Bogleheads

[PiperWarrior]

OK, I am reinventing the wheel for fun and generating efficient frontiers. One of my favorite posts is Updated figures and results on slice and dice vs TSM. I wanted to know what things would look like with international stocks, REITs, and commodities.

Each colored line below represents a portfolio that dilutes a 100% Total Bond Market with some stock portfolio. (OK, I am counting commodities as stocks for now. Please excuse me for that.)

Data are taken from Spreadsheet for backtesting (includes TrevH's data), which means that:

• Returns are net of Investor Shares' expenses for years in which Vanguard funds existed (except for PCRIX, which is from PIMCO).
  
• Returns are index performance for years in which Vanguard funds did not exist.
  
• The universe consists of 26 funds.

Efficient

10% PIMCO CommodityRealRet Strat Instl (PCRIX) (0.75%)
60% Vanguard Small Cap Value Index (VISVX) (0.22%)
30% Vanguard Total Intl Stock Index (VGTSX) (0.27%)

SCV40

20% Vanguard Total Stock Mkt Idx (VTSMX) (0.15%)
40% Vanguard Small Cap Value Index (VISVX) (0.22%)
10% Vanguard REIT Index (VGSIX) (0.20%)
30% Vanguard Total Intl Stock Index (VGTSX) (0.27%)

4x25

15% Vanguard 500 Index (VFINX) (0.15%)
15% Vanguard Value Index (VIVAX) (0.20%)
15% Vanguard Small Cap Index (NAESX) (0.22%)
15% Vanguard Small Cap Value Index (VISVX) (0.22%)
10% Vanguard REIT Index (VGSIX) (0.20%)
30% Vanguard Total Intl Stock Index (VGTSX) (0.27%)

SCV20

40% Vanguard Total Stock Mkt Idx (VTSMX) (0.15%)
20% Vanguard Small Cap Value Index (VISVX) (0.22%)
10% Vanguard REIT Index (VGSIX) (0.20%)
30% Vanguard Total Intl Stock Index (VGTSX) (0.27%)

Swensen

42.9% Vanguard Total Stock Mkt Idx (VTSMX) (0.15%)
28.6% Vanguard REIT Index (VGSIX) (0.20%)
28.6% Vanguard Total Intl Stock Index (VGTSX) (0.27%)

Core Four

60% Vanguard Total Stock Mkt Idx (VTSMX) (0.15%)
10% Vanguard REIT Index (VGSIX) (0.20%)
30% Vanguard Total Intl Stock Index (VGTSX) (0.27%)

Target Retirement

80% Vanguard Total Stock Mkt Idx (VTSMX) (0.15%)
20% Vanguard Total Intl Stock Index (VGTSX) (0.27%)

VTSMX

Vanguard Total Stock Mkt Idx (VTSMX) (0.15%)

1972-2007



1972-1980



1981-1989



1990-1998



1999-2007



Observations

As everybody knows, 1990's were strange years when domestic large-cap did extremely well. The ordering of lines are pretty much completely reversed compared to other periods. Other than that, these charts are pretty consistent with Updated figures and results on slice and dice vs TSM.

I looked at those very efficient portfolios that were more efficient than Efficient above. Many of them had a huge bet on Emerging Markets. I don't know if people put such a bet on Emerging Markets starting in 1970's let alone the availability of a low-cost product for Emerging Markets.

The "crosssection" at standard deviation 14% for the 1972-2007 period is as follows:

[Rodc]

It will take a bit to digest all this, but I wanted to be the first to thank you for this work. Very cool.
_________________
"all standard caveats apply"

[Rodc]

Those results are very consistent in nature with my earlier results. This is very reassuring as I was using the Fama-French Benchmark Portfolios and you are using actual mutual funds for the most part and otherwise using live indexes upon which the real funds are based. So two different datasets (although with over-lap in time) led to similar results.

Given that in my work I saw large(ish) differences for the slide and dice portfolios over 20 year periods, but extremely similar results when averaged over 80 years, I might expect the differences you found to narrow with time as well.

