Wiki comments requested: The importance of asset allocation

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Re: Wiki comments requested: The importance of asset allocat

Post by Peculiar_Investor » Fri Jan 30, 2015 12:57 pm

scone wrote:if there is "contention" about the interpretation of that policy, as the OP suggests, then I will bow out, until the fighting is over and the all-clear is blown.
Please don't. That was the whole purpose of asking the forum to help, to gain further insight and ideas. That is happening and it is very helpful to not only the wiki editors, but to all forum readers.

Remember, the wiki is intended to represent the collective wisdom and knowledge of the Bogleheads community.
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Re: Wiki comments requested: The importance of asset allocat

Post by knpstr » Fri Jan 30, 2015 12:58 pm

Leeraar wrote: ...the fact is that savings rate is by far the most important factor in determining your investment success.
I am in this camp.

The most important asset allocation one can do is to allocate cash from one's paycheck into one's investment account. After that it is all about optimizing based upon a lot of personal/individual preferences.
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Re: Wiki comments requested: The importance of asset allocat

Post by MathWizard » Fri Jan 30, 2015 1:34 pm

I think the problem with finding good sources highlights that the statement is not true.

This is not an uncommon occurrence when a statement has been accepted as dogma for a long time.
I don't believe that AA is the most important decision. It is at best a secondary decision.
Over the long term AA only helps control volatility in portfolio value. This is important in the short term
and for providing a steady course for the investor to follow. Too volatile a portfolio for an investor's
risk tolerance and they bail from equities near market bottom. Too safe and the portfolio cannot withstand
a long withdrawal period, and the investor may be forced into equities for return when least able to
stand a downturn.

Saying AA is more important than selection of individual securities goes counter to the "Buy the market"
advice from Jack Bogle. Diversification within asset classes is very important, between asset classes not as much.

And as had been said : savings rate; LBYM; low expenses are much more important than AA.

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Re: Wiki comments requested: The importance of asset allocat

Post by Leeraar » Fri Jan 30, 2015 1:48 pm

Bogle: The little book of common sense investing:

Asset Allocation is on page 208 of 216. To present it as the first and most important decision for new investors is just wrong.

May I invoke Taylor Larimore: When experts disagree, it probably doesn't matter.

L.
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Re: Wiki comments requested: The importance of asset allocat

Post by JimmyJammy » Fri Jan 30, 2015 2:01 pm

The examples on that Asset Allocation wiki page carry a significant assumption - that stocks and bonds always move in opposite directions. The "Rules of Thumbs" section basically suggests that bonds are "non-risky assets." But that's not always the case, is it? The results referenced in the 2000-2002 Bear Market chart may not mirror what happens in the future right? Maybe there should be language added to frame these examples from the past more carefully?

According to this blog entry, since 1976 there have been 14 quarters when both stocks and bonds declined together:
http://awealthofcommonsense.com/often-s ... line-time/

It's rare but not without precedence.

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Re: Wiki comments requested: The importance of asset allocat

Post by clip651 » Fri Jan 30, 2015 2:13 pm

Hmmm. A few months ago, I printed an asset allocation chart from Vanguard that showed simple pie charts for each 10% band of stocks vs. bonds for various AAs. Next to each pie chart were some numbers about best returns in a year, worst returns in a year, and I think number of years with a loss for the associated AA. I can't seem to find it now. Instead when I go to the investing insights area, the page on asset allocation makes it all look incredibly complicated:

https://personal.vanguard.com/us/insigh ... about-risk

I can see the usefulness of a page like that for a serious investor, or someone that simply prefers to read detailed documents, etc. But I think for new investors, or people that don't see themselves as academic or mathematic types, it will turn people off from trying to learn the basics. Maybe that pie chart is still around and I'm just not looking in the right place.

Anyway, this only tangentially relates to the wiki. I actually went to find the link to the pie chart page to show an example of something that would be approachable to newbies, and I was going to check what they used for the introductory text. I could go dig up my printout, but since I can't link to it, I'll skip that for now. Just thought I'd throw out the observation.

