How much does tinkering hurt returns?

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Deighve
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How much does tinkering hurt returns?

Post by Deighve »

With the help of the boglehead forum and website I have moved to a three fund portfolio. Thank you! I am happy with my current portfolio and feel much more confident. However, I continue to learn about things such as tilting to small caps, and some low cost actively managed funds. I am not yet ready to make changes, but I am tempted to in the near future.

There are warnings about tinkering with a portoflio too much, and how the frequent changes will result in lower returns. However, if I keep my asset allocation the same, stick with low cost funds, and don't try to time the market does this tinkering really matter?
bradpevans
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Re: How much does tinkering hurt returns?

Post by bradpevans »

Deighve wrote: Sat Apr 21, 2018 5:20 pm With the help of the boglehead forum and website I have moved to a three fund portfolio. Thank you! I am happy with my current portfolio and feel much more confident. However, I continue to learn about things such as tilting to small caps, and some low cost actively managed funds. I am not yet ready to make changes, but I am tempted to in the near future.

There are warnings about tinkering with a portoflio too much, and how the frequent changes will result in lower returns. However, if I keep my asset allocation the same, stick with low cost funds, and don't try to time the market does this tinkering really matter?
While it’s not what most do on this forum you could certainly try it “on paper” if you want to track it. Doesn’t mean it would hold afterwards but might ease your mind. Or convince you not to bother
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nedsaid
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Re: How much does tinkering hurt returns?

Post by nedsaid »

If I had to guess, it would be that tinkering could cost you 1% to 2% a year in returns. That is if you are changing your basic investing approach.

You also have to understand that there are ebbs and flows to the markets, times when one investing approach will outperform another. For example, Small-Value tilted portfolios did really well from 2000 until the time the financial crisis hit in the fall of 2008. Since the financial crisis, the tilted portfolios have underperformed the simpler index fund portfolios. The big reason is that Value in general has underperformed the market since the financial crisis. Someone could say that Value is due to outperform the market but we don't know when or even if that would happen. So you need a strong belief system behind your investing plan and extreme patience.

During New Year's Day weekend, I spent a lot of time analyzing my 2017 returns. I underperformed a three fund portfolio mostly because of my value tilts.
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tennisplyr
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Re: How much does tinkering hurt returns?

Post by tennisplyr »

nedsaid wrote: Sat Apr 21, 2018 5:33 pm If I had to guess, it would be that tinkering could cost you 1% to 2% a year in returns. That is if you are changing your basic investing approach.

You also have to understand that there are ebbs and flows to the markets, times when one investing approach will outperform another. For example, Small-Value tilted portfolios did really well from 2000 until the time the financial crisis hit in the fall of 2008. Since the financial crisis, the tilted portfolios have underperformed the simpler index fund portfolios. The big reason is that Value in general has underperformed the market since the financial crisis. Someone could say that Value is due to outperform the market but we don't know when or even if that would happen. So you need a strong belief system behind your investing plan and extreme patience.

During New Year's Day weekend, I spent a lot of time analyzing my 2017 returns. I underperformed a three fund portfolio mostly because of my value tilts.
+1. Yes I've heard that cost you 1-2 pp
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inbox788
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Re: How much does tinkering hurt returns?

Post by inbox788 »

tennisplyr wrote: Sat Apr 21, 2018 6:35 pm +1. Yes I've heard that cost you 1-2 pp
No, it’s costing you 1-2% not tinkering, IF you listen to those who tinker.
viewtopic.php?t=35493
Since the winds change constantly, sometimes it hurts and sometimes it helps, so it depends when you’re looking and what tilt you want. Over many long periods, there is reversion to the mean where it doesn’t make a significant difference, and accurately determining the true difference would involve tracking every buy and sell as well as dividends reinvested. Not a simple task.
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Re: How much does tinkering hurt returns?

Post by radiowave »

Deighve wrote: Sat Apr 21, 2018 5:20 pm There are warnings about tinkering with a portoflio too much, and how the frequent changes will result in lower returns. However, if I keep my asset allocation the same, stick with low cost funds, and don't try to time the market does this tinkering really matter?
I'm not sure what you mean by "tinkering". I you have everything set with a 3 fund, tax efficient strategy, you should not have to do very much tinkering at all maybe rebalance once or twice a year.
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nedsaid
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Re: How much does tinkering hurt returns?

Post by nedsaid »

tennisplyr wrote: Sat Apr 21, 2018 6:35 pm
nedsaid wrote: Sat Apr 21, 2018 5:33 pm If I had to guess, it would be that tinkering could cost you 1% to 2% a year in returns. That is if you are changing your basic investing approach.

You also have to understand that there are ebbs and flows to the markets, times when one investing approach will outperform another. For example, Small-Value tilted portfolios did really well from 2000 until the time the financial crisis hit in the fall of 2008. Since the financial crisis, the tilted portfolios have underperformed the simpler index fund portfolios. The big reason is that Value in general has underperformed the market since the financial crisis. Someone could say that Value is due to outperform the market but we don't know when or even if that would happen. So you need a strong belief system behind your investing plan and extreme patience.

During New Year's Day weekend, I spent a lot of time analyzing my 2017 returns. I underperformed a three fund portfolio mostly because of my value tilts.
+1. Yes I've heard that cost you 1-2 pp
I looked back at my thread where I have tracked my portfolio, the New 'Doo thread, my results for the blended 3 fund portfolio was 16.39% and I returned 15.01% for 2017. My best guess is that the "factor drag" for 2017 was about 1%. Over longer periods of time, it looks like I have trailed the benchmark 3 fund portfolio from 0.40% a year to maybe 0.70% a year depending upon when I peek. It would appear that most of this is the Value factor drag. My expenses are about 0.48% a year and the fee drag is a factor too. If Value was working, it should have at least canceled out the fees.

