If You Can't

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amd7239
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If You Can't

Postby amd7239 » Fri May 19, 2017 5:34 pm

In “If You Can” Dr. Bernstein says (I’m paraphrasing): “A 33/33/33 (Total US/ Total International/Total Bond) allocation is an easy and effective form of market timing, since it means you will be buying more stocks after market falls and selling some stocks after price rises”

The 33/33/33 is good in theory, but I think it would be hard to stick with over a lifetime for me personally. It requires reacting (although seldom) to large market fluctuations, which for me (because I am obsessive and detail oriented) will lead me down a black hole of analysis ending in either 1) paying too much attention to small fluctuations leading to a mistake 2) getting greedy and going 100% stocks in market downturns instead of staying at 33/33/33 (which would be bad right)? or 3) jumping ship due to high expectations (always comparing myself to the market and abandoning the strategy when I do worse for years, even though I logically know this is to be expected)
Since I can’t imagine managing a 33/33/33, a target date fund (which has the same rebalancing effects) seems to be the next best option. Do you agree?

So psychologically, I think my only options are
A) target date fund
B) A 3-fund portfolio without bonds [67% US Total US (VTSAX), 33% Total International (VTIAX)].

I am 27 years old.


Has anybody done the math on whether A or B has a higher historical post-fee return?

I know the target date fund data is very recent, but perhaps somebody has done a backtest based on the target date structure.
Last edited by amd7239 on Fri May 19, 2017 6:11 pm, edited 1 time in total.

delamer
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Re: If You Can't

Postby delamer » Fri May 19, 2017 5:44 pm

Each target date fund is managed differently; your question is too broad.

If you believe that you could not avoid intervening with a two-fund or three-fund portfolio, what makes you think a target date fund would stop you?

aristotelian
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Re: If You Can't

Postby aristotelian » Fri May 19, 2017 5:46 pm

Personally I don't see the issue with rebalancing. Just write down a policy in your IPS (quarterly, etc) and do it. But if that is too much, there is absolutely nothing wrong with a set and forget target date fund.

amd7239
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Re: If You Can't

Postby amd7239 » Fri May 19, 2017 5:48 pm

delamer wrote:Each target date fund is managed differently; your question is too broad.

If you believe that you could not avoid intervening with a two-fund or three-fund portfolio, what makes you think a target date fund would stop you?


Because I never have to rebalance and I can't tweak the allocations, I would look at market fluctuations far less and be less tempted as a result

amd7239
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Re: If You Can't

Postby amd7239 » Fri May 19, 2017 5:50 pm

aristotelian wrote:Personally I don't see the issue with rebalancing. Just write down a policy in your IPS (quarterly, etc) and do it. But if that is too much, there is absolutely nothing wrong with a set and forget target date fund.


The issue for me is greed. I would say why reallocate to only 33% stocks in a down market? Why not 40? or 50? or 100?
Last edited by amd7239 on Fri May 19, 2017 5:50 pm, edited 1 time in total.

BigJohn
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Re: If You Can't

Postby BigJohn » Fri May 19, 2017 5:50 pm

You really can't compare A and B because A is not going to be 100% stock. As a result, over a long period of time, B will usually win but.... the ride is going to be very bumpy (higher volatility) without some bonds for stability. Not sure why you feel that 67/33/0 will be easier to stick with than 33/33/33. A big market correction (down 30-50%) with 100% in stock might well trigger your emotions described above into a "sell before it gets worse" reaction which would be even worse than going 100% stock during a correction.