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Re: Wiki comments requested: The importance of asset allocat

Post by Fallible » Fri Jan 30, 2015 4:35 pm

clip651 wrote:Hmmm. A few months ago, I printed an asset allocation chart from Vanguard that showed simple pie charts for each 10% band of stocks vs. bonds for various AAs. Next to each pie chart were some numbers about best returns in a year, worst returns in a year, and I think number of years with a loss for the associated AA. I can't seem to find it now. Instead when I go to the investing insights area, the page on asset allocation makes it all look incredibly complicated:

https://personal.vanguard.com/us/insigh ... about-risk

I can see the usefulness of a page like that for a serious investor, or someone that simply prefers to read detailed documents, etc. But I think for new investors, or people that don't see themselves as academic or mathematic types, it will turn people off from trying to learn the basics. ...
This is my concern. It's good to remember that the new investors we're writing for run the gamut in age, experience, interest, ability. They may be budding or experienced mathematicians or academics and still new to investing. They're also going to be like those who post on the forum asking for advice, or those who attend our local chapter meetings, with varied backgrounds, education, financial problems, difficult personal situations, from teens to 60s. If they are turned off, they have many other publications to turn to that will give them the basics.
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Re: Wiki comments requested: The importance of asset allocat

Post by kolea » Fri Jan 30, 2015 7:14 pm

It is hard for me to make a choice or recommendation on your options without knowing more about the guiding principles for the wiki. For instance, is its purpose to provide general education, or education specific to bogleheadism? The former would drop value statements (such as "...AA is the most important decision...") about the topic. The latter would show how it is an important part of the philosophy.

I also do not know who your target audience is. I would think it would be average people who have no formal training in finance or economics. If so, I would not cite papers by Nobel laureates or perhaps anyone else for that matter. It will only make people's heads spin. Put those in the "further reading" section. And I certainly wouldn't show any plots of efficiency frontiers.

My take on this is to tilt towards purely educating people, first on terminology, and second on its practical use. And stay away from making a case for a particular AA. I would even give some nod to the competing theories.
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Re: Wiki comments requested: The importance of asset allocat

Post by LadyGeek » Fri Jan 30, 2015 7:31 pm

Based on the responses, let me propose another option: Should the notice be removed? We can certainly do that.

The notice appears in both Asset allocation and Risk and return: an introduction (Asset allocation).
TwoByFour wrote:I also do not know who your target audience is. I would think it would be average people who have no formal training in finance or economics. If so, I would not cite papers by Nobel laureates or perhaps anyone else for that matter. It will only make people's heads spin. Put those in the "further reading" section. And I certainly wouldn't show any plots of efficiency frontiers.
I think that you've identified the target audience - at least from my perspective.

We can list papers for further reading as just that - for further reading.
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Re: Wiki comments requested: The importance of asset allocat

Post by LadyGeek » Fri Jan 30, 2015 8:18 pm

As a follow-up to what richard posted about sscritic's idea of a contribution allocation rather than an asset allocation, sscritic sent me this by PM:
A contribution allocation is an asset allocation, an allocation of the assets you are purchasing. However, most bogleheads take asset allocation to refer to existing assets, not new assets. Note the statement from Jack Brennan that Taylor contributed.
"The first step in assembling an investment portfolio is to decide how to spread your dollars among stock, bond, and cash investments. Spend a lot of time on this decision--it is the most important one you will make."
Now I didn't look up the context, but it is not clear that "how to spread" doesn't just refer to your purchases when you make your purchases and is in no way a reference to looking at the result months or years later. So yes, decide what you want to buy in what proportions, then let things ride. AA as most use the term seems mostly irrelevant if you have a contribution allocation that you stick with.
(sscritic gave permission to post this reply.)
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Re: Wiki comments requested: The importance of asset allocat

Post by avenger » Fri Jan 30, 2015 8:22 pm

LadyGeek wrote:^^^ Yes, it does. Taylor Larimore has more quotes in: What Experts Say About "Asset-Allocation & Diversification"

For a new investor, I would think that easy-to-understand phrases (not too "technical") that make a strong point work best. Doing this in one or two sentences should be optimal.

New investors - Does anything of what we've posted so far work for you? Is it understandable and does it bring the point home?

We can argue on the details all day (which paper, what the statistics mean), but the bottom line is we want to educate new investors. Asset allocation is important first, then pick the funds.
I think usage of the term "variability" may not really bring home the point you are trying to make.
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Re: Wiki comments requested: The importance of asset allocat

Post by LadyGeek » Fri Jan 30, 2015 8:26 pm

I think one of the sources for the initial notice was from Investopedia. Note the similarity:
Investopedia wrote:However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of individual securities is secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.
Wiki wrote:Asset allocation is one of the most important decisions that investors can make. In other words, the importance of an investor's selection of individual securities is insignificant compared to the way the investor allocates their assets to stocks, bonds, and cash equivalents.
Investopedia can be hit or miss when it comes to authoritative information. Overall, it's a good reference. However, for the "must be sure" stuff, it can fall short sometimes.
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Re: Wiki comments requested: The importance of asset allocat