But pretty much what I have done is keep what I had and add new things. Over the years, I have reduced my individual stocks as a percentage of my portfolio and increased my index funds. So it isn't like I have switched from one thing to another, more like changing emphasis over time.
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venkman
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Re: How much does tinkering hurt returns?

Post by venkman »

Deighve wrote: Sat Apr 21, 2018 5:20 pm There are warnings about tinkering with a portoflio too much, and how the frequent changes will result in lower returns. However, if I keep my asset allocation the same, stick with low cost funds, and don't try to time the market does this tinkering really matter?
How exactly would you tinker with your portfolio, while also keeping your AA the same and not timing the market?
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Alexa9
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Re: How much does tinkering hurt returns?

Post by Alexa9 »

I'd stick with the three fund portfolio and don't tinker. It's not worth it. If you're going to tilt to small (value), do it and stick with it and rebalance. Set it and forget it. Tinkering could hurt or help. It's okay to tinker when you're starting out if you change your mind and add extra REIT's for example (although I wouldn't). Most importantly, make a plan in writing and stick to it.
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PinotGris
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Re: How much does tinkering hurt returns?

Post by PinotGris »

In the same tinkering way, how does TLH and moving funds to TLH partner fund and back affect returns? If I move 50k from VTSAX to SP500 index fund, and then back again, what will I be losing? Or Gaining?
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Alexa9
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Re: How much does tinkering hurt returns?

Post by Alexa9 »

chabil wrote: Sat Apr 21, 2018 9:18 pm In the same tinkering way, how does TLH and moving funds to TLH partner fund and back affect returns? If I move 50k from VTSAX to SP500 index fund, and then back again, what will I be losing? Or Gaining?
Tax loss harvesting is different and can save you a lot of money. I wouldn't consider it tinkering.
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Re: How much does tinkering hurt returns?

Post by pkcrafter »

Deighve wrote: Sat Apr 21, 2018 5:20 pm With the help of the boglehead forum and website I have moved to a three fund portfolio. Thank you! I am happy with my current portfolio and feel much more confident. However, I continue to learn about things such as tilting to small caps, and some low cost actively managed funds. I am not yet ready to make changes, but I am tempted to in the near future.

There are warnings about tinkering with a portoflio too much, and how the frequent changes will result in lower returns. However, if I keep my asset allocation the same, stick with low cost funds, and don't try to time the market does this tinkering really matter?
Tinkering is never going to produce better returns, but tilting might improve returns a bit. You don't tinker, you commit to a higher percent of small or whatever you are tilting toward and you hold at least 10 years. And it can be tough when you go through 3-4 years of underperforming the 3 fund portfolio you used to have. That commitment should be reinforced by a written contract (investment policy statement).


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MJW
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Re: How much does tinkering hurt returns?

Post by MJW »

One of the pitfalls of tinkering is that what sounds good to you will likely change as you continue to learn and/or read convincing arguments by people who seem like they know what they're talking about. For a while it may be small cap value. Then it goes to multi-factor emerging markets. Or maybe that active managed fund that has a 48.3% one year return.

Tilting may very well produce higher returns but it seems like one would need conviction about their tilt (or just not care enough to change it) to stick with it through extended periods of under-performance. Changing your tilt without conviction just takes you back to tinkering.
livesoft
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Re: How much does tinkering hurt returns?

Post by livesoft »

Nobody can really tell you how much your tinkering will hurt or help your returns. All of the posts in this thread have no data to back up their claims except for nedsaid.

There are studies that show that some people who trade more do not do as well that trade less, too.

But then it only takes one event to change the entire calculus. Ask Nassim Taleb about that.

Also keep excellent records so that you can calculate the performance of your portfolio AND the performances of your benchmarks. It is so rare for people to do that correctly, that very few people can give a factual answer to the question you posed.
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3funder
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Re: How much does tinkering hurt returns?

Post by 3funder »

It depends on how much tinkering you do as well as the magnitude (tinkering can mean different things to different people). Generally speaking, tinkering is not recommended.
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oldcomputerguy
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Re: How much does tinkering hurt returns?

Post by oldcomputerguy »

Deighve wrote: Sat Apr 21, 2018 5:20 pm With the help of the boglehead forum and website I have moved to a three fund portfolio. Thank you! I am happy with my current portfolio and feel much more confident. However, I continue to learn about things such as tilting to small caps, and some low cost actively managed funds. I am not yet ready to make changes, but I am tempted to in the near future.

There are warnings about tinkering with a portoflio too much, and how the frequent changes will result in lower returns. However, if I keep my asset allocation the same, stick with low cost funds, and don't try to time the market does this tinkering really matter?
Yes. Tinkering racks up expenses, even if they are underlying and unseen.

If you're happy with your portfolio as it is, then don't tinker. If you think that a change is needed, think long and hard about it. Don't change your portfolio just because you see some people say "tilting is good". If you decide that a change is needed, be sure of the reasons.

And if you do decide to tilt, be prepared to stick to it. It may be many years before any benefits come from the changes you make.
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MathWizard
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Re: How much does tinkering hurt returns?

Post by MathWizard »

An index fund's low ER comes partially from minimal transaction costs, so if you have a lot of tinkering you may lose out on being in a low ER fund.

The other part is chasing returns. If you believe in return to mean, then moving into a fund that outperformed would guarantee underperformance for a bit after that.
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