Please critique this portfolio: 100% VT. [Total World Index]

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nisiprius
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Re: Please critique this portfolio: 100% VT.

Post by nisiprius »

boggler wrote:
nisiprius wrote:Do not overestimate your risk tolerance. Think long and hard about why you think it is so important to be at 100% stocks rather than, say 80% stocks.
Great post. I want 100% VT because of the higher return and the total simplicity. That said, the points about risk adjusted returns are well-taken, and I'm willing to add a bond allocation. There are two options:

1) Devote all my tax-advantaged accounts to BND (coincidentally, these accounts comprise approximately 20% of my portfolio).
2) Invest all my brokerage accounts (taxable and tax-advantaged) in 100% VT, as above, but set aside some money to by I-bonds. (or EE bonds?)

Which is better? Not sure how to pick.
Just to add confusion. I happen to be staying the course with Total Bond myself--well, actually, my fixed income is about 40% Total Bond, 40% individual TIPS, and 20% I bonds--but tfb and others make a strong case for the best bank CDs being as good or better than traditional bond funds. I won't even guess at optimizing. I'm just saying that you should seriously consider having some meaningful portion of your "retirement savings money" in something relatively nonvolatile.
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rmelvey
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Re: Please critique this portfolio: 100% VT.

Post by rmelvey »

staythecourse wrote: Looking at MPT the only way to get HIGHER returns then equities is to find another asset that has a HIGHER expected return. No mix of a higher expected return and lower expected return assets can produce a higher expected return in combination. It can reduce volatility, but cannot increase returns MORE then the highest returning asset class, i.e. equities. I believe Mr. Gibson's Asset Allocation book has a good chart on this (or is it one of Dr. Bernstein's book??)
This all correct for arithmetic returns (or the expectation of a single period's returns) but is entirely wrong if you are talking about compounding returns. The compounded return of a portfolio can be higher than the weighted CAGR of its components because of volatility harvesting.

Imagine a portfolio that has a 50% chance of doubling and a 50% chance of getting cut in half. The expected single period return is 25% but the expected CAGR is 0%. However, if you blend this portfolio with cash (rebalancing each period) the CAGR of the portfolio goes up.

Expectations about single period returns are interesting, but compounding returns are what matters.
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boggler
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Re: Please critique this portfolio: 100% VT.

Post by boggler »

rmelvey wrote:
staythecourse wrote: Looking at MPT the only way to get HIGHER returns then equities is to find another asset that has a HIGHER expected return. No mix of a higher expected return and lower expected return assets can produce a higher expected return in combination. It can reduce volatility, but cannot increase returns MORE then the highest returning asset class, i.e. equities. I believe Mr. Gibson's Asset Allocation book has a good chart on this (or is it one of Dr. Bernstein's book??)
This all correct for arithmetic returns (or the expectation of a single period's returns) but is entirely wrong if you are talking about compounding returns. The compounded return of a portfolio can be higher than the weighted CAGR of its components because of volatility harvesting.

Imagine a portfolio that has a 50% chance of doubling and a 50% chance of getting cut in half. The expected single period return is 25% but the expected CAGR is 0%. However, if you blend this portfolio with cash (rebalancing each period) the CAGR of the portfolio goes up.

Expectations about single period returns are interesting, but compounding returns are what matters.
This is fascinating. Does this mean holding a single fund like VT (vs. VTI + VXUS) is actually a bad idea?
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rmelvey
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Re: Please critique this portfolio: 100% VT.

Post by rmelvey »

boggler wrote:
This is fascinating. Does this mean holding a single fund like VT (vs. VTI + VXUS) is actually a bad idea?
Hi Boggler,

I am glad you find it interesting! Lot's of people shoot this idea down when first presented, but is entirely within the confines of efficient markets :happy

I wrote a post that illustrates the concept here, and provides a link to a more formal paper:
http://www.stableinvesting.com/2013/04/ ... demon.html

The implications are that diversification reduces risk and brings your portfolios geometric returns closer to the weighted arithmetic returns of the portfolios components.

The effect is strongest with assets that exhibit high volatility and low correlation. It is one of the reasons why I like the PP (a blend of stocks, gold, and LTT). I am not sure if the effect would be material with VTI + VXUS because they are both so similar. It's definitely a wonderful area to research though! It is a game changer for viewing how REALLY REALLY awesome diversification can be. :happy
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Re: Please critique this portfolio: 100% VT.

