Doubting Your Portfolio Tilts

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neomutiny06
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Doubting Your Portfolio Tilts

Post by neomutiny06 » Wed Nov 02, 2016 10:05 pm

I understand all of the research on small-caps outperforming large caps over the long-term (especially small-cap value). I know many here tilt their portfolio away from the market-cap weights.

But I am not 100% convinced that small-caps will continue to outperform in the future. Say I'm 80% or 90% convinced...this would still cause me to doubt my portfolio during a major downturn. I don't know how I would behave.

For that simple reason, I have a vanilla, market-cap weighted portfolio without any tilts to value or small-cap.

I think more Bogleheads who tilt should make sure that they are 100% certain that those segments will outperform in the future. If you aren't 100%, time to trust in the good 'ol market-cap world index.

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Re: Doubting Your Portfolio Tilts

Post by lack_ey » Wed Nov 02, 2016 10:13 pm

I disagree. If you're 100% sure you're just self-deluding. There's no way your confidence should be that high in basically anything in finance and many parts of economics, fields of study based on human systems that can and do change over time. Your confidence shouldn't be 100% in stocks outperforming anything over the long run either, for that matter, among many other things. Yet it's probably a good idea to lean at least partly on the so-called equity risk premium and hope it shows up.

At 90% you should consider taking the risk and playing the odds if you'll really stick with it and you think the potential benefit is worth the time and mental effort (relating to evaluation over the years, tracking error regret, etc.). Of course there are going to be doubts. Maybe it won't turn out well, but maybe it will.

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Re: Doubting Your Portfolio Tilts

Post by avalpert » Wed Nov 02, 2016 10:22 pm

neomutiny06 wrote:But I am not 100% convinced that small-caps will continue to outperform in the future. Say I'm 80% or 90% convinced...this would still cause me to doubt my portfolio during a major downturn. I don't know how I would behave.
Honestly, that doesn't make much sense - during a major downturn do you really think the difference between being down 20% and 25% is going to save you from capitulating?

The time when it might be a challenge (and this only if you are constantly comparing performance which you don't need to do be doing) is when the market overall is doing great but your tilted portfolio is struggling. But, the flip side can also be true - why should you need to be 100% certain that it won't outperform in order to choose the 'good 'ol market-cap world index'?

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Re: Doubting Your Portfolio Tilts

Post by abuss368 » Wed Nov 02, 2016 10:42 pm

We have always preferred total market investing. Recently we have been learning about the total international bond markets.
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Re: Doubting Your Portfolio Tilts

Post by abuss368 » Wed Nov 02, 2016 10:45 pm

I guessing the question really is what defines a total market? Is it stocks, or precious metals, domestic bonds, international bonds, real estate, etc.?
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neomutiny06
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Re: Doubting Your Portfolio Tilts

Post by neomutiny06 » Wed Nov 02, 2016 10:52 pm

abuss368 wrote:We have always preferred total market investing. Recently we have been learning about the total international bond markets.
Can you share what you have learned, and if you are close to adding to your bond portfolio?

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Re: Doubting Your Portfolio Tilts

Post by njboater74 » Wed Nov 02, 2016 10:55 pm

I'm not sure you'll need to wait for a downturn to start doubting yourself. Tracking error regret is probably the larger concern. You might tilt and your tilts might underperform for a long time, even during a hot market.

But if you use the tilts to reduce risk in your portfolio, rather than increase expected return, than a down market is when you'd expect your portfolio to outperform.
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead

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Re: Doubting Your Portfolio Tilts

Post by njboater74 » Wed Nov 02, 2016 10:55 pm

abuss368 wrote:We have always preferred total market investing. Recently we have been learning about the total international bond markets.
Just total international bond? Or are you thinking about emerging markets as well?
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead

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Re: Doubting Your Portfolio Tilts

Post by William4u » Wed Nov 02, 2016 11:15 pm

Tilting for us is a set-it-and-forget it strategy. My IPS says to have 50% of our stock investments in total market (VTI VXUS) and 50% tilted to small-mid value (VBR VOE), small international (VSS), and emerging market (VWO).

It might have more ups and downs, but we are not likely to ever change it. I do not foresee any new reason to change it will ever come up.

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Re: Doubting Your Portfolio Tilts

Post by White Coat Investor » Wed Nov 02, 2016 11:34 pm

neomutiny06 wrote:I understand all of the research on small-caps outperforming large caps over the long-term (especially small-cap value). I know many here tilt their portfolio away from the market-cap weights.

But I am not 100% convinced that small-caps will continue to outperform in the future. Say I'm 80% or 90% convinced...this would still cause me to doubt my portfolio during a major downturn. I don't know how I would behave.

For that simple reason, I have a vanilla, market-cap weighted portfolio without any tilts to value or small-cap.

I think more Bogleheads who tilt should make sure that they are 100% certain that those segments will outperform in the future. If you aren't 100%, time to trust in the good 'ol market-cap world index.
You don't need to be 100%. If you're 60% sure, then have a small tilt. If 80%, a larger tilt. If 100%, then put the whole kit and kaboodle in small value. If you're only 50% sure, then go with the market portfolio.
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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Re: Doubting Your Portfolio Tilts

Post by AlohaJoe » Wed Nov 02, 2016 11:57 pm

neomutiny06 wrote:I think more Bogleheads who tilt should make sure that they are 100% certain that those segments will outperform in the future. If you aren't 100%, time to trust in the good 'ol market-cap world index.
What if I'm not 100% sure that indexing will outperform in the future? Should I only use low-cost actively managed funds?

