Thoughts about tilting away from the sector you work in?

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smesman
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Thoughts about tilting away from the sector you work in?

Post by smesman » Tue Jun 20, 2017 2:20 pm

So let's say you own part of a business or you're only trained to work in one specific sector.

Would it make sense to reduce your exposure to that sector of the TSM? (To reduce correlation)

And if one were to attempt this, what would be the best way to reduce ones exposure to that sector? Would you approximate the TSM by using Vanguard sector ETFs in the percentages of the TSM sans your sector, or is there an easier way.

delamer
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Re: Thoughts about tilting away from the sector you work in?

Post by delamer » Tue Jun 20, 2017 2:30 pm

I bought an index ETF that takes out the telecom sector because I inherited a portfolio significantly overweighted in individual stocks in that sector. (Did not get a cost basis step-up due to bypass trust so selling all telecom shares was not tax efficient).

There are similar ETFs excluding other sectors.

In your case, how big a portion of the total market is your work sector? If it is 20% then I could see making some kind of an adjustment. If it is 6%, I wouldn't bother.

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Re: Thoughts about tilting away from the sector you work in?

Post by rkhusky » Tue Jun 20, 2017 2:34 pm

If you are currently in Total Stock Market, that seems like too much work for too little gain. Perhaps you could find a fund that shorts your sector and see if the cost is worth it.

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Re: Thoughts about tilting away from the sector you work in?

Post by smesman » Tue Jun 20, 2017 2:36 pm

Personally I work in a tech startup (18,2% of the TSM) that partially pays me in stock options. So theoretically, if the tech sector crashes similar to the dotcom bubble I could lose that part of the TSM, my job and my options become worthless. OTOH tech is so integrated in all parts of life nowadays it seems like it should have a pretty high correlation to the stock market overall. But I'm really curious to your opinions.

delamer
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Re: Thoughts about tilting away from the sector you work in?

Post by delamer » Tue Jun 20, 2017 2:41 pm

smesman wrote:Personally I work in a tech startup (18,2% of the TSM) that partially pays me in stock options. So theoretically, if the tech sector crashes similar to the dotcom bubble I could lose that part of the TSM, my job and my options become worthless. OTOH tech is so integrated in all parts of life nowadays it seems like it should have a pretty high correlation to the stock market overall. But I'm really curious to your opinions.
Yes, I'd take some action to tilt away from tech in your situation. The question is, how much?

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Re: Thoughts about tilting away from the sector you work in?

Post by TD2626 » Tue Jun 20, 2017 8:49 pm

This is something that may be theoretically justified but is pretty hard to accomplish.

In theory, accomplishing this would involve things like (in order of most to least reasonable)
1. Hold as little employer stock as you are able to
2. Buy sector funds of major other sectors
3. Have a passive, buy and hold individual stock portfolio of stocks that aren't in the sector of employment
4. Do more complex things.

I feel that option 1 is certainly a good idea. If the employer is paying employees in stock, of course take the money (or even consider it if the employer is subsidizing/substantially discounting purchase of stock). However, while working within the rules of the employer, keep exposure to employer stock at a minimum.

Option 2 may also be somewhat reasonable. One could hold a portfolio of mostly TSM but also add small allocations to a few large, very unrelated sectors. Make these buy-and-hold, not speculative of course.

Option 3 is more complex and difficult, though passively buying and holding 3-4 large stocks from 5-7 sectors (except your employer's), while also having most of the portfolio in index funds, may be reasonable. The vast majority should not do this due to the risks. Only those with high complexity tolerance and a desire for more direct approach can begin to justify this. Index funds are simple. Building your own fund is not.

Option 4 should not be attempted. Things like shorts, options, etc should not belong in a individual investor's toolbox in my opinion. They are too risky and too complex to be worth it.

Note that it probably would be very unwise to have a full zero allocation to your employer's sector. That's why having a most in TSM is probably best. There is a strong chance that the employer does poorly while the rest of the industry does well (or vice versa).

Oh, and it is very, very important to limit any individual stock to a very small percentage of a portfolio. 3 to 5% should be the limit. If employer stock gets up that high, it should be worrisome. If you can't do anything about it due to non-vested options, OK... but this is the sort of scenario (concentrated diversifiable risk) where under performing the market can easily happen.

