Here's my portfolio

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vineviz
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Here's my portfolio

Post by vineviz » Wed Mar 20, 2019 7:52 pm

Every once in a while I get asked for my personal portfolio. It changes a bit over time (I'm a tinkerer), and I've shared it in the past but usually in some other thread. Here it is for reference.

Please don't assume I'm recommending this portfolio to anyone, including you.

21.37% Vanguard US Multifactor ETF (VFMF)
17.38% SPDR® S&P 600 Small Cap Value ETF (SLYV)
12.79% Xtrackers MSCI EAFE High Div Yld Eq ETF (HDEF)
12.18% iShares Core MSCI Emerging Markets ETF (IEMG)
9.30% iShares Edge MSCI Intl Size Factor ETF (ISZE)
8.48% Vanguard Extended Duration Trs ETF (EDV)
8.22% Individual Stocks
6.54% Individual Bonds
3.74% SPDR® S&P 500 ETF (SPY)

The individual stocks are mostly mid/small cap utility stocks (e.g. ATO,EE, HE, NJR, OGE, OGS, WTR) and consumer staples.

The individual bonds are a mix of corporate bonds and taxable municipal bonds (average duration about 9 years, which is dragged down by some bonds that are callable in the next year).

SPDR® S&P 500 ETF (SPY) is actually a proxy for a CIT that's in a 401(k) plan. Virtually all the other assets are in Traditional IRAs.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Thesaints
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Re: Here's my portfolio

Post by Thesaints » Wed Mar 20, 2019 7:56 pm

And what about a pension: you have it, you don't have it, it does not make a difference ? :)

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Re: Here's my portfolio

Post by vineviz » Wed Mar 20, 2019 8:00 pm

Thesaints wrote:
Wed Mar 20, 2019 7:56 pm
And what about a pension: you have it, you don't have it, it does not make a difference ? :)
I took my pension as an early lump sum distribution so it would actually be an asset that I could allocate. :)
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by Thesaints » Wed Mar 20, 2019 8:06 pm

vineviz wrote:
Wed Mar 20, 2019 8:00 pm
Thesaints wrote:
Wed Mar 20, 2019 7:56 pm
And what about a pension: you have it, you don't have it, it does not make a difference ? :)
I took my pension as an early lump sum distribution so it would actually be an asset that I could allocate. :)
How would you account for that lump sum ? Was is something that suddenly materialized the day you made the election, or was it always present in some form when you still had the choice between pension and lump sum ?

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vineviz
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Re: Here's my portfolio

Post by vineviz » Wed Mar 20, 2019 8:15 pm

Thesaints wrote:
Wed Mar 20, 2019 8:06 pm
vineviz wrote:
Wed Mar 20, 2019 8:00 pm
Thesaints wrote:
Wed Mar 20, 2019 7:56 pm
And what about a pension: you have it, you don't have it, it does not make a difference ? :)
I took my pension as an early lump sum distribution so it would actually be an asset that I could allocate. :)
How would you account for that lump sum ? Was is something that suddenly materialized the day you made the election, or was it always present in some form when you still had the choice between pension and lump sum ?
To be honest, I'd forgotten the pension benefit even existed until the company contacted me with the offer of the early lump sum distribution. In my personal situation, the future income stream would have been relatively immaterial to our overall financial plan so the fact that I was unintentionally ignoring it didn't make much difference.

If I hadn't been able to convert it to a lump sum, I'd have just reduced the projected withdrawal rate from my investment portfolio in retirement to account for it that way.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by LadyGeek » Wed Mar 20, 2019 9:45 pm

This thread is now in the Investing - Theory, News & General general portfolio discussion.
vineviz wrote:
Wed Mar 20, 2019 7:52 pm
21.37% Vanguard US Multifactor ETF (VFMF)
17.38% SPDR® S&P 600 Small Cap Value ETF (SLYV)
12.79% Xtrackers MSCI EAFE High Div Yld Eq ETF (HDEF)
12.18% iShares Core MSCI Emerging Markets ETF (IEMG)
9.30% iShares Edge MSCI Intl Size Factor ETF (ISZE)
8.48% Vanguard Extended Duration Trs ETF (EDV)
8.22% Individual Stocks
6.54% Individual Bonds
3.74% SPDR® S&P 500 ETF (SPY)
A general rule-of-thumb given in this forum is that you only need to keep your asset allocation to the nearest 5%. Going with more precision is a lot more work for little added benefit. Is this a snapshot in time and you just listed it to 2 decimal places? What is your criteria for rebalancing?
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sergeant
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Re: Here's my portfolio

Post by sergeant » Wed Mar 20, 2019 10:30 pm

Thank you for sharing. I enjoy your posts and think they raise the level of discussion.
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.

andrew99999
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Re: Here's my portfolio

Post by andrew99999 » Thu Mar 21, 2019 1:24 am

For ISZE
iShares writes
Exposure to large- and mid-cap developed international stocks with a tilt towards the smaller, lower risk stocks
Does this mean basically large/mid with a lesser proportion of the mega caps?

klaus14
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Re: Here's my portfolio

Post by klaus14 » Thu Mar 21, 2019 2:06 am

vineviz wrote:
Wed Mar 20, 2019 7:52 pm
Every once in a while I get asked for my personal portfolio. It changes a bit over time (I'm a tinkerer), and I've shared it in the past but usually in some other thread. Here it is for reference.

Please don't assume I'm recommending this portfolio to anyone, including you.

21.37% Vanguard US Multifactor ETF (VFMF)
17.38% SPDR® S&P 600 Small Cap Value ETF (SLYV)
12.79% Xtrackers MSCI EAFE High Div Yld Eq ETF (HDEF)
12.18% iShares Core MSCI Emerging Markets ETF (IEMG)
9.30% iShares Edge MSCI Intl Size Factor ETF (ISZE)
8.48% Vanguard Extended Duration Trs ETF (EDV)
8.22% Individual Stocks
6.54% Individual Bonds
3.74% SPDR® S&P 500 ETF (SPY)

The individual stocks are mostly mid/small cap utility stocks (e.g. ATO,EE, HE, NJR, OGE, OGS, WTR) and consumer staples.

The individual bonds are a mix of corporate bonds and taxable municipal bonds (average duration about 9 years, which is dragged down by some bonds that are callable in the next year).