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Re: Doubting Your Portfolio Tilts

Post by abuss368 » Thu Nov 03, 2016 7:08 am

neomutiny06 wrote:
abuss368 wrote:We have always preferred total market investing. Recently we have been learning about the total international bond markets.
Can you share what you have learned, and if you are close to adding to your bond portfolio?
If I understand correctly, international bonds are the largest investable market in the world. How can that be ignored?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Doubting Your Portfolio Tilts

Post by livesoft » Thu Nov 03, 2016 7:13 am

I think there is no reason to tilt unless you are going to buy things when they perform worse than the total market funds and sell things when they perform better than the total market funds. That is, one must rebalance when these things happen. I see that many people want to practice "buy-and-hold", but don't want to practice "buy, hold, and rebalance." There is nothing wrong with that especially since many people do not have the intestinal fortitude to buy something that is performing worse than what they would like it to.

A case in point is demonstrated by grap0013's thread on emerging markets: viewtopic.php?t=182107

Furthermore, if one doesn't "peek", then one cannot "peak."
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Re: Doubting Your Portfolio Tilts

Post by letsgobobby » Thu Nov 03, 2016 8:10 am

neomutiny06 wrote:I understand all of the research on small-caps outperforming large caps over the long-term (especially small-cap value). I know many here tilt their portfolio away from the market-cap weights.

But I am not 100% convinced that small-caps will continue to outperform in the future. Say I'm 80% or 90% convinced...this would still cause me to doubt my portfolio during a major downturn. I don't know how I would behave.

For that simple reason, I have a vanilla, market-cap weighted portfolio without any tilts to value or small-cap.

I think more Bogleheads who tilt should make sure that they are 100% certain that those segments will outperform in the future. If you aren't 100%, time to trust in the good 'ol market-cap world index.
investing is not about being 100% sure. Are you 100% sure stocks will outperform bonds?

investing is about meeting my financials goals in the lowest risk possible manner, and that means playing the odds.

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Re: Doubting Your Portfolio Tilts

Post by Dulocracy » Thu Nov 03, 2016 8:56 am

neomutiny06 wrote:I understand all of the research on small-caps outperforming large caps over the long-term (especially small-cap value). I know many here tilt their portfolio away from the market-cap weights.

But I am not 100% convinced that small-caps will continue to outperform in the future. Say I'm 80% or 90% convinced...this would still cause me to doubt my portfolio during a major downturn. I don't know how I would behave.

For that simple reason, I have a vanilla, market-cap weighted portfolio without any tilts to value or small-cap.

I think more Bogleheads who tilt should make sure that they are 100% certain that those segments will outperform in the future. If you aren't 100%, time to trust in the good 'ol market-cap world index.
OP, this sounds a lot like, "I am uncertain and cannot bring myself to tilt, but I am afraid I am missing the boat, so I want others to do what I am doing so I feel better."

IF that is the case, what others do does not matter. Whether you tilt or do not tilt, staying the course is more important than asset allocation. Bob's allocation may be better than Sally's, but if Bob changes it over and over, he has undermined his own future. Set an allocation. Stick with it. If you are not comfortable with a tilt, then do not tilt. I am a realist who knows that having a tilt may not benefit me (and may hurt me), but based on the information that I have, I am comfortable with my portfolio. There are times that I wonder, "Should I have more of an emerging market allocation? Should I have more of a developed market allocation? Should I have more of an international allocation? Should I have less of an international allocation? Whatever the answer is irrelevant, however. I have chosen an asset allocation, and I will stick with that allocation (and the written glide path that my wife and I will follow).

If I am wrong, I am wrong. At least I will not have made things worse by fiddling with it. :beer
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: Doubting Your Portfolio Tilts

Post by neomutiny06 » Thu Nov 03, 2016 7:59 pm

abuss368 wrote:
neomutiny06 wrote:
abuss368 wrote:We have always preferred total market investing. Recently we have been learning about the total international bond markets.
Can you share what you have learned, and if you are close to adding to your bond portfolio?
If I understand correctly, international bonds are the largest investable market in the world. How can that be ignored?
I agree. When will you add BNDX and how much will you allocate?

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Re: Doubting Your Portfolio Tilts

Post by abuss368 » Thu Nov 03, 2016 8:33 pm

neomutiny06 wrote: If I understand correctly, international bonds are the largest investable market in the world. How can that be ignored?
I agree. When will you add BNDX and how much will you allocate?[/quote]

Hi neomutiny06,

I am not there yet personally. Vanguard investment experts recommend 30% of fixed income. This is reasonable a material enough to move the needle in either direction. If I move forward, it would probably be this allocation.
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Re: Doubting Your Portfolio Tilts

Post by abuss368 » Thu Nov 03, 2016 8:34 pm

neomutiny06 wrote:
abuss368 wrote:
neomutiny06 wrote:
abuss368 wrote:We have always preferred total market investing. Recently we have been learning about the total international bond markets.
Can you share what you have learned, and if you are close to adding to your bond portfolio?
If I understand correctly, international bonds are the largest investable market in the world. How can that be ignored?
I agree. When will you add BNDX and how much will you allocate?
One interesting aspect is there are foreign companies with bonds issued in the U.S. that are included in Total Bond. On the flip side, Apple, Berkshire, etc. have issued bonds in Europe and Asia and those bonds are in the Total International Bond Index fund. We live in a global world.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Doubting Your Portfolio Tilts

Post by LibertyLover » Thu Nov 03, 2016 8:43 pm

livesoft wrote:I think there is no reason to tilt unless you are going to buy things when they perform worse than the total market funds and sell things when they perform better than the total market funds. That is, one must rebalance when these things happen. I see that many people want to practice "buy-and-hold", but don't want to practice "buy, hold, and rebalance." There is nothing wrong with that especially since many people do not have the intestinal fortitude to buy something that is performing worse than what they would like it to.

