Read too many books... help untangle

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Bubbagump
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Read too many books... help untangle

Post by Bubbagump » Sat Sep 27, 2014 11:14 am

So I have been a knee deep in books over the past month (and juxtaposing with what I read here) or so trying to plan a portfolio for post business exit and it seems I have thoroughly confused myself. It seems there is a lot of contradiction out there, but maybe I just see it as contradiction. It seems to me that most everyone has a toe in the MPT pool, a general sense that markets are indeed efficient, and low costs are critical but things get murky from there. Bogle is skeptical of pretty much anything beyond a market based portfolio. Ferri seems to be in a similar camp with a willingness to tilt towards REIT and SCV (though his comments on this board of optimal asset allocations being "trash" is notable"). Swedroe says quite clearly that Efficient Frontier models are forgettable. Yet in the three fund super thread, Taylor refers to them frequently enough and Malkiel refers to them especially in reference to limiting risk by introducing international stocks in Random Walk. Then, I know Swedroe is a respected contributor around these parts... he talks about the Larry portfolio which is very much not "the whole market" or pure AA based and many of his books get far away from a market or three fund basis. Larry seems to talk a lot about beta in his portfolio construction, yet Malkiel in Random Walk sort of dismisses beta as a concept that has run its course and is forgettable in many ways. Then don't get me started on discussions of Fama French, slice and dice, 25/25/25/25 allocations and the like.

So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory. I feel like I am having to choose a religion when I may simply be missing a simple point that would tie of this all together. Maybe I should just go back to school.

chaz
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Re: Read too many books... help untangle

Post by chaz » Sat Sep 27, 2014 11:31 am

Look at the forum wiki.

Good luck.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

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Re: Read too many books... help untangle

Post by larryswedroe » Sat Sep 27, 2014 11:32 am

don't know if this will help but,
First, IMO the best book on modern financial theory is Ilmanen's Expected Returns. Two other excellent books are The Physics of Wall Street by Weatherall and the Success Equation by Mouboussin, and finally successful Investing is a process by Lussier. Read those and they should fully explain modern financial theory.

Second, short version: Modern financial theory demonstrates that there are a variety of identifiable factors that exploit almost all the risk and return of diversifiable portfolios.
The leading/big ones are beta, size, value, momentum and profitability (quality) on the stocks side (you can add liquidity) and term and credit on bond side.
Each of them are persistent and pervasive across markets and time and even across asset classes in many cases (like value and momentum)

They also have low correlation with each other, so the whole is greater than sum of parts (Markowitz). So the question then is how much exposure do you want to each of the factors.

There is no one right portfolio, IMO but there is one right for you and perhaps the most important issue is choosing to only take risks you understand because otherwise you'll likely not be able to adhere to the plan when the factors perform poorly for extended periods, which will likely happen to each of them at some point (which is why IMO you diversify across them). So choosing one that you can stick with is more important than choosing some "perfect" plan.

If you want to see the evidence and the logic for the way I personally invest then read Reducing the Risk of Black Swans---it's only about a 2-3 hour read.

There's nothing wrong with a two stock fund portfolio like Total US and total international. But if you do own that recognize you have exposure only to beta, and not the other factors. And you need a higher equity allocation then you would if "tilt" to higher expected returning factors (asset classes). And that increases tail risk and volatility. So "pick your poison", what risks you are willing and able to take and be sure you understand them

Hope that helps

Larry

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Re: Read too many books... help untangle

Post by The Wizard » Sat Sep 27, 2014 11:39 am

larryswedroe wrote:don't know if this will help but,
First, IMO the best book on modern financial theory is Ilmanen's Expected Returns. Two other excellent books are The Physics of Wall Street by Weatherall and the Success Equation by Mouboussin, and finally successful Investing is a process by Lussier...
Oh great, just what he needs: More Books! :D :D
(Um, just joshing, Larry...)
Attempted new signature...

22twain
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Re: Read too many books... help untangle

Post by 22twain » Sat Sep 27, 2014 12:43 pm

Remember the old saying that goes something like: "The worst enemy of a good plan is the search for a perfect plan."

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Re: Read too many books... help untangle

Post by SimpleGift » Sat Sep 27, 2014 12:45 pm

Bubbagump wrote:So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory. I feel like I am having to choose a religion when I may simply be missing a simple point that would tie of this all together.
My suggestion is to start simple with the basics. First, decide your stock/bond split. This decision is the most important one you will make in your investing life and will ultimately determine your long-term portfolio returns and risk profile. For some investors, this is enough! A simple portfolio of diversified stocks and safe bonds is perfectly adequate and will provide most of the benefits of a more complex one.

Then, if you'd like to try to marginally increase expected returns (and reduce portfolio volatility a bit), gradually research adding more asset classes, one step at a time. How about foreign stocks? How about small-value stocks? How about REITs? Emerging market stocks? None of these additional asset classes are absolutely necessary, but they can marginally improve a portfolio's expected risk-adjusted return. Your final destination will depend on what interests you, what you are comfortable with and how much portfolio complexity you are willing to take on.

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Re: Read too many books... help untangle

Post by EyeYield » Sat Sep 27, 2014 12:49 pm

Bubbagump wrote:So I have been a knee deep in books over the past month (and juxtaposing with what I read here) or so trying to plan a portfolio for post business exit and it seems I have thoroughly confused myself. It seems there is a lot of contradiction out there, but maybe I just see it as contradiction. It seems to me that most everyone has a toe in the MPT pool, a general sense that markets are indeed efficient, and low costs are critical but things get murky from there. Bogle is skeptical of pretty much anything beyond a market based portfolio. Ferri seems to be in a similar camp with a willingness to tilt towards REIT and SCV (though his comments on this board of optimal asset allocations being "trash" is notable"). Swedroe says quite clearly that Efficient Frontier models are forgettable. Yet in the three fund super thread, Taylor refers to them frequently enough and Malkiel refers to them especially in reference to limiting risk by introducing international stocks in Random Walk. Then, I know Swedroe is a respected contributor around these parts... he talks about the Larry portfolio which is very much not "the whole market" or pure AA based and many of his books get far away from a market or three fund basis. Larry seems to talk a lot about beta in his portfolio construction, yet Malkiel in Random Walk sort of dismisses beta as a concept that has run its course and is forgettable in many ways. Then don't get me started on discussions of Fama French, slice and dice, 25/25/25/25 allocations and the like.