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Re: Thoughts about tilting away from the sector you work in?

Post by TheRightKost87 » Tue Jun 20, 2017 8:57 pm

I also work in tech. I don't purposefully tilt away from tech, however I do have a pretty strong value tilt to my equity allocation. Since tech has more growth companies and less value companies, I've ended up with a slight de facto tilt away from the tech sector.
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Re: Thoughts about tilting away from the sector you work in?

Post by avalpert » Tue Jun 20, 2017 8:59 pm

Company specific risks are far more likely to sink your business than sector-wide risks - tilting away from the entire sector seems unwarranted and probably unwise.

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Re: Thoughts about tilting away from the sector you work in?

Post by grabiner » Tue Jun 20, 2017 9:03 pm

It also depends on how much your career is tied to the industry; this depends on your job as well as the industry. If you work in a retail store, your job is tied more to your own store than to the retail sector as a whole. If you are a computer programmer or a secretary working at an oil company, you could probably work in another industry if oil prices fall; if you are a petroleum engineer or a geologist, your fortunes are tied much more to the industry.
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Re: Thoughts about tilting away from the sector you work in?

Post by AlohaJoe » Tue Jun 20, 2017 9:51 pm

TD2626 wrote:This is something that may be theoretically justified but is pretty hard to accomplish.
I agree with this. It is common to see finance authors say to take your human capital into account when creating a portfolio but it is almost always useless handwaving. The most serious attempt I've seen is from the paper "No Portfolio Is An Island" where (after some other steps) the authors find the following portfolios are "best" based on the sector you work in

Image

It generally results in higher allocation to small value, large growth, and commodities (and none at all to REITs for anyone). It also generally includes a lot more Long Bonds that people recommend. For instance, for someone in the Construction industry it recommends:

- 15% intermediate bond
- 20% long bond
- 20% TIPS
- 2% high yield bond
- 13% international bond
- 20% small value
- 7% large growth

Overall, it is around 30% equity (almost all in Small Value) and 70% bonds of various sorts.

On the other hand, someone working on Manufacturing would have:

- 18% cash
- 12% TIPS
- 3% high yield bond
- 20% large growth
- 16% small growth
- 20% small value
- 10% commodities

That's almost the complete opposite with about 70% equities and 30% bonds.

Honestly, I don't really know what to make of that except it seems like taking human capital into account isn't a matter of small tweaks. But I also don't really have confidence that the portfolios above are "correct", either. So small tweaks don't help and I'm not confident in big changes. So.....do nothing.

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Re: Thoughts about tilting away from the sector you work in?

Post by TD2626 » Tue Jun 20, 2017 10:24 pm

At a minimum, this sort of idea would probably require 5-8 sector funds or 15-30 individual stocks, and a lot of work and complexity.

A tenant of the Boglehead philosophy is simplicity, and getting every sector fund (save one) doesn't really adhere to that very well.

Of course, if one's willing to stomach that level of complexity and has the ability to stay the course and rebalance a very complex portfolio, this sort of thing likely would help in theory... but the mechanics are so hard that this may be a case of "works in theory but not in practice".

It's worth noting that most probably do nothing.

Also - do you tilt away from companies headquartered in your state/region/country? Because each person's job prospects are correlated to the situation in one's own state/region/country. I have heard of someone suggesting 60% international for this sort of reason but doing that sort of thing is rare for obvious reasons.

I would caution against any fund or ETF that claims that it invests in every sector except one. It may be possible to find such a fund/ETF but it's probably a bad investment due to a high expense ratio or due to it being thinly traded. If someone has ideas along these lines, though, it would be interesting to hear about them.

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Re: Thoughts about tilting away from the sector you work in?

Post by delamer » Tue Jun 20, 2017 10:28 pm

TD2626 wrote:At a minimum, this sort of idea would probably require 5-8 sector funds or 15-30 individual stocks, and a lot of work and complexity.

A tenant of the Boglehead philosophy is simplicity, and getting every sector fund (save one) doesn't really adhere to that very well.