A case in point is demonstrated by grap0013's thread on emerging markets: viewtopic.php?t=182107

Furthermore, if one doesn't "peek", then one cannot "peak."
Interesting point livesoft. In action, there are a lot of variations though.

For instance, I purchased small caps after years of underperformance and emerging markets after almost a decade of underperformance. Both have outperformed the market, with EM up over 20% YTD. Going by your theory, it may point to selling both now. If suggest that after the length of underperformance, holding for a longer period of time is reasonable.

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Re: Doubting Your Portfolio Tilts

Post by livesoft » Thu Nov 03, 2016 9:13 pm

^Presumably you have a percentage allocation to these, so one would not sell 100% of your shares in these asset classes, but would only sell enough shares to get back to your desired asset allocation in these asset classes. If you are below your desired percentage, then perhaps they did not outperform to your expectations or you did not buy enough of them to fulfill your desired percentage in the first place.
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Re: Doubting Your Portfolio Tilts

Post by investorguy1 » Thu Nov 03, 2016 9:34 pm

abuss368 wrote:
neomutiny06 wrote:
abuss368 wrote:
neomutiny06 wrote:
abuss368 wrote:We have always preferred total market investing. Recently we have been learning about the total international bond markets.
Can you share what you have learned, and if you are close to adding to your bond portfolio?
If I understand correctly, international bonds are the largest investable market in the world. How can that be ignored?
I agree. When will you add BNDX and how much will you allocate?
One interesting aspect is there are foreign companies with bonds issued in the U.S. that are included in Total Bond. On the flip side, Apple, Berkshire, etc. have issued bonds in Europe and Asia and those bonds are in the Total International Bond Index fund. We live in a global world.
An argument against international bonds I've read on this site that I find compelling is that basically with investment grade bonds your expected return is about what the yield is. With international you are getting a lower yield, lower average credit quality and a longer duration for a higher cost. So why would you want that?

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Re: Doubting Your Portfolio Tilts

Post by TomCat96 » Thu Nov 03, 2016 9:34 pm

neomutiny06 wrote:I understand all of the research on small-caps outperforming large caps over the long-term (especially small-cap value). I know many here tilt their portfolio away from the market-cap weights.

But I am not 100% convinced that small-caps will continue to outperform in the future. Say I'm 80% or 90% convinced...this would still cause me to doubt my portfolio during a major downturn. I don't know how I would behave.

For that simple reason, I have a vanilla, market-cap weighted portfolio without any tilts to value or small-cap.

I think more Bogleheads who tilt should make sure that they are 100% certain that those segments will outperform in the future. If you aren't 100%, time to trust in the good 'ol market-cap world index.

I tilt small caps. I don't see a real issue with it one way or another.

The point is that I own the entire market to diversify, and retain a more or less static allocation passively. The question of how much weight to accord to each individual security is a little more nitpicky to me. I mean is the best way to own the market really at 3% appl, 1.9 microsoft, and whatever the weights of VFINX are?

Consider that 19.3% of VFINX is:

1 Apple Inc.
2 Alphabet Inc.
3 Microsoft Corp.
4 Exxon Mobil Corp.
5 Amazon.com Inc.
6 Johnson & Johnson
7 Facebook Inc.
8 Berkshire Hathaway Inc.
9 General Electric Co.
10 AT&T Inc.

Does that mean that exactly 19.3% into those stocks is the optimal allocation? I tilt strongly with VXF, but I do own a good portion of VFINX and the S&P 500. The combination of my portfolio looks like Vanguard total market with slightly different weights. The diversification is there, as is the low expense ratio and passive tracking.

I think you're right that one has to be convinced in one's own mind. I would probably do worse if I was only 80% sure of my tilt and panicked during a downturn. But I don't believe the particular weights of the S&P 500 to be the perfect weights. They're a little arbitrary. I don't think it matters too much what your weights are because they will probably balance out in the long run with DCA and rebalancing. Nevertheless, my point is if the exact weights aren't that important, then one shouldn't have to panic with their tilts during a downturn. That is to say, there was nothing inherently superior to the S&P chosen weights in the first place.

And if one DOES think that the exact weights are important, then one ought to ask themselves, what is the secret sauce S&P used to determine that the weight of the market should be those top 10 companies at 19.3%?

If I really did want to go out of my way to look for some empirical basis of optimal weights of individual components to diversify in, I would probably follow Larry Swedroe's approach of allocating one's portfolio to mirror the global allocation of capital. (Apparent that looks like 50% overseas)

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Re: Doubting Your Portfolio Tilts

Post by timboktoo » Thu Nov 03, 2016 9:56 pm

My portfolio isn't perfect. I don't think that many people would approve of it. But it's the only portfolio which I've been able to stay the course with.

If you have found a good portfolio that you think will take care of your future needs and still lets you sleep at night and focus on life instead of money, then I'm glad for you.

I think that portfolios are very personal and in my own experience they take time to get right. But I know that storms of doubt will come again. I will never be 100% confident that I've made the right decisions. I'm heavily influenced by what others think and do. Much more than I thought possible for someone who claims to be fiercely independent. I've got a feeling that I'm not alone in that, either.