Post by Fallible » Fri Jan 30, 2015 8:46 pm

LadyGeek wrote:Based on the responses, let me propose another option: Should the notice be removed? We can certainly do that. ...
After having earlier overstated my case on writing for the new investor, I'll just suggest that our choices be to either remove the notice or go with richard's suggestion (which I prefer):

"Asset allocation is one of the most important decisions that investors can make. We recommend that investors first decide on an asset allocation, then implement that allocation with carefully chosen funds or securities."
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Good enough

Post by Taylor Larimore » Fri Jan 30, 2015 8:59 pm

Lady Geek:

The Wiki Asset-Allocation states:
Asset allocation is one of the most important decisions that investors can make. In other words, the importance of an investor's selection of individual securities is insignificant compared to the way the investor allocates their assets to stocks, bonds, and cash equivalents.
I think this quote (which I had nothing to do with) is as good as any.

Best wishes.
Taylor
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Re: Wiki comments requested: The importance of asset allocat

Post by LadyGeek » Fri Jan 30, 2015 9:17 pm

Taylor is proposing to keep the original wording - it's as good as any. If so, then I propose Fallible's idea and keep the decision simple:

1. Delete the statement
2. Use richard's suggestion
richard wrote:Asset allocation is one of the most important decisions that investors can make. We recommend that investors first decide on an asset allocation, then implement that allocation with carefully chosen funds or securities.
In either case, we can list the Sharpe paper, Ibbotson, and other references, as "Further reading."
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Re: Wiki comments requested: The importance of asset allocat

Post by Tamales » Fri Jan 30, 2015 10:57 pm

I'm not sure why the word "importance" (and any associated adjectives or quantitative claims or citations to "experts") has to enter into this at all. What matters is the *reason* for AA. I assume diversification and risk tolerance top the list of reasons.

If a person invests in anything more than a single stock, the are doing asset allocation whether they consciously do it per some numeric target or not. In other words, the vast majority of people are going to do asset allocation anyway, so persuading them of the importance doesn't accomplish anything.

Maybe the points to stress are that you want to do AA consciously, and the reasons it has value (allows you as the investor some control over risk and diversification).

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Re: Wiki comments requested: The importance of asset allocat

Post by TooLateSmart » Fri Jan 30, 2015 11:44 pm

I've not been here very long, but here are some thoughts.

I agree that the original version is unsupported and unsupportable as written ("AA is the most important decision because mumble mumble"), but I don't see how quoting famous people helps it any. What we need is a clear reason, not an authority.

Actually, it seems to me that AA is more part of the machinery than some kind of guiding principle. As evidence, everyone says to start with AA, but they also say it doesn't matter too much which AA you use. 40/60 or 60/40, whatever suits your fancy.

From what I see, the value of starting with AA is that it provides a conceptually simple framework to hang the details from. It really isn't that important as you start saving that first $10,000 (Just dump the money into Total Stock Mkt and go get some more); but as your investments grow you need some basis for keeping things under control and avoiding catastrophe. AA is a convenient organizing mechanism.

Another way to look at AA, perhaps, is as a guide to diversification.

Anyway, I agree with those who say that Saving is way more important than AA. Perhaps the statement on AA just needs a different place in the hierarchy.

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Re: Wiki comments requested: The importance of asset allocat

Post by FrugalInvestor » Sat Jan 31, 2015 12:21 am

I don't know why there needs to be a hierarchy but if I were forced to rank one factor as most important it would be control of one's emotions. That is the greatest enemy of successful investing. To the extent that asset allocation reduces volatility, supports emotional stability and enables staying the course it is important.
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Re: Wiki comments requested: The importance of asset allocat

Post by Leeraar » Sat Jan 31, 2015 1:16 am

LadyGeek wrote:Taylor is proposing to keep the original wording - it's as good as any. If so, then I propose Fallible's idea and keep the decision simple:

1. Delete the statement
2. Use richard's suggestion
richard wrote:Asset allocation is one of the most important decisions that investors can make. We recommend that investors first decide on an asset allocation, then implement that allocation with carefully chosen funds or securities.
In either case, we can list the Sharpe paper, Ibbotson, and other references, as "Further reading."
Might I suggest:
Asset allocation is one of the most important decisions that investors can make. We recommend that investors first Investors should decide on an asset allocation, then implement that allocation with carefully chosen funds or securities.
For beginning investors, AA is not that important. In the long run, AA is an important factor in a portfolio's overall rate of return, and also of the relative risk (volatility) that an investor may encounter.