Of course, if one's willing to stomach that level of complexity and has the ability to stay the course and rebalance a very complex portfolio, this sort of thing likely would help in theory... but the mechanics are so hard that this may be a case of "works in theory but not in practice".

It's worth noting that most probably do nothing.

Also - do you tilt away from companies headquartered in your state/region/country? Because each person's job prospects are correlated to the situation in one's own state/region/country. I have heard of someone suggesting 60% international for this sort of reason but doing that sort of thing is rare for obvious reasons.

I would caution against any fund or ETF that claims that it invests in every sector except one. It may be possible to find such a fund/ETF but it's probably a bad investment due to a high expense ratio or due to it being thinly traded. If someone has ideas along these lines, though, it would be interesting to hear about them.
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Re: Thoughts about tilting away from the sector you work in?

Post by JaneyLH » Wed Jun 21, 2017 10:14 am

delamer wrote:
smesman wrote:Personally I work in a tech startup (18,2% of the TSM) that partially pays me in stock options. So theoretically, if the tech sector crashes similar to the dotcom bubble I could lose that part of the TSM, my job and my options become worthless. OTOH tech is so integrated in all parts of life nowadays it seems like it should have a pretty high correlation to the stock market overall. But I'm really curious to your opinions.
Yes, I'd take some action to tilt away from tech in your situation. The question is, how much?
+1

I lost about $1.5M when the bubble burst. I finally sold when the share price went from $52 to $16. Eventually it went to $2. Fortunately I took some out along the way and paid off my mortgage. The majority of my retirement portfolio, though, is from my IRA and 401(k) contributions.

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Re: Thoughts about tilting away from the sector you work in?

Post by Phil DeMuth » Wed Jun 21, 2017 11:26 am

The technology is not really there to make this convenient for most investors. While we wait, I think the pretty-good workaround is through beta. If you are in a high-beta industry (presumably with a high-beta career), you should invest low-beta in compensation. If you are in a low-beta sector with a low-beta career, then you can take on more market risk in your portfolio. This could be done simply by adjusting your stock:bond allocation, or by seeking out low- or high-beta funds themselves.
Consider my friend who is a bankruptcy attorney, for example. His career has high negative beta. He thrives when the market falls apart. This lets him invest very aggressively on the stock side.

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Re: Thoughts about tilting away from the sector you work in?

Post by Phineas J. Whoopee » Wed Jun 21, 2017 12:07 pm

I think it's worth noticing. The most I ever did in practice was to reduce and when good opportunity arose eliminate holdings in my employer's stock, acquired via option and restricted share grants, that sort of thing. I'm certainly grateful to have had the opportunity to be awarded them.
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Re: Thoughts about tilting away from the sector you work in?

Post by gclancer » Wed Jun 21, 2017 12:11 pm

TheRightKost87 wrote:I also work in tech. I don't purposefully tilt away from tech, however I do have a pretty strong value tilt to my equity allocation. Since tech has more growth companies and less value companies, I've ended up with a slight de facto tilt away from the tech sector.
+1 these were my thoughts - if you believe in tilting towards value (or can convince yourself of the merits) you would indirectly accomplish your goal to an extent.

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Re: Thoughts about tilting away from the sector you work in?

Post by smesman » Wed Jun 21, 2017 2:03 pm

TD2626 wrote:2. Buy sector funds of major other sectors
...

Option 2 may also be somewhat reasonable. One could hold a portfolio of mostly TSM but also add small allocations to a few large, very unrelated sectors. Make these buy-and-hold, not speculative of course.

Option 3 is more complex and difficult, though passively buying and holding 3-4 large stocks from 5-7 sectors (except your employer's), while also having most of the portfolio in index funds, may be reasonable. The vast majority should not do this due to the risks. Only those with high complexity tolerance and a desire for more direct approach can begin to justify this. Index funds are simple. Building your own fund is not.
This is an interesting idea. If you could hold the index plus part of the "opposite" sectors of the one you're working in that would be very cheap and easy to manage. I tried putting all of the sectors into portfolio visualizer and got this (over 2004-2017):

Image

So for example, for the tech sector it would seem like Utilities (0.40), Energy (0.57) and REITs (0.63) and I guess most of the "defensive" sectors are the most unrelated and could be overweighted until the tech sector is reduced by the percentage I own in it.

