Abuss368,abuss368 wrote:Hi Default User BR,Default User BR wrote:As usual, you seem to imply that there will be no difference in return for the two strategies. This is very likely incorrect.abuss368 wrote:Jack Bogle had a small but interesting write up in his book "The Little Book of Common Sense Investing".
You can tilt to large and small, but if you invest in the Total Stock Market fund for the long term, there is no need to add the complexity and headaches.
The headaches for this "complexity" are not really of any significance.
Brian
Total Market investing has been called the efficient frontier of investing. Taylor Larimore has provided and excellent link to research that discusses this. I recommend that anyone take some time and read this.
Mr. Bogle and David Swensen, who know more about investing than anyone will in their lifetime, have also discussed this matter in depth in their many excellent books, articles, and video interviews available on line. The way I look at it, anyone who can create a company like Vanguard, and another individual who has grown the Yale endowment from just under $1 BILLION to over $20 BILLION, are so successful and knowledgable, that no one else can even come close.
Warren Buffett has stated many times that investors would be best off owning a Total Market Index fund that is low cost.
I understand the slice and dice/tilt folks have a hard time acccepting this, and that is ok. Eventually they will see the many benefits of total market investing.
The experts at Vanguard design nearly all of their fund of funds (i.e. Life Strategy and Target Retirement series) with the Total Stock, Total International, and Total Bond (i.e. the later funds near the target retirement date include Inflation Bonds and a Money Market). Their research on their website also point to the overwhelming facts.
We all think we are smarter than the next guy. We have a "leg up" on the competition. We just "know" more. In some respects it is human nature. Me? I choose to follow the lead of Jack Bogle, David Swensen, and Warren Buffett. I just listen to them.
More funds result more headaches, more rebalancing issues, more concerns for heirs, more administration, more tax considerations, more paperwork, etc. with no benefits.
Another benefit, and one that another forum member "craigr" also highlighted a week or two ago. It is incredible at my firm during tax season how we compare and contrast the Total Market folks and the Slice and Dice crowd with their many funds. We review investment statements, returns, tax implications, and the actual tax return. For the Slice and Dice folks, the trading, rebalancing, fees, etc. all add up and detract from returns. These clients pay much more in tax, have more concerns, and the overall return is that much less. Not to mention we charge them more to record all the activity. We meet with the clients, review the results and tax return, point this out, with most clients admitting a more simple portfolio is that much more effective. For our Total Market Index clients, they pay so much less in tax, less fees, minimal rebalancing, their spouses are so thankful for the simplicity and are more confident should something happen to their spouse. Every year the results note how the Total Market folks just lead the race year in and year out. It stinks for the slice and dice folks and some have a hard time accepting it. Can it really be this easy? Can I stop pretending to do all this "extra".
I would try a simple Total Market portfolio such as the Three Fund as noted by Taylor Larimore and Vanguard or even the Core-4 as recommended by Rick Ferri. Who knows, you might like it. If after some time, add a fund or two if you want. You might do better, but you can do a lot worse.
Let us know your thoughts and concerns. There are many knowledgable folks on the forum that can explain in further detail.
Hopefully that explains things a little better.
Kind regards.
I pretty much disagree with everything you say above.
1. TSM may be on the "efficient frontier" in a one-factor (beta) world where a stock's expected return is soley a function of its covariance with the market, but we obviously don't live in that world. Fama has said that the CAPM is an elegant model, except its wrong. We live in a 3 factor world, whereby the market portfolio is just one allocation among many that are appropriate across a spectrum of size and value possibilities. So this claim is wrong.
2. Multifactor investors (what you call "slice and dice" investors) appreciate the market portfolio...as a LG oriented component in a multi-asset class portfolio. I have shown many times that TSM or S&P 500 (there really isn't much difference between the two) are a worthwhile component in a LG/LV/SV portfolio. It is TSMers who refute any additional diversification across equity dimensions, although apparently REITs (an "industry") are an exception?
3. I am not so sure a multi-asset class portfolio has any of the additional headaches you list. I looked at a tax-managed US large growth, large value, small value mix (30/30/40) for the last 10 years and found it shed 0.4% of its return to taxes. Vanguard'd TSM fund lost 0.3%. So that is just a rounding error. To the extent that sometimes SV loses money when LG is positive (and vice versa), you have more tax-loss harvesting opportunities. And finally, lets not forget, because a multi-asset class portfolio earns its returns from multiple risk/return sources with less than perfect correlation, we should also expect a smoother long term outcome--with the expectation of higher returns over the LG heavy TSM portfolio. Not sure what heirs would find complicated about this? Unless you mean 'mo money, 'mo problems?
4. I find your personal tax firm example unconvincing, as my experience comes to the opposite conclusion. First, I doubt you have a sample of investors large enough to gauge the relative implementation and management complexity of a TSM vs. asset class based approach on all the issues you mention over a sufficiently long period of time. And I am not sure you are accurately representing "slice and dice" investing (or as I call it, asset class investing). Are you including everyone in this S&D group who holds multiple funds (index or otherwise)? If you are, that is a pretty big tent that covers a lot of problematic approaches--active investing,tactical management, etc.. If we instead take asset class investing to be a TSM (or S&P 500)/LV/SV, ILV/ISV/EMV portfolio, I simply do not believe there is any meaningful added complexity, tax insensitivity, or general problems that a basic knowledge of spreadsheets can't solve. TM portfolios and ETFs exist in most of these asset classes, so the tax issues are moot. Rebalancing with cash in/outflows or dividend distributions succeed at keeping a multi-asset class portfolio in line without excessive buys/sells. Finally, asset class investors have of course earned higher returns over market portfolios, so I can't imagine anyone taking issue with that? Also, it is not necessary to hold multiple asset class portfolios to tilt the market away from its natural LG heavy weights. Using DFAs Core Equity portfolios, and TA US and World exUS Core in particular, an investor can achieve the same simplicity and tax sensitivity as a Total Market approach with higher expected returns from modest tilts to small and value. ETF investors can do something similar with TILT.
5. As to the conversion of many investors (S&D or asset class?) to a TSM approach, I don't think so. As the old saying goes: fool me once, shame on you...fool me twice, shame on me. And unfortunately for TSM investors, they've now been "fooled" twice in the last 40 years into thinking the LG heavy index was all they needed. 1965-1981 and 2000-2012 are two excessively long periods where TSM had 0% real returns, yet size and value premiums (expectedly, due to their unique risks and low correlations with the market factor) had above average payoffs, lifting a titled market portfolio well above a TSM allocation and the subsistence level in general. Of course, you see many TSMers throwing in the towel in very subtle ways already -- adding REITs (and "industry") to TSM/TISM is just one widespread example.
No, when you really look at it from all angles, the case for "TSM-only under all circumstances" point-of-view is far from ideal, and won't work for most investors. The pro-TSM arguments don't hold up under even modest levels of scrutiny.