Also, in playing with mean variance optimization with other datasets including Emerging Markets I too found that the very most efficient portfolios (in hindsight) included a ton of emerging markets hedged with short term bonds. Not sure I'd count on that repeating though. I agree with your decision not to include them as viable options.

Good work.
_________________
"all standard caveats apply"

[PiperWarrior]

[Rodc]

[detifoss]

I loved RodC's earlier post in this fashion, and your post is also fantastic - thank you!

I do have a few (simpleton) questions. Sorry for in advance if they are too basic.

As I understand it, the blue dots are representative of 'different' portfolio mixtures. You stated you used a multiple of 10% allocation for each fund, and you sampled one out of every 25 portfolios.

Since the 'universe' for this consists of 26 funds, does that mean that one of the blue dots could conceivably represent 100% EM (even though EM is not in any of the represented portfolios) or 100% REITs or 100% CCF? On the other end of the spectrum can a dot represent a fantastically complicated 26 'fund' slice and dice type portfolio (though I don't know how multiples of 10% would be possible then...). Sorry for my rather naive question, but I want to be able to fully understand the wonderful work that you have done here.

Also, Swensen seems to like EM, somewhere between 5-10% being his desirable allocation i think. Would this (presumably) have shifted his curve up?

Thanks again for doing all of this work, and for any answers (tutorial?) that you are able to provide. I am continually impressed by how much knowledge and altruism exists on this site.

[Ilovevolleyball]

Hello,

Thank You for your wonderful post. I notice that there are no bonds. I thought that even the most aggressive should have some allocation to bonds like 10%. I was under the impression that the ballast provided in down markets would be worth the drag on returns in up markets.

20% Tips.
20% Total Bond Market.
15% International Index Fund or newer FTSE
5% Emer Markets
35% Total Stock Market.
5% Small Value Fund.

That is what I would be curious about. Small Value Tilt and Slight Emerg Markets Tilt but for a Balanced Portfolio.

If you were willing to crunch those numbers that would be wonderful ... If not I understand. But please consider adding so Bonds to future comparisons... nice to see what bonds do.

Thank You,

Mike

[PiperWarrior]

[detifoss]

Hi ilovevolleyball

I will admit I don't understand all of the workings of these graphs but from the OP:

Each colored line below represents a portfolio that dilutes a 100% Total Bond Market with some stock portfolio. (OK, I am counting commodities as stocks for now. Please excuse me for that.)

So as I understand it, Bonds are present nearly everywhere (both on the lines and in the dots). Presumably the further to the right one travels on each colored line, the higher the proportion of equities (in the stated portfolio) is present, relative to the amount of bonds present. Or to put it another way, at the furthest left point from which these curves originate, they are all nearly 100% Total Bond Market and very close to 0% of the studied equity portfolio.

If I am wrong please correct me...

[PiperWarrior]

[PiperWarrior]

[JustAsking]

So what this shows, if I interpret it correctly, is that for a given degree of risk, adding VTSMX to Total Bond produced lower returns than the other portfolios in every decade except the 90s?
_________________
"In theory, there is no difference between theory and practice, but in practice there is."
-- Jan L.A. van de Snepscheut (1953-1994), late of CalTech

[PiperWarrior]

[Roger]

PiperWarrior,

This post is Awesome, Thanks for sharing !

What are the chances of running :

40% SP 500
30 % Total International.
20 % Reits
10 Emerging markets

For the longest period charted.

I understand if it is too much work. That is my AA - just curious. All vangaurd funds are ok .

Roger

[Roger]

Oooops -just realized probably can't even do Emerging markets for that time frame.


Piper - really nice post


Roger

[PiperWarrior]

[JustAsking]

[PiperWarrior]

[InvestorJohn]

PiperWarrior,

This post is Awesome, Thanks for sharing !

What are the chances of running : All Vangurd

33.5% Total stock market
16.5% FTSE All-World ex-US Inv
25% TIPS
25% Short-Term Treasury Inv

[esf]

Piper,
thanks for the excellent work. Am I correct in assuming that the returns are adjusted for expenses, but not for taxes?

I would be interested in knowing where these different portfolios would rank if a portion of the funds or all of the funds had to be held in a taxable account. Would small value provide as much of a boost if it had to be held in a taxable account?