I guess you could take this further and actually not own your sector at all PLUS overweight the non-correlated sectors, to hedge against a situation where your sector tanks and you're forced to get a low-paying job in another sector.

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Re: Thoughts about tilting away from the sector you work in?

Post by jebmke » Wed Jun 21, 2017 2:32 pm

My wife worked as a portfolio manager for a small firm managing equity. All of her bonus, profit sharing and pension was deferred and put in a small cap value pool. Because of this exposure, we carried a fairly high bond allocation while she was working.
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Re: Thoughts about tilting away from the sector you work in?

Post by smesman » Wed Jun 21, 2017 2:38 pm

TD2626 wrote:Of course, if one's willing to stomach that level of complexity and has the ability to stay the course and rebalance a very complex portfolio, this sort of thing likely would help in theory... but the mechanics are so hard that this may be a case of "works in theory but not in practice".
Yeah complexity is definitely an issue. You wouldn't need to rebalance between sectors (since they are cap weighted, like the TSM) but you would still need to sell from all of them in order buy more bonds. Then as you approach retirement/your goal you should probably slowly start converting to the TSM as the industry you worked in becomes less important.
Also - do you tilt away from companies headquartered in your state/region/country? Because each person's job prospects are correlated to the situation in one's own state/region/country. I have heard of someone suggesting 60% international for this sort of reason but doing that sort of thing is rare for obvious reasons..
I think you want your assets to be somewhat correlated to your country, since say your country is doing very well and house prices and expenses shoot up you will need more money. But on the other hand if you lose your earning power you want as much uncorrelated assets as humanly possible. The 50-50 int/local split seems reasonable.

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Re: Thoughts about tilting away from the sector you work in?

Post by smesman » Wed Jun 21, 2017 2:45 pm

Nice find. This seems perfect except for the fact that it only has $1,2M in assets and a TER of 0.27%. Not a great choice for your core holdings.

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Re: Thoughts about tilting away from the sector you work in?

Post by TD2626 » Wed Jun 21, 2017 8:15 pm

smesman wrote:
Nice find. This seems perfect except for the fact that it only has $1,2M in assets and a TER of 0.27%. Not a great choice for your core holdings.
I agree it's an interesting find - interesting to know about. But not a good choice for a core holding. Having it as a core holding would involve holding an enormous fraction of the fund's total assets - possibly even over half! In TSM, each individual is a drop in the bucket.

The 0.27% expense ratio was actually better than what I was expecting - but still very pricey compared to a plain old S&P or TSM fund. At least it's not 1% or something. Of course, it's an ETF not a mutual fund so that's probably why it has those levels of fees. The bid-ask spread is likely where investors would be squeezed here.

smesman wrote:
TD2626 wrote:Of course, if one's willing to stomach that level of complexity and has the ability to stay the course and rebalance a very complex portfolio, this sort of thing likely would help in theory... but the mechanics are so hard that this may be a case of "works in theory but not in practice".
Yeah complexity is definitely an issue. You wouldn't need to rebalance between sectors (since they are cap weighted, like the TSM) but you would still need to sell from all of them in order buy more bonds. Then as you approach retirement/your goal you should probably slowly start converting to the TSM as the industry you worked in becomes less important.
Good point about slowly converting to TSM. Anyone attempting this sort of strategy would have to think about that sort of thing.

smesman wrote:
TD2626 wrote:Also - do you tilt away from companies headquartered in your state/region/country? Because each person's job prospects are correlated to the situation in one's own state/region/country. I have heard of someone suggesting 60% international for this sort of reason but doing that sort of thing is rare for obvious reasons..
I think you want your assets to be somewhat correlated to your country, since say your country is doing very well and house prices and expenses shoot up you will need more money. But on the other hand if you lose your earning power you want as much uncorrelated assets as humanly possible. The 50-50 int/local split seems reasonable.
I think assets should have low correlation to the country one lives in - if there's a crash in domestic markets, it means there's a decent chance you've lost your job and need to draw on your investments. That being said, you'd draw on emergency funds, not stocks, first. Also, international stock takes on currency risk and political/country risks. Cap weight (currently close to 50/50) is something that seems reasonable. Those with zero to 20% international could probably benefit from tilting more away from the sector of the globe in which they work, though.

