Bogleheads

[Trev H]

.
CraigR,

Spoken like a true LUMPER.

The only safe and sure investment is TSM, and you should FEAR everything else.

I think you forgot to mention the Collective Wisedom of the Market, and Tracking Error Regret (although) you did toss in there that if you invest in anything else it will surly underperform TSM for years on end no matter what (something like that anyway).

All in all a very classic Fear of Diversification - Lumper Response.

Hope you don't have any dreams about SV or ISV tonight (oh what a horrible nightmare that would be).

If investing in Taxable, YES your statements about tax efficiency should be considered.

DFA is not the only place you can get SV or IS, and you can get those asset classes for just a few more bp's a year than TSM. Robert T and others have made several post her on SV and Tax Efficiency and choices of ETF's for tax efficiency. Anyone investing in taxable and insterested in tilting there, should look up some of those post by Robert.

Me - All Tax Deferred at this point, so no tax worries, can S&D and Small and Value tilt all I want.

If you are investing in Taxable consider what CraigR said (well the concerns over tax efficiency) and look up the post by Robert T for suggestions on ETF options.

I would suggest that you strike out the FEAR FACTOR in CraigR's post though.

It may not feel comfortable to truly diversify - but it is very important that you do so.

===
_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[Roy]

[Trev H]

Below is one more comparison I wanted to do.

Not as extreme as Larry on the Small and Value Tilts but holding Half Large, Half Small including Value components on both the US & Intl Side and Blend components as well.

LB,SV,ILV,IS

A simplified ultimate buy and hold mix.

I took that mix of equity at 50% combined with 50% Short Term Treasury for a somewhat moderate mix of equity/bonds.

Then reduced the equity by 10% while adding in Gold at 10%.

Did that two times, getting up to 20% exposure to Gold combines with the 3F diversified equity mix.



Adding the Gold did not help the performance "Return Wise" but it sure did kick the volatility down quite a bit.

Looks like that first 10% add of GOLD was more beneficial than the second.

I do believe that Bernstein suggested keeping the Precious Metals slice low (in the 3-5% range) but a 10% slice seemed to work well, at least Sharpe liked it a lot.

CraigR - so you would not feel left out, I included a warm and fuzzy 50/50 TSM/Tot Bond mix - just for you !

===
_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[MediumTex]

Trev, I'm not getting the same signal from craig as you.

It seems to me that backtesting can get to be a little gimmicky if you're not careful. Putting in a plug for simplicity is not inappropriate.

BTW, how would someone do with 12.5% VGTSX, 12.5% VTSMX, and the rest of the PP as previously discussed?

Doing that would get you broad international exposure as well as an equal dose of good old VTSMX.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[meckaneck]

[meckaneck]

I saw this question posted to Craig's blog and thought I would add it here and hopefully solicit a response from Craig, Tex and others?

"Wouldn’t it be appropriate to be holding SHY over periods of declining interest rates and BIL during periods of rising interest rates. With interest rates at near zero and only one way to go perhaps a rebalance of the ‘cash’ component out of SHY and into BIL might be considered an appropriate action."

[craigr]

If I had followed standard value tilting dogma I would have been down perhaps 30-40% last year. That's hardly the kind of diversification I want.

[sdrone]

This thread is fascinating. There's so much info here.

I've learned a lot about Swedroe's investment theory in this thread; what options are there for international small cap value? Is Wisdomtree's DLS about it if you don't have a DFA account ? TrevH referred to Robert T's posts, but I haven't yet found one that answers the question.

[Trev H]

.
Morning Folks...

This morning I was working on replying to several PM's and I got all to all of them except the 2 most recent.

Before I opened those last to, when attempting to delete one I had already responded to, I accidentally hit the Delete All - instead of Delete Marked.

Hate that - deleted a couple of PM's that I have no idea who they were from or what they were asking.

I figure it was probably from folks following this thread.

If you sent me a PM in the past day or two and do not have a reply from me yet - please resend.

That Delete All button is WAY to easy to get on, and there is no recycle bin to go to for getting em back either.

Thanks
_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[Trev H]

I did a search this morning and found the post below from Robert T.

===


First on expected return. You should subtract expected portfolio costs and taxes from the factor load inferred estimates. Obviously each has to make their own judgment as to what these may be. Personally, my estimated expected return (from factor load estimates) for my 75:25 portfolio was about 8%, took off about 0.5% for costs and taxes with an expected portfolio return of about 7.5% - not perfect but good enough for me. Each has to decide how to do this (reflecting personal circumstance).