Peace

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Re: Doubting Your Portfolio Tilts

Post by saltycaper » Fri Nov 04, 2016 2:12 am

investorguy1 wrote:
abuss368 wrote:
neomutiny06 wrote:
abuss368 wrote:
neomutiny06 wrote: Can you share what you have learned, and if you are close to adding to your bond portfolio?
If I understand correctly, international bonds are the largest investable market in the world. How can that be ignored?
I agree. When will you add BNDX and how much will you allocate?
One interesting aspect is there are foreign companies with bonds issued in the U.S. that are included in Total Bond. On the flip side, Apple, Berkshire, etc. have issued bonds in Europe and Asia and those bonds are in the Total International Bond Index fund. We live in a global world.
An argument against international bonds I've read on this site that I find compelling is that basically with investment grade bonds your expected return is about what the yield is. With international you are getting a lower yield, lower average credit quality and a longer duration for a higher cost. So why would you want that?
It's not so simple with the currency hedging. Some heavyweights here on the forum have tried to crack this nut, but without Vanguard's help, I don't think we'll get a firm grasp on how their Int'l Bond Index fund really works.
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Re: Doubting Your Portfolio Tilts

Post by in_reality » Fri Nov 04, 2016 6:28 am

saltycaper wrote:
investorguy1 wrote:
abuss368 wrote:
neomutiny06 wrote:
abuss368 wrote:
If I understand correctly, international bonds are the largest investable market in the world. How can that be ignored?
I agree. When will you add BNDX and how much will you allocate?
One interesting aspect is there are foreign companies with bonds issued in the U.S. that are included in Total Bond. On the flip side, Apple, Berkshire, etc. have issued bonds in Europe and Asia and those bonds are in the Total International Bond Index fund. We live in a global world.
An argument against international bonds I've read on this site that I find compelling is that basically with investment grade bonds your expected return is about what the yield is. With international you are getting a lower yield, lower average credit quality and a longer duration for a higher cost. So why would you want that?
It's not so simple with the currency hedging. Some heavyweights here on the forum have tried to crack this nut, but without Vanguard's help, I don't think we'll get a firm grasp on how their Int'l Bond Index fund really works.
Well, we do know how their currency hedging works. We know the hedge yield will mean equal returns between US and Intl. bonds IF the yield curves run parallel. If the US has a steeper curve as it mostly does now, the Intl bonds will have lower yields as you lose some of your term premium (because you are only getting a short term hedge return).

When short term Intl. rates rise (perhaps all the way up to zero in some places), you'll get less hedge return (assuming US rates remain unchanged). Plus, if longer term Intl. rates rise (to some degree long term rates are being depressed by QE in many countries), those bonds will get hit by a loss of NAV.

I'm sure there are some scenarios where Intl. bonds come out even or ahead but I'm not optimistic. Wish I had time to do some charts of various scenarios.

At the moment though, Intl bonds are yielding less, and it only looks like they'd do better if the US short term rate climbs faster than rates down the curve.

Of course those holding Intl. bonds while rates went deeper negative or down benefited from NAV gains. Not sure if now is the time to get into them though.

And I might be wrong ... please correct me if you see where/how.

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Re: Doubting Your Portfolio Tilts

Post by abuss368 » Fri Nov 04, 2016 7:50 am

investorguy1 wrote: An argument against international bonds I've read on this site that I find compelling is that basically with investment grade bonds your expected return is about what the yield is. With international you are getting a lower yield, lower average credit quality and a longer duration for a higher cost. So why would you want that?
Hi investorguy1,

I have read that as well. That is one of the reasons why I have been reading about international bonds in general. I am really undecided at this point.

Vanguard investment experts will recommend the asset class for the additional diversification benefits in terms of interest rates and credit. My understanding was bonds in general is an asset class were an investor will typically be able to have a high concentration (i.e. U.S. Bonds only) and be fine.

Best.
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Re: Doubting Your Portfolio Tilts

Post by abuss368 » Fri Nov 04, 2016 7:54 am

investorguy1 wrote: An argument against international bonds I've read on this site that I find compelling is that basically with investment grade bonds your expected return is about what the yield is. With international you are getting a lower yield, lower average credit quality and a longer duration for a higher cost. So why would you want that?
Hi investorguy1,

As a follow up, one of my concerns is how international bonds would react and perform in the next financial crisis. That is, if credit and liquidity dry up and become challenging, would Vanguard still be able to under write and execute hedging transactions? I have not seen much written about this. In my opinion, it is exactly during a time of crisis where an investor needs there bonds to provide safety to an investment portfolio.

Then again, the TIPS market did not fare well during the financial crisis. My understanding was this was the result of Lehman Brothers having to fire sale many TIPS bonds. I would also suspect the TIPS market is much larger and more liquid today.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Doubting Your Portfolio Tilts

Post by investorguy1 » Fri Nov 04, 2016 9:56 am

abuss368 wrote:
investorguy1 wrote: An argument against international bonds I've read on this site that I find compelling is that basically with investment grade bonds your expected return is about what the yield is. With international you are getting a lower yield, lower average credit quality and a longer duration for a higher cost. So why would you want that?
Hi investorguy1,

.... if credit and liquidity dry up and become challenging, would Vanguard still be able to under write and execute hedging transactions?
Hi abuss368,

That's an interesting point. If that is a problem maybe they could be a little more flexible than strictly sticking to the benchmark index. But I think that would only be a problem if the liquidity problem coincided with investors selling the mutual fund. In terms of hedging I don't know how it works or what they do but I thought they are hedge the currency the bond is demonstrated so there is no real connection to the bond liquidity itself. Correct me if I am totally off base on this one.