L.
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Re: Wiki comments requested: The importance of asset allocat

Post by YDNAL » Sat Jan 31, 2015 1:51 am

LadyGeek wrote:On several wiki pages, such as Asset allocation and Risk and return: an introduction, we make a very bold statement:
ImageAsset allocation is one of the most important decisions that investors can make. In other words, the importance of an investor's selection of individual securities is insignificant compared to the way the investor allocates their assets to stocks, bonds, and cash equivalents.
An important statement such as this should cite a credible source, but none is to be found.......
Agree. Claims of "most important decisions, etc." is the fuel that lights argument and debate, and it says a whole lot without proper documentation.

IMO, the Wiki should be informative and leave it at that.

My preference would be to remove the statement and replace it with the very first sentence in the Wiki page.
ImageAsset allocation is an investment strategy that aims to balance risk and return by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.
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Re: Wiki comments requested: The importance of asset allocat

Post by Leeraar » Sat Jan 31, 2015 2:44 am

For an outside (of the Bogleheads clique) view, I went to Jane Bryant Quinn's "Making the Most of Your Money NOW". 2009, ISBN 978-0-7432-6996-4.

She gets to Asset Allocation on p. 709 of 1242. I think all the Wiki editors should read what she has to say, and how she puts it into context.

L.
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Re: Wiki comments requested: The importance of asset allocat

Post by SGM » Sat Jan 31, 2015 4:14 am

I like Bernstein's point of view that AA changes over time. I don't see the need to make a statement that AA is more important than fund selection. If one picked high cost funds that may not be the case at all. It is logical to pick AA before picking specific funds, but the importance of AA vs. specific funds is a little controversial. As stated many times on this forum savings rate may trump AA or selection for investors with a long time horizon.

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Re: Wiki comments requested: The importance of asset allocat

Post by kcollett » Sat Jan 31, 2015 8:46 am

I think the primary distinction between the two examples is that Investopedia uses the word "secondary" whereas the Wiki uses the word "insignificant". The latter seems to be an extreme position.
LadyGeek wrote:I think one of the sources for the initial notice was from Investopedia. Note the similarity:
Investopedia wrote:However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of individual securities is secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.
Wiki wrote:Asset allocation is one of the most important decisions that investors can make. In other words, the importance of an investor's selection of individual securities is insignificant compared to the way the investor allocates their assets to stocks, bonds, and cash equivalents.
Investopedia can be hit or miss when it comes to authoritative information. Overall, it's a good reference. However, for the "must be sure" stuff, it can fall short sometimes.

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Re: Wiki comments requested: The importance of asset allocat

Post by LadyGeek » Sat Jan 31, 2015 9:36 am

TooLateSmart wrote:I've not been here very long, but here are some thoughts.

I agree that the original version is unsupported and unsupportable as written ("AA is the most important decision because mumble mumble"), but I don't see how quoting famous people helps it any. What we need is a clear reason, not an authority.

Actually, it seems to me that AA is more part of the machinery than some kind of guiding principle. As evidence, everyone says to start with AA, but they also say it doesn't matter too much which AA you use. 40/60 or 60/40, whatever suits your fancy.

From what I see, the value of starting with AA is that it provides a conceptually simple framework to hang the details from. It really isn't that important as you start saving that first $10,000 (Just dump the money into Total Stock Mkt and go get some more); but as your investments grow you need some basis for keeping things under control and avoiding catastrophe. AA is a convenient organizing mechanism.

Another way to look at AA, perhaps, is as a guide to diversification.

Anyway, I agree with those who say that Saving is way more important than AA. Perhaps the statement on AA just needs a different place in the hierarchy.
Thank you.

kcollett - Also, thank you.

To our "newer" members - Don't get worried about our experienced members deep-diving into theory. Please continue to provide comments, they're not lost in the noise. If you don't understand what this means, we haven't done our job.

To the lurkers - Provide comments in the "Help improve this page" at the bottom of Asset allocation, no login required. Or, join the forum and let us know what you think.
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Re: Wiki comments requested: The importance of asset allocat

Post by BigJohn » Sat Jan 31, 2015 1:50 pm

Having reread this discussion maybe the right answer is not to make a judgement on absolute importance but rather to help a new investor understand why all of these decisions are important based on what they influence. Here are my thoughts as a starting point

Savings Rate (includes both % and starting early) - major influence on size of retirement portfolio. Don't plan to make up for a low savings rate with sustained market beating returns. Don't plan to make up for a low savings rate in your 20's & 30's with a much higher savings rate in your 40's & 50's

Asset Allocation - major influence on portfolio volatility and therefore a major influence on ability to stay the course and not sell at market lows. Minor/moderate influence on size of portfolio at retirement. Whether it's minor or moderate is a tough call. I'd say it only moderate at extremes of 90 -100% in either and minor if your constrained to a more middle ground AA.