Second on holding value in a taxable account. Personally, I’m okay with holding a value ETF or TM value fund in a taxable account. You are right that, as a result of using an ETF, the largest tax portion may be from dividends (ordinary income taxed at higher rate than capital gains, with possibly less qualified), but this has not cost value ETFs funds much over the last 5 years:

Five year tax efficiency (tax-cost ratio) to end March 2009

iShares S&P600 Small Cap Value [IJS]............0.29
iShares Russell Mid Cap Value [IWS]..............0.42
Vanguard TSM [VTSMX]...................................0.27

Obviously no guarantees going forward.

Robert

===

Robert T's portfolio has some serious Value Tilts and Size Tilts.

I have read over several post by him looking at tax efficiency of SV options and he favors IJS for that.

If you were going to construct a taxable account S&D with similar size/price tilts to the Ultimate Simplified Buy and Hold equity components.

25% Vanguard Large Cap Index (ETF)
25% IJS Small Value (ETF)
15% EFV (Intl Developed Large Value)
10% Vanguards EM ETF
25% FTSE X-US Intl Small Cap (ETF)

And you could replace the 15/10 slices of ILV Developed and EM Large, with FTSE X-US Intl Large Cap (ETF). You sould loose the value tilt on the International Side, but would likely gain in tax efficiency.

I know that Robert uses EFV in Taxable and best I remember a rather Large Slice of it, and his only Value Tilt on the Intl side is EFV. At least last I heard he had not decided to go with any of the newer ISV type EFT's (Wisdomtree and the likes).

Robert posted the details below on his portfolio a few years back and I saved it. Since he made it public on the M* forum, don't think he would mind sharing it here.

For US Equities he holds a 5% slice of TSM, and 5% slice of MicroCaps (BRSIX). The part he calls US Large Value is actually a Mid Value ETF (IWS best I remember) and the US SV = IJS (although seems like he holds both IJS and also a slice of the S&P 600 Deep Value ETF.

His size loads are .2 and value .4 so a lot of value tilting going on there.

For more on his thoughts on size/price diversification and tax efficiency you might try searching the forum for IJS, IWN, tax efficiency and of course Author Robert T.

Hope this helps.

===

42. Asset Allocation
Robert T| 02-26-07 | 10:49 PM

75:25 Equities:Fixed Income (its easier to present below
as 80:20).

Target Factor Loadings
Beta=1.0; Value=0.4; Size=0.2; Term=0.5; Default=0.0.

Target Asset Allocation to achieve above factor loadings

US Large Cap Market 5%
US Large Cap Value 10%
US Micro Cap Market 5%
US Small Cap Value 20%
Intl Large Cap Market 5%
Intl Large Cap Value 20%
Intl Small Cap Market 5%
Emerging Market Large Cap 10%
US Intermediate Treasuries 10%
US Inflation Protected Securities 10%
100%
Expectations (for 75:25)
Annual return 7.6%
Standard deviation 11.9%
Which implies:
Every 6 years annual loss of at least 4%
Every 44 years annual loss of at least 16%
Stress test:
Two year cumulative loss (73-74 sim) 24%
-ve annual total mkt tracking error up to 10% pts

FWIW the above allocation has similar factor loadings to the DFA balance strategy but I need to allocate more to value as the underlying funds have lower individual loadings than the DFA funds. I use broad allocations to market, value, large and small to reduce (sub) asset tracking error regret (human).

Robert - 37
_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[craigr]

deleted...

[Trev H]

CraigR - I smelled a LUMPER in regards to (at least in part) to these comments by you...

===
So now when you look at the return difference it's not so clear cut. Assuming the ISV or SV fund can beat the TSM fund going forward (and nobody knows that), you have to deduct real world expenses. In this case you are losing perhaps 3% of the returns per year you are seeing in these spreadsheet results.

Here's the best part: You are losing that money whether or not the fund beats TSM.

So it comes back to Harry. Not Harry Browne, but Dirty Harry: "Do you feel lucky?"
===

I was not speaking of the PP (in general) but only your obvious objection to using anything other than TSM for the equity component.

Will say it again - those were classic LUMPER responses.

Nothing aginst PP, never said it was not diversified, or a decent alternative to the more standard asset allocation models.

My comments were specifically pointed at your single minded reference to TSM as being the ONLY - sure and safe way to go on the Equity side.

