how best to diversify

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how best to diversify

Postby larryswedroe » Wed Jul 24, 2013 8:12 am

There's now more and more research focusing on this question. Here's one look.

http://www.cbsnews.com/8301-505123_162-57594938/avoid-the-alternative-investments-mousetrap/

Hope you find it helpful
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Re: how best to diversify

Postby Investing is boring » Wed Jul 24, 2013 8:20 am

Interesting theory. But how would a retail investor who refuses to pay the high fee's for DFA advisors access these factor? Further, how would one monitor these factors to maintain a balance? Seems like it is all theory without practical implementation advice.
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Re: how best to diversify

Postby nedsaid » Wed Jul 24, 2013 9:42 am

My take on all of this is that volatility cannot be avoided. Sometimes the best thing to do is nothing and let the markets return to sanity.

Investing across factors makes sense. I am doing this with the "small" and "value" premiums. I wonder what happens when you try to capture more and more premiums. One poster snarked that what you get is an expensive total market index. My gut feeling is to try for maybe three or four of these factors. I wonder about the increased complexity of trying to capture all of these.

I am skeptical of many of the "alternatives", particularly if they are illiquid. It also helps if like David Swenson, you get into these things early. By the time products for these investments are ready for the retail investor, in many cases the story is already over. It would be like buying bell-bottom jeans during the 1980's trying to keep up the the latest clothing fashions. The early bird gets the worm. The fact that Swenson had success at this doesn't translate to the retail investor. Sort of like growing a ponytail at my age. Looks pretty dorky.

We all want the "secret sauce" of increased returns and decreased volatility. Even the best strategies that attempt to do this don't work all the time.
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Re: how best to diversify

Postby bertilak » Wed Jul 24, 2013 12:12 pm

nedsaid wrote:My take on all of this is that volatility cannot be avoided.

... except with annuities (SPIAs). The price you pay is loss of principle -- aka legacy.

That price may or may not be a good deal for any particular investor. If the expected volatility leaves you with enough return even at a worst case assumptions then the annuity is probably not ideal. But there degrees of "ideal." Perhaps annuitizing some percentage of your wealth is the optimal solution. I think that Wade Pfau's studies are giving us that kind of answer, or at least a point of view where one can come up with a personal answer.

This also ties into the idea of a safe floor. We can accept different amounts of volatility at different levels of need. You make "safe" what you "need." It is up to you to define "safe" and "need" to your own personal satisfaction. At least there is a framework for your planning.
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Re: how best to diversify

Postby mickens16 » Wed Jul 24, 2013 11:01 pm

Investing is boring wrote:Interesting theory. But how would a retail investor who refuses to pay the high fee's for DFA advisors access these factor? Further, how would one monitor these factors to maintain a balance? Seems like it is all theory without practical implementation advice.


I've been asking this same question. I have no interest in paying for a DFA or an AQR advisor. The only thing I've seen comparable:

http://us.ishares.com/solutions/factor_investing.htm
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Re: how best to diversify

Postby nedsaid » Thu Jul 25, 2013 12:03 am

Bertilak, I actually am considering a single premium annuity upon retirement for a portion of my nest egg. It is worthy of consideration.
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Re: how best to diversify

Postby staythecourse » Thu Jul 25, 2013 9:06 am

nedsaid wrote:My take on all of this is that volatility cannot be avoided. Sometimes the best thing to do is nothing and let the markets return to sanity.


The more I invest the more I believe in this. I'm not so sure MPT is the way to go with trying to maximize risk adjusted returns using returns, S.D., and correlation coefficients. It is great in theory, but the further I go along the more I just believe in focusing on how much risk, i.e. risk of loss you are willing to take and go from there. Shakespeare was right when he said "time heals all wounds". The only question is can you wait it out.

Good luck.
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Re: how best to diversify

Postby Beagler » Thu Jul 25, 2013 1:12 pm

Investing is boring wrote:Interesting theory. But how would a retail investor who refuses to pay the high fee's for DFA advisors access these factor? Further, how would one monitor these factors to maintain a balance? Seems like it is all theory without practical implementation advice.


A competent advisor is there to monitor and help guide the investor who feels they need help, right? Plenty of investor choose to go it alone. Others feel they benefit from advice. There's no "one size fits all."
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
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Re: how best to diversify

Postby Oliver » Sat Jul 27, 2013 2:01 pm

mickens16 wrote:
Investing is boring wrote:Interesting theory. But how would a retail investor who refuses to pay the high fee's for DFA advisors access these factor? Further, how would one monitor these factors to maintain a balance? Seems like it is all theory without practical implementation advice.


I've been asking this same question. I have no interest in paying for a DFA or an AQR advisor. The only thing I've seen comparable:

http://us.ishares.com/solutions/factor_investing.htm
The AQR funds are available at fidelity and td ameritrade with no minimums. I have purchased an AQR fund at TD Ameritrade. The fee to purchase the fund is $50.
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