SPDR® S&P 500 ETF (SPY) is actually a proxy for a CIT that's in a 401(k) plan. Virtually all the other assets are in Traditional IRAs.
Thanks for sharing. I am curious why you use HDEF and ISZE instead of ISCF?
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds. 50% value tilt in stocks.

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Re: Here's my portfolio

Post by vineviz » Thu Mar 21, 2019 5:56 am

LadyGeek wrote:
Wed Mar 20, 2019 9:45 pm
This thread is now in the Investing - Theory, News & General general portfolio discussion.
Thanks. I debated which forum I should place this in.
LadyGeek wrote:
Wed Mar 20, 2019 9:45 pm
vineviz wrote:
Wed Mar 20, 2019 7:52 pm
21.37% Vanguard US Multifactor ETF (VFMF)
17.38% SPDR® S&P 600 Small Cap Value ETF (SLYV)
12.79% Xtrackers MSCI EAFE High Div Yld Eq ETF (HDEF)
12.18% iShares Core MSCI Emerging Markets ETF (IEMG)
9.30% iShares Edge MSCI Intl Size Factor ETF (ISZE)
8.48% Vanguard Extended Duration Trs ETF (EDV)
8.22% Individual Stocks
6.54% Individual Bonds
3.74% SPDR® S&P 500 ETF (SPY)
A general rule-of-thumb given in this forum is that you only need to keep your asset allocation to the nearest 5%. Going with more precision is a lot more work for little added benefit. Is this a snapshot in time and you just listed it to 2 decimal places? What is your criteria for rebalancing?
This is indeed just a current snapshot of my actual portfolio, not my target allocations.

I agree that worrying about asset class differences much below even 10% represents a false level of precision. My IPS calls for 5/20 rebalancing bands, but in practice I'm still stabilizing my asset allocation. I don't have my dividends auto-reinvesting, so I generally just redirect cash to the out-of-balance assets.

My bond allocation is an exception to my 10% rule in that I'm on a glide path to gradually increase my fixed income allocation over the next 15 years or so. Current bond target is 17% of the portfolio. But within equities I basically target 60% US and 40% international. Within US equity it is 30% large cap and 70% mid/small cap. Within international equity it is 60% developed and 40% emerging markets. Nice big round numbers.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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vineviz
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Re: Here's my portfolio

Post by vineviz » Thu Mar 21, 2019 7:14 am

andrew99999 wrote:
Thu Mar 21, 2019 1:24 am
For ISZE
iShares writes
Exposure to large- and mid-cap developed international stocks with a tilt towards the smaller, lower risk stocks
Does this mean basically large/mid with a lesser proportion of the mega caps?
Basically. The index is kind of weird in its weighting scheme: the weights in the Low Size index are in inverse proportion to the log of company market cap. According to Morningstar it ends up being about 40% mid cap and 60% large cap.

klaus14 wrote:
Thu Mar 21, 2019 2:06 am
Thanks for sharing. I am curious why you use HDEF and ISZE instead of ISCF?
Because my US equities are so heavily tilted to small/mid cap I really didn't need pure exposure to international small caps. I actually owned ISCF for a while, but replaced it with the HDEF/ISZE combo. In part because that combination has a lower ER (about 0.15% lower) and in part because the factor exposures provided better diversification in the context of the overall portfolio.

One issue is that last fall BlackRock changed the index for ISZE, and I'm still evaluating whether the new index will work as well as the old one. The new one should have more size exposure, but the old one had a volatility screen which provided some low vol and low beta exposure that was helpful.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

cheezit
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Re: Here's my portfolio

Post by cheezit » Thu Mar 21, 2019 8:15 am

I would love if VG came out with international versions of their domestic factor funds, even if it was only the all-in-wonder version.

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Re: Here's my portfolio

Post by celerity » Thu Mar 21, 2019 8:38 am

Thanks for posting! I thought you had a Risk Parity portfolio? 60% USA, 25% EAFE and 15% EM looks market-cap weighted to me (although with various risk factors). Could you tell us a bit more about your portfolio technique?

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Re: Here's my portfolio

Post by columbia » Thu Mar 21, 2019 8:43 am

What is your benchmark?
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: Here's my portfolio

Post by vineviz » Thu Mar 21, 2019 10:39 am

columbia wrote:
Thu Mar 21, 2019 8:43 am
What is your benchmark?
My goal is to match or exceed the return of Vanguard Target Retirement 2035 Fund (VTTHX), which roughly corresponds to my goal for when to retire.

My asset allocation isn't precisely the same as that fund, but I figure it's as reasonable a benchmark as any: not too easy a hurdle to clear, but not so high it prompts me to take on more risk than I should be taking on.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by vineviz » Thu Mar 21, 2019 12:04 pm

celerity wrote:
Thu Mar 21, 2019 8:38 am
Thanks for posting! I thought you had a Risk Parity portfolio? 60% USA, 25% EAFE and 15% EM looks market-cap weighted to me (although with various risk factors). Could you tell us a bit more about your portfolio technique?
My portfolio construction approach is always evolving, so the current portfolio might not be precisely what I'd get if I was starting from 100% cash. I try to be judicious in making changes, though, and live with things when they are "close enough".

This will be long, but you asked. . . .

Basically I start with the equity/bond ratio. For me this flows primarily from the desired overall portfolio volatility. My personal risk tolerance is pretty high, and for planning purposes I'm targeting portfolio volatility of about 13-14% annualized standard deviation. This is a function of what kind of drawdown I think I can tolerate and still make my retirement goals. Behaviorally, I love buying things that have gone down and/or underperformed: old value investors never die, they just get their fix from rebalancing. Anyway, this step is probably the least objective step, but it is where I start.

I then estimate the stock/bond ratio that I think will roughly get me to that targeted amount of volatility. For this step I assume a global basket of stocks (e.g. the MSCI ACWI index or similar) and long-term US treasury bonds (e.g. Vanguard Extended Duration Treasury Index Fund), then find the mix of the two that matches my volatility target and maximizes portfolio diversification. Right now that's about 82% stocks and 18% bonds, so I set my overall asset allocation target roughly in line with that.

Ideally the 18% bonds would be entirely zero coupon US Treasuries or zero coupon non-callable municipal bonds, but as it is I have some individual bonds remaining from earlier days that are callable and/or have coupons so my bond duration is shorter than I'd like it to be. And my overall bond allocation is under target, so I'll be making additional purchases this year.

For equities, my next step is to allocate the 82% between US stocks and international stocks. Again, I estimate the mix that will maximize equity diversification while minimizing costs. I settled on 60% US and 40% international as a nice round target.