Post by hafius500 »

rmelvey wrote:This all correct for arithmetic returns (or the expectation of a single period's returns) but is entirely wrong if you are talking about compounding returns. The compounded return of a portfolio can be higher than the weighted CAGR of its components because of volatility harvesting.

Imagine a portfolio that has a 50% chance of doubling and a 50% chance of getting cut in half. The expected single period return is 25% but the expected CAGR is 0%. However, if you blend this portfolio with cash (rebalancing each period) the CAGR of the portfolio goes up.

Expectations about single period returns are interesting, but compounding returns are what matters.
I think your maths is wrong (tautological).
First, it would be appropiate to compare a mix of two assets because in equilibrium you must must sell an asset to have cash.
Second, you compare a passive buy-and-hold strategy (the unrebalanced portfolio) with a trading strategy (rebalancing).

The passive investor earns the "market return". All investors must earn the "market return" and if the rebalancer outperforms a third investor must underperform.
Who is this (stupid) third investor ? Her CAGR would go down. OTOH, we know that momentum exists and your example ignored it.
Obviously the expectation of a higher CAGR is just an expectation. The third investor assumes a different sequence of return and expects a higher CAGR too.
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Cash
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by Cash »

I've long thought that the best Bogleheads portfolio is the two-fund portfolio of VT + BND (or whatever fixed income you prefer). It's a market-cap-weighted portfolio that is agnostic as to everything else, including country weightings (no one knows what's ideal, and the Vanguard study people like to cite says as much). The three-fund portfolio is a legacy from the time before VT existed and became so cheap (.19%). And splitting up domestic/international encourages people to tinker too much.

So I say go for it :thumbsup.
durrrr
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by durrrr »

Cash wrote:I've long thought that the best Bogleheads portfolio is the two-fund portfolio of VT + BND (or whatever fixed income you prefer). It's a market-cap-weighted portfolio that is agnostic as to everything else, including country weightings (no one knows what's ideal, and the Vanguard study people like to cite says as much). The three-fund portfolio is a legacy from the time before VT existed and became so cheap (.19%). And splitting up domestic/international encourages people to tinker too much.

So I say go for it :thumbsup.
I think more people would switch to VT when the fund expense ratio drops more, like say when it hits .1%.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by Sunny Sarkar »

Other than expense ratios, which may come down for VT, here's why I don't like the Total World Index and feel that Total Stock Market sprinkled with a personalized alocation of Total International is still the way to go...
William Sharpe wrote:The global market portfolio might be a good choice for a truly international investor, who lives in hotels and on airlines, pays taxes everywhere, consumes goods from all over the world, is of average age and risk tolerance, and so on. Of course this is not likely to describe anyone in this room. But the global market portfolio is a good place for you to start, tilting each of your investment positions in a direction that makes sense, based on the differences between your characteristics and those of this fictional global investor.

http://www.stanford.edu/~wfsharpe/art/t ... esting.htm
Now regarding 100% equities... the first real investing book I read was Ben Graham's classic The Intelligent Investor. In it he clearly stated that the prudent investor should allocate at least 25% in both stocks and bonds, i.e. 75/25 or 25/75 should be the outer bounds of asset allocation. 50+ years later, in his own timeless classic Bogle on Mutual Funds, Jack Bogle repeated that advice from The Intelligent Investor - quoted verbatim!

All this put together, I think Taylor's 3-Fund Portfolio is still the way the go.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by galenos »

Cash wrote:I've long thought that the best Bogleheads portfolio is the two-fund portfolio of VT + BND (or whatever fixed income you prefer). It's a market-cap-weighted portfolio that is agnostic as to everything else, including country weightings (no one knows what's ideal, and the Vanguard study people like to cite says as much). The three-fund portfolio is a legacy from the time before VT existed and became so cheap (.19%). And splitting up domestic/international encourages people to tinker too much.
I'm using 45% VTI and 55% VXUS combination instead of 100% VT. The combined expense ratio is 0.11% and also the diversification is a bit broader - VT has ~4900 stocks and VTI+VXUS has ~9400.
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boggler
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by boggler »

durrrr wrote: I think more people would switch to VT when the fund expense ratio drops more, like say when it hits .1%.
I have to admit, part of the reason I'm leaning towards VT is because I expect this to happen eventually. I think VT's assets will grow over time and Vanguard will be able to further lower the expense ratio and add more stocks. They've already lowered the cost multiple times. I'd rather invest now so that I don't need to incur the tax cost of switching to VT later.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by Cash »