So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory. I feel like I am having to choose a religion when I may simply be missing a simple point that would tie of this all together. Maybe I should just go back to school.
You seem to have educated yourself fairly well. Now for the hard part, what do YOU want to do. No two investors are identical, each of us has to make decisions that we believe are in our best interests according to our specific needs. Many people can't handle this so they leave it up to the helpers, who usually charge a fee. If you track the portfolios you mentioned, long term, they probably will be close in total returns, so there's no wrong one.
"The stock market is a giant distraction from the business of investing." - Jack Bogle

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Mel Lindauer
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Re: Read too many books... help untangle

Post by Mel Lindauer » Sat Sep 27, 2014 1:01 pm

Bubbagump wrote:So I have been a knee deep in books over the past month (and juxtaposing with what I read here) or so trying to plan a portfolio for post business exit and it seems I have thoroughly confused myself. It seems there is a lot of contradiction out there, but maybe I just see it as contradiction. It seems to me that most everyone has a toe in the MPT pool, a general sense that markets are indeed efficient, and low costs are critical but things get murky from there. Bogle is skeptical of pretty much anything beyond a market based portfolio. Ferri seems to be in a similar camp with a willingness to tilt towards REIT and SCV (though his comments on this board of optimal asset allocations being "trash" is notable"). Swedroe says quite clearly that Efficient Frontier models are forgettable. Yet in the three fund super thread, Taylor refers to them frequently enough and Malkiel refers to them especially in reference to limiting risk by introducing international stocks in Random Walk. Then, I know Swedroe is a respected contributor around these parts... he talks about the Larry portfolio which is very much not "the whole market" or pure AA based and many of his books get far away from a market or three fund basis. Larry seems to talk a lot about beta in his portfolio construction, yet Malkiel in Random Walk sort of dismisses beta as a concept that has run its course and is forgettable in many ways. Then don't get me started on discussions of Fama French, slice and dice, 25/25/25/25 allocations and the like.

So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory. I feel like I am having to choose a religion when I may simply be missing a simple point that would tie of this all together. Maybe I should just go back to school.
I think the common message you'll find in all of these is "own the market or markets you decide to invest in by using low-cost index funds, rebalance and then Stay The Course".
Best Regards - Mel | | Semper Fi

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Re: Read too many books... help untangle

Post by White Coat Investor » Sat Sep 27, 2014 1:42 pm

Plenty of great portfolios out there. It's more important that you stick with what you pick than what you actually pick, as long as its reasonable.

http://whitecoatinvestor.com/150-portfo ... han-yours/
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Re: Read too many books... help untangle

Post by retiredjg » Sat Sep 27, 2014 1:47 pm

Bubbagump wrote:So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory.
I'm going to suggest that people can put aside all those contradictions and focus on the basics instead.

The basics of
  • -saving a reasonable amount of money

    -using both stocks and bonds/fixed income investments in some way that suits your needs

    -keeping costs low

    -not doing stupid stuff
Probably none of the people you mentioned would disagree on the first 3. The 4th one is thrown in for fun and to cover all the dumb things we sometimes do and I think almost all would agree with that one too. I think these 4 simple things result in most of our investing success (or failure).

All those things that concern the contradictions may produce a little extra. Or not. Since we can't really know which one will be the best, there is nothing to do but follow your gut. Or just not get involved in the extracurricular activity (be satisfied with just basics).

And I think it is a lot like religion. None of us really know what "it" is all about, but most people have some kind of belief system that they have developed from their own training, reading, experiences, soul searching, gut instinct, etc.

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Re: Read too many books... help untangle

Post by BigJohn » Sat Sep 27, 2014 1:55 pm

Don't think you're going to get the kind of consensus to untangle all these thoughts on this forum. Many here believe in highly tilted multi-factor portfolios while others just as firmly believe in the market indexed 3 fund portfolio. Even with this wide variety of specifics, there are some common beliefs that I think most on this forum would support. The top ones that likely apply in your situation are; have a detailed IPS in writing, keep costs low, rebalance back to your target AA to manage risk, don't invest in actively managed funds and don't try to time the market.

If you can do those fundamental things well, you should be OK. Unless taken to an extreme (eg 100% SCV), where you choose to invest on the tilt/no tilt spectrum is not nearly as fundamental, largely a matter of optimization and personal choice. So at some point you're going to have to stop reading, make that choice and then stick with it.

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nedsaid
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Re: Read too many books... help untangle

Post by nedsaid » Sat Sep 27, 2014 1:59 pm

You have stumbled on one of the most frustrating things for an investor to experience. Contrary opinions, conflicting data, and paradoxes.

Below I will repost from a couple of my prior posts and you might find this helpful:

This is why we all need to put on our philosopher's hat and put down on paper our beliefs about markets and investments. Create a model by which we can understand how markets work. Have core beliefs that we hold strongly.

Otherwise you run into the problem of thinking you have a good plan until you read the next article on investing. If you don't have strong core beliefs and a strong investing philosophy, you will run from investing style to investing style depending on the last article that you read. I guarantee you that no matter what you do as an investor, that sooner or later you will come across something in the media that will tell you that everything you are doing is completely wrong. This can be very disconcerting to an investor. That is the existence of contrary information and contrary opinion.

And again I am reposting from a related post from yet another thread:

The thing is that we need a good framework or a model by which we can better understand the markets. That is that we build models that are based upon beliefs that are true most of the time. Otherwise we just say it is all bunk or horse-pucky or a rigged game and never invest. We all operate on presuppositions or assumptions.

So if I build a "Nedsaid" model of how markets work, it might go something like this:

1) Over long periods of time stocks outperform bonds.
2) Stocks are more volatile than bonds.
3) To get much of the excess returns of stocks and yet keep volatility low enough that one can stay
invested, invest in both stocks and bonds.
4) Markets are not perfectly efficient but mostly efficient. For a small investor, it makes sense to act as though markets are perfectly efficient and buy broad indexes rather than individual securities.
5) To the extent that you believe markets are not efficient, one might tilt his/her portfolio in a fashion to capture certain performance factors such as small and value.
6) Stocks tend to be up twice as often as they are down, so the odds are more in your favor if you are optimistic and bullish.

I could go on, but you get the idea. I have constructed a model or a paradigm that helps me understand markets and evaluate investments. But one could poke holes in any one of my assumptions. For example, bonds sometimes outperform stocks. Statement one is mostly true but depending on the time period selected may in certain cases not be true. So what I am doing is creating sort of a short hand in my thinking about the markets. Summary statements that are true enough of the time that for all intents and purposes are true all of the time.

So nothing is perfect. I use portfolio theory in constructing my portfolio not because I believe it is infallible holy writ but because it works well enough. Not perfect, but something that is mostly correct is a whole lot better than nothing. If we insist on perfection, we will discover that no model is perfect and that our understanding of the markets is incomplete. So perfect can be the enemy of taking any type of action. Or perfect can be an enemy of learning because we may soon realize that we will never know it all. Better to know something rather than nothing. Better to have an imperfect plan rather than no plan at all. Better to operate on some assumptions rather than none at all.

Using math, formulas, efficient frontiers, statistics are good as long as we know that they help us understand the thing (markets) but are not the thing themselves. In other words, all the math, graphs, ratios, formulas, etc. are useful to an investor but have their limitations. Nothing is perfect but that doesn't mean it is bunk.
A fool and his money are good for business.

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Re: Read too many books... help untangle

Post by nedsaid » Sat Sep 27, 2014 2:19 pm

In my previous post, I talked about developing an investment philosophy. That is a statement of your beliefs about investments, the markets, and the economy. A set of deeply held core beliefs.

It boils down to that I believe in human progress and the advancement of civilization over time. That economies will grow over time and than human beings will innovate, improve productivity, and create wealth. To best capture the financial benefits of human wealth creation, I purchase sets of cash flows created by businesses and investment real estate through stocks and REITs. I stabilize my portfolio by purchasing sets of cash flows that are representative of the debts of business, government, and individuals and for which the cash flows are more predictable. More predictable cash flows from bonds will over time make bonds more stable in value than the more unpredictable cash flows from business.