Then I allocate within the US stock and international stock sleeves. Again, I'm looking for the combination of funds that maximizes equity diversification given the 60/40 split from the prior step. This step is a bit complicated in that it is somewhat iterative: the intra-US allocation depends on the intra-international allocation, and vice versa. What I landed on for my portfolio is that US stocks should be roughly 30% large cap and 70% small cap and that the international stocks should be roughly 60% developed markets and 40% emerging markets. Fund choice will affect the precise weights, obviously, so I make no claim that these ratios are in any way universal. They are just the product of my process.

It worked out that many of my allocation targets are different than market cap weighting by a good amount, but I'm okay with that: I consider my portfolio to be much more diversified than a cap-weighted portfolio would be (though I know that others will disagree).

Compared to a strict global cap-weighted index, I estimate my target equity allocation compares as follows (me vs index):

US large cap: 18% vs. 37%
US small/mid: 42% vs. 17%
Developed ex US: 24% vs. 37%
Emerging mkts: 16% vs. 9%

The portfolio I posted in the OP is a current snapshot, so it doesn't precisely line up with my target allocations. I'm a little bit underweight on emerging markets right now and overweight on US small/mid cap stocks, plus my bond allocation is a tad bit light.

In summary, I'd say that while have definitely made use of the risk parity algorithm in the past that my portfolio construction approach would best be summarized as "maximizing diversification given a portfolio volatility target".

I can use this mix of assets combined with the volatility target to makes some estimates about expected return, but I have tried not to explicitly rely on return expectations in constructing the portfolio. Given the challenges involved in forecasting returns, I feel more comfortable letting expected return be an output, rather than an input, in the portfolio construction process.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by HEDGEFUNDIE » Thu Mar 21, 2019 12:48 pm

Vineviz, thanks for lifting the veil for us.

What's your opinion of VFMF's performance thus far?

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Re: Here's my portfolio

Post by vineviz » Thu Mar 21, 2019 2:07 pm

HEDGEFUNDIE wrote:
Thu Mar 21, 2019 12:48 pm
What's your opinion of VFMF's performance thus far?
So far I've been pleased.

It's a bit early, but it looks like they've been able to maintain reasonably strong exposure to multiple factors while maintaining (so far) a mildly positive alpha. My main initial concern was the potential impact of turnover on costs, but as far as I can tell they've managed it well. And, knock on wood, it seems to have been pretty tax-efficient in its first year.

As for its role in my portfolio, I'm a bit more ambivalent. It has played its role solidly, for sure, but I've grown more sure that the best role fro VFMF in a portfolio is as a core holding (i.e. a replacement for VTI for investors who want more factor diversification than total stock market offers). In my portfolio it gets a little lost among some of my other investments.

Personally, I could possibly achieve more factor diversification by reallocating money from VFMF to funds like SLYV, VPU, and maybe even IVW or MTUM. The main thing that holds me back is the added complexity (especially if my wife were left to manage the portfolio on her own) for what is likely a marginal gain.

In summary, I plan to continue to hold VFMF and will likely reevaluate on its 2nd birthday.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by GrowthSeeker » Thu Mar 21, 2019 2:34 pm

vineviz wrote:
Thu Mar 21, 2019 12:04 pm
<snip>
Basically I start with the equity/bond ratio. For me this flows primarily from the desired overall portfolio volatility. My personal risk tolerance is pretty high, and for planning purposes I'm targeting portfolio volatility of about 13-14% annualized standard deviation. This is a function of what kind of drawdown I think I can tolerate and still make my retirement goals. Behaviorally, I love buying things that have gone down and/or underperformed: old value investors never die, they just get their fix from rebalancing. Anyway, this step is probably the least objective step, but it is where I start.

I then estimate the stock/bond ratio that I think will roughly get me to that targeted amount of volatility. For this step I assume a global basket of stocks (e.g. the MSCI ACWI index or similar) and long-term US treasury bonds (e.g. Vanguard Extended Duration Treasury Index Fund), then find the mix of the two that matches my volatility target and maximizes portfolio diversification. Right now that's about 82% stocks and 18% bonds, so I set my overall asset allocation target roughly in line with that.
</snip>
Could you share the mechanics of how you do make these computations?
I'm guessing you're using Portfolio Visualizer and the Portfolio Optimization screen; but can you clarify some details, like how many years back and what are the dropdown list settings? Or if you have some other method of calculation, please share.

Thanks.
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Re: Here's my portfolio

Post by bloom2708 » Thu Mar 21, 2019 2:40 pm

You just need 2.24% Gold ETF and you will win the "best in show" portfolio. :wink:

I kid, I kid. Lot's of "I do this but don't recommend it for anyone else" portfolios out there. :moneybag
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Re: Here's my portfolio

Post by vineviz » Thu Mar 21, 2019 2:53 pm

GrowthSeeker wrote:
Thu Mar 21, 2019 2:34 pm
vineviz wrote:
Thu Mar 21, 2019 12:04 pm
<snip>
Basically I start with the equity/bond ratio. For me this flows primarily from the desired overall portfolio volatility. My personal risk tolerance is pretty high, and for planning purposes I'm targeting portfolio volatility of about 13-14% annualized standard deviation. This is a function of what kind of drawdown I think I can tolerate and still make my retirement goals. Behaviorally, I love buying things that have gone down and/or underperformed: old value investors never die, they just get their fix from rebalancing. Anyway, this step is probably the least objective step, but it is where I start.

I then estimate the stock/bond ratio that I think will roughly get me to that targeted amount of volatility. For this step I assume a global basket of stocks (e.g. the MSCI ACWI index or similar) and long-term US treasury bonds (e.g. Vanguard Extended Duration Treasury Index Fund), then find the mix of the two that matches my volatility target and maximizes portfolio diversification. Right now that's about 82% stocks and 18% bonds, so I set my overall asset allocation target roughly in line with that.
</snip>
Could you share the mechanics of how you do make these computations?
I'm guessing you're using Portfolio Visualizer and the Portfolio Optimization screen; but can you clarify some details, like how many years back and what are the dropdown list settings? Or if you have some other method of calculation, please share.

Thanks.
PortfolioVisualizer used to include an option to optimize for "Diversification Ratio", but earlier in 2019 they deprecated that functionality.

