Optimum # of Funds in a Portfolio ?

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What is the optimum # of funds to achieve the greatest diversification benefit?

1. 1-3 (Total Markets)
22
44%
2. 4-6 (Simple Slice & Dice)
19
38%
3. 7-9 (Slice & Dice)
4
8%
4. 10+ (Asset Class Junkie)
5
10%
 
Total votes: 50

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Fat-Tailed Contagion
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Optimum # of Funds in a Portfolio ?

Post by Fat-Tailed Contagion »

Assumptions:

1. Holding a portfolio of non-correlated assets (funds) can increase risk-adjusted returns (the most generic interpretation)

2. There is possibly a rebalancing bonus with a disciplined rebalancing program (the most generic interpretation)

3. Similar funds held in different accounts count as one (1) fund

Just interested in the poll and any responses.

Thank you all for participating!
Last edited by Fat-Tailed Contagion on Mon Oct 06, 2014 2:02 am, edited 5 times in total.
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jaab
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Re: Optimum # of Funds in a Portfolio ?

Post by jaab »

I don't think the way you have set up the question is that useful. It does not separate between an investment strategy and available fund options. I don't think people strive to increase their number of funds. Your first checkbox for example, 1 fund. You call it "TSM". Okay, but what about 1 because you own DFA Vector or RAFI 1000 (Slice & Dice)? Today you can buy S&D with a single fund too and sleep well at night and enjoy majesty of simplicity. :D On the other hand, before TSM funds came around you had to buy at least 2 funds just for market coverage (500 + Extended).
gogleheads.orb
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Re: Optimum # of Funds in a Portfolio ?

Post by gogleheads.orb »

3.14 or 2.718
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cfs
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Re: Optimum # of Funds in a Portfolio ?

Post by cfs »

Fair question.

Well, I believe the question is a fair one with good options. For simplicity I went with the three fund portfolio, but this is not what we have in our Imperfect SWAN Portfolio consisting of four funds and one individual stock.
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nisiprius
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Re: Optimum # of Funds in a Portfolio ?

Post by nisiprius »

Fat-Tailed Contagion wrote:Assumptions:

1. Holding a portfolio of non-correlated assets (funds) can increase risk-adjusted returns.
Benefit A. But "increase?" That's just direction. What about magnitude? How much is that in dollars?

2. There is possibly a rebalancing bonus with a disciplined rebalancing program.
Benefit B. But "possibly a bonus?" That's just direction. What about magnitude? How much is that in dollars?

Now, what are the costs?

Because, to determine the optimum, you have to balance the size of the benefits against the costs. If you aren't willing to put numbers on it, you can't find an optimum.

If you believe the costs are zero, then the "optimum" is to go on adding asset classes as long as you think there is any benefit at all.

My own opinion is that both benefits A and B are dubious, uncertain, and small. And I believe that cost of complexity is meaningful... in terms of
  • actual out-of-pocket dollar cost AND
  • increased time and attention spent on futzing around AND
  • worry about the asset classes that happen to be going down AND
  • worry about whether the premiums you've hitched your wagon to will persist AND
  • worry about whether the funds and ETFs you've bought have high "loads" on the factors you bought them for AND
  • the cost of behavioral errors, and failure to stay the course, induced by these worries.
Therefore, since I judge that the benefits are small and the costs are large, I judge that the optimum is down around 3 funds.
Last edited by nisiprius on Fri Oct 03, 2014 2:15 pm, edited 7 times in total.
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livesoft
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Re: Optimum # of Funds in a Portfolio ?

Post by livesoft »

If one has a taxable account that one has done some tax-loss harvesting in, then one might have two funds for each asset class there.

Since the poll was asking about the "Optimum" though, I suppose the optimum would be to never buy a position that dropped in value and would need to be tax-loss harvested.
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galeno
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Re: Optimum # of Funds in a Portfolio ?

Post by galeno »

I'm totally in love with the 2-fund port for non-USA persons using a non-USA broker: 60% VRLD + 40% IUAG.

The USA equivalent = 60% VT + 40% AGG.
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Fat-Tailed Contagion
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Re: Optimum # of Funds in a Portfolio ?

Post by Fat-Tailed Contagion »

Thanks guys!

It seems that a lot of wise investors are simplifying to 3 funds or so.

I always thought that Total Stock and Total Intl Stock had such a similar correlation coefficient that there was not enough zigging and zagging with just the Total Bond Fund.

But, as always, I remain open-minded.

Thank you for taking the time to vote and share your experience! :)
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SimpleGift
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Re: Optimum # of Funds in a Portfolio ?

Post by SimpleGift »

Just to put some real-world numbers on the question, for the twenty years from 1991 to 2011, there wasn't much additional portfolio return or reduction in portfolio volatility to be gained from adding asset classes beyond the three-fund portfolio (table below). Once past the basic three funds, the benefits appear marginal — and will of course vary with the time period studied.

Image
Source: Northern Trust

Personally, this is a bit hard to accept, as I've been something of an asset class collector over the years. If I had it to do over again, I'd likely limit myself to a portfolio of 3-4 funds maximum and call it a day.
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Re: Optimum # of Funds in a Portfolio ?

Post by Day9 »

12 is the maximum? Child's play.

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ruralavalon
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Re: Optimum # of Funds in a Portfolio ?

Post by ruralavalon »

I wanted to vote a 3-5 option. (Mugwump)
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Re: Optimum # of Funds in a Portfolio ?

Post by Mel Lindauer »

One fund could actually do it just fine (the appropriate Vanguard Target Retirement fund).
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stan1
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Re: Optimum # of Funds in a Portfolio ?

Post by stan1 »

This might be easier if words like "optimum" are avoided. There is no way to predict the future so there is no way to optimize a portfolio. Saying you want to optimize expected returns makes no sense because as soon as the assumptions associated with the expected asset allocation change the optimization is no longer valid.

I'd focus on acceptable returns and an acceptable asset allocation. An acceptable asset allocation for most people will include total domestic market, total international market, and bonds. You can get that in one fund with a Target Retirement fund or you might find that you need more than 10 if you have a complex portfolio with multiple 401Ks offering different investing choices, Roth IRAs, Traditional IRAs, and taxable accounts.
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mwm158
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Re: Optimum # of Funds in a Portfolio ?

Post by mwm158 »

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Last edited by mwm158 on Thu Jan 08, 2015 11:52 am, edited 1 time in total.
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Re: Optimum # of Funds in a Portfolio ?

Post by placeholder »

I dispute that having >9 funds makes one an asset class junkie because number of funds doesn't necessarily correspond to the number of asset classes due to different offerings in various accounts and TLH swaps and the like.
pascalwager
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Re: Optimum # of Funds in a Portfolio ?

Post by pascalwager »

Two funds: VG TSM and VG TISM, 50:50.
VT 60% / VFSUX 20% / TIPS 20%
Trader Joe
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Re: Optimum # of Funds in a Portfolio ?

Post by Trader Joe »

The optimum number of funds in a portfolio is 13. See Paul Merriman:

http://paulmerriman.com/vanguard/

http://paulmerriman.com/the-ultimate-bu ... tegy-2014/
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Re: Optimum # of Funds in a Portfolio ?

Post by Lafder »

I believe 3 is the best answer, but felt I had to honestly answer 4-6 since it reflects what I have.

Funny, this is proof that I am not even following my own investment logic!!

lafder
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