Very good points - I like the point about how a 3-fund portfolio should be seen as a benchmark for performance comparison. I like to think of it as a benchmark portfolio. My thinking is this, though - if it's so hard to beat the benchmark portfolio, why not own the benchmark portfolio?Random Walker wrote: ↑Wed Nov 22, 2017 12:01 amAs I’ve written many times in the past, costs are certain and potential benefits are only just that, potential. So it’s hard to go wrong with a low cost tax efficient TSM approach. I would consider that the benchmark for comparison. But take a look at my thread on volatility drag, or Larry’s short essay Efficient Diversification In A 3 Factor World, or the central chart in Gibson’s Asset Allocation. Volatility inflicts a real cost on a portfolio. (And this ignores perhaps the bigger issue of investor behavior in the face of a grueling equity bear market.). Whether one looks at a more efficient portfolio as one that lessens portfolio standard deviation and increases Sharpe ratio, one that lessens maximal drawdown, one that brings geometric return closer to average annual return, the conclusion is the same. A more efficient portfolio is worth some increased cost compared to the rock bottom cost of TSM/TBM. Is it possible the advisor/DFA/AQR/factor route increases the cost too much? The answer quite possibly is yes. But after a lot of ongoing thought, I chose that route because I saw the number and size of potential benefits start to look large compared to the certain costs.
Unfortunately, as I have learned, there is no way to directly compare the two paths. The sample period would be too short as well. They are apples and oranges. My overall stock/bond split is much different than I would have likely put together on my own, I doubt I would have ever used alternatives on my own, and I’m sure I would have made tweaks in my all VG portfolio over time as well. I think my behavior as an investor is pretty solid, but I nonetheless have an extra level of protection from myself with an advisor.
Currently we have had an 8-9 year bull market. We all look like investing superstars. A 100% equity growthy TSM portfolio looks like the MVP. Let’s see what the conversations look like when we have a bear like 1972-4 or worse yet Japan for a generation. There are many potential alternative histories, but only one will play out. Investing is about putting the odds of success in our favor. Starting with rock bottom costs is about as strong a start as one could ask for. Betting on the US economic engine is certainly pretty good as well. But academic research has shown we can diversify way beyond that in multiple dimensions. That diversification is worth something.
Also - good point about how one should consider not just how things did turn out, but the full spectrum of what was possible. Not confusing strategy with outcome is important. If one takes steps to prevent a "Japan scenario" (e.g. diversifying away from the home country) and the home country doesn't experience a Japan-scenario meltdown, of course the added expense and volatility drag of currency risk would likely pull down returns. That's a cost of the protection. Insurance isn't a bad deal just because you didn't use it.
Finally, I think that it is best to note that there can be different portfolios for different people. If someone is particularly interested in maximizing portfolio efficiency, and has the knowledge, experience, and wherewithal to invest in a way that aims to do that, maybe that's reasonable for them. Most people probably can't manage this sort of complex portfolio - so TSM is likely better for them. The improvements of a complex portfolio are likely at the margins and slight (and aren't guaranteed... the only thing guaranteed by a complex strategy is more paperwork, hassle, and expense). But there can be "more than one road to Dublin" as Taylor often has said and as I feel Rick was echoing earlier in this thread.
It's reasonable to think that Dave likely has one of the more efficient portfolios around, and in some ways that is enviable. However, in other ways it begs the question -- why is having the most efficient portfolio possible the overriding aim? Yes, having a portfolio that has the highest return per unit risk (with risk measured by standard deviation) is a good goal. However, maybe there are more important things to life, and settling for a reasonably efficient portfolio (like a 3-fund portfolio) and enjoying hobbies or new-found spare time could be better. (Of course, if investing is intellectually stimulating and is a hobby in and of itself, this could be different.)