Swedroe Fat Tails Portfolio for VG 529 Plan

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Swedroe Fat Tails Portfolio for VG 529 Plan

Postby bogle2013 » Fri Feb 01, 2013 2:35 pm

Is there any way to come close to replicating the Swedroe Fat Tails porfolio in the Vanguard 529 Plan? You are only allowed to use 5 funds, and the selection is limited. Here are the options:

Stock Portfolios
Vanguard 500 Index Portfolio
Vanguard Aggressive Growth Portfolio
Vanguard Growth Index Portfolio
Vanguard Mid-Cap Index Portfolio
Vanguard Morgan™ Growth Portfolio
Vanguard Small-Cap Index Portfolio
Vanguard Total International Stock Index Portfolio
Vanguard Total Stock Market Index Portfolio
Vanguard Value Index Portfolio
Vanguard Windsor™ Portfolio

Bond Portfolios
Vanguard High-Yield Bond Portfolio
Vanguard Income Portfolio
Vanguard Inflation-Protected Securities Portfolio
Vanguard Total Bond Market Index Portfolio
Short-Term Investments Portfolio
Vanguard Interest Accumulation Portfolio
------
Best I can think of is using:

25% Inflation-Protected Securities Portfolio
25% Short Term Investments Portfolio
25% Small Cap Index
15% Total International
10% Total Stock Market
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby letsgobobby » Fri Feb 01, 2013 2:52 pm

replace TSM with value?
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby larryswedroe » Fri Feb 01, 2013 7:01 pm

I would not include TSM at all if that is what you want
Unfortunately dont have international diversification, at least would want that if possible
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby Roy » Fri Feb 01, 2013 8:05 pm

Bogle,

If I had to try and imitate the original Swedroe concept given your mix, I would likely be 100% Vanguard Small Cap Index (about 30% of your portfolio), and the rest (70%) in ST High Quality Bonds (given current TIPS yields, and once I thoroughly looked under the hood of that ST fund you have there), or some mix of Vanguard TIPS and ST Bonds, as you suggested. Remember, the Swedroe conept is a massive concentration (tilt) but in a small equity allocation.

I would not use the Total International fund for the same reason Larry said not to use the TSM fund, even as Larry's portfolio is internationally diversified. Backtesting this 30/70, above, might show Returns, Max Drawdowns, and a Standard Deviation, not very different to what Larry's portfolio would have done in backtest. Going forward, things may be different. As discussed many times, by Larry and others, understanding how different this design is from a Total Markets portfolio (or even most other portfolios), is important.
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby bogle2013 » Fri Feb 01, 2013 8:52 pm

Roy wrote:Bogle,

If I had to try and imitate the original Swedroe concept given your mix, I would likely be 100% Vanguard Small Cap Index (about 30% of your portfolio), and the rest (70%) in ST High Quality Bonds (given current TIPS yields, and once I thoroughly looked under the hood of that ST fund you have there), or some mix of Vanguard TIPS and ST Bonds, as you suggested. Remember, the Swedroe conept is a massive concentration (tilt) but in a small equity allocation.

I would not use the Total International fund for the same reason Larry said not to use the TSM fund, even as Larry's portfolio is internationally diversified. Backtesting this 30/70, above, might show Returns, Max Drawdowns, and a Standard Deviation, not very different to what Larry's portfolio would have done in backtest. Going forward, things may be different. As discussed many times, by Larry and others, understanding how different this design is from a Total Markets portfolio (or even most other portfolios), is important.


thanks - interesting concept. my issue is that my children already have 2 trusts (from both sides of the grandparents) all invested in vanguard lifestrategy growth fund. a great, diversified fund that when asked that is what i said i would prefer. so they have a nice amount already invested in TSM, Intl Total Stock and Total bond. We have considerably funded their 529 plan already at age 2 and 4- which is tax-advantaged. I thought it might make sense to think outside the box and employ a strategy for the 529 different from their trusts.
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby Grt2bOutdoors » Fri Feb 01, 2013 9:25 pm

If you used the West Virginia 529plan you'd have access to DFA funds - but you will pay a higher er for that privileged access.
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby Call_Me_Op » Sat Feb 02, 2013 8:41 am

I never thought of a "Fat Tails" portfolio as being appropriate for a 529. I see it more as a portfolio for folks who want to preserve most of their current wealth, but want strong upside potential at the same time (i.e., wealthier folks).
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby Roy » Sat Feb 02, 2013 9:20 am

Call_Me_Op wrote:I never thought of a "Fat Tails" portfolio as being appropriate for a 529. I see it more as a portfolio for folks who want to preserve most of their current wealth, but want strong upside potential at the same time (i.e., wealthier folks).