After you decide what your core beliefs are, then you need to know thyself as an investor. As for myself, I tend to be more cautious and conservative and thus am value-oriented as an investor. That is I like to buy stuff on sale whenever I can. Buy low and sell high. I like to hold my investments for long periods of time thus having low turnover in my portfolio.

So when I start writing my Investment Policy Statement, I should know what my core beliefs are and also who I am as an investor. This saves you from going from investing style to investing style depending on the last investment book you read. For example, do you want to invest in a simple 3-5 fund portfolio or do you want to attempt to capture excess returns with some sort of tilt away from market weightings? Most here that tilt do small cap and value tilts.

Once you have these types of things settled the questions of asset allocation and the choice of investments get to be a lot easier to answer. If you can't answer the most basic questions first, then investments and the markets will always be baffling.
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Re: Read too many books... help untangle

Post by Bubbagump » Sat Sep 27, 2014 4:00 pm

All good input and I think the problem I am running into is the "belief" portion. So I am right. This is somewhat religious as I am afraid this is a bit of a soft science.

What I do know I believe:

Costs matter
Active investments = gambling
Rebalance
Market timing is playing with fire
Buy and hold
Stick to your plan
Asset allocation matters

What I am still in the wilderness on:
A market portfolio versus a tilted or SnD
Do I really care to keep up on the care and feeding of a more complicated allocation
Do tilts REALLY matter
Does Fama French REALLY matter (I see this as separate from tilts as you can tilt various ways)


And really, knowing how I am wired, I will want to know how the most complicated models work or are constructed yet I will fall back to some practical middle ground (Maybe I have some Markowitz in me ala his quote “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier…Instead, I split my contributions 50/50 between bonds and equities.”). While I don't want perfect to be be the enemy of good and I am very good at being disciplined in executing a plan, I just need to find my plan I do believe in. At that point, it should be smooth sailing.

I just need to figure out where I feel that practical middle ground is. In the mean time, I will probably indeed read all of what Larry listed above. Even if I dismiss some of it as overkill or minutiae, I would rather understand the bigger picture and know and understand what I am dismissing as inconsequential.

All this said, I think the best advice I have gotten is from the Wiki... after a windfall, don't do a damn thing for 6 months. In the mean time, I'll keep reading everything I can and I am sure I'll find my way out of the wilderness. Thanks for all the input and candid responses.

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Re: Read too many books... help untangle

Post by Cal Aggie » Sat Sep 27, 2014 4:21 pm

Nedsaid wrote:
This is why we all need to put on our philosopher's hat and put down on paper our beliefs about markets and investments. Create a model by which we can understand how markets work. Have core beliefs that we hold strongly.

Otherwise you run into the problem of thinking you have a good plan until you read the next article on investing. If you don't have strong core beliefs and a strong investing philosophy, you will run from investing style to investing style depending on the last article that you read. I guarantee you that no matter what you do as an investor, that sooner or later you will come across something in the media that will tell you that everything you are doing is completely wrong. This can be very disconcerting to an investor. That is the existence of contrary information and contrary opinion
+1

Information overload is definitely a problem in personal finance. If you take a look at the list of portfolios put together by EmergDoc, you will see that there are a lot of simple portfolios (allocations) that perform very well over time. I am sure that you will find at least one portfolio in the group that you will be comfortable with. Once you pick an allocation, it provides a point of reference for all of the financial information you read thereafter -- and, in my opinion, makes the information more manageable.

By way of disclosure, I have a 60/40 (stock/bond) allocation.
What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience? Adam Smith

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Re: Read too many books... help untangle

Post by Abe » Sat Sep 27, 2014 4:39 pm

Mel Lindauer wrote:I think the common message you'll find in all of these is "own the market or markets you decide to invest in by using low-cost index funds, rebalance and then Stay The Course".
I agree with the above. There is a lot of investing theory discussed which is okay I guess, but I don't think it is necessary. Why make it more complicated than it needs to be.
Slow and steady wins the race.

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Re: Read too many books... help untangle

Post by BigJohn » Sat Sep 27, 2014 5:06 pm

Bubbagump wrote:What I am still in the wilderness on:
A market portfolio versus a tilted or SnD
Do I really care to keep up on the care and feeding of a more complicated allocation
Do tilts REALLY matter
Does Fama French REALLY matter (I see this as separate from tilts as you can tilt various ways)
I had to come to grips with the same questions years ago. All of your questions are variations on the same theme so the first question I'd propose that you answer is do you want the simplicity of something like the 3 fund portfolio or the complexity of tilting (don't worry about what tilt yet)? When I got to this point I did some simple math. Let's say the tilts over time do actually return an incremental 1% vs a market index. If I'm willing to risk 25% of my stock in tilting and have a 60/40 allocation, tilting will increase my total portfolio return by 0.15% (say from 3% real to 3.15% real return). This makes a big assumption which is that I can tilt and not increase expenses or taxes. If I incur an increase in either, I end up lower than 3.15%. If extra costs exceed incremental returns, I will end up lower than 3.0%.

Knowing that all the tilts increase risk, the key question became....Do I have enough faith in them to make that bet for that incremental return? My answer was a very clear "NO" at which point I stopped and didn't have to worry about how to tilt.

You maybe willing to do more extreme tilting or you may have a more bullish outlook for incremental return from tilts but the key message in the above is to at least know the size of the prize before you start down that road.

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Re: Read too many books... help untangle

Post by chaz » Sat Sep 27, 2014 5:22 pm

Keep it simple. No need to tilt. A 3 fund portfolio is recommended by many here.
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Re: Read too many books... help untangle

Post by retiredjg » Sat Sep 27, 2014 5:44 pm

Bubbagump wrote: What I do know I believe:

Costs matter
Active investments = gambling
Rebalance
Market timing is playing with fire
Buy and hold
Stick to your plan
Asset allocation matters

What I am still in the wilderness on:
A market portfolio versus a tilted or SnD
Do I really care to keep up on the care and feeding of a more complicated allocation
Do tilts REALLY matter
Does Fama French REALLY matter (I see this as separate from tilts as you can tilt various ways)
To me, this argues for a basic 3 fund portfolio until you have a strong enough conviction on tilting or slice and dice to change it.

I have found the best way to make a decision is to not try. Put it on the back burner. Focus on other things. If I leave something alone long enough the answer usually comes to me. Unfortunately this is often at 3:00 a.m. :?

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Re: Read too many books... help untangle

Post by Kevin M » Sat Sep 27, 2014 5:53 pm

I was thinking of publishing a blog post titled, "The More I Learn, the Less I Know".

I personally tilt to small and value, but have less confidence that it's the right thing for me to do than I did a few years ago. As I went beyond reading "retail" investment books, and started reading investment textbooks and academic papers, I learned that things are not as simple and clear-cut as sometimes portrayed. However, as other folks have said, sticking to a decent plan probably is more important than trying to find the perfect plan, so I'm not making any drastic changes anytime soon.