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Re: Doubting Your Portfolio Tilts

Post by investorguy1 » Fri Nov 04, 2016 9:57 am

saltycaper wrote:
investorguy1 wrote:
abuss368 wrote:
neomutiny06 wrote:
abuss368 wrote:
If I understand correctly, international bonds are the largest investable market in the world. How can that be ignored?
I agree. When will you add BNDX and how much will you allocate?
One interesting aspect is there are foreign companies with bonds issued in the U.S. that are included in Total Bond. On the flip side, Apple, Berkshire, etc. have issued bonds in Europe and Asia and those bonds are in the Total International Bond Index fund. We live in a global world.
An argument against international bonds I've read on this site that I find compelling is that basically with investment grade bonds your expected return is about what the yield is. With international you are getting a lower yield, lower average credit quality and a longer duration for a higher cost. So why would you want that?
It's not so simple with the currency hedging. Some heavyweights here on the forum have tried to crack this nut, but without Vanguard's help, I don't think we'll get a firm grasp on how their Int'l Bond Index fund really works.
Could you give me a little more info or links on what I'm missing?

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Re: Doubting Your Portfolio Tilts

Post by czeckers » Fri Nov 04, 2016 10:00 am

I think the OP presents a very good argument against tilting. If you're not convinced, then you'll me more likely to change your portfolio when small or value underperforms for a period time.
The Espresso portfolio: | | 16% LCV, 16% SCV, 16% EM, 8% Int'l Value, 8% Int'l Sm, 8% US REIT, 8% Int'l REIT, 20% Inter-term US Treas | | "A journey of a thousand miles begins with a single step."

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Re: Doubting Your Portfolio Tilts

Post by empb » Fri Nov 04, 2016 10:14 am

czeckers wrote:I think the OP presents a very good argument against tilting if you're not convinced. You'll be more likely to change your portfolio when small or value underperforms for a period of time.
Rephrased that for you. Have you ever seen someone on this forum advocate tilting to an investor at risk of capitulating? It's no more an argument against tilting than suggesting someone blind not get behind the wheel is an argument against driving.

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Re: Doubting Your Portfolio Tilts

Post by saltycaper » Fri Nov 04, 2016 3:51 pm

in_reality wrote:
saltycaper wrote:
investorguy1 wrote:
abuss368 wrote:
neomutiny06 wrote: I agree. When will you add BNDX and how much will you allocate?
One interesting aspect is there are foreign companies with bonds issued in the U.S. that are included in Total Bond. On the flip side, Apple, Berkshire, etc. have issued bonds in Europe and Asia and those bonds are in the Total International Bond Index fund. We live in a global world.
An argument against international bonds I've read on this site that I find compelling is that basically with investment grade bonds your expected return is about what the yield is. With international you are getting a lower yield, lower average credit quality and a longer duration for a higher cost. So why would you want that?
It's not so simple with the currency hedging. Some heavyweights here on the forum have tried to crack this nut, but without Vanguard's help, I don't think we'll get a firm grasp on how their Int'l Bond Index fund really works.
Well, we do know how their currency hedging works. We know the hedge yield will mean equal returns between US and Intl. bonds IF the yield curves run parallel. If the US has a steeper curve as it mostly does now, the Intl bonds will have lower yields as you lose some of your term premium (because you are only getting a short term hedge return).

When short term Intl. rates rise (perhaps all the way up to zero in some places), you'll get less hedge return (assuming US rates remain unchanged). Plus, if longer term Intl. rates rise (to some degree long term rates are being depressed by QE in many countries), those bonds will get hit by a loss of NAV.

I'm sure there are some scenarios where Intl. bonds come out even or ahead but I'm not optimistic. Wish I had time to do some charts of various scenarios.

At the moment though, Intl bonds are yielding less, and it only looks like they'd do better if the US short term rate climbs faster than rates down the curve.

Of course those holding Intl. bonds while rates went deeper negative or down benefited from NAV gains. Not sure if now is the time to get into them though.

And I might be wrong ... please correct me if you see where/how.
LOL. I would not even attempt to correct anything you just said, but what I was referring to is the still outstanding issue you pointed out in this post regarding short-term hedging somehow resulting in long-term interest-rate parity.
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Re: Doubting Your Portfolio Tilts

Post by saltycaper » Fri Nov 04, 2016 3:52 pm

investorguy1 wrote:
saltycaper wrote:
investorguy1 wrote:
abuss368 wrote:
neomutiny06 wrote: I agree. When will you add BNDX and how much will you allocate?
One interesting aspect is there are foreign companies with bonds issued in the U.S. that are included in Total Bond. On the flip side, Apple, Berkshire, etc. have issued bonds in Europe and Asia and those bonds are in the Total International Bond Index fund. We live in a global world.
An argument against international bonds I've read on this site that I find compelling is that basically with investment grade bonds your expected return is about what the yield is. With international you are getting a lower yield, lower average credit quality and a longer duration for a higher cost. So why would you want that?
It's not so simple with the currency hedging. Some heavyweights here on the forum have tried to crack this nut, but without Vanguard's help, I don't think we'll get a firm grasp on how their Int'l Bond Index fund really works.
Could you give me a little more info or links on what I'm missing?
Besides the post I just linked to above, there's a good discussion here: Those with negative yields on international bonds take heart
Quod vitae sectabor iter?