So I built a spreadsheet that can calculate the diversification ratio. I've uploaded a simple version of it to DropBox here. You just run the assets you want to compare through Asset Correlation in Portfolio Visualizer and paste the result into the spreadsheet with a little modification.

I have also built a more complicated version of this same spreadsheet for personal use. In can then use the Solver function of Excel to maximize diversification given whatever of constraints I need to impose (e.g. set volatility to XX%, limit bonds to no more than YY%, make sure international stocks are between AA% and ZZ%). Those modifications would be easy for someone who is reasonably advanced with Excel to add themselves. The formula for diversification ratio is actually very simple:

Image

It's the weighted average of asset volatilities divided by the volatility of the resultant portfolio.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Post by hdas » Thu Mar 21, 2019 6:47 pm

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Last edited by hdas on Wed Jan 29, 2020 7:53 pm, edited 1 time in total.
....

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Re: Here's my portfolio

Post by LadyGeek » Thu Mar 21, 2019 7:04 pm

vineviz wrote:
Thu Mar 21, 2019 2:53 pm
...PortfolioVisualizer used to include an option to optimize for "Diversification Ratio", but earlier in 2019 they deprecated that functionality.

So I built a spreadsheet that can calculate the diversification ratio. I've uploaded a simple version of it to DropBox here. You just run the assets you want to compare through Asset Correlation in Portfolio Visualizer and paste the result into the spreadsheet with a little modification.

...
FYI - The spreadsheet works fine in Linux with LibreOffice Calc, including the array formula.
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Re: Here's my portfolio

Post by celerity » Fri Mar 22, 2019 8:23 pm

vineviz wrote:
Thu Mar 21, 2019 12:04 pm
This will be long, but you asked. . . .
Thanks! :)
My personal risk tolerance is pretty high, and for planning purposes I'm targeting portfolio volatility of about 13-14% annualized standard deviation.
Do you have a volatility targeting strategy? Such as reducing standard deviation by 50 basis points every year or something like that.
I settled on 60% US and 40% international as a nice round target.
I didn't quite understand that part. Are you trying to replicate a global index geographically or not?

What about concentration risk? What if US ends up like Japan in the 90s? 60% US is pretty much.
What I landed on for my portfolio is that US stocks should be roughly 30% large cap and 70% small cap [...]
You seem to focus on the size factor. What's your view of other factors such as value or momentum?

Btw, have you read the article "The Death of Diversification Has Been Greatly Exaggerated"? Do you agree with it?

https://www.aqr.com/Insights/Research/J ... xaggerated
In summary, I'd say that while have definitely made use of the risk parity algorithm in the past that my portfolio construction approach would best be summarized as "maximizing diversification given a portfolio volatility target".
Sounds reasonable. What portfolio construction technique do you consider superior for an accumulating investor -- risk parity or market-cap weighted?
Last edited by celerity on Sat Mar 23, 2019 12:32 am, edited 1 time in total.

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Re: Here's my portfolio

Post by vineviz » Fri Mar 22, 2019 9:00 pm

celerity wrote:
Fri Mar 22, 2019 8:23 pm
vineviz wrote:
Thu Mar 21, 2019 12:04 pm
My personal risk tolerance is pretty high, and for planning purposes I'm targeting portfolio volatility of about 13-14% annualized standard deviation.
Do you have a volatility targeting strategy? Such as reducing standard deviation by 50 basis points every year or something like that.
Sort of. I basically set my allocation for now and projected it for retirement, and then just did a linear glide in between. Nothing fancy.
celerity wrote:
Fri Mar 22, 2019 8:23 pm
vineviz wrote:
Thu Mar 21, 2019 12:04 pm
I settled on 60% US and 40% international as a nice round target.
I didn't quiet understand that part. Are you trying to replicate a global index geographically or not?
No, not trying to replicate global weights. 40% international stocks just ended up being within the region of optimal diversification benefit, and the spot that balanced diversification with fund expenses.
celerity wrote:
Fri Mar 22, 2019 8:23 pm
What about concentration risk? What if US ends up like Japan in the 90s? 60% US is pretty much.
It's a risk, I guess, but I have no objective way to quantify the probability of such an event. My US portfolio is also much better diversified than a portfolio of Nikkei 225 stocks was in Japan in the late 1980s. Japanese small cap stocks, for instance, have not been nearly the disaster that Japanese large cap stocks have been.
celerity wrote:
Fri Mar 22, 2019 8:23 pm
vineviz wrote:
Thu Mar 21, 2019 12:04 pm
What I landed on for my portfolio is that US stocks should be roughly 30% large cap and 70% small cap [...]
You seem to focus on the size factor. What's your view of other factors such as value or momentum?
I mentioned size in my narrative but I'm also evaluating for value, quality, and AQR's BAB factor (at least within the US stocks). For me market beta, size, value, quality, and BAB are the five I focus on. I haven't found a way to integrate momentum into my holdings in a way that makes sense (i.e. produces enough exposure to it without reducing some other factor
celerity wrote:
Fri Mar 22, 2019 8:23 pm
Btw, have you read the article "The Death of Diversification Has Been Greatly Exaggerated"? Do you agree with it?
I think I've read it (I've read a LOT about diversification) but I don't recall much about that article. I'll read it again.
celerity wrote:
Fri Mar 22, 2019 8:23 pm
vineviz wrote:
Thu Mar 21, 2019 12:04 pm
In summary, I'd say that while have definitely made use of the risk parity algorithm in the past that my portfolio construction approach would best be summarized as "maximizing diversification given a portfolio volatility target".
Sounds reasonable. What portfolio construction technique do you consider superior for an accumulating investor -- risk parity or market-cap weighted?
If I had to choose between those two I'd probably say market cap weighted for most investors. It's cheap, easy, and very effective (assuming they don't do something stupid like ignore international).

Few accumulators should have much in bonds or are interested in leverage, so I think risk parity would be hard to implement and overly complicated for most folks.