Fear based and biased IMO (for most LUMPERS) who spout stuff like that.

Now you could be the exception to that - hope so.

Trev H
_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[craigr]

[Roy]

[Trev H]

Roy,

I was thinking the same thing, a comparison of the PP with 3 components fixed (GOLD, TBILLS, LTT) but vary the equity between Lumper (Global Couch Potato style), SUB&H and Larry.

Will do that soon and post.


===
_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[Trev H]

Here you go..

I only included the Lumper (TSM,Tot Intl) & Larry (SV,ISV) equity comparisons.

The SUB&H combo of LB,SV,ILV,ISB would have performed in-between, a bit closer to Larry than Lumper.




Considering the other diversification factors in the mix, going all SV,ISV vs Lumping made very little difference in volatility, but nice difference in return.

==
_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[Lbill]

Doesn't it come down to the correlations between Gold, STT, and LTT and TSM (vs. slice and dice)? It looks to me that the correlations between TSM and Gold, STT, and LTT are about the same as correlations with other sub-TSM indices such as SCV. Just how much bang for the buck are you going to get when you already have very low correlations using TSM, anyway? Is it worth the effort and expense to try to milk a few fractions by slicing and dicing the equity component - it's only 25% of the PP to begin with. Might make sense with Larry's port, but he's not using such strong diversifiers as 25% gold or 25% LTT.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[Roy]

[meckaneck]

[meckaneck]

For those that do not hold their own physical gold, check this out...

http://jsmineset.com/

[Trev H]

Here you go Roy...

Annual Returns year-by-year for Lumper PP vs Larry PP.



_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[meckaneck]

Trev- could you please pst the following performance data and chart? thanks

7.5% LB,SV,ILV,ISB, 10% Gold, 60% STT

[james22]

1. My problem with the PP is its equal weighting to hedges of unequally occuring economic climates. Could you show us the historically optimized weighting of the four components, Trev?

2. And you are using VG SV and DFA ISV? Could you re-run Larry's strategy with DFA SV substituted?

3. Could you compare VG ILV, VG ISB, and VG ILV+ISB?

4. And then substitute the best of the three options for DFA ISV in Larry's strategy? How much more equity would one need add to match the more FF weighted DFA portfolio?

Thanks!
_________________
Please assume my post refers to my Bogle-approved 15% Tactical Asset Allocation or 5% Funny Money.

[craigr]

[brswif00]

TrevH you are adding a lot of value to this thread with all the data, so thanks.

I see from the yearly returns that about all of the LarryPP outperformance [and possibly more than 100%] resulted from massive small-cap outperformance in the 70s coming out of the 73-74 shellacking after the 'Nifty Fifty' large-cap bubble. The large-small gap was pronounced in the 90s [large] and 2000s [small] but effect was far less.

In other words value-tilting is usually credited for return improvements in the Larry style, but from your data it looks like an artifact of a few years of very extreme market conditions that may not recur the same way during my investing lifetime. Could things just as easily go the opposite way during the time period that matters to me?

What happens to the overall numbers if you start from 1979? Sorry my math/Excel skills aren't up to the task, I'm old.

Thanks again to everyone posting here, this is the thread that keeps on giving.

[Roy]

[Roy]

[Trev H]

Brswif00 asked..

===
What happens to the overall numbers if you start from 1979?
===

I had already started a sheet looking at PP vs more traditional 3F Diversified portfolio starting in 1980.

Not for the reasons you stated (large vs small performance) but because of the 79-80 peak in gold price and the steady down hill slide of that price for many years.

In the comparison below, I included the Lumper PP, Larry PP and a more traditional S&D 3F Diversified Portfolio of equities and ST bonds (no Gold). I also included 100% Gold which exits view south around 1980 and remains out of view until around 2006 when it reappears.



I wanted to see how the slump for Gold, while holding Gold at 25% of portfolio affected the portfolio performance. It was not as bad as I thought, the other 3 components did a decent job of keeping your head above water, but compared to a more traditional S&D 3F Diversified mix it did not look so good (still not bad though, considering different goals).

==
_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[Roy]

[james22]

[MediumTex]

[Roy]

[Lbill]

brswif00 said:

[Trev H]

Roy/James..

==
In the comparison below, I included the Lumper PP, Larry PP and a more traditional S&D 3F Diversified Portfolio of equities and ST bonds (no Gold).
==

I was considering the 25% Gold + 12.5% Each TSM, ILB to be 50% Equity.