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Re: Doubting Your Portfolio Tilts

Post by Aptenodytes » Fri Nov 04, 2016 4:23 pm

To take the criticisms to a higher level of generality, the thought process recommended by the OP is a horrible way to make almost any decision you can think of. It leads you to fall victim to something like a one-person variant of Arrow's Impossibility Theorem. No matter what investment approach you choose, there will always be some alternative that you cannot be 100% sure won't perform better. The OP's approach dooms you to reject an endless stream of investment strategies.

Moreover, I'd suggest that the impulse behind the post is antagonistic to the core Boglehead philosophy which contains the maxim "stay the course." If you want to be our coach you should be saying "Stop Doubting Your Portfolio Tilts." Or do what Taylor helpfully does and periodically share time-tested gems of good advice.

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Re: Doubting Your Portfolio Tilts

Post by czeckers » Fri Nov 04, 2016 5:33 pm

Rephrased that for you. Have you ever seen someone on this forum advocate tilting to an investor at risk of capitulating? It's no more an argument against tilting than suggesting someone blind not get behind the wheel is an argument against driving.[/quote]

I agree with you that blind people shouldn't drive.

People who aren't absolutely convinced that there is a real reason why tilts should work in the long run, shouldn't tilt.

We buy stocks even though they are considerably riskier than bonds because there are very good reasons to believe that in the long run, stocks should outperform bonds or cash. You need the same conviction to tilt.
The Espresso portfolio: | | 16% LCV, 16% SCV, 16% EM, 8% Int'l Value, 8% Int'l Sm, 8% US REIT, 8% Int'l REIT, 20% Inter-term US Treas | | "A journey of a thousand miles begins with a single step."

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Re: Doubting Your Portfolio Tilts

Post by grap0013 » Fri Nov 04, 2016 9:52 pm

I'd say SCV has a 90% chance of outperforming TSM over the next 20 years. If SCV does underperform it won't be by much and I won't notice. I don't have any large caps other than EM value. I don't look at large cap performance either. I have no idea if SCV has done better than the TSM the past 3 or 5 years.
There are no guarantees, only probabilities.

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Re: Doubting Your Portfolio Tilts

Post by nedsaid » Fri Nov 04, 2016 10:01 pm

neomutiny06 wrote:I understand all of the research on small-caps outperforming large caps over the long-term (especially small-cap value). I know many here tilt their portfolio away from the market-cap weights.

But I am not 100% convinced that small-caps will continue to outperform in the future. Say I'm 80% or 90% convinced...this would still cause me to doubt my portfolio during a major downturn. I don't know how I would behave.

For that simple reason, I have a vanilla, market-cap weighted portfolio without any tilts to value or small-cap.

I think more Bogleheads who tilt should make sure that they are 100% certain that those segments will outperform in the future. If you aren't 100%, time to trust in the good 'ol market-cap world index.
Whatever good investment approach you choose, it is important to have strong convictions behind it and stick with it through thick and thin. Whatever you do, don't change your investment approach every time you read a compelling investment book, you will wind up making changes at the worst possible time. Changing investment strategies is really a form of performance chasing and we all know how that goes.

If you have chosen not to tilt, that is okay. What you are doing is plenty good enough.
A fool and his money are good for business.

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Re: Doubting Your Portfolio Tilts

Post by tooluser » Fri Nov 04, 2016 11:34 pm

I have a
1/3 vanilla
1/3 chocolate
1/3 strawberry, rocky road, and butter brickle
portfolio

I'm not kidding, just being figurative. I like ice cream but don't eat it all that often. :mrgreen: And note that there is no garlic-anchovy or matter-antimatter ice cream in that portfolio.

Even the most conservative industries (medical equipment and space launch) only plan to a Gaussian 3-sigma reliability (99.73%) in the final product.

No one is right all the time, and acknowledging that allows you to adjust as circumstances change.
Had we come a little later, we'd have seen a better crater. -- M.P., Sept 1886 (on Kilauea)

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Re: Doubting Your Portfolio Tilts

Post by avenger » Sat Nov 05, 2016 3:05 am

neomutiny06 wrote:I understand all of the research on small-caps outperforming large caps over the long-term (especially small-cap value). I know many here tilt their portfolio away from the market-cap weights.

But I am not 100% convinced that small-caps will continue to outperform in the future. Say I'm 80% or 90% convinced...this would still cause me to doubt my portfolio during a major downturn. I don't know how I would behave.

For that simple reason, I have a vanilla, market-cap weighted portfolio without any tilts to value or small-cap.

I think more Bogleheads who tilt should make sure that they are 100% certain that those segments will outperform in the future. If you aren't 100%, time to trust in the good 'ol market-cap world index.
This is exactly why I chose a market cap approach.
cheers ... -Mark | "Our life is frittered away with detail. Simplify. Simplify." -Henry David Thoreau | [3 fund portfolio: VTI, VXUS, SV fund (yield 3.01%)]

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Re: Doubting Your Portfolio Tilts

Post by xjz » Sat Nov 05, 2016 4:16 am

neomutiny06 wrote:But I am not 100% convinced that small-caps will continue to outperform in the future. Say I'm 80% or 90% convinced...this would still cause me to doubt my portfolio during a major downturn. I don't know how I would behave.