Asset Placement (includes thing like 401(k) to match, tIRA vs Roth, tax efficient placement) - moderate influence on size of portfolio at retirement. If you include 401(k) match in savings rate rather than here you might decide this is a minor influence.

Fund selection (includes both cost and risk choices) - moderate influence on size of portfolio at retirement (mostly downside if you make poor choices), moderate influence on portfolio volatility

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Re: Wiki comments requested: The importance of asset allocat

Post by Fallible » Sat Jan 31, 2015 1:51 pm

Leeraar wrote:For an outside (of the Bogleheads clique) view, I went to Jane Bryant Quinn's "Making the Most of Your Money NOW". 2009, ISBN 978-0-7432-6996-4.

She gets to Asset Allocation on p. 709 of 1242. I think all the Wiki editors should read what she has to say, and how she puts it into context.

L.
Just happened to have my copy of "Making the Most" close by :happy. I do agree with Quinn, but I'm not certain how you meant her context in relation to the thread.

Also interesting is the AA context in Rick Ferri's book, All About Asset Allocation, in which AA is one of four "Key Concepts" in the first chapter, "Planning for Investment Success." He writes: "Asset allocation is the key element of investment planning."
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Re: Wiki comments requested: The importance of asset allocat

Post by Leeraar » Sat Jan 31, 2015 2:43 pm

Fallible wrote:
Leeraar wrote:For an outside (of the Bogleheads clique) view, I went to Jane Bryant Quinn's "Making the Most of Your Money NOW". 2009, ISBN 978-0-7432-6996-4.

She gets to Asset Allocation on p. 709 of 1242. I think all the Wiki editors should read what she has to say, and how she puts it into context.

L.
Just happened to have my copy of "Making the Most" close by :happy. But I'm not certain how you meant Quinn's context in relation to the thread.

Also interesting is the AA context in Rick Ferri's book, All About Asset Allocation, in which AA is one of four "Key Concepts" in the first chapter, "Planning for Investment Success." He writes: "Asset allocation is the key element of investment planning."
She gets to asset allocation only in terms of implementing a plan, and includes it with a discussion of diversification and rebalancing.

In terms of decisions to be made early, AA is not the most important thing, by any means.

L.
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Re: Wiki comments requested: The importance of asset allocat

Post by peppers » Sat Jan 31, 2015 3:15 pm

Hypothetical


Hi everyone, 1st time poster

I am starting a new job with an excellent benefit program. I will be able to max out my contributions to the Roth 401k and I am think about putting 100% into an International fund. Is this a good plan?

You guys are the best
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Re: Wiki comments requested: The importance of asset allocat

Post by LadyGeek » Sat Jan 31, 2015 3:31 pm

^^^ Exactly. We need to (politely :wink:) explain why this wrong. A message which says "Stop, you're heading for a train wreck" is needed.

Immediate understanding is critical. "Variability of returns" can come later.
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Re: Wiki comments requested: The importance of asset allocat

Post by Mel Lindauer » Sat Jan 31, 2015 4:09 pm

kcollett wrote:I think the primary distinction between the two examples is that Investopedia uses the word "secondary" whereas the Wiki uses the word "insignificant". The latter seems to be an extreme position.
LadyGeek wrote:I think one of the sources for the initial notice was from Investopedia. Note the similarity:
Investopedia wrote:However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of individual securities is secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.
Wiki wrote:Asset allocation is one of the most important decisions that investors can make. In other words, the importance of an investor's selection of individual securities is insignificant compared to the way the investor allocates their assets to stocks, bonds, and cash equivalents.
Investopedia can be hit or miss when it comes to authoritative information. Overall, it's a good reference. However, for the "must be sure" stuff, it can fall short sometimes.
Agree that the word "secondary" is much more appropriate. One can have a good asset allocation and pick lousy, high-priced funds, so it's certainly not "insignificant". IMO, that needs to changed promptly.
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Re: Wiki comments requested: The importance of asset allocat

Post by Mel Lindauer » Sat Jan 31, 2015 4:13 pm

knpstr wrote:
Leeraar wrote: ...the fact is that savings rate is by far the most important factor in determining your investment success.
I am in this camp.

