Two Fund Vanguard vs. Managed Portfolio

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JSS
Posts: 10
Joined: Tue Jul 25, 2017 7:48 pm

Two Fund Vanguard vs. Managed Portfolio

Post by JSS »

Age:61
Desired Asset allocation: (Moderate Portfolio). 60% stocks / 40% bonds?
Desired International allocation: % of stocks, Not Sure.
I am 61 and may retire in three years. At 64 I would have social security, a moderate size pension or lump sum, and this IRA and Roth.
The IRA and Roth total mid six figures.
I currently have a two fund portfolio similar to Jim Collins wrote about in "Simple Path To Wealth" a Vanguard IRA and a Vanguard Roth IRA.
Both are 60% VTSAX, and 40% VICSX.
I am considering hiring a local financial advisor (BMM). Over the past five years, even after deducting a 1.12% advisor fee, their returns are consistently 3% - 5% better than my two fund Vanguard portfolio, when back tested on Portfolio Visualizer. They custody the money at Charles Schwab. They pay any trading costs, and they include at no extra charge Financial Planning, Estate Planning, Medicare Planning, Social Security Planning, and Retirement Planning.

IWF iShares Russell 1000 Growth ETF 15.00%
IWM iShares Russell 2000 ETF 20.00%
MDY SPDR S&P MidCap 400 ETF 20.00%
MTUM iShares Edge MSCI USA Momentum Fctr ETF 5.00%
OEF iShares S&P 100 ETF 12.50%
SPY SPDR S&P 500 27.50%

Returns Comparison April - April:
2 fund BMM (Managed)
1yr 8.70% 13.67%
3yr. 6.96% 9.45%
5yr. 8.97% 11.64%
What are pros and cons of moving my portfolio to this financial advisor?
Thank you.
PFInterest
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by PFInterest »

are you trying to compare a 40% fixed income portfolio to a 100% equity, tilted portfolio?
cause thats not fair....to say the least.

1.12% is still criminal.
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dogagility
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by dogagility »

^ What they said!
Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
Topic Author
JSS
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Joined: Tue Jul 25, 2017 7:48 pm

Re: Two Fund Vanguard vs. Managed Portfolio

Post by JSS »

I'm still learning and trying to figure out how to make the greatest return on investment.
My thoughts are if I can get a far greater return AND have an advisor who would make tactical adjustments as market conditions change, then why not.
I am currently at 60/40 with VTSAX and VICSX because that is what I have read in finance literature such as Jim Collins book "Simple Path To Wealth", but I am a novice at investing. I'm not positive that is what's best for me given the latest market valuations and conditions.
Ron Scott
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by Ron Scott »

Smoke and mirrors, including mismatching asset allocations to show a better return.

Your 2-fund is sound. Forget international equities. Stay the course.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.
ChinchillaWhiplash
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by ChinchillaWhiplash »

One year of backtesting doesn't tell you a whole lot. How would the management fees affect your returns over time? It will eat into your returns pretty quickly.
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BL
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by BL »

At your age 40% bonds sound reasonable. The two portfolios are not comparable. Theirs is more risky. The fee continues even when stocks fall. You could easily invest in those funds yourself and buy CDs or bonds.
drk
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by drk »

Hello again, JSS. You have received a lot of good advice on this board, and it has all been consistent. You really need to stop shopping for opinions because you keep running into snake-oil salesmen trying to confuse you. In particular this post is almost identical to two other recent ones:
I'm going to quote from my PM reply to you regarding the latter:
drk wrote:Wed May 16, 2018 10:52 am
JSS wrote:Wed May 16, 2018 9:33 am I don't know how to use Morningstar tools, but I do use Portfolio Visualizer to back test portfolios.
My two fund of 60/40 vtsax and vicsx beats every portfolio that I've tested against with higher return and higher sharpe and sortino ratios, except this one.
However the 1% advisor fee of this diverse portfolio negates that.
Two things:

First, there is nothing more diverse about that portfolio than just holding VTSAX (leaving aside the small international allocation). There are a lot more funds, sure. As I noted in my response, though, you really just end up with a worse version of the market, by which I mean higher risk and lower expected return.

Second, the 1% fee is the ballgame. That's at heart of the Boglehead Philosophy:
Keep costs low wrote: The difference between an expense ratio of 0.15% and 1.5% might not seem like much, but the effect of the compounding over an investing lifetime is enormous. After 30 years, a fund with a 1.5% expense ratio will provide an investor with several hundred thousand dollars less for retirement than a 0.15% index fund with the same growth.[13] And remember that most managed funds actually underperform index funds. Costs matter, and investors need returns compounding for their own benefit, not the benefit of fund companies who skim unnecessary fees off the top. Figure 2. is an example showing that 1% of additional costs will reduce available retirement funds by 10 years.
You'll pay that 1% fee (on top of the higher fund ERs) every single year. That's a big hole to overcome, even assuming that the funds outperform the market, which is a huge assumption.
JSS wrote:Wed May 16, 2018 9:33 am I am trying to decide if I want to continue to manage my own investments, or hire an advisor.
It seems like you've done quite well managing your own investments, but, now that you're closing in on retirement, you're worried that you won't have done enough. That's an understandable and normal fear. Remember to keep it in perspective, though: we're more likely to damage by doing more than we are by doing less. As Mr. Bogle likes to say, "Don't do something. Stand there."