For that simple reason, I have a vanilla, market-cap weighted portfolio without any tilts to value or small-cap.

I think more Bogleheads who tilt should make sure that they are 100% certain that those segments will outperform in the future. If you aren't 100%, time to trust in the good 'ol market-cap world index.
This seems predicated on the assumption that people must always benchmark portfolio performance against a market-cap weighted reference. That doesn't have to be the case - because why should I care about the performance of a portfolio that isn't mine? There will always be portfolios that outperform mine. All that matters to me is that I remain content with the characteristics of my own portfolio, and that I do not tempt myself to tweak it and lock in losses in the process. (Stay the course, whichever course you like.)

If you find that contentment in a total global market-cap strategy (as many people do), go for it. If you find it in a US-tilted strategy (as many others do), go for that instead. If you find it in a small-cap-value-tilted strategy (as some others do), run with it.

Full disclosure: I actually agree with you; small-cap-value-tilting has always seemed like performance-chasing to me. I accept the chance that I will miss out on bonus returns, and I view it simply as a potential expense (relative to my favored market-cap portfolio) paid for peace of mind. My investment goals are to have enough money, not the most possible money.

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Re: Doubting Your Portfolio Tilts

Post by Robert T » Sat Nov 05, 2016 4:39 am

.
1. In finance – “There is no certainty, only probabilities, and you go where they are the highest” – Bill Bernstein. If there were certainties there would be no risk and no associated risk premiums. Where are probabilities highest? See Table 2, page 12 https://us.dimensional.com/pdf/Volatili ... emiums.pdf (at least according to Fama-French).

2. "Tracking-error" - return deviations from the market - is larger for larger portfolio tilts away from the market, almost by definition. If you cannot tolerate tracking-error (if your conviction is not strong enough), then don't deviate from the market - but be sure to have your stock:bond allocation right to help you stay the course in 2008-type environments.

3. How can you strengthen conviction to stay the course? David Swensen's answer: “Devoting significant time and energy to the science and art of designing long-term portfolio targets increases the likelihood that investors will develop the conviction necessary to maintain a steady long-term course amid the turbulent crosscurrents endemic to security markets.” .... “Investment success requires the conviction that comes from a fundamental understanding of the rationale for building the portfolio to certain specifications.”

For me, there is sufficient evidence (fundamental characteristics) to expect a long-term equity, size, value and term premium - and this conviction has been sufficient to maintain the same equity, size, value, and term exposure over the last 14 years. So far so good. No plans to change anytime soon.

Robert
.

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Re: Doubting Your Portfolio Tilts

Post by Johnnie » Sat Nov 05, 2016 9:50 am

"But I am not 100% convinced that small-caps will continue to outperform in the future."

Heck, I'm not 100% convinced the sun will come up tomorrow, although past performance has been phenomenally reliable and confidence is high...
Robert T wrote: In finance – “There is no certainty, only probabilities, and you go where they are the highest” – Bill Bernstein.
What he said.

Unfortunately the track record for equity markets and value tilts is nowhere near as extensive as old Sol's, but you still go with the best evidence you have, hope it's still relevant, and hope for the best. <shrug>
"I know nothing."

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Re: Doubting Your Portfolio Tilts

Post by oldcomputerguy » Sat Nov 05, 2016 10:13 am

neomutiny06 wrote:I understand all of the research on small-caps outperforming large caps over the long-term (especially small-cap value). I know many here tilt their portfolio away from the market-cap weights.

But I am not 100% convinced that small-caps will continue to outperform in the future.
Past Performance Is No Guarantee Of Future Returns.

This is exactly what that phrase means.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: Doubting Your Portfolio Tilts

Post by ruralavalon » Sat Nov 05, 2016 10:15 am

neomutiny06 wrote:I understand all of the research on small-caps outperforming large caps over the long-term (especially small-cap value). I know many here tilt their portfolio away from the market-cap weights.

But I am not 100% convinced that small-caps will continue to outperform in the future. Say I'm 80% or 90% convinced...this would still cause me to doubt my portfolio during a major downturn. I don't know how I would behave.

For that simple reason, I have a vanilla, market-cap weighted portfolio without any tilts to value or small-cap.

I think more Bogleheads who tilt should make sure that they are 100% certain that those segments will outperform in the future. If you aren't 100%, time to trust in the good 'ol market-cap world index.
You are over thinking this in my opinion.

If you don't want to tilt, don't tilt. If you think that being only 80-90% convinced would "cause [you] to doubt [your] portfolio during a major downturn" and you might behave poorly, then don't tilt.

For myself, I know that nothing is 100% certain in investing or in life in general. If I insisted on 100% certainty I wouldn't be investing at all.

We do have tilts to small-cap value and REIT, but 70% of our stocks are in total stock market index funds.
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Re: Doubting Your Portfolio Tilts

Post by investorguy1 » Sat Nov 05, 2016 6:29 pm

neomutiny06 wrote:...Say I'm 80% or 90% convinced...
If you are 80% or 90% convinced that SCV has an above average chance of outperforming then maybe you shouldn't do it.

If you are 100% sure that SCV has an 80%-90% chance out outperforming over your investment lifetime and sure you can withstand 15 years of under performance than go for it.

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Re: Doubting Your Portfolio Tilts

Post by grap0013 » Sun Nov 06, 2016 7:12 am

investorguy1 wrote:
neomutiny06 wrote:...Say I'm 80% or 90% convinced...
If you are 80% or 90% convinced that SCV has an above average chance of outperforming then maybe you shouldn't do it.