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Re: Thoughts about tilting away from the sector you work in?

Post by RudyS » Wed Jun 21, 2017 9:08 pm

Phineas J. Whoopee wrote:I think it's worth noticing. The most I ever did in practice was to reduce and when good opportunity arose eliminate holdings in my employer's stock, acquired via option and restricted share grants, that sort of thing. I'm certainly grateful to have had the opportunity to be awarded them.
PJW
I lived in a "company town" working for megacorp. I also sold stock shares, etc., since I thought that if the company has problems, not only would the stock go down, my job could disappear, and I'd have problems selling my house. Diversity is good.

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Re: Thoughts about tilting away from the sector you work in?

Post by Theoretical » Fri Jun 23, 2017 12:36 am

While we wait, I think the pretty-good workaround is through beta. If you are in a high-beta industry (presumably with a high-beta career), you should invest low-beta in compensation. If you are in a low-beta sector with a low-beta career, then you can take on more market risk in your portfolio. This could be done simply by adjusting your stock:bond allocation, or by seeking out low- or high-beta funds themselves.
Consider my friend who is a bankruptcy attorney, for example. His career has high negative beta. He thrives when the market falls apart. This lets him invest very aggressively on the stock side.
I think this is really insightful. One could also argue for or against momentum/value. I have to whistle at your friend's portfolio insight there. Bankruptcy lawyer and aggressive stock allocation=win.

For example, an executive at a classic small value company (boring manufacturing concern in the Rust belt) could well be considering mid-large momentum, or conversely a key figure in a hotshot biotech company could tilt small (or large) value.

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Re: Thoughts about tilting away from the sector you work in?

Post by itstoomuch » Fri Jun 23, 2017 1:11 am

Our son who is in tech, does the traditional major vanguard funds, total, mid and value (no bonds) and his discretionary investments are individual tech stocks and a couple of blackrock indexes. He has been fortunate that he started major investing in 2008. His portfolios would still look good in if a major correction happened tomorrow.
IOW, it's when you started in the cycle of investing that sometimes matters.
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Re: Thoughts about tilting away from the sector you work in?

Post by Phineas J. Whoopee » Sat Jun 24, 2017 5:00 pm

itstoomuch wrote:Our son who is in tech, does the traditional major vanguard funds, total, mid and value (no bonds) and his discretionary investments are individual tech stocks and a couple of blackrock indexes. He has been fortunate that he started major investing in 2008. His portfolios would still look good in if a major correction happened tomorrow.
IOW, it's when you started in the cycle of investing that sometimes matters.
I don't understand how the dollars in their unit-of-account sense can tell the difference between starting at one time and starting at another. They're all identical and neither know nor care. I believe the shares themselves don't know or care either.
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Re: Thoughts about tilting away from the sector you work in?

Post by nisiprius » Sat Jun 24, 2017 6:08 pm

I think it's meaningless over-refinement.

In one direction, certainly, a heavy tilt toward, not only the sector, but the company you work in--as with someone who puts half or all of their 401(k) in their company stock--is a bad idea.

On the other hand, the sector breakdown of the Vanguard Total Stock Market Index Fund looks like this:

Image

The largest sector weighting is less than 20%, so you don't have more than 20% of your eggs in any sector basket.

Sectors are still stocks and share in the general behavior of the whole market. According to this article, out of nine sectors, seven had a correlation of 0.8 or more with the market; energy had a correlation of 0.72; utilities, 0.56. Unless you work in energy or utilities, your sector goes up and down generally with the market. For example, consider someone who works in healthcare. This PortfolioVisualizer chart shows the difference between the behavior of Total Stock and a hypothetical portfolio of 114% Total Stock and -14% VHT, the Vanguard Healthcare Index ETF, which is equivalent to removing the healthcare sector from Total Stock. Did it make a really important difference?

Image

Finally, you are one person, and the idiosyncratic risk of your individual career far exceeds the systematic risk of the sector you work in. Your ability to predict your personal career future and calculate on a spreadsheet how it fits into your retirement savings plan is limited.