Adding a diversification overlay to market cap weighting would probably be a win for most accumulators, I'd say. Probably just means overweighting small cap value, utilities, and emerging markets.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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celerity
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Re: Here's my portfolio

Post by celerity » Fri Mar 22, 2019 11:33 pm

vineviz wrote:
Fri Mar 22, 2019 9:00 pm
No, not trying to replicate global weights. 40% international stocks just ended up being within the region of optimal diversification benefit, and the spot that balanced diversification with fund expenses.
I think I've read it (I've read a LOT about diversification) but I don't recall much about that article. I'll read it again.
The reason I asked is your portfolio reminds me a lot of a global market-cap weighted but diversified with factors. That’s roughly what I’ve been thinking of doing – MSCI ACWI slice and dice but with factors. Build a factor fund portfolio with the highest diversification ratio while preserving the geographical weights. Do you think it's a good strategy?
Few accumulators should have much in bonds or are interested in leverage, so I think risk parity would be hard to implement and overly complicated for most folks.
Yeah, what keeps me away from risk parity is leverage. Unlevered portfolios usually end up being something like 25% stocks and 75% bonds - which is too conservative. I do however like Hedgefundie's idea of using LETF. I just backtested a simple risk parity portfolio for EU investors using 2x Euro Stoxx 50 and 2x German 10 Y Euro-Bunds. Results are impressive (against 100% Euro Stoxx 50 unlevered): 11,1% vs. 4,6% CAGR and 9,6% vs. 15,4% stdev. Max drawdown only -11,2% vs. -25,7%. Perhaps one day, if these strategies turn out to work, ordinary people can use them too.

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Re: Here's my portfolio

Post by vineviz » Sat Mar 23, 2019 7:54 am

celerity wrote:
Fri Mar 22, 2019 11:33 pm
The reason I asked is your portfolio reminds me a lot of a global market-cap weighted but diversified with factors. That’s roughly what I’ve been thinking of doing – MSCI ACWI slice and dice but with factors. Build a factor fund portfolio with the highest diversification ratio while preserving the geographical weights. Do you think it's a good strategy?
I think it's quite likely your approach would lead to a similar outcome as my approach. But remember that while my ex-US/US ratio is roughly similar to global weights, within the ex-US holdings I have a lot more emerging markets than global weight.

Intellectually the global weight approach seems a little more dangerous. Remember your Japan example: your approach would have increased exposure to Japan right up until the crash just because everyone else was doing it. Using a top-down maximum diversificaiton approach would have at least given the investor a possibility of avoiding such high concentration. I don't know if it actually would have, but conceptually it seems more likely than a global market cap weighted approach.

Perhaps one day, if these strategies turn out to work, ordinary people can use them too.
I hope so. It'd make an awful lot of sense to see some target date funds, for instance package the leverage in an easy-to-use way. I suspect there would be legal and regulatory challenges that make it hard to do.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by vineviz » Sat Mar 23, 2019 8:17 am

hdas wrote:
Sat Mar 23, 2019 8:10 am
vineviz wrote:
Fri Mar 22, 2019 9:00 pm
I haven't found a way to integrate momentum into my holdings in a way that makes sense (i.e. produces enough exposure to it without reducing some other factor
I have achieved this using individual stocks. It’s not that high maintenance to manage, but the initial research and implementation it’s intense. Specially testing and data wrangling.

Time will tell, but I have achieved significant exposure to Mkt, Size, Value, Quality, BAB and Momentum with 3 funds + 25 stocks.

Cheers :greedy
Thanks for the nudge. I might keep exploring it, but additional concerns for me are 1) making sure my wife can handle the portfolio on her own if I died; 2) dealing with an employer constraint that we have no more than ten investment transactions per month.

It sounds like your approach probably doesn't have more turnover than that, though.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by vineviz » Sat Mar 23, 2019 8:34 am

hdas wrote:
Sat Mar 23, 2019 8:13 am
vineviz wrote:
Wed Mar 20, 2019 7:52 pm
12.79% Xtrackers MSCI EAFE High Div Yld Eq ETF (HDEF)
12.18% iShares Core MSCI Emerging Markets ETF (IEMG)
9.30% iShares Edge MSCI Intl Size Factor ETF (ISZE)
Vineviz,
Do you have an opinion on WisdomTree funds DLS, DGS. I like them except the high ER. Thanks
Not a strong opinion, except that the expenses strike me as awfully high. When I tested them in my portfolio I just didn't see enough diversification benefit to justify the fees. Their performance has definitely been good, what you'd expect given their strategies, but I didn't see a place for them in my portfolio.

My portfolio, for example, would be less diversified if I replaced any of my existing international funds with DLS and equivalently diversified if I replaced any of them with DGS.

That left me to decide whether I was confident that a fund like DLS or DGS could deliver enough factor beta to justify the high ER. I decided that the lower ER of my existing funds was the safer strategy.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

stan1
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Re: Here's my portfolio

Post by stan1 » Sat Mar 23, 2019 8:41 am

vineviz wrote:
Thu Mar 21, 2019 10:39 am
My goal is to match or exceed the return of Vanguard Target Retirement 2035 Fund (VTTHX), which roughly corresponds to my goal for when to retire.
Thanks for this post, I appreciate you and a few others who are obviously knowledgeable and are willing to share some slightly unorthodox views here especially for those of us with a reasonable chance of a life expectancy of 40 or more years (I'm in my early 50s and have had a dozen great aunts and uncles live into their 90s so I'm going to assume I'm blessed with longevity genes). I'm also not comfortable with defaulting to the assumption that the last 70 years of stability and growth will be repeated over the next 70 years.

You might have told us this in other posts, but may I ask what your approximate age is to go along with your expected retirement date of around 2035?

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Re: Here's my portfolio

Post by vineviz » Sat Mar 23, 2019 9:22 am

stan1 wrote:
Sat Mar 23, 2019 8:41 am
vineviz wrote:
Thu Mar 21, 2019 10:39 am
My goal is to match or exceed the return of Vanguard Target Retirement 2035 Fund (VTTHX), which roughly corresponds to my goal for when to retire.
Thanks for this post, I appreciate you and a few others who are obviously knowledgeable and are willing to share some slightly unorthodox views here especially for those of us with a reasonable chance of a life expectancy of 40 or more years (I'm in my early 50s and have had a dozen great aunts and uncles live into their 90s so I'm going to assume I'm blessed with longevity genes). I'm also not comfortable with defaulting to the assumption that the last 70 years of stability and growth will be repeated over the next 70 years.

You might have told us this in other posts, but may I ask what your approximate age is to go along with your expected retirement date of around 2035?
I'm 50 and my wife is 52.