I like the way Bogleheads author William Bernstein puts it. To paraphrase, with a simple 3-fund portfolio you'll do better than 90%-95% of all other investors. You might do a little better by tilting to small and value, but it is by no means certain.

So I think starting with a simple 3-fund portfolio probably is a fine choice for most investors. Doing something more complex probably warrants a great amount of study. As you may have seen, the debate between sticking with a 3-fund portfolio and slicing/dicing/tilting (aka, adding exposure to additional risk factors) is endless and unresolved. You have to have enough confidence to stick with your strategy despite all the apparently convincing arguments to do otherwise.

Kevin
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Re: Read too many books... help untangle

Post by Dale_G » Sat Sep 27, 2014 5:57 pm

I've been investing for a long time, and my assets now amount to about 3 times my gross lifetime earnings as a wage slave. There was some stupidity in my early years and it was only in the last 25 years or so that low cost index investing became easily available. I never "tilted", the simple market portfolio worked fine for the vast bulk of my investments.

I suggest the OP stick with the basics, and if he wants to tilt after 5 years or so of experience and education, so be it, but he shouldn't be surprised if it doesn't work out as advertised/prophesied.

Some, but not all, of the "tilting" advice seems to come from those who stand to profit if you sign for the secret sauce advice.

No one seems to charge you much for a basic 3 fund portfolio. Costs count.

Dale
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Re: Read too many books... help untangle

Post by nedsaid » Sun Sep 28, 2014 7:40 am

Bubbagump wrote:All good input and I think the problem I am running into is the "belief" portion. So I am right. This is somewhat religious as I am afraid this is a bit of a soft science.

You have hit the nail on the head here. Investing is a bit of a soft science because it involves human nature and human behavior. This is why the quants can never get things right 100% of the time, their models work most of the time but when they fail, they can fail really big.

What I do know I believe:

Costs matter
Active investments = gambling
Rebalance
Market timing is playing with fire
Buy and hold
Stick to your plan
Asset allocation matters

I don't 100% agree that active management equals gambling. Two things can help you here, keeping your costs low and picking funds with a value orientation. But I mostly agree as I am indexing more and more of my portfolio.

What I am still in the wilderness on:
A market portfolio versus a tilted or SnD
Do I really care to keep up on the care and feeding of a more complicated allocation
Do tilts REALLY matter
Does Fama French REALLY matter (I see this as separate from tilts as you can tilt various ways)

Here is the big question for you. Are there investment factors that can be captured by the small investor? There are three camps on this question: those don't believe they exist at all; those who believe they exist but expenses eat up whatever gains the small investor might achieve; and those who believe they exist and that small investors can capture the excess gains. You have to evaluate the evidence and decide which of the three camps you are in.

And really, knowing how I am wired, I will want to know how the most complicated models work or are constructed yet I will fall back to some practical middle ground (Maybe I have some Markowitz in me ala his quote “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier…Instead, I split my contributions 50/50 between bonds and equities.”). While I don't want perfect to be be the enemy of good and I am very good at being disciplined in executing a plan, I just need to find my plan I do believe in. At that point, it should be smooth sailing.

I just need to figure out where I feel that practical middle ground is. In the mean time, I will probably indeed read all of what Larry listed above. Even if I dismiss some of it as overkill or minutiae, I would rather understand the bigger picture and know and understand what I am dismissing as inconsequential.

I like what financial planner Jonathan Pond has to say about financial decisions, they are often not "either/or". You can do some of each. This has been a weak point for me, when faced with a decision between two alternatives, I often answer YES. Apple pie or Blueberry pie? YES. Vanilla or Strawberry ice cream? YES. Really tilting is a version of what I have described. Value or Index funds? YES. Large-cap or Small-Cap? YES. US or International? YES. It really is a combination of using market cap index funds with low turnover value funds. A tilter still has a lot of large growth stocks in his/her portfolio but less than for the Total Market. You can make your tilts as small or as large as you would like.

All this said, I think the best advice I have gotten is from the Wiki... after a windfall, don't do a damn thing for 6 months. In the mean time, I'll keep reading everything I can and I am sure I'll find my way out of the wilderness. Thanks for all the input and candid responses.
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The enemy of a good plan.

Post by Taylor Larimore » Sun Sep 28, 2014 11:20 am

So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory.
Bubbagump:

When experts disagree it is often because it does not make a foreseeable difference.

Jack Bogle wrote: "The enemy of a good plan is the dream of a perfect plan."

The Three Fund Portfolio is a "good" plan recommended by many investing experts.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Read too many books... help untangle

Post by protagonist » Sun Sep 28, 2014 4:03 pm

Bubbagump wrote:So I have been a knee deep in books over the past month (and juxtaposing with what I read here) or so trying to plan a portfolio for post business exit and it seems I have thoroughly confused myself. It seems there is a lot of contradiction out there, but maybe I just see it as contradiction. It seems to me that most everyone has a toe in the MPT pool, a general sense that markets are indeed efficient, and low costs are critical but things get murky from there. Bogle is skeptical of pretty much anything beyond a market based portfolio. Ferri seems to be in a similar camp with a willingness to tilt towards REIT and SCV (though his comments on this board of optimal asset allocations being "trash" is notable"). Swedroe says quite clearly that Efficient Frontier models are forgettable. Yet in the three fund super thread, Taylor refers to them frequently enough and Malkiel refers to them especially in reference to limiting risk by introducing international stocks in Random Walk. Then, I know Swedroe is a respected contributor around these parts... he talks about the Larry portfolio which is very much not "the whole market" or pure AA based and many of his books get far away from a market or three fund basis. Larry seems to talk a lot about beta in his portfolio construction, yet Malkiel in Random Walk sort of dismisses beta as a concept that has run its course and is forgettable in many ways. Then don't get me started on discussions of Fama French, slice and dice, 25/25/25/25 allocations and the like.

So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory. I feel like I am having to choose a religion when I may simply be missing a simple point that would tie of this all together. Maybe I should just go back to school.
OK. I will simplify it, since I love the bubba gump model of existence:

1. Efficient markets is not a theory or even really a hypothesis since it cannot be scientifically tested a priori and is not falsifiable. It is more a conjecture that may or may not be true in any one of its many formulations. But it doesn't matter. What does matter to me is that I am not smart enough to beat Wall Street in the long run. You probably aren't either. Neither probably are the money managers you hire given their track record. Maybe the high frequency traders who sweat over microseconds are, but they are paying hundreds of millions of dollars to do it, and I can't afford that. So indexing probably makes sense to me.
2. Reducing cost makes sense. Why buy something for more if you can buy it for less?
3. None of the "experts" that disagree on the fine points have anything but weak chunks of past data to "prove" that their "theory" is better at predicting where the market will be, say, 30 years from now in 2044 than the others. And past performance of "experts" in predicting future long-term results is so pathetic that one can only assume that chaos reigns and noise ultimately overwhelms signal. So keep it as simple as you can. Tweaking might help, but it might not, and that is about as much as you can say about that. The broad market is easy, but if you pick anything else very diverse, whether you will stand a better chance of making more money in 30 years is likely either a function of luck, or a function of the amount of risk you are taking. No expert has convincing enough evidence to make me think otherwise.
4. Asset Allocation.... Pick your asset allocation based on your tolerance for risk and what you think you can stomach. And be true to yourself when it all hits the fan.
5. Even if past performance DID predict future results, predicting 30 years into the future based on 90 years of data is the equivalent of predicting where the market will be Thursday if you only knew where it was Monday, Tuesday and Wednesday. It is statistically invalid. You would need millenia worth of data to do that and have it mean anything.
6. So pick 1-3 index funds you like with very low costs, pick an AA strategy vaguely based on your own tolerance for risk and situation in general (don't knock yourself silly over 50-50 vs 60-40 vs 40-60), Don't worry. Be happy.
7. Maybe keep one book. Book of Predictions by Wallace et al published around 1981 (in case you need further convincing of the value of long-range eg 30 year future predictions by experts). Back test their predictions for a laugh. It might change your life.
8. Throw your finance books away, as well as your WSJ subscription.