[purduepete]

Is anybody aware of work that slices and dices across constituent sectors of the US market?

Consumer Staples, Energy, Financials, Health Care, IT etc

If an allocation is maintained to historical averages for the sector and then rebalanced it might result in good performance. For example we would be buying Financials now and selling IT in 99-00 etc in such a scheme.

[Rodc]

[Easy Rhino]

Wow, the 90's were almost completely the precise opposite of every other time period. Bizarre. I wonder if the 50's or 60's looked like that (whenver the "nifty 50" was)

[dave.d]

[PiperWarrior]

[PiperWarrior]

[PiperWarrior]

[PiperWarrior]

[PiperWarrior]

[purduepete]

[Ilovevolleyball]

PiperWarrior,

Thank You. I am blown away by the work you did for me.

Statistics was not my best course in college -I took it twice !
(I really did )

I barely understand the Bell Curve and Standard Deviation!

On the efficient frontier... I forget which is the x and which is the y axis so I shall use North South East and West....

The Further North the Higher your return. The Further East the more Volatilty and the Further South, the worse your returns.

The best returns are the highest North and the most West, for those the want to avoid volatility.

The absolute best returns would be whatever was the furthest North.

And for the gray line that you charted for me, the meaning of it would be ... these are the possible places your choice of funds would place you. The Triangle is where I am given the 60% 40% portfolio given in prior post of mine.

Anyone please feel free to educate me....

Thank you again for your kind reply PiperWarrior,

Mike

[Valuethinker]

You'd be a brave man to pursue a portfolio 10% commodities, 30% SCV, 60% international.

I suspect all kinds of artefacts of the data in creating that frontier ie it is de facto 'data mining' (I am not accusing you or anyone of that! I should stress).

Therefore it is a dangerous strategy, because it relies on what worked well in the past.

even 37 years of data isn't enough. One needs to go back to theory (that risk and return are highly correlated) and to the economic fundamentals of why different asset classes are/ are not correlated.

The Small Cap Value anomaly is there, to be sure, but it cannot be relied upon (it's the sort of thing one can throw 20% of total wealth at, but probably not 50%). Conversely fixed income returns are near certain either in nominal terms (straight bonds) or more importantly real terms (which is all investors should care about) ie TIPS.

I think the job can be done with:

- Vanguard TSM or equivalent
- an international index fund (large cap)
- a US Treasury ST or IT bond fund
- a TIPS fund

If I was adding classes beyond that, then SCV or even International SCV equities. Municipal bonds if insufficient room in tax exempt accounts.

I am agnostic on property (I think the low correlation with other assets is partly a data artefact ie that valuations move with a lag). Commodities I still don't see the source of economic return.

[PiperWarrior]

[PiperWarrior]

[stratton]

[Valuethinker]

[dbr]

[stratton]

[PiperWarrior]

[dbr]

[Alex Frakt]

If you are taking requests

Microcaps. You can use CRSP 10 until BRSIX appears.

Who am I kidding, I just want to see my portfolio. I already took out the EM. If you don't have the international breakdown, let's go with 40% EAFE.

30% VFINX (VTSMX would be fine)
15% Midcap Value
15% Microcap

15% Pacific
15% Europe
10% Int'l Value

[carlsworld]

A lot of us use market weights. It would be interesting to see a graph of that. Vanguard Total Stock Index and Vanguard Total Intl Index, never rebalancing between these two. This would probably be trickier to do than the other combinations listed because your software is probably designed to rebalance back to set percentages.

[stratton]

[caklim00]

Piper, you rock!

This may be too complicated to run, but if it is possible I would love to see it as it is going to be my equity portion of my portfolio...

27% TSM (VTI)
18% SCV (VBR)
5% CRSP 10 (BRSIX)
5% US REIT (VNQ)
27% Tot Int (VEU)
18% Int Small Cap (I am using DLS, GWX, and DGS equally --> any sort of international small cap estimation would be cool)

[PiperWarrior]

[caklim00]

[PiperWarrior]

[PiperWarrior]

[PiperWarrior]

[JustAsking]