The most important asset allocation one can do is to allocate cash from one's paycheck into one's investment account. After that it is all about optimizing based upon a lot of personal/individual preferences.
And you can't have a savings rate if your don't handle the first step, and that's living below your means. So the order is:

1. Learn to live below your means.
2. Develop a plan (the rest of the following steps would be included in the plan).
3. Maximize your savings rate.
4. Establish an emergency fund.
5. Determine your asset allocation.
6. Flesh it out with low-cost index funds whenever possible.
7. Rebalance as needed.
8. Stay the course.
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Re: Wiki comments requested: The importance of asset allocat

Post by scone » Sat Jan 31, 2015 4:18 pm

peppers wrote:Hypothetical

Hi everyone, 1st time poster

I am starting a new job with an excellent benefit program. I will be able to max out my contributions to the Roth 401k and I am think about putting 100% into an International fund. Is this a good plan?

You guys are the best
Ok, ok, I'll bite:

"No, this is a bad plan because you don't want to put all your eggs in one basket. Sometimes international does well, sometimes it doesn't. Sometimes domestic stock does well, sometimes it doesn't. Sometimes stocks don't do well, but bonds will help you through that. Spreading your money around is your best bet, since we don't know what the future holds."

------

No technical jargon needed at all. Just basic common sense, simple metaphors, and narratives that are familiar to most English readers. If you bring the level down to about the 8th grade, you will reach a lot more people, and there's a better chance some of the message will stick around in their brains long enough to influence behavior!
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore

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Re: Wiki comments requested: The importance of asset allocat

Post by FrugalInvestor » Sat Jan 31, 2015 5:20 pm

Mel Lindauer wrote:
knpstr wrote:
Leeraar wrote: ...the fact is that savings rate is by far the most important factor in determining your investment success.
I am in this camp.

The most important asset allocation one can do is to allocate cash from one's paycheck into one's investment account. After that it is all about optimizing based upon a lot of personal/individual preferences.
And you can't have a savings rate if your don't handle the first step, and that's living below your means. So the order is:

1. Learn to live below your means.
2. Develop a plan (the rest of the following steps would be included in the plan).
3. Maximize your savings rate.
4. Establish an emergency fund.
5. Determine your asset allocation.
6. Flesh it out with low-cost index funds whenever possible.
7. Rebalance as needed.
8. Stay the course.
I would add one step.....

1. Learn to live below your means.
2. Develop a plan (the rest of the following steps would be included in the plan).
3. Maximize your savings rate.
4. Establish an emergency fund.
5. Determine your risk tolerance and time horizon.
6. Set your asset allocation.
7. Flesh it out with low-cost index funds whenever possible.
8. Re-balance as needed.
9. Stay the course.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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Re: Wiki comments requested: The importance of asset allocat

Post by Fallible » Sat Jan 31, 2015 5:32 pm

peppers wrote:Hypothetical


Hi everyone, 1st time poster

I am starting a new job with an excellent benefit program. I will be able to max out my contributions to the Roth 401k and I am think about putting 100% into an International fund. Is this a good plan? ...
The problem here, of course, is that there is no plan, which is No. 2 on the Bogleheads' list - after No.1, LBYM, to save enough to invest. Or at least a plan isn't mentioned how this investment fits in with an overall life plan, how an investing plan is intended to meet life goals, and so on.

Speaking of saving enough to invest, I suspect this hypothetical poster has not? :)

And we haven't even gotten to asset allocation... :shock:
Last edited by Fallible on Sat Jan 31, 2015 5:39 pm, edited 1 time in total.
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Re: Wiki comments requested: The importance of asset allocat

Post by peppers » Sat Jan 31, 2015 5:39 pm

Fallible wrote:
peppers wrote:Hypothetical


Hi everyone, 1st time poster

I am starting a new job with an excellent benefit program. I will be able to max out my contributions to the Roth 401k and I am think about putting 100% into an International fund. Is this a good plan? ...
Unusually clever post for a first-timer. :P

The problem here, of course, is that you have no plan, which is No. 2 on the Bogleheads' list - after No.1, LBYM, to save enough to invest. Or at least you haven't mentioned how this investment fits in with your overall life plan, how your investing plan is intended to meet your life's goals, and so on.