As Taylor Lattimore quoted Jack Bogle above: "The enemy of a good plan is the dream of a perfect plan." I like that.

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Re: Read too many books... help untangle

Post by trueblueky » Sun Sep 28, 2014 4:44 pm

nedsaid wrote: Revised 1) Over long periods of time stocks have outperformed bonds.

2) Stocks are more volatile than bonds.
3) To get much of the excess returns of stocks and yet keep volatility low enough that one can stay
invested, invest in both stocks and bonds.
4) Markets are not perfectly efficient but mostly efficient. For a small investor, it makes sense to act as though markets are perfectly efficient and buy broad indexes rather than individual securities.
5) To the extent that you believe markets are not efficient, one might tilt his/her portfolio in a fashion to capture certain performance factors such as small and value.
6) Stocks tend to be up twice as often as they are down, so the odds are more in your favor if you are optimistic and bullish.

Added 7) Bonds have tended to be up twice as often as they are down as well. Fortunately, the times bonds were down were usually not the same times stocks were down. One more reason to diversify.
+1
I would caveat a bit more. See the change to 1) as an example. I added 7), which could be 6a).
Last edited by trueblueky on Mon Sep 29, 2014 8:28 pm, edited 2 times in total.

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Re: Read too many books... help untangle

Post by pkcrafter » Sun Sep 28, 2014 8:49 pm

Bubbagump wrote:All good input and I think the problem I am running into is the "belief" portion. So I am right. This is somewhat religious as I am afraid this is a bit of a soft science.

What I do know I believe:

Costs matter
Active investments = gambling
Rebalance
Market timing is playing with fire
Buy and hold
Stick to your plan
Asset allocation matters

What I am still in the wilderness on:
A market portfolio versus a tilted or SnD
Do I really care to keep up on the care and feeding of a more complicated allocation
Do tilts REALLY matter
Does Fama French REALLY matter (I see this as separate from tilts as you can tilt various ways)


And really, knowing how I am wired, I will want to know how the most complicated models work or are constructed yet I will fall back to some practical middle ground (Maybe I have some Markowitz in me ala his quote “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier…Instead, I split my contributions 50/50 between bonds and equities.”). While I don't want perfect to be be the enemy of good and I am very good at being disciplined in executing a plan, I just need to find my plan I do believe in. At that point, it should be smooth sailing.

I just need to figure out where I feel that practical middle ground is. In the mean time, I will probably indeed read all of what Larry listed above. Even if I dismiss some of it as overkill or minutiae, I would rather understand the bigger picture and know and understand what I am dismissing as inconsequential.

All this said, I think the best advice I have gotten is from the Wiki... after a windfall, don't do a damn thing for 6 months. In the mean time, I'll keep reading everything I can and I am sure I'll find my way out of the wilderness. Thanks for all the input and candid responses.
I have walked your walk, and here's what I discovered: The more I learned, the more I realized the less I needed to know. :D None the less, I agree that you should continue the walk.

As for a windfall, I fully agree with doing nothing for 6 months is the best strategy. Just keep in mind that every decision you make will have a negative effect on some other decision you are considering. Because of this, it is usually best to apply some moderation to all decisions.



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Re: Read too many books... help untangle

Post by tadamsmar » Mon Sep 29, 2014 9:45 am

Bubbagump wrote:So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory. I feel like I am having to choose a religion when I may simply be missing a simple point that would tie of this all together. Maybe I should just go back to school.
My view on this it that you will never untangle it. Just choose one. They are all good enough. You must satisfice, it's not possible to optimize.

Of course, one of the other of these AA's will "win" in the sense that the day you die hindsight would reveal which would have been better. But that's just a single point, not a hypothesis test, so it will prove nothing.

Back in 2000, I adopted the life cycle AA from Random Walk Down Wall Street. Later, I discovered this AA changed with each new edition of the book, the AA itself was a bit of a random walk. I was not always following the most recent AA.

I think you should put some in international, but I will never be able to prove it.

I have about 12% in REIT but I think that is a bit of an overweighting, that's my biggest concern about following Malkiel's randomly walking AA recommendations.

Also, what Malkiel will not live forever, what happens to my AA after he is gone? I bet someone will continue the trun out editions of the book, do I keep following it?
Last edited by tadamsmar on Mon Sep 29, 2014 10:06 am, edited 1 time in total.

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Re: Read too many books... help untangle

Post by Toons » Mon Sep 29, 2014 9:51 am

22twain wrote:Remember the old saying that goes something like: "The worst enemy of a good plan is the search for a perfect plan."
+1 That is one of my favorite quotes,,,,Carl Von Clausewitz-"Principles of War" :happy

https://www.goodreads.com/author/quotes ... Clausewitz
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Read too many books... help untangle

Post by protagonist » Mon Sep 29, 2014 10:06 am

pkcrafter wrote: I have walked your walk, and here's what I discovered: The more I learned, the more I realized the less I needed to know. :D
Paul

+1

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Re: Read too many books... help untangle

Post by Bubbagump » Mon Sep 29, 2014 11:49 am

protagonist wrote: OK. I will simplify it, since I love the bubba gump model of existence:
Hah, soon you can find me on the top of a mountain in the Himalayas in deep contemplation.

This has all been a very good conversation. I think to folks who are perhaps more novice, they see all of these things thrown around and feel they may be missing out or that there are "more righter" ways to do things. I am that guy... throughout life I have been wooed by component audio, car mods, guitar modifications, DIY yourself tube amps, custom drums etc and now in my mid 30s I have realized the very REAL effect of diminishing returns. I don't consider myself a completely novice investor as I was fortunate enough to have grandparents that showed me much of the ways of simple three fund portfolios, the rule of 72, and the power of compunding in grade school. It just got to a point lately where I wanted to be sure I knew why I was doing what I was doing as I have much more to lose, thus the descent into books.

So as so many things... I can talk to you until I am blue in the face as to the difference in 12AX7s vs 6L6s, P90s vs humbuckers, and maple versus birch... but at the end of the day I'll likely fall back on the stock configuration, plain old 2 speaker stereo, and conventional oil as I am too busy to care about that last 1% of optimization. I'll be too busy over researching my next endeavor. 80/20 rule I suppose in all things.

