Optimum # of Funds in a Portfolio ?
- Fat-Tailed Contagion
- Posts: 1251
- Joined: Fri Mar 02, 2007 10:49 am
Optimum # of Funds in a Portfolio ?
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!
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.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” |
― Benjamin Graham, The Intelligent Investor (75/25 - 50/50 - 25/75)
Re: Optimum # of Funds in a Portfolio ?
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. On the other hand, before TSM funds came around you had to buy at least 2 funds just for market coverage (500 + Extended).
-
- Posts: 194
- Joined: Fri Oct 18, 2013 12:34 pm
Re: Optimum # of Funds in a Portfolio ?
3.14 or 2.718
Re: Optimum # of Funds in a Portfolio ?
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.
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.
~ Member of the Active Retired Force since 2014 ~
- nisiprius
- Advisory Board
- Posts: 52105
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: Optimum # of Funds in a Portfolio ?
Benefit A. But "increase?" That's just direction. What about magnitude? How much is that in dollars?Fat-Tailed Contagion wrote:Assumptions:
1. Holding a portfolio of non-correlated assets (funds) can increase risk-adjusted returns.
Benefit B. But "possibly a bonus?" 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.
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.
Last edited by nisiprius on Fri Oct 03, 2014 2:15 pm, edited 7 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Optimum # of Funds in a Portfolio ?
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.
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.
Re: Optimum # of Funds in a Portfolio ?
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.
The USA equivalent = 60% VT + 40% AGG.
KISS & STC.
- Fat-Tailed Contagion
- Posts: 1251
- Joined: Fri Mar 02, 2007 10:49 am
Re: Optimum # of Funds in a Portfolio ?
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!
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!
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” |
― Benjamin Graham, The Intelligent Investor (75/25 - 50/50 - 25/75)
- SimpleGift
- Posts: 4477
- Joined: Tue Feb 08, 2011 2:45 pm
Re: Optimum # of Funds in a Portfolio ?
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.
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.
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.
Re: Optimum # of Funds in a Portfolio ?
12 is the maximum? Child's play.
Large Momentum
Large Value
Small Momentum
Small Value
Intl Large Momentum
Intl Large Value
Intl Small Momentum
Intl Small Value
Emerging Markets Momentum
Emerging Markets Value
REIT
Intl REIT
Long Term Treasury
Short Term Bond
TIPS
Commodities
Large Momentum
Large Value
Small Momentum
Small Value
Intl Large Momentum
Intl Large Value
Intl Small Momentum
Intl Small Value
Emerging Markets Momentum
Emerging Markets Value
REIT
Intl REIT
Long Term Treasury
Short Term Bond
TIPS
Commodities
I'm just a fan of the person I got my user name from
- ruralavalon
- Posts: 26297
- Joined: Sat Feb 02, 2008 9:29 am
- Location: Illinois
Re: Optimum # of Funds in a Portfolio ?
I wanted to vote a 3-5 option. (Mugwump)
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
- Mel Lindauer
- Moderator
- Posts: 35757
- Joined: Mon Feb 19, 2007 7:49 pm
- Location: Daytona Beach Shores, Florida
- Contact:
Re: Optimum # of Funds in a Portfolio ?
One fund could actually do it just fine (the appropriate Vanguard Target Retirement fund).
Best Regards - Mel |
|
Semper Fi
Re: Optimum # of Funds in a Portfolio ?
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.
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.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
Re: Optimum # of Funds in a Portfolio ?
deleted
Last edited by mwm158 on Thu Jan 08, 2015 11:52 am, edited 1 time in total.
-
- Posts: 8374
- Joined: Tue Aug 06, 2013 12:43 pm
Re: Optimum # of Funds in a Portfolio ?
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.
-
- Posts: 2311
- Joined: Mon Oct 31, 2011 8:36 pm
Re: Optimum # of Funds in a Portfolio ?
Two funds: VG TSM and VG TISM, 50:50.
VT 60% / VFSUX 20% / TIPS 20%
-
- Posts: 2697
- Joined: Fri Apr 25, 2014 6:38 pm
Re: Optimum # of Funds in a Portfolio ?
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/
http://paulmerriman.com/vanguard/
http://paulmerriman.com/the-ultimate-bu ... tegy-2014/
Re: Optimum # of Funds in a Portfolio ?
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
Funny, this is proof that I am not even following my own investment logic!!
lafder