There is nothing magic about 33/33/33, the key is to pick an allocation you are comfortable with and then have the discipline to leave it alone and only rebalance back to that allocation infrequently (say once per year). You can/should revisit your allocation as you get older (say every 5 - 10 years) and make small adjustments based on life changes. If you can't fight the urge to fiddle with it by changing your asset allocation frequently, then any allocation you pick will be hurt by your efforts to market time.

amd7239
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Re: If You Can't

Postby amd7239 » Fri May 19, 2017 5:54 pm

BigJohn wrote:You really can't compare A and B because A is not going to be 100% stock. As a result, over a long period of time, B will usually win but.... the ride is going to be very bumpy (higher volatility) without some bonds for stability. Not sure why you feel that 67/33/0 will be easier to stick with than 33/33/33. A big market correction (down 30-50%) with 100% in stock might well trigger your emotions described above into a "sell before it gets worse" reaction which would be even worse than going 100% stock during a correction.

There is nothing magic about 33/33/33, the key is to pick an allocation you are comfortable with and then have the discipline to leave it alone and only rebalance back to that allocation infrequently (say once per year). You can/should revisit your allocation as you get older (say every 5 - 10 years) and make small adjustments based on life changes. If you can't fight the urge to fiddle with it by changing your asset allocation frequently, then any allocation you pick will be hurt by your efforts to market time.


The way I think it will go is this: If I pick the 33/33/33, I will sort of "prime" myself to market timing. There is a lot of money to be made market timing by selling stocks for bonds or vice versa, but not really for domestic and international (my 67/33/0) portfolio since they move together (loosely).

The issue for me would be sitting down on my laptop and saying ok time to rebalance. Oops looks like the market has been down. Time to rebalance to 33% stocks. Wait, can't I make more with 40% stocks? 50%? 90%? etc. I just know that temptation will be there when that option is there. If its not, it won't be.

delamer
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Re: If You Can't

Postby delamer » Fri May 19, 2017 5:55 pm

amd7239 wrote:
delamer wrote:Each target date fund is managed differently; your question is too broad.

If you believe that you could not avoid intervening with a two-fund or three-fund portfolio, what makes you think a target date fund would stop you?


Because I never have to rebalance and I can't tweak the allocations, I would look at market fluctuations far less and be less tempted as a result


Based on your other thread, you seem to follow the fluctuations in the market pretty closely. Is being in a target fund is going to change that? If yes, then go for it.

TropikThunder
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Re: If You Can't

Postby TropikThunder » Fri May 19, 2017 5:55 pm

amd7239 wrote:So psychologically, I think my only options are
A) target date fund
B) A 3-fund portfolio without bonds [67% US Total US (VTSAX), 33% Total International (VTIAX)]. <---- that's a 2 fund portfolio :P

[b]Has anybody done the math on whether A or B has a higher historical post-fee return?

As delamer said, each target date fund is managed differently. However, each target fund at its simplest contains a mix of stocks and bonds that adjusts over time to reduce volatility as retirement approaches. So what you're asking is, has anyone has done a backtest comparing 100% stock to, say, 70% stock/30% bonds. I think it's safe to say the 100% stock usually has higher returns. But I don't think that's what you are really asking.

amd7239
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Re: If You Can't

Postby amd7239 » Fri May 19, 2017 6:00 pm

TropikThunder wrote:
amd7239 wrote:So psychologically, I think my only options are
A) target date fund
B) A 3-fund portfolio without bonds [67% US Total US (VTSAX), 33% Total International (VTIAX)]. <---- that's a 2 fund portfolio :P

[b]Has anybody done the math on whether A or B has a higher historical post-fee return?

As delamer said, each target date fund is managed differently. However, each target fund at its simplest contains a mix of stocks and bonds that adjusts over time to reduce volatility as retirement approaches. So what you're asking is, has anyone has done a backtest comparing 100% stock to, say, 70% stock/30% bonds. I think it's safe to say the 100% stock usually has higher returns. But I don't think that's what you are really asking.


Are you saying 100% stock has higher returns, even after factoring in rebalancing?

amd7239
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Re: If You Can't

Postby amd7239 » Fri May 19, 2017 6:01 pm

delamer wrote:Each target date fund is managed differently; your question is too broad.

If you believe that you could not avoid intervening with a two-fund or three-fund portfolio, what makes you think a target date fund would stop you?


