Is the market smarter than Vanguard Target funds?

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stlutz
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Is the market smarter than Vanguard Target funds?

Post by stlutz » Fri Mar 01, 2019 7:24 pm

The global market portfolio would hold about 40% stocks and 60% bonds. Most target date funds and most people here utilize much higher stock allocations.

This article proposes something closer to a market-weight position for all investors:

https://www.bloomberg.com/opinion/artic ... nd=opinion
Most people assume an 8 percent return from an equity portfolio. I’m not going to quibble with the historical returns of the stock market—everyone knows what they are—but I will say that few people realize those returns because of suboptimal behavior along the way. In other words, buying on the highs and selling on the lows. Or, they only faithfully dollar cost average on the way up.

This has given rise to a cottage industry of advisers who put their clients into low-fee index funds and then engage in “behavioral coaching” to make sure they don’t take their money out of the market at the worst possible time. It’s a little odd to pay someone to tell you to do what you should be able to do on your own, but an adviser wouldn’t even be necessary if you didn’t have a portfolio that scared the bejeezus out of you once every few years. It wouldn’t be necessary if you had a portfolio that you could set and forget.
Given the common belief here that future stock returns will be less than past returns, the recommendation of this article might make even more sense.

Thoughts?

MotoTrojan
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Re: Is the market smarter than Vanguard Target funds?

Post by MotoTrojan » Fri Mar 01, 2019 7:40 pm

Bond returns are also expected to be worse.

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nisiprius
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Re: Is the market smarter than Vanguard Target funds?

Post by nisiprius » Fri Mar 01, 2019 7:50 pm

The point of the article does not seem to be so much "follow the global market portfolio," which is not even mentioned, but that--as hidden title of the web page itself says--the key to investing success is less stress. In a nutshell, the writer says that advisors recommend 80% stocks, that's too high, most investors should be about 35% stocks and save more if necessary. I happen to agree; or, at least, I happen to think that is a reasonable idea for many people and that people should not be pushed into a high stock allocation "for their own good."

With regard to the idea that an advisor can recommend a high stock allocation, and then bolster your risk tolerance through coaching, I doubt it. If you have "a portfolio that [scares] the bejeezus out of you," can an advisor un-scare you?

Writer and behavioral economist Cass Sunstein panic-sold in 2011 despite coaching from behavioral economist Richard Thaler:
Economists know that if you invest in stocks, it makes sense to choose passively managed, highly diversified index funds. I had done exactly that. But seeing a decline in the fund’s value, I decided to sell a significant chunk. I e-mailed Richard Thaler, the great behavioral economist and my co-author on Nudge, and before proceeding, I asked him whether I would be making a mistake.

His response: “Reread our book!”

I pretty much knew what he meant, but that was a bit vague for me (our book is long), so I proceeded as planned and sold that significant chunk. Giving Thaler the news, he exclaimed, “No! Nudge explains that you shouldn’t have done that!”
Got that? Sunstein ignored coaching to follow the advice in a book he had co-written himself. It is hard to see how any coaching could be much more effective than that.

But it gets worse. It seems to be hard to find now in a Google search, but author and wealth manager Dan Solin wrote that during 2008-9
I did the opposite of what I advise my clients to do: I panicked and reduced my asset allocation to stocks, thereby missing out on a significant portion of the recovery.
Solin does not say what, in fact, his clients really did. But if he panic-sold himself, then despite his saying that he advised them not to, I suspect that many of them did.
Last edited by nisiprius on Fri Mar 01, 2019 8:12 pm, edited 1 time in total.
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mindboggling
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Re: Is the market smarter than Vanguard Target funds?

Post by mindboggling » Fri Mar 01, 2019 8:07 pm

At the age of 65 I'm comfortable with a 30% allocation to equities. FireCalc shows little difference compared to 40 or 50 percent allocations, so why take the extra risk?

I guess I'm just not cut out to be a swashbuckling equity pirate like many here.
In broken mathematics, We estimate our prize, --Emily Dickinson

JBTX
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Re: Is the market smarter than Vanguard Target funds?

Post by JBTX » Fri Mar 01, 2019 9:02 pm

I generally agree with op ed. Having higher stock allocation does you know good if you dump it in a panic. Better off having an allocation that you can stick with a saving a little bit more.

I have a little quibble with his saying higher bond allocation has better Sharpe ratio and is superior. I highly suspect that is based on a history of the last 40 years where interest rates have tended down rather dramatically. That helps both stocks and bonds, but obviously directly boosts bond performance.