Now, if you're concerned about whether you have the right allocation, I see a couple of great options:
  1. Check out Vanguard's retirement planning materials and maybe have a consultation with Vanguard Personal Advisory Services (they'll offer a proposed plan using Vanguard funds for free)
  2. Consider a Vanguard All-In-One Fund (e.g., Vanguard Target Retirement 2020)
Either of these will help you get some validation that you can manage this. The latter will let you go completely hands-off for a tiny 0.13% ER. I would also recommend picking up a copy of The Bogleheads Guide to Investing and giving it a read. It even has a chapter on whether you need an advisor.
JSS wrote:Wed May 16, 2018 9:33 am What would your ideal portfolio be and why?
If I were being glib, I would say that that's irrelevant because I'm half your age. :wink:

Instead, I'm going to take your question to mean "what would you do in my position?" The answer: I would put all of my IRA money into either Vanguard Target Retirement 2020 or Vanguard LifeStrategy Moderate Growth. Maybe I would split them, putting the Target fund in Traditional and the LifeStrategy in Roth. That way I would still have something to compare.

Oh, and I would come up with a single, objective, unchanging benchmark to compare my performance to no matter what I did. Again, we do damage by doing more, not by doing less.
A useful razor: anyone asking about speculative strategies on Bogleheads.org has no business using them.
pkcrafter
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by pkcrafter »

JSS, please see comments in blue, below.
JSS wrote: Sun May 27, 2018 2:56 pm Age:61
Desired Asset allocation: (Moderate Portfolio). 60% stocks / 40% bonds?
Desired International allocation: % of stocks, Not Sure.
I am 61 and may retire in three years. At 64 I would have social security, a moderate size pension or lump sum, and this IRA and Roth.
The IRA and Roth total mid six figures.

Your portfolio might be fine, but we need to know how much you plan to initially withdraw from the two tax-advantaged accounts when you start retirement. The safe figure is 4% the first year.

I currently have a two fund portfolio similar to Jim Collins wrote about in "Simple Path To Wealth" a Vanguard IRA and a Vanguard Roth IRA.
Both are 60% VTSAX, and 40% VICSX.

60/40 might be OK, but we need your initial withdrawal rate. The two fund is minimal and you might be better off with a Vanguard Lifestrategy fund or target fund.

I am considering hiring a local financial advisor (BMM). Over the past five years, even after deducting a 1.12% advisor fee, their returns are consistently 3% - 5% better than my two fund Vanguard portfolio, when back tested on Portfolio Visualizer. They custody the money at Charles Schwab. They pay any trading costs, and they include at no extra charge Financial Planning, Estate Planning, Medicare Planning, Social Security Planning, and Retirement Planning.

IWF iShares Russell 1000 Growth ETF 15.00%
IWM iShares Russell 2000 ETF 20.00%
MDY SPDR S&P MidCap 400 ETF 20.00%
MTUM iShares Edge MSCI USA Momentum Fctr ETF 5.00%
OEF iShares S&P 100 ETF 12.50%
SPY SPDR S&P 500 27.50%

Returns Comparison April - April:
2 fund BMM (Managed)
1yr 8.70% 13.67%
3yr. 6.96% 9.45%
5yr. 8.97% 11.64%
What are pros and cons of moving my portfolio to this financial advisor?
Thank you.

Are you aware that you are comparing one portfolio that has 60% equity with one that has 100% equity. Of course the 100% portfolio will outperform when the market is doing well, and it will lose substantially more when the market falls. It's a lot more risky than your 60/40% portfolio. I guess the pros of using this advisor is you don't have to do anything. The cons are you won't be doing anything but letting someone else charge you for a portfolio that is completely inappropriate for a new retiree. Maybe they just gave you those funds to compare and demonstrate how they are better, and maybe they actually would not recommend a 100% equity portfolio.

I'm still learning and trying to figure out how to make the greatest return on investment.
I think you need to understand that every investing decision involves some kind of compromise. Example: you want higher returns, you must take higher risk, and the returns may not materialize. What we all need to do is decide on a balance of potential returns vs the certainty of risk.