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Re: Read too many books... help untangle

Post by protagonist » Mon Sep 29, 2014 2:58 pm

Bubbagump wrote:
protagonist wrote: OK. I will simplify it, since I love the bubba gump model of existence:
Hah, soon you can find me on the top of a mountain in the Himalayas in deep contemplation.

This has all been a very good conversation. I think to folks who are perhaps more novice, they see all of these things thrown around and feel they may be missing out or that there are "more righter" ways to do things. I am that guy... throughout life I have been wooed by component audio, car mods, guitar modifications, DIY yourself tube amps, custom drums etc and now in my mid 30s I have realized the very REAL effect of diminishing returns. I don't consider myself a completely novice investor as I was fortunate enough to have grandparents that showed me much of the ways of simple three fund portfolios, the rule of 72, and the power of compunding in grade school. It just got to a point lately where I wanted to be sure I knew why I was doing what I was doing as I have much more to lose, thus the descent into books.

So as so many things... I can talk to you until I am blue in the face as to the difference in 12AX7s vs 6L6s, P90s vs humbuckers, and maple versus birch... but at the end of the day I'll likely fall back on the stock configuration, plain old 2 speaker stereo, and conventional oil as I am too busy to care about that last 1% of optimization. I'll be too busy over researching my next endeavor. 80/20 rule I suppose in all things.
Tell me about it. I spent three hours last night researching the best kitchen garbage pail to buy.
That said, ultimately you will probably get more joy and satisfaction out of modifying your guitar than you will modifying your portfolio once you simplify it. Even if it doesn't make you sound better, you will THINK it does, I buy a new overpriced sax ligature (basically just a rubber band on steroids) and all of a sudden I am convinced I sound like Coltrane. But if you are convinced that tilting your portfolio or adding another 5% international or REITs or equities to your AA is going to make you rich like Buffett , go for it. Be happy.

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Re: Read too many books... help untangle

Post by BL » Mon Sep 29, 2014 3:51 pm

retiredjg wrote:
Bubbagump wrote:So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory.
I'm going to suggest that people can put aside all those contradictions and focus on the basics instead.

The basics of
  • -saving a reasonable amount of money

    -using both stocks and bonds/fixed income investments in some way that suits your needs

    -keeping costs low

    -not doing stupid stuff
Probably none of the people you mentioned would disagree on the first 3. The 4th one is thrown in for fun and to cover all the dumb things we sometimes do and I think almost all would agree with that one too. I think these 4 simple things result in most of our investing success (or failure).

All those things that concern the contradictions may produce a little extra. Or not. Since we can't really know which one will be the best, there is nothing to do but follow your gut. Or just not get involved in the extracurricular activity (be satisfied with just basics).

And I think it is a lot like religion. None of us really know what "it" is all about, but most people have some kind of belief system that they have developed from their own training, reading, experiences, soul searching, gut instinct, etc.
+1
And I might add "Keep it simple",
and "Stay the course."

We don't have a perfectly Boglehead portfolio, but it mostly follows the above ideas.

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Re: Read too many books... help untangle

Post by YDNAL » Mon Sep 29, 2014 4:19 pm

Bubbagump wrote:So I have been a knee deep in books over the past month (and juxtaposing with what I read here) or so trying to plan a portfolio for post business exit and it seems I have thoroughly confused myself...
Welcome to the Bogleheads! :)

Regardless of anyone says, NO ONE knows what awaits at the end of the rainbow. So, I would do whatever you can do with conviction in seeing through the long haul, and well past the "post business exit."

That's the best I've got! Good luck.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Re: Read too many books... help untangle

Post by protagonist » Mon Sep 29, 2014 6:26 pm

BL wrote:
retiredjg wrote:
Bubbagump wrote:So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory.
I'm going to suggest that people can put aside all those contradictions and focus on the basics instead.

The basics of
  • -saving a reasonable amount of money

    -using both stocks and bonds/fixed income investments in some way that suits your needs

    -keeping costs low

    -not doing stupid stuff
Probably none of the people you mentioned would disagree on the first 3. The 4th one is thrown in for fun and to cover all the dumb things we sometimes do and I think almost all would agree with that one too. I think these 4 simple things result in most of our investing success (or failure).

All those things that concern the contradictions may produce a little extra. Or not. Since we can't really know which one will be the best, there is nothing to do but follow your gut. Or just not get involved in the extracurricular activity (be satisfied with just basics).

And I think it is a lot like religion. None of us really know what "it" is all about, but most people have some kind of belief system that they have developed from their own training, reading, experiences, soul searching, gut instinct, etc.
+1
And I might add "Keep it simple",
and "Stay the course."


We don't have a perfectly Boglehead portfolio, but it mostly follows the above ideas.

And add "Stay out of debt". Though that might be subsumed under "not doing stupid stuff".

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Re: Read too many books... help untangle

Post by retiredjg » Mon Sep 29, 2014 6:48 pm

protagonist wrote:And add "Stay out of debt". Though that might be subsumed under "not doing stupid stuff".
Yeah, with the caveat that I'm not anti-debt.

I'm anti-stupid debt. I happen to think a (reasonable) mortgage is not a stupid debt. Sometimes student loans are not a stupid debt. Occasionally, a car loan is not stupid (although this one often is stupid).

Not everyone agrees. :P

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Good debt and stupid debt.

Post by Taylor Larimore » Mon Sep 29, 2014 7:21 pm

retiredjg= wrote: Yeah, with the caveat that I'm not anti-debt.

I'm anti-stupid debt. I happen to think a (reasonable) mortgage is not a stupid debt. Sometimes student loans are not a stupid debt. Occasionally, a car loan is not stupid (although this one often is stupid).

Not everyone agrees. :P
Retiredjg:

I agree.

Best wishes.
Taylor
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Re: Read too many books... help untangle

Post by nedsaid » Thu Oct 02, 2014 8:34 pm

trueblueky wrote:
nedsaid wrote: Revised 1) Over long periods of time stocks have outperformed bonds.

2) Stocks are more volatile than bonds.
3) To get much of the excess returns of stocks and yet keep volatility low enough that one can stay
invested, invest in both stocks and bonds.
4) Markets are not perfectly efficient but mostly efficient. For a small investor, it makes sense to act as though markets are perfectly efficient and buy broad indexes rather than individual securities.
5) To the extent that you believe markets are not efficient, one might tilt his/her portfolio in a fashion to capture certain performance factors such as small and value.
6) Stocks tend to be up twice as often as they are down, so the odds are more in your favor if you are optimistic and bullish.

Added 7) Bonds have tended to be up twice as often as they are down as well. Fortunately, the times bonds were down were usually not the same times stocks were down. One more reason to diversify.
+1
I would caveat a bit more. See the change to 1) as an example. I added 7), which could be 6a).
Trueblueky, thanks for commenting on my post. Basically what we are doing is writing something like a preamble to an Investment Policy Statement. It's philosophical presuppositions. Or the "why" behind your investment policy statement. If you are investing hard earned money and putting it into uncertain markets, you sure want to have some sound reasoning behind it. Also we want to form our foundation of investment beliefs upon which we build an Investment Policy Statement to have good basis in fact, history, and investor experience. We aren't just throwing our money at the markets hoping that something good might happen. We are doing something a whole lot better than betting on the third horse in the seventh race.
A fool and his money are good for business.