For planning purposes I am assuming a retirement at age 65 or so, but we are both in professions that would allow us to happily work past that point if need be.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by dcabler » Sat Mar 23, 2019 11:33 am

vineviz wrote:
Thu Mar 21, 2019 2:53 pm
GrowthSeeker wrote:
Thu Mar 21, 2019 2:34 pm
vineviz wrote:
Thu Mar 21, 2019 12:04 pm
<snip>
Basically I start with the equity/bond ratio. For me this flows primarily from the desired overall portfolio volatility. My personal risk tolerance is pretty high, and for planning purposes I'm targeting portfolio volatility of about 13-14% annualized standard deviation. This is a function of what kind of drawdown I think I can tolerate and still make my retirement goals. Behaviorally, I love buying things that have gone down and/or underperformed: old value investors never die, they just get their fix from rebalancing. Anyway, this step is probably the least objective step, but it is where I start.

I then estimate the stock/bond ratio that I think will roughly get me to that targeted amount of volatility. For this step I assume a global basket of stocks (e.g. the MSCI ACWI index or similar) and long-term US treasury bonds (e.g. Vanguard Extended Duration Treasury Index Fund), then find the mix of the two that matches my volatility target and maximizes portfolio diversification. Right now that's about 82% stocks and 18% bonds, so I set my overall asset allocation target roughly in line with that.
</snip>
Could you share the mechanics of how you do make these computations?
I'm guessing you're using Portfolio Visualizer and the Portfolio Optimization screen; but can you clarify some details, like how many years back and what are the dropdown list settings? Or if you have some other method of calculation, please share.

Thanks.
PortfolioVisualizer used to include an option to optimize for "Diversification Ratio", but earlier in 2019 they deprecated that functionality.

So I built a spreadsheet that can calculate the diversification ratio. I've uploaded a simple version of it to DropBox here. You just run the assets you want to compare through Asset Correlation in Portfolio Visualizer and paste the result into the spreadsheet with a little modification.

I have also built a more complicated version of this same spreadsheet for personal use. In can then use the Solver function of Excel to maximize diversification given whatever of constraints I need to impose (e.g. set volatility to XX%, limit bonds to no more than YY%, make sure international stocks are between AA% and ZZ%). Those modifications would be easy for someone who is reasonably advanced with Excel to add themselves. The formula for diversification ratio is actually very simple:

Image

It's the weighted average of asset volatilities divided by the volatility of the resultant portfolio.
I wonder if they deprecated the functionality because "Diversification Ratio" is a registered trademark
https://www.mackenzieinvestments.com/en ... 562c9cbe08

One thing they point out is that the calculation is done "provided the assets are not fully correlated" which makes sense. What isn't clear is what the full equation might be with assets with correlation other than zero. As we know, most small caps have a very high correlation with total stock market. Similar with emerging markets vs. total international, etc... Doesn't seem correct that two highly correlated assets would be treated in the diversification ratio calculation based only on their weights and not somehow include their correlation.

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Re: Here's my portfolio

Post by celerity » Sat Mar 23, 2019 12:54 pm

dcabler wrote:
Sat Mar 23, 2019 11:33 am
I wonder if they deprecated the functionality because "Diversification Ratio" is a registered trademark
https://www.mackenzieinvestments.com/en ... 562c9cbe08
PV was threatened legal action if they didn’t remove Diversification Ratio. The formula is apparently patented. Completely absurd, if you ask me. :shock:

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Re: Here's my portfolio

Post by celerity » Sat Mar 23, 2019 1:02 pm

vineviz wrote:
Sat Mar 23, 2019 7:54 am
Intellectually the global weight approach seems a little more dangerous. Remember your Japan example: your approach would have increased exposure to Japan right up until the crash just because everyone else was doing it. Using a top-down maximum diversificaiton approach would have at least given the investor a possibility of avoiding such high concentration. I don't know if it actually would have, but conceptually it seems more likely than a global market cap weighted approach.
Concentration risk is a concern. I keep telling myself (perhaps wrongly): US is the worlds biggest economy and if you guys are in shit, so is everyone else :)

Building a diversified portfolio is a good idea – in theory. For example, pick a bunch of nice funds with low TER and optimize using diversification ratio. Then estimate expected return with Monte Carlo. IMO the drawback with this approach is it may underperform MSCI ACWI. The technique strikes me as more speculative than market-cap weighting.

Another option could be to stick to market-cap BUT constrain US to say 30%. I recall you saying diversification can be gained by capping the top constituents.

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Re: Here's my portfolio

Post by vineviz » Sat Mar 23, 2019 1:02 pm

dcabler wrote:
Sat Mar 23, 2019 11:33 am
I wonder if they deprecated the functionality because "Diversification Ratio" is a registered trademark
Perhaps, though the ratio itself seems unlikely to enjoy the benefits of protection.
dcabler wrote:
Sat Mar 23, 2019 11:33 am
One thing they point out is that the calculation is done "provided the assets are not fully correlated" which makes sense. What isn't clear is what the full equation might be with assets with correlation other than zero.
The equation is the same regardless of what the correlations is.

If all the assets are fully correlated (i.e. equal to 1.00) then the equation simplifies to 1.00 by definition.

In order to calculated the denominator you need to know three things: 1) the weight of each asset; 2) the volatility of each asset; and 3) the correlation between each pair of assets (aka the covariance matrix of the assets).

Holding #1 and #2 constant, the lower the correlations are the higher the diversification ratio becomes.

Imagine a portfolio that is divided evenly (i.e. 50/50) between two assets that have identical variances to each other. This would be like having 50% Vanguard Total Stock Market ETF (VTI) and 50% iShares Core S&P Total US Stock Mkt ETF (ITOT).

If the correlation of the two assets is 1.0 (as would be the case for VTI and ITOT), the diversification ratio is by definition 1.00.

If the correlation of the two assets is 0.0 (completely uncorrelated), the diversification ratio becomes 1.41

If the correlation of the two assets is -1.0 (completely inversely correlated), the diversification ratio become infinitely large. This is intuitive, because such a portfolio would have zero variance.

Practically speaking, diversification ratios of between 1.25 and 1.95 are about the best you can achieve using assets that are appropriate for retail investors (i.e. 1940 act funds that invest in stocks, bonds, commodities, and/or liquid alternatives). For example the following portfolio would have a diversification ratio of about 1.58:

• 25% Vanguard Total Stock Market ETF (VTI)
• 25% iShares S&P Small-Cap 600 Value ETF (IJS)
• 25% Shares Core MSCI Emerging Markets ETF (IEMG)
• 25% Vanguard Extended Duration Treasury ETF (EDV)

On the other hand, the following "simpler" portfolio would have a considerably lower diversification ratio of about 1.10:

• 75% Vanguard Total World Stock ETF (VT)
• 25% Vanguard Total Bond Market ETF (BND)
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by vineviz » Sat Mar 23, 2019 1:21 pm

celerity wrote:
Sat Mar 23, 2019 1:02 pm
IMO the drawback with this approach is it may underperform MSCI ACWI. The technique strikes me as more speculative than market-cap weighting.
I think it's just a question of picking your poison.