And you're really splitting hairs when you talk about a .11% ER v. .19% or 4900 stocks v. 9400.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by durrrr »

Cash wrote:And you're really splitting hairs when you talk about a .11% ER v. .19% or 4900 stocks v. 9400.
I'm sure the expense ratio is a huge reason to go VTI/VXUS, however I do not think the jump from 4900 stocks to 9400 would have much benefit, in terms of volatility, standard deviation, and performance. I wish VT was here in early 2000s so I could see if it had a near-perfect/perfect correlation with VTI/VXUS, with the same allocation to each country/sector/et cetera. I can't get Google Finance to show me data past a few days for the FTSE Global All-Cap Index either, anyone know how? I would hazard a guess that it would be 0.96-0.99 correlation, though.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by notsure »

boggler might want to read this on Long-Term Returns, demonstrating how it's really very simple to hold VTI and VXUS and achieve comparable results to VT.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by boggler »

So now I'm wondering whether the Permanent Portfolio would be more appropriate. Incredibly, it seems to have done just as well as a 100% stock portfolio over the past 30 years or so, despite the fact that it only holds 25% stocks... and done so with significantly less volatility. Why don't more people use it?
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by rmelvey »

boggler wrote:So now I'm wondering whether the Permanent Portfolio would be more appropriate. Incredibly, it seems to have done just as well as a 100% stock portfolio over the past 30 years or so, despite the fact that it only holds 25% stocks... and done so with significantly less volatility. Why don't more people use it?
Internalizing how the PP works takes a lot of effort because it breaks a lot of the conventional rules. Lots of experts see it and think of it as a mere gimmick at first glance. However, I am obsessed with finance and I spend a lot of time thinking about portfolios. I think there is a lot to learn from the allocation even if you don't end up using it.

Understanding why people don't use it is not very hard. Most people see asset classes in isolation. Additionally, most people see portfolios as a combination of "risky assets" (stocks) and "safe assets" (short duration bonds). The idea of combining three very volatile asset classes (stocks, gold, and LTT) to reduce risk is counter intuitive to the way that most retail investors think. Additionally, most people think about single period expected returns, and they fail to take into account the diversification return (also called volatility harvest) that combining high volatility but low correlation asset classes provides. Finally the equal weighted 25% split looks overly simplified. Many investors crave complexity, attempting to turn investing into more of a science than makes sense.

Finally, the PP involves admitting that the world is much more unpredictable than most think. That is an extremely difficult thing to do. It has definitely worked in the past though, and its main framework was developed in the 1980s. Everything since then is an out of sample test. Also, it wasn't developed using precise quantification. There is a macroeconomic theoretical framework driving the allocation so I think the chances are good that it will continue to be an attractive portfolio.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by danwhite77 »

I'm in my 30s and 100% equity (although not total world). Essentially, I haven't ever sold a share. As long as you have the stomach to not panic during a downturn, I think this is a reasonable approach. I've been very pleased with my returns, but I accept that -- at a moment's notice -- my paper net worth (that is, ex-housing and cash on hand) could go down by half (or more).
"While some mutual fund founders chose to make billions, he chose to make a difference." - Dedication to Jack Bogle in 'The Bogleheads' Guide to Investing'.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by boggler »

Which of the following are valid justifications for holding 100% stock in VT, given that a bond allocation is generally recommended?

- Have a significant (>20%) amount of cash in the bank to act as a "bond" allocation
- Have a significant expected future cash income in the near term
- Have a mattress stuffed with dollar bills
- Hold 20% in Vanguard's BND ETF

I'm still having trouble understanding why 80% VT, 20% BND is better than 100% VT, given that I'm not selling anytime in the next few decades, and all adding bonds will do is dampen returns.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by GMT-8 »

all bonds will do is dampen returns.
And increase the number of days you see positive movement in your portfolio, and the number of nights you sleep well.

Both of which are (in the words of the ad) priceless. Don't underestimate the need for constant reassurance that your strategy is worth sticking to. Bond help provide that.