If you are 100% sure that SCV has an 80%-90% chance out outperforming over your investment lifetime and sure you can withstand 15 years of under performance than go for it.
If you are 80% or 90% convinced that TSM has an above average chance of outperforming bonds then maybe you shouldn't do it.

If you are 100% sure that TSM has an 80%-90% chance out outperforming bonds over your investment lifetime and sure you can withstand 15 years of under performance than go for it.

Same logic. Plus one does not need to wait 15 years. Does one asset literally underperform another each and every year for 15 years straight? No. SCV is doing better than TSM this year. Sometimes it will not. It definitely diversifies your return stream.
There are no guarantees, only probabilities.

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Re: Doubting Your Portfolio Tilts

Post by longinvest » Sun Nov 06, 2016 8:58 am

grap0013 wrote:SCV is doing better than TSM this year. Sometimes it will not. It definitely diversifies your return stream.
Technically speaking, adding SCV in addition to TSM in a portfolio concentrates the portfolio, and thus the return stream, because SCV is a subset of TSM. It makes the portfolio more subject to the behavior of a set of securities representing a very small part (in terms of market weight) of the entire market (TSM). :wink:

Of course, the hope of SCV investors, based on statistical analysis of past returns, is that SCV outperforms TSM in the long term. That's fine. But, I don't think that redefining the meaning of "diversification" and "concentration" is necessary.

If I'm right, small caps (and micro caps) are defined by CRSP as the smallest securities representing 15% of the weight of the entire market. If we pick, within these securities, the ones with the best value metrics representing the third of the small+micro market weight, we end up with SCV representing 5% of the entire market (TSM).

There can only be at most 5% of the market's dollars invested into SCV, no matter how one puts it. So, all SCV investors must compete to buy into this small part of the market. Given the popularity of SCV (every other day, there's a new article about it in the financial press), that makes a lot of people wanting to invest into this 5% of the market.

Good luck!
Last edited by longinvest on Sun Nov 06, 2016 9:23 am, edited 5 times in total.
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Re: Doubting Your Portfolio Tilts

Post by Johnnie » Sun Nov 06, 2016 9:15 am

BTW, 20 percent of my equities are in VSIAX "the old fashioned way," not from any deliberate decision to tilt: It's a position I've been accumulating for 20 years, since long before I discovered disciplined buy-hold-rebalance investing.

Originally it was in active fund from a previous employer's 410k, but when Bogleheadness knocked me off my horse on the road to Damascus I transferred it to the VG index.

Here's my challenge/question: I don't mind being tilted that much, but if I did would it prudent at this point to lighten up? You know the routine: An investor adopts a tilt for years, gets frustrated by underperfomance, sells out and - wham - the asset class then goes on a multi-year tear.
"I know nothing."

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Re: Doubting Your Portfolio Tilts

Post by investorguy1 » Sun Nov 06, 2016 10:04 am

grap0013 wrote:
investorguy1 wrote:
neomutiny06 wrote:...Say I'm 80% or 90% convinced...
If you are 80% or 90% convinced that SCV has an above average chance of outperforming then maybe you shouldn't do it.

If you are 100% sure that SCV has an 80%-90% chance out outperforming over your investment lifetime and sure you can withstand 15 years of under performance than go for it.
If you are 80% or 90% convinced that TSM has an above average chance of outperforming bonds then maybe you shouldn't do it.

If you are 100% sure that TSM has an 80%-90% chance out outperforming bonds over your investment lifetime and sure you can withstand 15 years of under performance than go for it.

Same logic. Plus one does not need to wait 15 years. Does one asset literally underperform another each and every year for 15 years straight? No. SCV is doing better than TSM this year. Sometimes it will not. It definitely diversifies your return stream.
You are right. What I meant to say is if you are not 100% sure that a SCV premium exists then there is a higher chance you won't stick to it. If on the other hand you are 100% sure that it exists and realize that there still is a chance that it won't work out in your favor that would be a reason to use a SCV tilt.

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Re: Doubting Your Portfolio Tilts

Post by heyyou » Sun Nov 06, 2016 11:28 am

I think more Bogleheads who tilt should make sure that they are 100% certain that those segments will outperform in the future. If you aren't 100%, time to trust in the good 'ol market-cap world index.
You lost me at "I think" and I "should."
I think that I should do what suits me.
Broad diversification and low costs matter. Note that does not say total market, cap-weighted, nor lowest cost are the only acceptable choices.

McClung in Living Off Your Money tested each of the equity sub-asset size and value classes as individual retirement portfolios, then ordered them by performance. Guess what was next to the last performer of small growth stocks, second worst was large growth. It is known that if trading costs were negligible, that equal weighted total market is the better performer. With slightly higher costs, equal slices of the equity sub-asset classes is a diversified alternative to total market, that suits me.

Since the 2000 Crash, I am tilting away from Large Growth. I no longer trust the wisdom of the crowd when they are buying whatever recently went up the most. I'm not trying to boost performance with a Small Value tilt, my 1/N portfolio is equal slices including some Large Growth in the Large Cap fund. I am responsible for my allocation, and I have to live with the results. So far, we retired a decade ago at age 55 with a small no-COLA pension. Since then, in spite of our progressively larger withdrawals, the barely two comma portfolio has almost stayed up with inflation so we are happy with our good enough results.

Perhaps others should do whatever suits them, since staying the course in down markets is more important than the percentage variations in allocations. The allocation is not paramount, but broad diversification, low costs, and staying the course are.

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