Let's assume it is the Vanguard 2060 Target Retirement

delamer
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Re: If You Can't

Postby delamer » Fri May 19, 2017 6:03 pm


aristotelian
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Re: If You Can't

Postby aristotelian » Fri May 19, 2017 6:04 pm

amd7239 wrote:
aristotelian wrote:Personally I don't see the issue with rebalancing. Just write down a policy in your IPS (quarterly, etc) and do it. But if that is too much, there is absolutely nothing wrong with a set and forget target date fund.


The issue for me is greed. I would say why reallocate to only 33% stocks in a down market? Why not 40? or 50? or 100?


Like I said, if the target fund suits you, go for it. The only downside is very marginal difference of expense ratio. That is a small price to pay if you don't trust yourself. What is your age and current allocation, by the way?

I would certainly not advise 100% equities (unless you are young and just starting out), although there is a certain elegance to it.

BigJohn
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Re: If You Can't

Postby BigJohn » Fri May 19, 2017 6:09 pm

amd7239 wrote:The issue for me would be sitting down on my laptop and saying ok time to rebalance. Oops looks like the market has been down. Time to rebalance to 33% stocks. Wait, can't I make more with 40% stocks? 50%? 90%? etc. I just know that temptation will be there when that option is there. If its not, it won't be.

So if you're in a target date fund what's to say you won't have the same reaction and move from Date A to Date B fund because B has a higher stock allocation? You know yourself better than anyone so target date maybe better but.... unless you become convinced that big moves to time the market will most likely hurt your performance, you are always going to be tempted to make a change.

Here's a wiki page that begins to address this issue https://www.bogleheads.org/wiki/US_mutual_fund_performance_studies. After reading it my question to you is, if experts who do this full time struggle to make market timing work, why would you think you can do any better?

amd7239
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Re: If You Can't

Postby amd7239 » Fri May 19, 2017 6:13 pm

aristotelian wrote:
amd7239 wrote:
aristotelian wrote:Personally I don't see the issue with rebalancing. Just write down a policy in your IPS (quarterly, etc) and do it. But if that is too much, there is absolutely nothing wrong with a set and forget target date fund.


The issue for me is greed. I would say why reallocate to only 33% stocks in a down market? Why not 40? or 50? or 100?


Like I said, if the target fund suits you, go for it. The only downside is very marginal difference of expense ratio. That is a small price to pay if you don't trust yourself. What is your age and current allocation, by the way?

I would certainly not advise 100% equities (unless you are young and just starting out), although there is a certain elegance to it.


Thanks for the comment!

I'm 27 and I currently have $50k in the 67/33 allocation mentioned in the post.

amd7239
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Re: If You Can't

Postby amd7239 » Fri May 19, 2017 6:20 pm

BigJohn wrote:
amd7239 wrote:The issue for me would be sitting down on my laptop and saying ok time to rebalance. Oops looks like the market has been down. Time to rebalance to 33% stocks. Wait, can't I make more with 40% stocks? 50%? 90%? etc. I just know that temptation will be there when that option is there. If its not, it won't be.

So if you're in a target date fund what's to say you won't have the same reaction and move from Date A to Date B fund because B has a higher stock allocation? You know yourself better than anyone so target date maybe better but.... unless you become convinced that big moves to time the market will most likely hurt your performance, you are always going to be tempted to make a change.

Here's a wiki page that begins to address this issue https://www.bogleheads.org/wiki/US_mutual_fund_performance_studies. After reading it my question to you is, if experts who do this full time struggle to make market timing work, why would you think you can do any better?


Good point. I am convinced that big moves hurt performance...but only in the case of selling stocks. Not buying more (unless I'm an old man) . If I already have 100% stocks, I obv cant buy anymore. So 100% stocks would be easier for me to stick with.

TropikThunder
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Re: If You Can't

Postby TropikThunder » Fri May 19, 2017 6:25 pm

amd7239 wrote:
TropikThunder wrote:I think it's safe to say the 100% stock usually has higher returns. But I don't think that's what you are really asking.