Agreed with Op re: the 529. I think if the children are young, you might consider a heavier initial allocation to equities, perhaps much heavier, and then taper it down as the time draws near to use the money.

But the utility of the strategy, I think, is also more for the risk averse (ones who fear a large, equity-driven drawdown), not necessarily just for wealthier folks. Again, all caveats need be well understood on it.
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby larryswedroe » Sat Feb 02, 2013 11:01 am

call me op
Remember that tilting can be used to EITHER raise expected returns by keeping same equity allocation or keeping same expectd return by lowering the equity allocation (and reducing tail risk).

So it can apply to any investor. The more risk averse, the more one should consider tilting and lowering equity allocation

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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby Call_Me_Op » Sat Feb 02, 2013 11:19 am

Thanks Larry. Two questions:

1.) Do you consider including only SCV and EM as giving-up some meaningful level of diversification?

2.) It has been suggested (in another thread) that you do not rebalance from bonds into equities in your personal portfolio (so-called asymmetric rebalancing). I would be interested in your thoughts on this approach.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby baw703916 » Sat Feb 02, 2013 11:23 am

I agree with Larry's post above. For a 529, the one thing you really don't want is for a 2008 meltdown to happen right before the beneficiary starts college. If you have enough to afford college, between the 529 and other sources, then the marginal utility of wealth becomes pretty low. If on the other hand you need a 12% rate of return to be able to afford college, then there's no strategy that has a good probability of success.

Much as I like the Fat Tails approach, I don't think it's possible with this fund lineup--not enough tilt or international diversification in the equities, and not enough quality in the bonds. The OP's original proposal is pretty close to how I would set up the portfolio. It's not a Fat Tails portfolio, but neither is my TSP account.

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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby larryswedroe » Sat Feb 02, 2013 6:28 pm

call me op

I would prefer more diversificaton to less, but you use what you have

Re rebal, see that thread
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby Call_Me_Op » Sun Feb 03, 2013 9:29 am

Thanks Larry. I'm not sure you followed what I was asking relative to diversification. In a "fat tail" portfolio, you (for example) limit your equity subclasses to small-cap value and emerging markets. You are not holding any large cap US or any developed market equities. While it is true that holding some of these will lower expected return, I guess I was asking whether you see any significant downside to not holding these other equity subclasses - aside from increased SD. Maybe it's another way of asking whether the risk premiums of SCV and EM are guaranteed to persist.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby larryswedroe » Sun Feb 03, 2013 9:35 am

call me op
You misunderstood the Larry Portfolio for stock portion, might be
50%US Sv, 37% ISV, 13% EMV
so have developed markets,

And of course risk premiums are not guaranteed to persist, if they were you could be 100% stocks
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Re: Swedroe Fat Tails Portfolio for VG 529 Plan

Postby Blue » Sat Jun 29, 2013 12:40 pm

Now that the Utah 529 plan includes a number of low cost DFA funds, it might be interesting to re-explore the idea of a Swedroe Fat Tails Portfolio for a 529.

What investors (if any) should favor tilted 529 plans?

UESP currently offers the following Dimensional funds as underlying investments in its customized investment options:

DFA Global Equity Portfolio (DGEIX)
DFA U.S. Large Cap Value Portfolio (DFLVX)
DFA U.S. Small Cap Value Portfolio (DFSVX)
DFA Real Estate Securities Portfolio (DFREX)
DFA International Value Portfolio (DFIVX)
DFA One-Year Fixed Income Portfolio (DFIHX)
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