If you lose your job, traditionally your buffer consists of 1) unemployment insurance, and 2) near-cash savings in your emergency fund. Neither of these is sector-specific. If things get to the point where you are going to have to dip into the stock funds in your retirement savings, that's pretty bad. If that happens, I don't think it is hugely important whether your stocks have lost, say, -52.97% or only -50.89%.
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Re: Thoughts about tilting away from the sector you work in?

Post by smesman » Mon Jun 26, 2017 3:06 pm

I think the low/high beta is an interesting perspective. If you're earning a lot of money in a "risky" career your need to take risk in the form of stocks should be less.

I understand your position that a job in IT is not necessarily tied to the "tech" sector per se, and even if it is then the tech sector has a quite high correlation to the TSM. With 50% intl and a bond allocation, the 1~2% extra harm is probably neglible.

I tried the same as your example but with the financial sector (TSM vs TSM - 20% financials) and had somewhat similar results. There is a difference but not shockingly so. Perhaps if your job is really correlated to your sector (e.g. being on the board of a company with a large % of the sector), it might be a good idea to hedge against it:

Image

Anyway thank you, I appreciate all your insights.

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Re: Thoughts about tilting away from the sector you work in?

Post by tup45678 » Mon Jun 26, 2017 8:24 pm

I think tilting away from the sector you work in is an interesting thought experiment but not especially practical or wise. You run into the following options:

1. You work in such a large and well-defined sector of the economy (tech, finance, etc.) that any sector recession surely spills over into the rest of the market (tech meltdown of 2001, real estate collapse of 2008, etc.) making your tilt away moot.

2. You work in such a small and isolated sector of the economy that there aren't many public companies that capture your area of the economy making a tilt away expensive and imprecise.

I think the much more actionable question is the value of your primary residence if you work in your area's predominant industry or employer. Let's say you own a house in Silicon Valley and work in tech or own a house in a coal mining town and work in the mine, if you're out of a job as a result of a local downturn, not only did your income dry up, but there's a real chance that the value of your primary residence could crater as well. Trying to live in areas with a well-diversified economy I would imagine makes property values less exposed to downside tail risk.

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Re: Thoughts about tilting away from the sector you work in?

Post by Engineer250 » Tue Jun 27, 2017 10:58 am

I agree it's largely impractical and complicated for the benefit you'd gain from it.

Even if you work in "tech" the largest sector, not all tech is really one industry. Semiconductors/computer hardware is going to behave differently than a software company under certain circumstances.

I think it's more important to think about your labor capital. If you're an accountant and all if you've done is one particular type of accounting at once company for your whole career, you could benefit from training in other specialties and networking if you can. This could include something like volunteering at a non-profit along with formal education so you don't have to quit your day job. Career diversification would probably be more critical in a downturn than tilting away from your industry would be.
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Re: Thoughts about tilting away from the sector you work in?

Post by Tamales » Tue Jun 27, 2017 11:58 am

Speaking only for the tech sector, I have a hard time believing a chart of my lifetime compensation (generally with just once-a-year bumps), when compared to a daily chart of a tech sector index (or even a sub-index specific to the various companies I worked for), would have very strong correlation. The tech sector underwent extended periods of steep declines, and in the worst case my compensation over that same period remained flat (or sometimes even went up, depending on my personal accomplishments for the year). Conversely, when the tech sector underwent steep increases over multi-year periods, while my annual compensation also went up, I doubt it matched the rate. I also doubt promotions had any meaningful correlations to the market and were instead individual.

So I'd agree with Nisiprius' characterization. Lots of idiosyncratic factors unrelated to the market, and a meaningless over-refinement.

Plus, you could argue, this would be an area where financial advisors would advertise the heck out of their ability to do this for you, if there were data to strongly support its value. Think of all the trading costs and churn they could generate!

Edit to add: it might be possible that one's lifetime compensation serves as a decent inflation hedge, although you'd have to weight it as your portfolio contributions and returns varied over time. But that's a different question.

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Re: Thoughts about tilting away from the sector you work in?

