When to deviate

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When to deviate

Postby airahcaz » Sat Feb 09, 2013 3:47 pm

Many discussions on the Two Fund or the Three Fund Portfolio.

Suppose an investor agrees on either as their sole strategy and thus their sole investments.

Is there a point in wealth accumulation that one should potentially think about deviating from this?

$1M,$5M,$10M,$20M,$50M,$500M?

And why? The only thing that has changed from the investment principles when the individual was not as wealthy, is, well, they've accumulated much more of the 2 or 3 funds...
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Re: When to deviate

Postby chaz » Sat Feb 09, 2013 3:55 pm

Keep it simple.
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Re: When to deviate

Postby VictoriaF » Sat Feb 09, 2013 3:57 pm

Deviate if you are a positive deviant.

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Re: When to deviate

Postby Random Walker » Sat Feb 09, 2013 3:58 pm

In general, I think the answer is no. I believe a good plan is scalable. The one exception might be when a certain minimum value is required to access an asset class at low cost. But for the most part I believe the incremental benefit of additional weakly correlated asset classes scales up.

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Re: When to deviate

Postby stemikger » Sat Feb 09, 2013 4:24 pm

If you own the two fund portfolio you own the total stock market and the total bond market. I think that is a nice about of diversification. However, if you are past 10 million, you may feel the need to own something other than stocks and bonds. However, according to the site Celebrity Net Worth, Mr. Bogle's net worth is $80 million and all of it is in Vanguard funds, and two houses (the house he lives in and his summer home in the Adirondacks which he inherited from his wife’s family).

Charlie Munger believes strongly in non-diversification. In fact, he goes a step further arguing that “in the United States a person or institution with almost all wealth invested, long term, in just three fine domestic corporations is securely rich.” It’s patience and non-diversification says Munger, that explain the astounding success of Buffet and Berkshire Hathaway.

Warren Buffett was once asked why he dosen’t own some real estate and he said why would I when stocks are easy. I don’t want to become a Superintend of Housing. He was also asked why he does not own a Yacht and a big Mansion like the other super wealthy do. His answer was that he dosen’t want the headache of hiring grounds keepers and a crew of people to take care of these things. He said it is much better to have friends that own them.
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Re: When to deviate

Postby Tortoise » Sat Feb 09, 2013 4:58 pm

Many Bogleheads feel that when you have saved "enough," you should stop playing the game. Meaning you should cut back on the percentage of equities if you can essentially live off the interest.

Note that I put quotes around "enough." That is because John Bogle wrote a book in 2010 titled, "Enough: True Measures of Money, Business, and Life."
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Re: When to deviate

Postby retiredjg » Sat Feb 09, 2013 5:19 pm

I think your choice of bonds will likely have to change as the amount goes up because a person with a $4 million portfolio is unlikely to have enough tax-advantaged space to hold all the bonds in there. Some would almost have to flow into the taxable account where tax-exempt bonds might be a better choice.

I don't think the mechanics of investing have to change because there is more money, but I think many people might have their own personal reasons to change their stock to bond ratios as the money grows. I see it as a change they might want because their willingness and need for risk has changed.
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Re: When to deviate

Postby dbr » Sat Feb 09, 2013 5:26 pm

airahcaz wrote:Many discussions on the Two Fund or the Three Fund Portfolio.

Suppose an investor agrees on either as their sole strategy and thus their sole investments.

Is there a point in wealth accumulation that one should potentially think about deviating from this?

$1M,$5M,$10M,$20M,$50M,$500M?

And why? The only thing that has changed from the investment principles when the individual was not as wealthy, is, well, they've accumulated much more of the 2 or 3 funds...


If it were me at $500M my whole perspective on what money is would be drastically different. I can't imagine anyone having that much money and just stuffing it away in some funds at Vanguard.

Where is the tipping point where that changes? I haven't been there, so I don't know. Based on present situation even $10M, even $5M, is so very far away from my actual situation that I would have to get there to know, and the chances of that are non-existent.

But, what is the point of your question?
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Re: When to deviate

Postby nisiprius » Sat Feb 09, 2013 5:26 pm

One factor would be whether the investor has "decreasing relative risk aversion" or "increasing relative risk aversion." This describes the behavior people have when they feel they have "enough."

A person with "decreasing relative risk aversion" says "I have enough now, I can afford to go crazy and grab for the brass ring with the extra," and increases the risk of their investments (and perhaps adds new kind of risky investments). The person with "increasing relative risk aversion" says "I have enough, I don't need to take any more risk" and decreases their risk, like Suze Orman, who as of 2007, was personally invested in 4% stocks, 96% zero-coupon AAA-rated municipal bonds.

The obvious point that people seem to be amazingly incapable of grasping is that neither of these is objectively right or wrong. It seems as if everyone projects their personal tastes and wants to regard those who differ with them as being objectively wrong.
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Re: When to deviate

Postby Aptenodytes » Sat Feb 09, 2013 5:35 pm

Of course.. But the question framed as generally as this is not useful for anything. Are you contemplating something specific?
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Re: When to deviate

Postby Calm Man » Sat Feb 09, 2013 6:48 pm

No.

OP, what happens is that it is not like you suddenly hit a magic number. You approach it gradually so that at any given point in time it's not like you just crossed a threshold. And I can tell you the desired number never decreases, might stay the same, but probably increases for most people. Assuming you do not take the position that "I won so I can dial down the risk" or "I won so I can increase the risk" then nothing really changes. Nisiprius put this much more elegantly. And frankly, assuming you do not believe in active management, hedge funds or alternative investments, which most here do not, what is the difference between a 50/50 or 60/40 in TSM and a bond fund whether you have 400K or 20 MM? Its the same.