Speaking of saving enough to invest, have you? :)

And we haven't even gotten to asset allocation... :shock:

And as the bard said "...therein lies the rub." :wink:

P.S. I don't think the bard used emoticons
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Re: Wiki comments requested: The importance of asset allocat

Post by Fallible » Sat Jan 31, 2015 5:48 pm

peppers wrote:
Fallible wrote:
peppers wrote:Hypothetical


Hi everyone, 1st time poster

I am starting a new job with an excellent benefit program. I will be able to max out my contributions to the Roth 401k and I am think about putting 100% into an International fund. Is this a good plan? ...
Unusually clever post for a first-timer. :P

The problem here, of course, is that you have no plan, which is No. 2 on the Bogleheads' list - after No.1, LBYM, to save enough to invest. Or at least you haven't mentioned how this investment fits in with your overall life plan, how your investing plan is intended to meet your life's goals, and so on.

Speaking of saving enough to invest, have you? :)

And we haven't even gotten to asset allocation... :shock:
And as the bard said "...therein lies the rub." :wink:

P.S. I don't think the bard used emoticons
I don't think the rub lies therein because the notice we're discussing, or that I think we're still discussing (richard's) doesn't say AA is the MOST important, just one of the most. The subject is AA, not LBYM or saving which are taken up in other sections.

As for my using emoticons when the bard never did, it's because emoticons are a crutch for folks like me who can't write nowhere near as good as him :P
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Re: Wiki comments requested: The importance of asset allocat

Post by Peter Foley » Sat Jan 31, 2015 6:23 pm

I would start with the SEC definition instead of the one currently used:
Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.
I would follow with a simplified version of the current statement as suggested by scone:
"Asset allocation is one of the more important decisions investors make. Selection of individual securities is less significant than the overall allocation to stocks, bonds, and cash."
Follow with a footnote reference to the Intelligent Investor:
in the late nineteen eighties, Gary Brinson, a noted money manager and financial analyst and his colleagues published two sophisticated statistical studies of eighty two large pension funds, but concluded that asset allocation accounted for over ninety percent of the return variability among the funds with less than ten percent contribution from market timing and actual stock and bond selection. In other words, asset allocation policy was ten times as important as stock picking and market timing combined" William Bernstein, the Intelligent Asset Allocator.
You could also footnote Sharpe. Nobel Laureate William F. Sharpe writes:
"It is widely agreed that asset allocation accounts for a large part of the variability in the return on a typical investor's portfolio."
This approach defines the topic, makes a statement about its importance, and provides a reference (or two) to support the statement.

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Re: Wiki comments requested: The importance of asset allocat

Post by LadyGeek » Sat Jan 31, 2015 6:58 pm

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Re: Wiki comments requested: The importance of asset allocat

Post by Peter Foley » Sun Feb 01, 2015 12:21 am

Just below the link to the SEC is a section titled Asset Allocation 101.

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Re: Wiki comments requested: The importance of asset allocat

Post by JamesSFO » Sun Feb 01, 2015 12:43 am

That's surprisingly well written.

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Re: Wiki comments requested: The importance of asset allocat

Post by Leeraar » Sun Feb 01, 2015 12:50 am

It is interesting how this discussion has evolved.

All the discussions on the forum on tilting, market timing, factors, when will interest rates go up, tactical asset allocation, should I rebalance, etc., etc., give (I think) a wrong impression of what BH investing is all about. I paid a lot of attention to those, until Taylor published his Three-Fund Portfolio thread.

January 1, 2012, it was. That post set off the light bulb for me.

The BH crowd generates its own noise, even as we recommend that people ignore the noise.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

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Re: Wiki comments requested: The importance of asset allocat

Post by Leeraar » Sun Feb 01, 2015 12:54 am

JamesSFO wrote:
That's surprisingly well written.
Yes, and that's what I tried to say when i quoted Jane Bryant Quinn.

Asset Allocation is part of a long term framework that goes with diversification and rebalancing to manage risk. And, it affects expected return. It's not a thing by itself.

L.
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Re: Wiki comments requested: The importance of asset allocat

Post by YDNAL » Sun Feb 01, 2015 7:12 am

Leeraar wrote:
JamesSFO wrote:
That's surprisingly well written.
Yes, and that's what I tried to say when i quoted Jane Bryant Quinn.

Asset Allocation is part of a long term framework that goes with diversification and rebalancing to manage risk. And, it affects expected return. It's not a thing by itself.
Yes. Thus claims of "most important" are not only inappropriate, but wrong!
YDNAL wrote:Agree. Claims of "most important decisions, etc." is the fuel that lights argument and debate, and it says a whole lot without proper documentation.

IMO, the Wiki should be informative and leave it at that.

