Second guessing the three fund portoflio

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Swymer
Posts: 56
Joined: Fri Apr 25, 2014 12:05 pm

Second guessing the three fund portoflio

Post by Swymer »

Hopefully this isn't wrong of me to do but I found this post and wanted to bring it here to see what you guys think about it.

''If you are truly serious about wanting to "put my cash in 5 to 10 funds or ETF's and just leave it there", you should reconsider owning ANY ETFs or index funds. These funds will lose 35% to 55% of their value in the next bear market and it will typically take 4-5 years for these funds to regain their full value. The experience from March 2009 to present is unusual because many funds have already more than made up what they lost in the most recent bear market.

2. If you are looking for "buy and hold" funds you are best served by holding the following types of mutual funds:

a. Equity mutual funds with managers that have already proven they can lose significantly less money during a bear market than an S&P 500 ETF or index fund.

b. A balanced mutual fund which varies the percentage it holds between bonds and equities depending on market conditions.

c. An all-asset go anywhere/do anything fund with a totally flexible mandate.

d. Multi-sector (flexible) go anywhere/do anything bond funds.

My specific recommendations:

1. Defensive equity funds: AMANX, FMIMX, BPAVX, MAPIX, MVPFX, RYSEX.

2. Balanced funds: OAKBX, MAPOX, ICMBX, FOBAX, PRWCX.

3. All asset funds: FPACX, PAUIX.

4. Flexible bond funds: LSBRX, PDIIX, PIMIX, MWCRX, SUBYX.''

Does this person know what he/she is talking about?
Tigermoose
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Re: Second guessing the three fund portoflio

Post by Tigermoose »

In the past, actively managed funds have not avoided bear markets any better than a passive index. And they charge you a higher expense ratio for the illusion that they are going to do something special next time to help you avoid losing money.
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livesoft
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Re: Second guessing the three fund portoflio

Post by livesoft »

Swymer wrote:Does this person know what he/she is talking about?
Absolutely not.

I laughed when I saw the group of balanced funds. Why does one need any balanced fund if they already have a balanced portfolio?
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Mike Scott
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Re: Second guessing the three fund portoflio

Post by Mike Scott »

The three fund (or mild variations of it) is the answer to those questions. Sounds like someone is trying to sell you something.
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William4u
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Re: Second guessing the three fund portoflio

Post by William4u »

IMHO, this person (salesperson?) is generally giving bad advice. However, the advice is so vague that he or she could make excuses for many of the problems it seems to have. The few funds I checked were pointlessly expensive and undiversified. The number of recommended funds is generally a bad sign, since it makes investing look complicated and gives the false impression that one needs to pay someone to manage one's investments.

There is a lot of unnecessary overlap among so many funds. Use a Morningstar X-ray to see what the overlaps really come to (in the end all these funds likely are similar to a very expensive version of a 3-fund portfolio). When I have seen friends with a similarly bizarre array of funds, they can use the Morningstar X-ray to see what it really adds up to. The stock allocation is usually very similar to an Index fund that costs far less.

The person (salesperson?) talks about risk of losing capital, which is always a risk with investing (this person's portfolio is also risky). The portfolio this person (salesperson?) recommends does not adjudicate these risks better than the 3-fund portfolio (maybe worse, but again it is vague on allocation and a number of other things).

To lower risks, just increase the percentage of bonds. If you want to soften the inevitable ups and downs of the market, just add bonds. The 3-fund portfolio can achieve the same or better level of risk/expected return at a fraction of the cost and complexity.
Last edited by William4u on Thu Sep 04, 2014 1:15 pm, edited 1 time in total.
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ogd
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Re: Second guessing the three fund portoflio

Post by ogd »

This person does not know what they are talking about.

Paying high expense ratios in the vain hope that managers can see the crash better than the market at large is how investors give up 1-2% of the returns they are entitled to (the market returns). Going by "proven track records", then jumping ship when those records get "unproven" is how they lose another 1.5% on average, below the very funds they invest in. The "Five star lifestyle" as I like to call it in reference to Morningstar and to some degree my own past is very expensive.

Tactical asset allocation funds in particular (i.e. balanced funds allowed to shift the balance) have been a losing proposition even during the time when they were supposed to work best. See: http://www.cbsnews.com/news/tactical-as ... er-ripoff/.
leonard
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Re: Second guessing the three fund portoflio

Post by leonard »

Where did you find it? Why not ask the person that wrote it - rather than have others speculate second hand?
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
NightFall
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Re: Second guessing the three fund portoflio

Post by NightFall »

Google works very well. The original source is from here:

http://www.mutualfundobserver.com/discu ... ent-advice
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SmileyFace
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Re: Second guessing the three fund portoflio

Post by SmileyFace »

NightFall wrote:Google works very well. The original source is from here:

http://www.mutualfundobserver.com/discu ... ent-advice
I just looked at this site - the discussion above along with other discussions on that site. Good site for a chuckle but OMG - talk about the blind-leading-the-blind. Kind of the opposite of all the great conversations and advice here!

I once had someone try to build the "An Active manager can be smart enough to throttle back on equity when the bear comes - whereas indexing has to keep full speed ahead" - and have seen that argument in many places - Active Managers are likely (and many have proven) to miss the rebound not knowing how long it will last.....and just because he got lucky in one downturn and rebound - doesn't mean he can do it next time! I'd stay off that site.
Topic Author
Swymer
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Re: Second guessing the three fund portoflio

Post by Swymer »

leonard wrote:Where did you find it? Why not ask the person that wrote it - rather than have others speculate second hand?

I found it at mutualfundobserver.com.