I've run hundreds of "what if" scenarios in the past 30 years, not one of which has come even close to happening as the computer simulations said it would. But while dreaming, I was relentlessly socking away small sums of money in Vanguard index funds and bonds. I retired last year at 60 with more than I ever imagined - because low expenses and compounded interest have been my best friends.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by Jebediah »

nisiprius wrote:
When something like 2008-2009 happens, you do not see it as "-50%". You see it as something different in kind from what has gone before. You see high officials on TV and they cannot completely hide the fact that they are scared. You finally get over the visceral impact of Fannie Mae and Freddie Mac getting taken over, and Lehman Brothers collapses. Just when you get used to that, AIG hits the fan. The hits just keep on coming.
Re-read the above. Until you've had the experience of losing a lot of money, you have no idea. Imagine that your 50K or whatever it is gets hacked down to 18K. Then all hell really starts to break loose, it becomes virtually guaranteed by every opinion under the sun (and you will be listening!) that you have another 50% down to go. Canada defaults, Pakistan launches a nuke, whatever. What you will be thinking at that time is "I'm not going to be stupid, I'm going to save my 18K while I can!". And if you stay in you'll be not too happy to realize that you need to roughly triple-up to get back to even, and unfortunately you had no bonds or "dry powder" to give yourself the boost of buying at the bottom.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by boggler »

Been mostly VT for a while now, and I'm still thinking this makes sense. My favorite part of a 100% VT portfolio is that it's so simple you never need to touch it, and therefore you can tune it out, and therefore you can avoid panicking during downturns. You hear stories all the time about people who "accidentally" became long term buy-and-hold investors simply because they weren't paying attention.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by InvestorNewb »

VT is a fine choice. Though all passive portfolios should give the ability to set & forget. I wish there were more brokers in Canada who offered DRIPs on US ETFs. This would increase the passivity of my portfolio, since I wouldn't have to check it 4x per year to reinvest dividends.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by Cash »

boggler wrote:Been mostly VT for a while now, and I'm still thinking this makes sense. My favorite part of a 100% VT portfolio is that it's so simple you never need to touch it, and therefore you can tune it out, and therefore you can avoid panicking during downturns. You hear stories all the time about people who "accidentally" became long term buy-and-hold investors simply because they weren't paying attention.
Do you have a 401(k) and use it there as well?
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boggler
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by boggler »

No, unfortunately :( Not sure what I'll do about this once I do have a 401k, since presumably it won't have access to this fund.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by InvestorNewb »

Are there tax differences between holding VT vs. holding VTI + VXUS?
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by leonidas »

In my 401k I am 50/50 Stock Bond and of the stock portion 50/50 US/Intl. Earlier this year I got this bright idea to simplify my taxable holdings. At the time I had about 12 stocks and 4 funds in my brokerage account. I am sold my some speculative winners (HNZ got bought out and PBI was a huge ST win) and some losers (VXX..{this one hurt}) and have been buying into VT and ITM (Intermediate Muni ETF). Any new taxable money goes into those 2 ETFs only.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by Cash »

boggler wrote:No, unfortunately :( Not sure what I'll do about this once I do have a 401k, since presumably it won't have access to this fund.
I use the brokerage option in my 401(k) to buy VT, but that's not an option in my wife's. So yeah, 401(k)'s add a roadblock to the quest for simplicity, which is why I was curious if you had one. Still a great plan in theory though :beer.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by Cash »

InvestorNewb wrote:Are there tax differences between holding VT vs. holding VTI + VXUS?
One argument in favor of splitting is that you can place more VXUS in taxable to maximize the foreign tax credit. The impact of this will vary by person, and if your holdings are either all taxable or all tax-advantaged, it won't matter. I have a mix of taxable and tax-advantaged but don't bother splitting. It probably costs me a few dollars every year, but I'm OK with that.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by Ken. »

I don't know if this has been mentioned but with VT you don't have control over taxes to the extent that with VTI + Total Internation Stock Index you can choose when to rebalance.

100% in stocks for young people is fine according to a lot of gurus. Bob Brinker says 75-100% up until you're 40. Charles Ellis's recommendations for folks 40-50 years old is 65-90%, Charles Schwab says 80-95% for aggressive investors in their 40's.

Probably the best determinator for what is a suitable asset allocation is the sleep at night test.
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Re: Please critique this portfolio: 100% VT. [Total World In

Post by John3754 »

I've seen a number of posts in the past few months asking for opinions on a 100% stock portfolio, for those of you who have been around this forum a lot longer than myself, how many of these posts did you see in 2008?
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