Are you saying 100% stock has higher returns, even after factoring in rebalancing?

Yes, and it's not just me saying it. Vanguard did a study of various rebalancing strategies (periodic, bands, combined) from 1926 - 2009 and found that no one strategy was any better than another, but that none of them did better then not rebalancing at all. Then again, rebalancing is not normally thought of as a strategy to increase return but as a strategy to reduce volatility.
https://www.vanguard.com/pdf/icrpr.pdf

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BL
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Re: If You Can't

Postby BL » Fri May 19, 2017 6:30 pm

How about setting your contributions to the ratio and never rebalance? Well, not for a few years or the next crash. If you set it and never look, maybe it will gradually build up stock %, but that is ok for quite a while. Not quite the Boglehead way, but if it works, fine. It's better than 100% stocks.

Otherwise, choose a balanced fund, and don't look.

amd7239
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Re: If You Can't

Postby amd7239 » Fri May 19, 2017 6:35 pm

BL wrote:How about setting your contributions to the ratio and never rebalance? Well, not for a few years or the next crash. If you set it and never look, maybe it will gradually build up stock %, but that is ok for quite a while. Not quite the Boglehead way, but if it works, fine. It's better than 100% stocks.

Otherwise, choose a balanced fund, and don't look.


Why is 100% stocks so unpopular when it had the highest return? You're gonna lose money in bear markets anyway, why not lose more in the worst times and gain more in the good times? Maybe i think this way because I've never been through a bear market, but I just don't see the logic.

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One Ping
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Re: If You Can't

Postby One Ping » Fri May 19, 2017 6:40 pm

TropikThunder wrote:
amd7239 wrote:
TropikThunder wrote:I think it's safe to say the 100% stock usually has higher returns. But I don't think that's what you are really asking.


Are you saying 100% stock has higher returns, even after factoring in rebalancing?

Yes, and it's not just me saying it. Vanguard did a study of various rebalancing strategies (periodic, bands, combined) from 1926 - 2009 and found that no one strategy was any better than another, but that none of them did better then not rebalancing at all. Then again, rebalancing is not normally thought of as a strategy to increase return but as a strategy to reduce volatility.
https://www.vanguard.com/pdf/icrpr.pdf

If you are 100% stocks ... what are you rebalancing? :twisted: ... asset allocations between several individual funds from different asset classes?

One Ping
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BigJohn
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Re: If You Can't

Postby BigJohn » Fri May 19, 2017 6:41 pm

amd7239 wrote:So 100% stocks would be easier for me to stick with.

OK, at your age there are worse decision than being 100% stock but that's not really an allocation you can "stick with" forever. At some point in 10 - 15 years and certainly in the 10 year before retirement, you'll want to add some bonds. If you can resist the urge to change dates, a target date fund will make this adjustment for you so maybe you'll be less tempted.

amd7239 wrote:Maybe i think this way because I've never been through a bear market

Yes, this plus the fact that at your age your balances are low so the losses are small on an absolute basis. Roll forward 20 years when maybe your balance is $500K. A 50% correction just cost you $250K and set your retirement back 10 years. I suspect you'd feel differently about it at that point.

delamer
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Re: If You Can't

Postby delamer » Fri May 19, 2017 6:52 pm

You are thinking purely about the accumulation phase. At some point, you will need to withdraw from your portfolio. Keeping a portion in bonds/cash allows you to use those funds for withdrawals in the event of a market downturn, rather than selling stocks when they have declined in value.

Also, just like you, people have a hard time leaving their portfolios alone. A portion of bonds/cash reduces portfolio volatility, and makes them less likely to cash out stocks when the inevitable downturn hits.

amd7239
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Re: If You Can't

Postby amd7239 » Fri May 19, 2017 6:57 pm

BigJohn wrote:
amd7239 wrote:So 100% stocks would be easier for me to stick with.