Your post does beg one question. Why are you asking the question and maybe we can better assist you.
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Re: When to deviate

Postby airahcaz » Sat Feb 09, 2013 7:20 pm

The root of the question was firstly curiosity.
The second was that one can certainly hope to get to these milestones.
The third, and I suppose not many such are on this board, but what do the folks with 10-20-50M do? I'd be willing to bet they get far more exotic, and as many have responded here, unnecessarily deviating from the beaten path.
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Re: When to deviate

Postby tibbitts » Sat Feb 09, 2013 7:36 pm

airahcaz wrote:I suppose not many such are on this board ... with 10-20-50M
True, most have way more than that :wink:

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Re: When to deviate

Postby Bungo » Sat Feb 09, 2013 9:13 pm

airahcaz wrote:Many discussions on the Two Fund or the Three Fund Portfolio.

Suppose an investor agrees on either as their sole strategy and thus their sole investments.

Is there a point in wealth accumulation that one should potentially think about deviating from this?

$1M,$5M,$10M,$20M,$50M,$500M?

And why? The only thing that has changed from the investment principles when the individual was not as wealthy, is, well, they've accumulated much more of the 2 or 3 funds...

$5M would be enough to live on for the rest of my life even if I never earned another nickel in interest. There would be no need or desire to take risk with this money, so I would shift it into something as safe as possible, such as short-term treasuries. Anything above $5M would remain invested more or less according to my present asset allocation, until and unless I find a use for the money, such as good charities or buying gifts for people or whatever.

In any case, I'll undoubtedly retire long before I accumulate $5 million, so there is no risk of ever having to face this question.
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Re: When to deviate

Postby YDNAL » Sun Feb 10, 2013 12:38 pm

airahcaz wrote:The root of the question was firstly curiosity.
The second was that one can certainly hope to get to these milestones.
The third, and I suppose not many such are on this board, but what do the folks with 10-20-50M do? I'd be willing to bet they get far more exotic, and as many have responded here, unnecessarily deviating from the beaten path. (my emphasis)

Says who?
  • First, it is near (beyond?) impossible to accumulate mid-high 8 digits investing in a 401K, Roth IRA, Vanguard funds, etc. People at this level of Net Worth are mostly either entrepreneurs or trust fund people.
  • Second, people who save 7 figures can easily adopt a simple strategy to diversify amongst thousands of Stocks/Bonds using Index funds.
Coincidentally, I was just reading Forbes magazine's April issue showing US top billionaires and change in Net Worth.
1. S. Robson Walton (Wal-Mart) $101.5 billion, +$2.6 billion
2. Bill Gates (Microsoft) $62.3 billion, +$260 million
3. Warrent Buffet (Berkshire) $45.5 billion, +$1.7 billion
4. Larry Ellison (Oracle) $37.6 billion, -$230 million

To name a few....
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Re: When to deviate

Postby The Wizard » Sun Feb 10, 2013 1:34 pm

Folks with $20M or more probably didn't get there by putting money aside each month from employment.
They did it by starting a business that does something lucrative, like real-estate development or drilling for petroleum.
And they developed EXPERTISE in that business. So they may still own a few oil wells or office buildings at age 70, but that doesn't mean that outsiders that have stumbled into big bucks should dump a few million into some field like that, which they HAVE NO EXPERTISE in...
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Re: When to deviate

Postby Dandy » Mon Feb 11, 2013 2:24 pm

If/when your portfolio grows to more than exceed your conconverative estimate of what you will need for retirement - you have won the retirement game. So further growth maybe for your heirs while further risk might put your retirement at some risk. At this point you might consider making sure you have enough "safe" investments to insure your retirement vs letting the "normal" portfolio allocation continue.

Why if you have won the retirement game would you risk reversing that? I think that is an essential point that Otar and Bernstein make. It is a major mind blowing change in managing your money. After all, in the accumualtion phase we are allocating based on our risk tolerance and rebalancing with the usual goal of makeing sure we can fund retirement - when we get there we tend to want to keep doing it out of habit and prior success. Of course for most of us once retirement hits our future earning power is very low. So we have enough to retire and we can't earn much more. Shouldn't that be a time to consider deviating from our approach during the accumulation phase when we didn't have enough and had future earning power. It may be that we need 2 portfolios: one is the 'Safe" portfolio that has as Mr. Berstein suggests 20 to 25 years of residual expenses (Yearly withdrawal needed) and one that is an "excess" portfolio that is for heirs or contingencies or mad money for special vacations etc.

I think another time to evaluate deviation is when things are at historic levels or the nature of the investment vehicle or landscape has changed. This is much more risky since it could easily lead to market timing or getting into "fad" funds or following fad ideas. I think historical low interest rates might mean moving some money from bond funds into higher yielding CDs. or lower duration bond funds. When money market funds are paying almost zero yield - and the prospects for a return to "normal" are cloudy maybe it is time to move the allocation to money markets to something different. I believe that is why Vanguard is planning to not have allocations to money market in their Target Date funds. If you were investng in the 1950's there might be no reason to invest internationally. Now with the growth in international markets vs the US markets that might be a reason to add some international funds or international bond funds.

If you have several times your retirement needs it probably doesn't matter if you change your alloocation.
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