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Wiggums
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Re: Is the market smarter than Vanguard Target funds?

Post by Wiggums » Fri Mar 01, 2019 9:05 pm

mindboggling wrote:
Fri Mar 01, 2019 8:07 pm
At the age of 65 I'm comfortable with a 30% allocation to equities. FireCalc shows little difference compared to 40 or 50 percent allocations, so why take the extra risk?

I guess I'm just not cut out to be a swashbuckling equity pirate like many here.
Finding the AA that is right for you is the hardest part of investing. It doesn’t matter what the others are doing. Some are still in the accumulation phase and their AA will likely be much different than you and I. Everyone’s situation is different.

There is a good article from mr Bernstein that says why take risk once you have won the game. Some people have a higher AA because they need it, may want to leave a legacy, etc. others have a higher AA and may panic sell stocks during a big market downturn; Turning a paper loss into a real loss. They risk Running out of money In retirement which is one of the worst things that can happen. The second risk to be concerned about is inflation, Especially when you retire early.

I have no issues with you higher bond/fixed equity allocation.

Good luck to you.

andrew99999
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Re: Is the market smarter than Vanguard Target funds?

Post by andrew99999 » Fri Mar 01, 2019 10:17 pm

mindboggling wrote:
Fri Mar 01, 2019 8:07 pm
At the age of 65 I'm comfortable with a 30% allocation to equities. FireCalc shows little difference compared to 40 or 50 percent allocations, so why take the extra risk?
I have always found this an odd argument.
30% equities is not much different to 50% equities. 50% equities are not much different to 70% equities. 70% equities are not much different to 90% equities.
So it sounds like you can follow each of those backwards and go from 90% to 30% because each 20% is not much different... ? :confused

I'm not saying you should be in over 30% equities, if that fits your ability, willingness and need to take risk, so be it.
But comparing to 50% seems arbitrary.
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Elric
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Re: Is the market smarter than Vanguard Target funds?

Post by Elric » Fri Mar 01, 2019 11:04 pm

If going over 35% stocks will cause you to do precisely the wrong thing when the market drops, then yes, going with that plan is better than buying high and selling low. But compared with sticking with a higher stock allocation through thick and thin, you're leaving money on the table. I started my career knowing little and being too conservative. But we were eventually about 70+% stocks when we retired early, and I'm quite fine now with a somewhat less aggressive, but still far over 35/65 profile.

If you've won the game, you have even more freedom to do what you want (up to a point). Don't risk it all and end up losing a won game. But if you're more than comfortable, you can just lock it in and go very conservative, or you can put the excess into something riskier, or anywhere in between. Whatever makes you happy. I'm a bit too much of a gamer to accept locking in and going very conservative. I can be a bit more aggressive without risking my retirement. But if you sleep better at night locking it in, go for it!
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lassevirensghost
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Re: Is the market smarter than Vanguard Target funds?

Post by lassevirensghost » Thu Mar 07, 2019 4:53 pm

MotoTrojan wrote:
Fri Mar 01, 2019 7:40 pm
Bond returns are also expected to be worse.
The author is quite aware, taking time to respond to that objection and basically saying that the investor would just need to not rely on an equity-like return and would have to save more.
“Groucho, how do you invest your money?” | “All in bonds.” | “But Groucho, they don’t pay much return.” | “They do when you have a lot of em!”

jacksonm
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Re: Is the market smarter than Vanguard Target funds?

Post by jacksonm » Thu Mar 07, 2019 5:17 pm

My only experience with a Target date fund was rolling all of my assets along with a pension buyout into a T. Rowe Price fund based on my age (around 55 at the time). It was their stated belief at the time that most people were too conservative and needed to be more stock heavy going into retirement or even in retirement. I think the ratio at the time was around 85/15. That was in the year 2007. You can imagine how well that worked out if you know anything about the so-called "great recession".

I had enough fortitude and experience to wait and see if things recovered, which they finally did in surprising short order, but then I started googling the words "safe investing" and got lots of hits for Harry Browne's book "Fail Safe Investing". I'm not advertising that portfolio or wanting to get into a discussion about its merits as there is already enough of that on the forum, but that's the portfolio I eventually went with and have been satisfied with the results, although I did switch to a modified version that is a bit more stock heavy.

What that experience taught me however, was that letting somebody else make bets for you because you think they are more knowledgeable is a very bad idea. It's your money and your life and their crystal ball is really no better than yours. If I turn out to be wrong I'd rather have only myself to blame.

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