My preference would be to remove the statement and replace it with the very first sentence in the Wiki page.
ImageAsset allocation is an investment strategy that aims to balance risk and return by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.
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Re: Wiki comments requested: The importance of asset allocat

Post by peppers » Sun Feb 01, 2015 7:40 am

Leeraar wrote:
The BH crowd generates its own noise, even as we recommend that people ignore the noise.

L.

BINGO
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Re: Wiki comments requested: The importance of asset allocat

Post by bertilak » Sun Feb 01, 2015 9:24 am

Could it be that there is contention because what is most important in one set of circumstances may not be most important in other circumstances?

For example:
  • A retiree with a mortgage and no other source of income may need to make a critical balance between risk and return. Perhaps annuitization is the most important.
  • A 20 year old with a good job and lots of saveable/investable income may simply need to avoid AA extremes and almost any AA somewhere in the middle will be OK.
  • A hypothetical investor who has somehow magically determined his absolute best AA is 60/40 so puts 60% in one stock (Enron?) and 40% in one bond (East Podunk skating rink bond?) has a more important issue than AA.
I think it is impossible to make "most" anything come out right for everyone.

Another point: William F. Sharpe writes "It is widely agreed that asset allocation accounts for a large part of the variability in the return on a typical investor's portfolio." Does NOT say that AA is the MOST important part of investing. There may be other "large part".
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Re: Wiki comments requested: The importance of asset allocat

Post by JamesSFO » Sun Feb 01, 2015 9:57 am

YDNAL wrote:
Leeraar wrote:
JamesSFO wrote:
That's surprisingly well written.
Yes, and that's what I tried to say when i quoted Jane Bryant Quinn.

Asset Allocation is part of a long term framework that goes with diversification and rebalancing to manage risk. And, it affects expected return. It's not a thing by itself.
Yes. Thus claims of "most important" are not only inappropriate, but wrong!
I still don't think it is wrong, I think it is shadow boxing against a different potential questions for different audiences.

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Re: Wiki comments requested: The importance of asset allocat

Post by Barry Barnitz » Sun Feb 01, 2015 12:11 pm

Hi:

Suggestion: Add a Template:See also to Balanced fund - Bogleheadsin this linked section of the User:LadyGeek/Asset allocation - Bogleheads page.

regards,
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Re: Wiki comments requested: The importance of asset allocat

Post by LadyGeek » Sun Feb 01, 2015 12:38 pm

I have added the template.

Barry Barnitz beat me to the punch. We now have a draft page for discussion: User:LadyGeek/Asset allocation

Here's the "live" page for comparison: Asset allocation

The wiki page is open to all editors, it just happens to be under my username (Wikipedia convention for draft pages).

Now, take a look at the footnote:
The most important decision is to start saving early. Delaying will require more funds to reach your investing goal than if you had saved early-on. See: Importance of saving early
I couldn't find anything in the wiki that specifically addresses the point, so we now have a new draft page: User:LadyGeek/Importance of saving early

How's it look? The wording isn't the best and could use some help. However, I think it brings the point home. Wiki editors are encouraged to work on the page directly (post here to collaborate on the changes).
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Re: Wiki comments requested: The importance of asset allocat

Post by Fallible » Sun Feb 01, 2015 1:48 pm

LadyGeek wrote:I have added the template.

Barry Barnitz beat me to the punch. We now have a draft page for discussion: User:LadyGeek/Asset allocation

Here's the "live" page for comparison: Asset allocation

The wiki page is open to all editors, it just happens to be under my username (Wikipedia convention for draft pages).

Now, take a look at the footnote:
The most important decision is to start saving early. Delaying will require more funds to reach your investing goal than if you had saved early-on. See: Importance of saving early
I couldn't find anything in the wiki that specifically addresses the point, so we now have a new draft page: User:LadyGeek/Importance of saving early
...
So this is in addition to the frequent mention of the importance of saving under "Develop a workable plan"/LBYM and "Getting Started" sections in the wiki?
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Re: Wiki comments requested: The importance of asset allocat

Post by LadyGeek » Sun Feb 01, 2015 2:11 pm

You are referring to mentions in: Getting started and Financial planning.

The process is there (develop a plan, implement the plan), but I couldn't find anything that says why you need to save early.

The answer is due to compound interest, but you really need a picture to bring the point home. See that big gap at retirement? Yes, you're stuck. Do you see a gap early on? No? That's why you invest early.

This is really a separate discussion point, but it's an important part of the larger picture.

(I'm open to all suggestions and we don't have to use this article. Or, we can insert it somewhere else in the wiki.)
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