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Re: Read too many books... help untangle

Post by wenderella » Thu Oct 02, 2014 9:54 pm

What a great and thoughtful thread. I like the concept of an investment preamble. Imagine if the founding fathers had bulleted goals or a core values statement. My only addition to the conversation are 3 directives that I try to live by: live below your means, moderation in all things, be a creator rather than a consumer or destroyer. This thread has reaffirmed my decision on a three fund portfolio. Why am I investing? To be consumed and preoccupied with market news and minutia, or to have the freedom to pursue what I love most?

Wenderella

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Re: Read too many books... help untangle

Post by subham » Thu Oct 02, 2014 11:00 pm

I was in your shoes just a month ago. Read too many things and got paralyzed in implementing anything. I was torn between lumpsum (for its simplicity) and S&D (for its extra returns over lumpsum) because of conflicting advice from books that came to regard highly of.

Thats when i picked up the phone and talked to VanGuard CFP who gave me an ultra simple 4 fund portfolio as a part of my financial plan. He told me there is no need to make it complex and tilt as this allocation would be adequate for my needs and told me that if i have the itch to ignore his advice, then he recommended i stay within 10% for any sector or single stock exposure. Having read 4 pillars and Larry's books I was itching to tilt. So i read Rick's blog where he super simplified it and said just use SV (and ignore LV, SG) in conjunction with TSM (25% SV, 75% TSM).It turned out that its ~10% of my portfolio which jived with VG CFP. So thats what i did to balance the need to keep it simple and need to scratch the itch.

I also funded a 529 plan using UESP's DFA funds to implement a S&D portfolio to get that out of my system.

After 1 month, my VG portfolio dropped by 2% and and the 529 plan dropped by 7%. I just hope this is a short term pain. Its one thing to read all the books and feel good about your risk assessment and entirely another thing to see your hard earned money go down the drain in a few weeks....as they say in the books!

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Re: Read too many books... help untangle

Post by Bubbagump » Sun Oct 05, 2014 10:11 am

subham wrote:I was in your shoes just a month ago. Read too many things and got paralyzed in implementing anything. I was torn between lumpsum (for its simplicity) and S&D (for its extra returns over lumpsum) because of conflicting advice from books that came to regard highly of.

Thats when i picked up the phone and talked to VanGuard CFP who gave me an ultra simple 4 fund portfolio as a part of my financial plan. He told me there is no need to make it complex and tilt as this allocation would be adequate for my needs and told me that if i have the itch to ignore his advice, then he recommended i stay within 10% for any sector or single stock exposure. Having read 4 pillars and Larry's books I was itching to tilt. So i read Rick's blog where he super simplified it and said just use SV (and ignore LV, SG) in conjunction with TSM (25% SV, 75% TSM).It turned out that its ~10% of my portfolio which jived with VG CFP. So thats what i did to balance the need to keep it simple and need to scratch the itch.

I also funded a 529 plan using UESP's DFA funds to implement a S&D portfolio to get that out of my system.

After 1 month, my VG portfolio dropped by 2% and and the 529 plan dropped by 7%. I just hope this is a short term pain. Its one thing to read all the books and feel good about your risk assessment and entirely another thing to see your hard earned money go down the drain in a few weeks....as they say in the books!
Interesting where you landed. As I have continued to read, Rick's book on AA lead me to a similar conclusion. Best of both worlds... easy enough to manage, slight tilt, but not tilted so much that I feel worried about "what if FF is bunk moving forward". Another good thing that put me in perspective was this thread: http://www.bogleheads.org/forum/viewtop ... st=2214658

Some times you get so wrapped up in the minutiae you forget about the basics.

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Re: Read too many books... help untangle

Post by Fallible » Sun Oct 05, 2014 10:37 am

Bubbagump wrote:So I have been a knee deep in books over the past month (and juxtaposing with what I read here) or so trying to plan a portfolio for post business exit and it seems I have thoroughly confused myself. It seems there is a lot of contradiction out there, but maybe I just see it as contradiction....
So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory. I feel like I am having to choose a religion when I may simply be missing a simple point that would tie of this all together. Maybe I should just go back to school.
Contradictions, initial confusion, etc., are simply part of the learning process. It's OK to be confused as your brain processes and assimilates the new information. Eventually, it will lead to new questions, new decisions, new actions, as your confusion has done re Vanguard, this forum, etc. And what you will learn from them will lead to more questions and moves. Learning is for life.
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

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Re: Read too many books... help untangle

Post by Abe » Sun Oct 05, 2014 12:08 pm

Don't succumb to analysis paralysis. The main thing is to select an asset allocation you can live with. It probably won't make a lot of difference which portfolio you select. There are several to choose from, but you will not know which one is optimal until later anyway. As someone once told me, "just do it". You will continue to learn as you go along.
Slow and steady wins the race.

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Re: Read too many books... help untangle

Post by ruralavalon » Sun Oct 05, 2014 3:14 pm

Bubbagump wrote:All good input and I think the problem I am running into is the "belief" portion. So I am right. This is somewhat religious as I am afraid this is a bit of a soft science.

What I do know I believe:

Costs matter
Active investments = gambling
Rebalance
Market timing is playing with fire
Buy and hold
Stick to your plan
Asset allocation matters

You have the big, important things right. That's all that is necessary to sound investing.

What I am still in the wilderness on:
A market portfolio versus a tilted or SnD
Do I really care to keep up on the care and feeding of a more complicated allocation
Do tilts REALLY matter
Does Fama French REALLY matter (I see this as separate from tilts as you can tilt various ways)

These are relatively small, unimportant things, as compared to points like "costs matter". Don't sweat the small stuff.

If you doubt your resolve about the care and feeding of a complicated portfolio, then don't do a complicated portfolio.


And really, knowing how I am wired, I will want to know how the most complicated models work or are constructed yet I will fall back to some practical middle ground (Maybe I have some Markowitz in me ala his quote “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier…Instead, I split my contributions 50/50 between bonds and equities.”). While I don't want perfect to be be the enemy of good and I am very good at being disciplined in executing a plan, I just need to find my plan I do believe in. At that point, it should be smooth sailing.

I just need to figure out where I feel that practical middle ground is. In the mean time, I will probably indeed read all of what Larry listed above. Even if I dismiss some of it as overkill or minutiae, I would rather understand the bigger picture and know and understand what I am dismissing as inconsequential.

My own personal solution to analysis paralysis was a "mugwump" portfolio. That's a 3 fund total market type portfolio, plus a little small cap value fund and a little REIT index fund.