Post by Top99% » Fri Jun 30, 2017 7:37 am

TheRightKost87 wrote:I also work in tech. I don't purposefully tilt away from tech, however I do have a pretty strong value tilt to my equity allocation. Since tech has more growth companies and less value companies, I've ended up with a slight de facto tilt away from the tech sector.
This is my situation as well. We have an employee stock purchase plan that allows us to put 10% of our salary into company stock at a 15% discount so I take advantage of that 15% risk free return without holding too much company stock by immediately selling the stock. At my previous employer I made the mistake of having way too much company stock when the music stopped during the tech bubble.
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Wagnerjb
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Re: Thoughts about tilting away from the sector you work in?

Post by Wagnerjb » Fri Jun 30, 2017 8:59 am

TD2626 wrote:This is something that may be theoretically justified but is pretty hard to accomplish.

In theory, accomplishing this would involve things like (in order of most to least reasonable)
3. Have a passive, buy and hold individual stock portfolio of stocks that aren't in the sector of employment

Option 3 is more complex and difficult, though passively buying and holding 3-4 large stocks from 5-7 sectors (except your employer's), while also having most of the portfolio in index funds, may be reasonable. The vast majority should not do this due to the risks. Only those with high complexity tolerance and a desire for more direct approach can begin to justify this. Index funds are simple. Building your own fund is not.
I use the option described above. However, I built my own individual stock portfolio for other reasons, primarily tax savings through tax loss harvesting, dividend minimization, gifting shares, donating shares, etc. There are other threads on this strategy. But given that I have an individual stock portfolio in my taxable account (holding US Large Caps), it is quite easy to simply avoid the industry of my employer (energy company). Living in Houston and being in energy means that your house, your job and your employer shares (stock options, restricted shares) are all highly sensitive to energy fortunes. Tilting away from energy made perfect sense.

I agree that tilting away from your employer is rather impractical for the vast majority of people, and I don't think it is worth the hassle unless you have a practical way to implement the strategy. In my case, I did.

Best wishes.
Andy

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TD2626
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Re: Thoughts about tilting away from the sector you work in?

Post by TD2626 » Fri Jun 30, 2017 11:22 pm

Wagnerjb wrote:
TD2626 wrote:This is something that may be theoretically justified but is pretty hard to accomplish.

In theory, accomplishing this would involve things like (in order of most to least reasonable)
3. Have a passive, buy and hold individual stock portfolio of stocks that aren't in the sector of employment

Option 3 is more complex and difficult, though passively buying and holding 3-4 large stocks from 5-7 sectors (except your employer's), while also having most of the portfolio in index funds, may be reasonable. The vast majority should not do this due to the risks. Only those with high complexity tolerance and a desire for more direct approach can begin to justify this. Index funds are simple. Building your own fund is not.
I use the option described above. However, I built my own individual stock portfolio for other reasons, primarily tax savings through tax loss harvesting, dividend minimization, gifting shares, donating shares, etc. There are other threads on this strategy. But given that I have an individual stock portfolio in my taxable account (holding US Large Caps), it is quite easy to simply avoid the industry of my employer (energy company). Living in Houston and being in energy means that your house, your job and your employer shares (stock options, restricted shares) are all highly sensitive to energy fortunes. Tilting away from energy made perfect sense.

I agree that tilting away from your employer is rather impractical for the vast majority of people, and I don't think it is worth the hassle unless you have a practical way to implement the strategy. In my case, I did.

Best wishes.
I read of your strategy from seeing a few old threads. I think it is quite interesting and unique - very well thought out and grounded in theory. I feel the strategy has many theoretical benefits to someone capable of implementing it consistently over the long term. It's pretty impressive that you've basically built your own low cost, broadly diversified fund.

Of course, it is a rare individual who can do that. By rare, I mean rare even on an investment forum. It requires a lot of patience, effort, consistency, and staying the course. One has to understand what is being done, and why - in order for it be a truly "passive" individual stock portfolio. I do think that the strategy as implemented is passive and completely consistent with the Boglehead approach.

It's best that inexperienced investors not attempt such an advanced strategy without more significant understanding of why they're doing it other than simply tilting away from an employer's sector. But for some, this strategy can work and can solve the problem the OP posed.

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