12.5% each LB,SV,ILV,ISB to be 50% Equity.

So in my mind (at least) it was a fair comparison.

Are you saying that Gold (which is extremely volatile) should be included on the Fixed side ?

==

On the why I use LB,SV,ILV,IS - it is a very simple mix that you can get at Vanguard, and it basically mirrors the performance of the more complicated 8 slice strategy shown in the Ultimate Buy and Hold Portfolio.

It is 25% US Large, 25% US Small, 25% Intl Large, 25% Intl Small (which is the core of what I want for general equitys) and it is also half blend, half value (value tilted) which is also what I want.

On the US side holding a Blend and Value component (low correlation) and doing the same on the International side.

If you compare that 4x25 mix of LB,SV,ILV,ISB to the more complicated 8x12.5 slice mix of LB,LV,SB,SV,ILB,ILV,ISB,ISV the performance is very much the same, with the 4x25 doing just a bit better than the 8x12.5.

For most of the 40 year span, the chart lines are right on top of each other.

That's why.

===
_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[Roy]

[rbowling]

I originally posted this over at craigr's blog.

Obviously, back-testing doesn’t insure anything, but I was playing around with Simba’s spreadsheet and came up with something interesting.

Using the default settings on the Portfolio page, if you set an additional variable as the maximum portfolio allocation and then run Excel Solver to maximize the Real Sortino Ratio (my pick for best measure of risk adjusted return) with only allowing any one asset to have 25% of your total allocation (don’t put all your eggs in one basket), this is the portfolio that you end up with:

3% US Small Cap Value
25% Emerging Markets
6% International Pacific
25% Long Term Government Bonds
24% 5 Year T-Bills
18% Gold

It seems an awful lot like the Permanent Portfolio, substituting 5 Year T-Bills for cash and having the riskiest equity exposure possible. I like the idea of having a small/value/international tilt in the equity portion and think it fits in well with the overall idea of the portfolio.

[daniel]

[craigr]

[rbowling]

[Roy]

[Lbill]

I too have found that a big chunk of emerging markets (as well as SCV) for the equity portion of the PP seems to "juice" the historical returns. You might want to check energy (VGENX) as well. It correlates pretty strongly with EM, as do other natural resource funds and ETFs. Reason: Emerging markets, large cap, as represented by VEIEX or EEM are stacked with energy and natural resource companies. If I go strictly by the backtesting I've done, I would allocate the equity portion to EM and SCV. Not sure I want to do this, however, because volatility and tracking error are both increased too. My philosophy is to target the CAGR I need for my port to last until I'm 100. In this regard, I've found Firecalc to be quite helpful. Presently, I can get that using the classic 4x25 PP so I don't feel like adding the EM and SCV wildcards into the mix right now. I do hold a little VGENX, however and that seems to pretty much play the role of EM in my port. Scott Burns has advocated holding it as well and the logic of holding energy stocks seems compelling to me and has historically done well.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[rbowling]

I just don't think that Fama-French Three Factor Equity Diversification and Harry Browne Permanent Portfolio Diversification need to be mutually exclusive. It doesn't have to be an either-or choice, both-and seems to work pretty well.

[MediumTex]

[Clive]

As Oil and Gold often correlate, could I ask Trev H to post a graph of a blend of TSM, IAU, XOM, BIL, SHY, TLT please, using 16.6% allocations each.

If XOM is considered as part stock like, part gold like then Gold (IAU) with half the oil (XOM) might be considered as the PP's 25% gold element. The other oil half with TSM is the 25% stock element, and the mix of BIL, SHY, TLT blend together to represent the cash + long treasuries 50% part.

Thanks in advance.

[meckaneck]

This thread has been excellent and I am now contemplating on adopting this approach for my mother. Does anyone have any strong recommendations one way or another on which allocation would maximize the risk adjusted return?

All would have 25% in gold, LTT and STT. The equity allocation options are:
25% total US Stock Market
20% total US stock market, 5% International stock market
12.5% US Small Cap Value, 12.5% Emerging Market
12.5% US small Cap Value, 12.5% International small Cap

Thanks much in advance

[Quasimodo]

[MediumTex]

[craigr]

[james22]

You/Chandler fail to see the SV risk premium?
_________________
Please assume my post refers to my Bogle-approved 15% Tactical Asset Allocation or 5% Funny Money.

[craigr]