When deciding on an acceptable allocation, you need to evaluate your need to take risk, your ability to take risk, and your willingness to take risk. The first two are conflicting--the more need, the less ability and vise versa. For instance, if you are 60/40, I would assume you have the ability to accept the potential loss associated with that allocation.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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dwickenh
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by dwickenh »

pkcrafter wrote: Sun May 27, 2018 6:28 pm JSS, please see comments in blue, below.
JSS wrote: Sun May 27, 2018 2:56 pm Age:61
Desired Asset allocation: (Moderate Portfolio). 60% stocks / 40% bonds?
Desired International allocation: % of stocks, Not Sure.
I am 61 and may retire in three years. At 64 I would have social security, a moderate size pension or lump sum, and this IRA and Roth.
The IRA and Roth total mid six figures.

Your portfolio might be fine, but we need to know how much you plan to initially withdraw from the two tax-advantaged accounts when you start retirement. The safe figure is 4% the first year.

I currently have a two fund portfolio similar to Jim Collins wrote about in "Simple Path To Wealth" a Vanguard IRA and a Vanguard Roth IRA.
Both are 60% VTSAX, and 40% VICSX.

60/40 might be OK, but we need your initial withdrawal rate. The two fund is minimal and you might be better off with a Vanguard Lifestrategy fund or target fund.

I am considering hiring a local financial advisor (BMM). Over the past five years, even after deducting a 1.12% advisor fee, their returns are consistently 3% - 5% better than my two fund Vanguard portfolio, when back tested on Portfolio Visualizer. They custody the money at Charles Schwab. They pay any trading costs, and they include at no extra charge Financial Planning, Estate Planning, Medicare Planning, Social Security Planning, and Retirement Planning.

IWF iShares Russell 1000 Growth ETF 15.00%
IWM iShares Russell 2000 ETF 20.00%
MDY SPDR S&P MidCap 400 ETF 20.00%
MTUM iShares Edge MSCI USA Momentum Fctr ETF 5.00%
OEF iShares S&P 100 ETF 12.50%
SPY SPDR S&P 500 27.50%

Returns Comparison April - April:
2 fund BMM (Managed)
1yr 8.70% 13.67%
3yr. 6.96% 9.45%
5yr. 8.97% 11.64%
What are pros and cons of moving my portfolio to this financial advisor?
Thank you.

Are you aware that you are comparing one portfolio that has 60% equity with one that has 100% equity. Of course the 100% portfolio will outperform when the market is doing well, and it will lose substantially more when the market falls. It's a lot more risky than your 60/40% portfolio. I guess the pros of using this advisor is you don't have to do anything. The cons are you won't be doing anything but letting someone else charge you for a portfolio that is completely inappropriate for a new retiree. Maybe they just gave you those funds to compare and demonstrate how they are better, and maybe they actually would not recommend a 100% equity portfolio.

I'm still learning and trying to figure out how to make the greatest return on investment.
I think you need to understand that every investing decision involves some kind of compromise. Example: you want higher returns, you must take higher risk, and the returns may not materialize. What we all need to do is decide on a balance of potential returns vs the certainty of risk.

When deciding on an acceptable allocation, you need to evaluate your need to take risk, your ability to take risk, and your willingness to take risk. The first two are conflicting--the more need, the less ability and vise versa. For instance, if you are 60/40, I would assume you have the ability to accept the potential loss associated with that allocation.

Paul
pkcrafter knows his stuff. Take some time and read his Investment guide here: https://investingroadmap.wordpress.com/

This will be the best time you can spend to educate yourself and become confident in your own investments.
I believe you already have great investments, and I see no reason to pay someone to take more risk on your behalf.

Best to you,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
pkcrafter
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by pkcrafter »

JSS:
My thoughts are if I can get a far greater return AND have an advisor who would make tactical adjustments as market conditions change, then why not.
Beating the market is difficult, and more so if you have to pay more fees. Tactical adjustments based on market conditions is market timing and it doesn't work.

https://www.bogleheads.org/wiki/Taylor_ ... ing_quotes

Do you think you can manage a portfolio like the 3-fund, or even a 2 fund as you now have?

Advantages of the 3 Fund portfolio -

viewtopic.php?t=88005

The biggest challenge to portfolio management - Behavior. Note that portfolio managers are also subject to this.

https://www.bogleheads.org/wiki/Behavioral_pitfalls

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
dbr
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by dbr »

I would also suggest going to getting started and systematically absorbing the basics of investing: https://www.bogleheads.org/wiki/Getting_started
UpperNwGuy
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by UpperNwGuy »

I think you should stay the course and stop exploring alternatives.
Doctor Rhythm
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Re: Two Fund Vanguard vs. Managed Portfolio

Post by Doctor Rhythm »

If you want to retire in 3 years and desire a moderate allocation of 60/40, then don't compare your returns to those of a very aggressive 100% stock portfolio. If you don't understand this, then you definitely should not be handing your money over to a manager.
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