All this said, I think the best advice I have gotten is from the Wiki... after a windfall, don't do a damn thing for 6 months. In the mean time, I'll keep reading everything I can and I am sure I'll find my way out of the wilderness. Thanks for all the input and candid responses.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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White Coat Investor
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Re: Read too many books... help untangle

Post by White Coat Investor » Sun Oct 05, 2014 3:43 pm

As Taylor likes to say, when experts disagree, it probably doesn't matter much. Following Ferri's, Bernstein's, Swedroe's, or Bogle's advice (or any combination thereof) is likely to be just fine. Focus on the important principles, rather than the exact implementation of them. Broad diversification, appropriate level of risk, low-cost etc.
Last edited by White Coat Investor on Sun Oct 05, 2014 4:21 pm, edited 1 time in total.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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arcticpineapplecorp.
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Re: Read too many books... help untangle

Post by arcticpineapplecorp. » Sun Oct 05, 2014 3:47 pm

I love all the advice given so far. I too read a lot of books as well. Paul Merriman helped me figure things out. Here's what happened:

First he really stressed how much more money you "would have made" in the past if you tilted. That enticed me, of course as it does everyone. However, two other things convinced me to keep things simple (Thanks Taylor!):

1. I thought deeply about what I would have done if I'd been tilting through the 80s-90s when large cap and growth were beating small cap and value. Merriman goes through the actual number of years you would have lagged a simple S&P500 index fund by tilting. I determined I probably would have bailed and not stayed the course with a tilting strategy. That would have been the wrong thing to do of course, as small cap and value came back in the 2000s...but that's the point. You have to be so sure of your convictions/philosophy regarding investing, that nothing and I mean nothing will shake it. If you stick with tilting, you've got to stick with it for life. I determined I couldn't be that certain and didn't want to wait my whole life to see if the bet (towards tilting) pays off.

2. I thought about the possibility of doing worse than the market by tilting. Yeah, everyone assumes you'll do better than the market as a whole, but past performance is no predictor of future results. That's not just a saying, that really means something. All of the evidence is based on back-testing. No one has actually shown if they held that portfolio over the past 30-40 years or whatever. As long as no one can guarantee the future will be like the past (or over what time frame), then I'd be taking a chance. I don't want to chance doing worse than the market as a whole, when by definition indexing the market will guarantee me the market's average (minus costs). And as Jack Bogle has said the market provides a fair and decent return for investors. He's right. Can you do better than that? Maybe, but you could also do worse. I'm ok with being average when it comes to investing.

Hope that helps. Remember tilts may work, but they may take much longer than you anticipate to show the results you're seeking. Can you be that patient?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

staythecourse
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Re: Read too many books... help untangle

Post by staythecourse » Sun Oct 05, 2014 4:33 pm

I can tell you what I have found to be important in investing in determining financial success:

1. Save as much as you can so you can invest as much as you can
2. Asset allocation is king and should be based on willingness/ ability/ need to take risk
3. Active management is a losers game
4. Be cognizant that fees, taxes, and inflation eat into long term returns
5. Stay the course to prevent you from messing everything up.

By FAR the most important is: Starting young, saving a lot, and staying the course.

As you can see NOTHING is mentioned about SCV, REITS, TSM vs. slice/ dice, etc... In living your investing life you goal is NOT to be an expert, write a book, write a thesis, or win a Nobel Prize. Your goal is to go from point A (where you are) to Point B (when you die) without ending up poor. Being TSM vs. slice/ dice, for example, will not be the difference of being poor eating dog food vs. sitting in a mansion eating fish eggs.

Don't overcomplicate investing. As I give lectures to my physician friends I tell them I love investing because it is so darn easy. Handling my 2 yr. or being a great husband is 10x more difficult!!

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Read too many books... help untangle

Post by HurdyGurdy » Sun Oct 05, 2014 5:08 pm

I feel like I am having to choose a religion when I may simply be missing a simple point that would tie of this all together.
It may be wrong to compare it to a religious denomination, if it is defined as a well defined system of dogmas, in which one needs to believe in order to achieve salvation (a binary outcome).

From where are you looking at this? there may be two extremes -- at one extreme, you only want a very practical investing recipe that works for you. At the other extreme, you are an academic that wants to be at the frontier of knowledge, and makes a living out of disentangling very subtle signals in the data. We all are in the middle somewhere.

The principles, as presented here, are extremely likely to lead you to a good outcome.

Now, finer points, like is it better to tilt to small caps, or to value, or to have REITs, or the role of international stocks and bonds, are factors that have showed up as statistically significant in the previous (short]) history of financial markets. Are they going to have a clear effect in the future? I may bet, but I would not place a large bet on it.

So this is not a dogmatic religious denomination, but a coalition of people who mostly agree in some core principles, love to meet to discuss details and peripheral questions, and make fun of alien sorcerers, prophets and fortune-tellers.

abyan
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Re: Read too many books... help untangle

Post by abyan » Sun Oct 05, 2014 5:54 pm

I've always believed that there are answers, but the question is whether we're able to discern them. I've always bristled a bit at quotes like: "When experts disagree it is often because it does not make a foreseeable difference." I think I prefer the notion that when experts disagree, the answer is perhaps not currently knowable, so worrying about it isn't going to help you. So as a non-expert, you should read what everyone thinks then go with what feels right, and with what you think you can stick with.

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Bustoff
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Re: Read too many books... help untangle

Post by Bustoff » Mon Oct 06, 2014 8:16 am

Bubbagump wrote: So help me untangle all these concepts from folks we all know and love around these parts that are seemingly contradictory.
The secret to successful investing is not about determining which author is most convincing.
Success in investing comes from eliminating the big mistakes.

So lets start with eliminating the biggest mistake of all time -- the illusion of skill.
If you never read another book, please read these excerpts, from Thinking, Fast and Slow by Daniel Kahneman.
Some years after my introduction to the world of finance, I had an unusual opportunity to examine the illusion of skill up close. I was invited to speak to a group of investment advisers in a firm that provided financial advice and other services to very wealthy clients. I asked for some data to prepare my presentation and was granted a small treasure: a spreadsheet summarizing the investment outcomes of some 25 anonymous wealth advisers, for eight consecutive years.

While I was prepared to find little year-to-year consistency, I was still surprised to find that the average of the 28 correlations was .01. In other words, zero. The stability that would indicate differences in skill was not to be found. The results resembled what you would expect from a dice-rolling contest, not a game of skill.

On the evening before the seminar, Richard Thaler and I had dinner with some of the top executives of the firm, the people who decide on the size of bonuses. We asked them to guess the year-to-year correlation in the rankings of individual advisers. They thought they knew what was coming and smiled as they said, “not very high” or “performance certainly fluctuates.” It quickly became clear, however, that no one expected the average correlation to be zero.

What we told the directors of the firm was that, at least when it came to building portfolios, the firm was rewarding luck as if it were skill. This should have been shocking news to them, but it was not. There was no sign that they disbelieved us. How could they? After all, we had analyzed their own results, and they were certainly sophisticated enough to appreciate their implications, which we politely refrained from spelling out. We all went on calmly with our dinner, and I am quite sure that both our findings and their implications were quickly swept under the rug and that life in the firm went on just as before. The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry.

When we were done, one executive I dined with the previous evening drove me to the airport. He told me, with a trace of defensiveness, “I have done very well for the firm, and no one can take that away from me.” I smiled and said nothing. But I thought, privately: Well, I took it away from you this morning. If your success was due mostly to chance, how much credit are you entitled to take for it?

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