?
You're exacly right.AviN wrote:So one consideration is that even a three-fund portfolio has a substantial amount of tracking error in the sense that in the best case scenario, the index that a beginner hears about is the S&P 500. The Total Bond fund wont track this at all and the Total International fund will track this only to the degree that international stocks correlate with the S&P 500.avenger wrote:For tilting, the investor should have the experience to withstand the anxiety that can come with long periods of tracking error related to the tilt so as not to abandon the tilt during periods of underperformance.
If you are going to give any advice, I would say to keep it simple (no tilting).
When I first started investing, I started with a small cap tilt. As I learned more, I chose to abandon it in a strive toward simplicity.
Avi
That's why target date and life cycle funds exist.
cheers ... -Mark |
"Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau |
[VTI, VXUS, BND, VTEB, SV fund]
Re: Should tilters recommend tilting to beginners?
It's not clear to me that this solves the problem though. The Target Date / Lifecycle fund will have tracking error too. It's true that helps prevent behavioral errors as long as the investor holds onto the fund. But the investor could sell the fund in response to tracking error. A more serious concern I have about Target Date funds is the high stock allocation they tend to have. A Target Date fund with 90% stocks has a good chance of causing lost sleep and selling near the bottom of a bear market. And selecting the wrong target year to compensate for that puts the investor on the wrong glide path. It's true that Vanguard's Lifecycle funds don't have this problem and I'd consider recommending those.avenger wrote: You're exacly right.
That's why target date and life cycle funds exist.
Avi
Last edited by AviN on Mon Mar 16, 2015 9:40 am, edited 1 time in total.
Re: Should tilters recommend tilting to beginners?
My experience is that folks in Target Date funds do not check the performance of their funds at all. They wouldn't know a tracking error if it hit them in the face. They don't even follow at all any stock market nor business news.
Re: Should tilters recommend tilting to beginners?
This.livesoft wrote:My experience is that folks in Target Date funds do not check the performance of their funds at all. They wouldn't know a tracking error if it hit them in the face. They don't even follow at all any stock market nor business news.
cheers ... -Mark |
"Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau |
[VTI, VXUS, BND, VTEB, SV fund]
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Re: Should tilters recommend tilting to beginners?
I've done it both ways. Both are reasonable.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy |
4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Re: Should tilters recommend tilting to beginners?
I would argue that no one truly understands total bond anyway.AviN wrote: To understand Total Bond, one must understand intermediate treasuries, mortgage backed securities, corporate bonds, what it means for a bond to be callable, etc.
Avi
We are getting beyond the "tilting" that I thought the thread was about now. I thought it meant the tilt to SCV or emerging or REITs or those types. Not total stock vs S&P 500 or intermediate treasury vs total bond... and tracking error. If you're talking to a beginner and trying to recommend or explain these things, their eyes just glossed over and they started thinking about beer or something.
Keep it simple. A beginner that could care less about all this and only contributes to a 401k because everyone says they're supposed to,... a target date type fund is fine. A beginner that is interested in this stuff and going to read and learn,... they're going to change their mind at least a half dozen times before settling on a strategy anyway, so have them just start throwing it all in an S&P 500 fund while they figure it out. This is a beginner starting from $0.00 not one that got a large inheritance recently. If you get beyond explaining what stock and bond funds/index funds are and what a reasonable AA might be, you have said too much to a beginner.
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Re: Should tilters recommend tilting to beginners?
I recommend target date funds because I'm not about to try to explain to someone how and when to rebalance, what AA to use, etc. Target date funds are cheap, and good enough (although I'm not thrilled about going to 40% international). Also, I am not a tilter, unless you consider only going 25% international to be a tilt.
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Re: Should tilters recommend tilting to beginners?
I tilt. I never recommend it to beginners. I only recommend a two fund portfolio or a target date fund. I use the two fund idea only if they seem ready to understand asset allocation and the idea of an equity/fixed split. Even so, for beginners, putting all the equity into one fund and all the fixed into a second fund is about as far as they are likely to take as an idea. More details just shut them down and they do nothing.
For engineers and very analytic types, I mention the possible future ideas of moving to a three fund portfolio to better represent international, and beyond that the idea of tilting, but never specific details. When they have some experience and are ready to build on the basics, then we can talk about that. For some people knowing there are more advanced ideas seems to motivate them to start, for others too much detail will make them do nothing. When in doubt I keep it as simple as possible.
For engineers and very analytic types, I mention the possible future ideas of moving to a three fund portfolio to better represent international, and beyond that the idea of tilting, but never specific details. When they have some experience and are ready to build on the basics, then we can talk about that. For some people knowing there are more advanced ideas seems to motivate them to start, for others too much detail will make them do nothing. When in doubt I keep it as simple as possible.