Ask the person who wrote it? Are you kidding? What would my question be? And do you think they would give an honest answer? (I already suspected that it was bogus info written by an advisor or someone similar)

Finding out if the claims in that post are BS by asking here seemed to be the best thing I could possibly do.
YDNAL
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Re: Second guessing the three fund portoflio

Post by YDNAL »

Swymer [OP] » Thu Sep 04, 2014 1:54 pm wrote:Hopefully this isn't wrong of me to do but I found this post and wanted to bring it here to see what you guys think about it.
[u]Assuming this is indeed a post[/u] that wrote:''If you are truly serious about wanting to "put my cash in 5 to 10 funds or ETF's and just leave it there", you should reconsider owning ANY ETFs or index funds. These funds will lose 35% to 55% of their value in the next bear market and it will typically take 4-5 years for these funds to regain their full value. The experience from March 2009 to present is unusual because many funds have already more than made up what they lost in the most recent bear market......

My specific recommendations:

1. Defensive equity funds: AMANX, FMIMX, BPAVX, MAPIX, MVPFX, RYSEX.

2. Balanced funds: OAKBX, MAPOX, ICMBX, FOBAX, PRWCX.

3. All asset funds: FPACX, PAUIX.

4. Flexible bond funds: LSBRX, PDIIX, PIMIX, MWCRX, SUBYX.''
Does this person know what he/she is talking about?
I looked at AMANX. A $10,000 investment in October 2007 dropped to $6,529 by February 2009 -- a -35% decrease.

For the heck of it, I went ahead and looked at RYSEX. A $10,000 investment in June 2007 (the high was earlier) dropped to $6,545 by February 2009 -- same as AMANX.

Equity is risky.... deal with it, or don't invest in it!
Last edited by YDNAL on Thu Sep 04, 2014 2:02 pm, edited 1 time in total.
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leonard
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Re: Second guessing the three fund portoflio

Post by leonard »

Swymer wrote:
leonard wrote:Where did you find it? Why not ask the person that wrote it - rather than have others speculate second hand?

I found it at mutualfundobserver.com.

Ask the person who wrote it? Are you kidding? What would my question be? And do you think they would give an honest answer? (I already suspected that it was bogus info written by an advisor or someone similar)

Finding out if the claims in that post are BS by asking here seemed to be the best thing I could possibly do.
I assume you needed clarification on their point of view. If you are simply looking for the boglehead answer then....

Set your Asset Allocation using Low Cost Indexes (and IPS if you need one), Buy your AA, hold your AA, and rebalance to your AA based on a written (non-market timing) plan in your IPS. Don't market time.

In light of that - you can ignore the advice quoted in your OP. Easy.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
Tom_T
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Re: Second guessing the three fund portoflio

Post by Tom_T »

When the day comes that I see a defense of active management that doesn't come from an active manager, then maybe I'll pay attention.
gtmn
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Re: Second guessing the three fund portoflio

Post by gtmn »

This is a classic argument (or advertisement) for active management that has been disproven repeatedly over the last 20 years, but it keeps getting rehashed by active managers and salespeople who desperately want to keep fees and commissions high.

When you compare performance of an active fund versus an index, you want to be sure you compare apples to apples, so a large company stock fund would be compared to the S&P 500 Index, a balanced fund holding 60% US stocks and 40% US bonds would be compared to the Vanguard Balanced Index fund, for example.

I recognized several of the ticker symbols you provided because they are among the best managed funds available. However, if you compare their performance to their index equivalents, they still don't measure up. Go to Yahoo Finance, Google Finance, or Morningstar and plug in the fund symbol, click on the chart, and then click "compare" and enter the corresponding index fund from Vanguard. I tried this with several of the funds on the list and compared the performance from 2007 to present so I could see what advantage was gained through the decline and rebound phases of the last cycle. None of the active funds I tried provided any meaningful benefit, and several trailed their respective Vanguard index fund. Moreover, this basic chart comparison doesn't reflect additional performance drags such as higher tax costs for actively managed funds and turnover of fund holdings due to underperformance or manager changes.

The longer you hold your index funds, the more inevitable their superior performance becomes as their low cost and low-turnover advantages snowball in your favor. If you haven't already, I recommend reading Jack Bogle's "Common Sense on Mutual Funds" and "Winning the Loser's Game" by Charles Ellis or "Four Pillars of Investing" by William Bernstein. After reading these books, there should be little question about the ability of active managers to consistently outperform the markets.
kaudrey
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Re: Second guessing the three fund portoflio

Post by kaudrey »

Swymer wrote:Hopefully this isn't wrong of me to do but I found this post and wanted to bring it here to see what you guys think about it.

''If you are truly serious about wanting to "put my cash in 5 to 10 funds or ETF's and just leave it there", you should reconsider owning ANY ETFs or index funds. These funds will lose 35% to 55% of their value in the next bear market and it will typically take 4-5 years for these funds to regain their full value. The experience from March 2009 to present is unusual because many funds have already more than made up what they lost in the most recent bear market.

2. If you are looking for "buy and hold" funds you are best served by holding the following types of mutual funds:

a. Equity mutual funds with managers that have already proven they can lose significantly less money during a bear market than an S&P 500 ETF or index fund.

b. A balanced mutual fund which varies the percentage it holds between bonds and equities depending on market conditions.

c. An all-asset go anywhere/do anything fund with a totally flexible mandate.

d. Multi-sector (flexible) go anywhere/do anything bond funds.
a. Past performance is not a predictor of future performance; and getting lucky once doesn't mean you will again.
b. This is either market timing or just rebalancing, and if you have an IPS, you should be rebalancing your porfolio to match that.
c. Market timing if they are chasing sectors/assets
d.Again, chasing yield/sectors

Stick to your low-cost index funds and rebalance as needed.
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