You can maximize diversification, you can maximize expected return, you can minimize expected volatility, or you can minimize tracking error: you can't, however, as a rule do more than one of those things.

Most investors, I suspect, would feel most comfortable aiming at some degree balance between those four goals and you could achieve that by optimizing diversification subject to whatever constraints you felt were appropriate. E.g. maximizing diversification subject to the dual constraint that the weight of US stocks be less than 40% of equities and the target volatility of the overall portfolio is 10%.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Post by hdas » Sat Mar 23, 2019 2:43 pm

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Re: Here's my portfolio

Post by vineviz » Sat May 18, 2019 9:23 am

I've made a few minor changes to my portfolio since my last update, partly because some of my individual bonds were called and partly because I wanted to clean up a few investments that I wasn't entirely happy with.

The current actual holdings looks like this:

Code: Select all

21.8%	SPDR® S&P 600 Small Cap Value ETF (SLYV)
15.6%	Vanguard U.S. Multifactor ETF Shares (VFMF)
12.3%	Xtrackers MSCI EAFE High Dividend Yield Equity ETF (HDEF)
11.1%	iShares Core MSCI Emerging Markets ETF (IEMG)
10.5%	Individual Stocks
8.6%	Vanguard Extended Duration Treasury Index Fund ETF Shares (EDV)
7.7%	iShares J.P. Morgan EM Local Currency Bond ETF (LEMB)
5.7%	Individual Bonds
3.5%	SPDR® S&P 500 ETF (SPY)
3.1%	SPDR® Portfolio Long Term Treasury ETF (SPTL)

The biggest change was replacing "iShares Edge MSCI Intl Size Factor ETF (ISZE)" with "iShares J.P. Morgan EM Local Currency Bond ETF (LEMB)" as part of my international equity allocation. Yes, for purposes of my asset allocation I'm treating these local currency emerging markets bonds as equities: they have a volatility similar to the S&P 500 and a 542bps spread over similar duration US treasuries.

As part of the rebalancing I switched out some of my "Vanguard U.S. Multifactor ETF Shares (VFMF)" for "SPDR® S&P 600 Small Cap Value ETF (SLYV)". This was mostly for logistical reasons, since I still like VFMF as an investment, but was partly motivated by the lower ER and no-transaction-fee status of SLYV.

The individual stocks I own are exclusively small cap and mid cap utility stocks. I currently have 11 stocks which were mostly selected from the utility holdings of the S&P 400 Value and and S&P 600 Value indexes (the smallest stocks in the S&P 500 Value index are also in the universe for my strategy, since they are more mid cap than large cap). If there was a S&P 1000 Value Equal Weight Utilities Index ETF, I'd own that instead since that's basically what I'm recreating.

The smallest holdings (i.e. the SPDR funds) are proxies for 401k options. Otherwise those funds would be in VFMF and EDV, respectively.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Post by hdas » Sat May 18, 2019 12:09 pm

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Re: Here's my portfolio

Post by vineviz » Sat May 18, 2019 2:28 pm

hdas wrote:
Sat May 18, 2019 12:09 pm
I like the change, however I can't believe the constant switching is going to be constructive for your returns.
That's always a risk, though I don't consider the changes I made to be dramatic and they definitely don't (I think) fall prey to the trap of performance chasing.

The ejection of ISZE was partly driven by a change in its underlying index last fall, which greatly increased its correlation with HDEF.

Image

I don't normally expect the index funds I invest in to have significant changes in their mandate, but sometimes they do. When that happens, I feel like some adjustments are called for.
hdas wrote:
Sat May 18, 2019 12:09 pm
The other issue is basically your whole allocation to US equities is depending on the value factor doing ok. VFMF has really done poorly because of that despite quality and momentum doing good.
I suppose you could look at it that way, but all my US stock holdings are long-only so their single biggest return/risk driver is by far market beta.

Depending on which factor model you use, market beta accounts for about 60% of my expected returns whereas value accounts for around 9% and size for around 11%. I've got reasonable factor exposure to momentum and quality as well, and decent (though not statistically significant) exposure to BAB as well. Because the portfolio is primarily optimized for diversification, it's pretty balanced relative to most Bogleheads portfolios I'd say.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by kfitz1313 » Sun May 19, 2019 1:44 pm

vineviz wrote:
Sat May 18, 2019 9:23 am
The biggest change was replacing "iShares Edge MSCI Intl Size Factor ETF (ISZE)" with "iShares J.P. Morgan EM Local Currency Bond ETF (LEMB)" as part of my international equity allocation. Yes, for purposes of my asset allocation I'm treating these local currency emerging markets bonds as equities: they have a volatility similar to the S&P 500 and a 542bps spread over similar duration US treasuries.
I just commented on the use of BWX in another one of your threads and you replied with "A fund like doesn't tend to shine as a great diversifier in a showdown like the one I constructed for two reason: 1) BWX has a higher correlation with both stocks and US treasuries than gold does; and 2) BWX has lower volatility than gold." That immediately reminded of LEMB but I see you're actually already using it now so that answers my follow up thought of an EDV/LEMB combo working very well together for the fixed income portion of a portfolio that was trying to increase diversification.

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Re: Here's my portfolio

Post by vineviz » Tue May 21, 2019 11:43 am

hdas wrote:
Tue May 21, 2019 11:11 am
vineviz wrote:
Wed Mar 20, 2019 7:52 pm

17.38% SPDR® S&P 600 Small Cap Value ETF (SLYV)
I was looking into this ETF. The lower expense ratio is nice. The only caveat is that seems very inefficient for a taxable account if needed, lots of LTCG, STCG distributions.
I hold it in a tax-deferred account, and would probably use VIOV in a taxable account instead.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by vineviz » Mon Jun 03, 2019 12:10 pm

vineviz wrote:
Sat May 18, 2019 9:23 am
The individual stocks I own are exclusively small cap and mid cap utility stocks. I currently have 11 stocks which were mostly selected from the utility holdings of the S&P 400 Value and and S&P 600 Value indexes (the smallest stocks in the S&P 500 Value index are also in the universe for my strategy, since they are more mid cap than large cap). If there was a S&P 1000 Value Equal Weight Utilities Index ETF, I'd own that instead since that's basically what I'm recreating.
One complication to this individual stock sleeve is the possibility of acquisitions. Twice already this year, stocks I own were either acquired (Vectren Corp, in February) or announced that they were being acquired (El Paso Electric, today). I knew that acquisitions were likely to occur, but having two in such a short period of time is a bit unexpected.