OK, at your age there are worse decision than being 100% stock but that's not really an allocation you can "stick with" forever. At some point in 10 - 15 years and certainly in the 10 year before retirement, you'll want to add some bonds. If you can resist the urge to change dates, a target date fund will make this adjustment for you so maybe you'll be less tempted.

amd7239 wrote:Maybe i think this way because I've never been through a bear market

Yes, this plus the fact that at your age your balances are low so the losses are small on an absolute basis. Roll forward 20 years when maybe your balance is $500K. A 50% correction just cost you $250K and set your retirement back 10 years. I suspect you'd feel differently about it at that point.



So I'm underestimating how difficult this will be. Old habits die hard, right? I'm 27 now - if over the next couple years I can manage to learn to set and forget the target date fund (and I never sit down to rebalance it), I will eventually get into the habit of looking at my portfolio less and less. And by the time I'm 50 ill barely be looking at all.

Maybe after all, target date is right for me then....in the long run?

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BolderBoy
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Re: If You Can't

Postby BolderBoy » Fri May 19, 2017 7:11 pm

amd7239 wrote:
aristotelian wrote:Personally I don't see the issue with rebalancing. Just write down a policy in your IPS (quarterly, etc) and do it. But if that is too much, there is absolutely nothing wrong with a set and forget target date fund.


The issue for me is greed. I would say why reallocate to only 33% stocks in a down market? Why not 40? or 50? or 100?

You and Gordon Gecko, eh?

I would proffer that you should go ahead and try to keep up with what you are afraid you would do with a 33/33/33 portfolio. It will quickly become tiresome and you'll decide you want a life instead. Also, once you go to 100%, it becomes tough to rebalance - basically you never have to again. But...
“Where you stand, depends on where you sit” - Rufus Miles | "Never underestimate one's capacity to overestimate one's abilities"

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Re: If You Can't

Postby Fallible » Fri May 19, 2017 7:16 pm

amd7239 wrote:...
So I'm underestimating how difficult this will be. Old habits die hard, right? I'm 27 now - if over the next couple years I can manage to learn to set and forget the target date fund (and I never sit down to rebalance it), I will eventually get into the habit of looking at my portfolio less and less. And by the time I'm 50 ill barely be looking at all. ...


I think besides finding a portfolio you'll barely look at, you'll also need to cultivate other interests you'd rather look at and have fun with. Or maybe you already have other interests that have taken a back seat to investing? Whatever works. Sooner the better.
Last edited by Fallible on Mon May 22, 2017 7:02 pm, edited 1 time in total.
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TropikThunder
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Re: If You Can't

Postby TropikThunder » Fri May 19, 2017 7:28 pm

One Ping wrote:
TropikThunder wrote:Yes, and it's not just me saying it.

If you are 100% stocks ... what are you rebalancing? :twisted: ... asset allocations between several individual funds from different asset classes?

One Ping

I accidentally deleted part of my answer while editing. :P Let's try that again:
amd7239 wrote:Are you saying 100% stock has higher returns, even after factoring in rebalancing?

Yes, because rebalancing does not increase returns. It is pretty much universally accepted that equities have higher returns over time then bonds in all but some specific time periods (I really don't think I need a reference for that lol). So, a 100% equity allocation will have higher returns then a balanced portfolio, regardless of rebalancing strategy. In addition, even if you start with a balanced portfolio, not rebalancing (and letting the higher-returning asset outpace the other) has a higher average return (but also higher average volatility). And it's not just me saying it. Vanguard did a study of various rebalancing strategies (periodic, bands, combined) from 1926 - 2009 and found that no one strategy was any better than another, but that none of them did better then not rebalancing at all. Then again, rebalancing is not normally thought of as a strategy to increase return but as a strategy to reduce volatility (i.e., reduce that consequence of stocks taking a tumble at a time you need to make withdrawals).
https://www.vanguard.com/pdf/icrpr.pdf


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