Anyone who wants to do something like this "DIY index" approach should have a plan laid out in advance to deal with it. One consideration is trading expense: waiting for an acquisition to close will likely result in a redemption that incurs no brokerage commission. On the other hand, holding onto stock in a company that has agreed to be acquired can lead to long periods of time when the stock behaves more like a bond than like equity (because you're basically just collecting the time value of money).

Normally a stock isn't removed from an index until the acquisition is complete, but I'm choosing to remove the stock when the acquisition is announced instead. I made this decision because my primary motivation is diversification, not an attempt to outperform the market. So today I sold El Paso Electric Company (EE) and purchased NorthWestern Corporation (NWE) to replace it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by azanon » Mon Jun 03, 2019 3:55 pm

vineviz wrote:
Sat May 18, 2019 9:23 am
I've made a few minor changes to my portfolio since my last update, partly because some of my individual bonds were called and partly because I wanted to clean up a few investments that I wasn't entirely happy with.

The current actual holdings looks like this:

Code: Select all

21.8%	SPDR® S&P 600 Small Cap Value ETF (SLYV)
15.6%	Vanguard U.S. Multifactor ETF Shares (VFMF)
12.3%	Xtrackers MSCI EAFE High Dividend Yield Equity ETF (HDEF)
11.1%	iShares Core MSCI Emerging Markets ETF (IEMG)
10.5%	Individual Stocks
8.6%	Vanguard Extended Duration Treasury Index Fund ETF Shares (EDV)
7.7%	iShares J.P. Morgan EM Local Currency Bond ETF (LEMB)
5.7%	Individual Bonds
3.5%	SPDR® S&P 500 ETF (SPY)
3.1%	SPDR® Portfolio Long Term Treasury ETF (SPTL)
I'd give anything to have your risk tolerance. If i were going to design a max return portfolio (regardless of volatility), it wouldn't look much different than that. I'd be nitpicking to propose changing anything from that POV...... Oh I dunno - maybe work some gold/commodities in there. Ehh.. nitpicking ;)

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Re: Here's my portfolio

Post by vineviz » Tue Jun 04, 2019 7:48 am

azanon wrote:
Mon Jun 03, 2019 3:55 pm
I'd give anything to have your risk tolerance. If i were going to design a max return portfolio (regardless of volatility), it wouldn't look much different than that. I'd be nitpicking to propose changing anything from that POV...... Oh I dunno - maybe work some gold/commodities in there. Ehh.. nitpicking ;)
I probably do have more risk tolerance than many people, but I also don't see this portfolio as particularly risky in the classic sense. My portfolio backtested over the past year had a lower standard deviation of returns than Vanguard LifeStrategy Growth fund (VASGX), for instance, and only slightly higher than a four-fund portfolio (e.g. VTI, VXUS, BND, BNDX) with the same overall asset allocation.

Some of the individual components are a little more volatile than total market funds are, but because my portfolio is much more diversified than a market-cap weighted portfolio would be the overall portfolio volatility isn't much different.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Here's my portfolio

Post by azanon » Tue Jun 04, 2019 7:57 am

vineviz wrote:
Tue Jun 04, 2019 7:48 am
azanon wrote:
Mon Jun 03, 2019 3:55 pm
I'd give anything to have your risk tolerance. If i were going to design a max return portfolio (regardless of volatility), it wouldn't look much different than that. I'd be nitpicking to propose changing anything from that POV...... Oh I dunno - maybe work some gold/commodities in there. Ehh.. nitpicking ;)
I probably do have more risk tolerance than many people, but I also don't see this portfolio as particularly risky in the classic sense. My portfolio backtested over the past year had a lower standard deviation of returns than Vanguard LifeStrategy Growth fund (VASGX), for instance, and only slightly higher than a four-fund portfolio (e.g. VTI, VXUS, BND, BNDX) with the same overall asset allocation.

Some of the individual components are a little more volatile than total market funds are, but because my portfolio is much more diversified than a market-cap weighted portfolio would be the overall portfolio volatility isn't much different.
I agree with everything you just said. I'm actually complimenting your portfolio because I see how you implemented factors in there, and also taking advantaged of some low correlations to offset isolated risks (use of EDV).

The catch, though, is that Vanguard LifeStrategy Growth Fund is risky. I'd roughly* (not supported by research, just recollection of articles and surveys) estimate that 20% of the population could hold that fund through the worst bear markets we've seen over the last 100 years, and not flinch. A 50% equity portfolio one can stick with is far better than an 80% equity one that someone can't.

Now I"m not saying you'r not in that 20%. If the US is 300 million people, that's 60 million people that are in it. I hope you really are one of those, and your educational background makes it far more likely you'll belong to the club.

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Re: Here's my portfolio

Post by klaus14 » Wed Jun 05, 2019 12:53 am

vineviz wrote:
Thu Mar 21, 2019 2:07 pm
So far I've been pleased.

It's a bit early, but it looks like they've been able to maintain reasonably strong exposure to multiple factors while maintaining (so far) a mildly positive alpha. My main initial concern was the potential impact of turnover on costs, but as far as I can tell they've managed it well. And, knock on wood, it seems to have been pretty tax-efficient in its first year.

As for its role in my portfolio, I'm a bit more ambivalent. It has played its role solidly, for sure, but I've grown more sure that the best role fro VFMF in a portfolio is as a core holding (i.e. a replacement for VTI for investors who want more factor diversification than total stock market offers). In my portfolio it gets a little lost among some of my other investments.

Personally, I could possibly achieve more factor diversification by reallocating money from VFMF to funds like SLYV, VPU, and maybe even IVW or MTUM. The main thing that holds me back is the added complexity (especially if my wife were left to manage the portfolio on her own) for what is likely a marginal gain.

In summary, I plan to continue to hold VFMF and will likely reevaluate on its 2nd birthday.
i guess you didn't go with VFMF alone because it's not as small cap loaded as SLYV?
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds. 50% value tilt in stocks.

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