And I would still disagree, because the role of VSS is not merely to exposure to the factors you included in your regressions. Geographic diversification is also important, and you must account for that when constructing the portfolio. Just "excluding" a fund at random from a model portfolio is a good way to end up making a bet you didn't intend to make.Anon9001 wrote: ↑Sun Jan 10, 2021 5:49 amI did test all the Ex-US small cap ETF's and it seems that GWX and SCZ have a statistically significant loading on the Profitability Factor but VFSNX does not have a statistically significant loading on anything other than the Size and Market factor so I will modify my advice to exclude the VSS ETF from the Five Fund Portfolio that you suggest.
A low-cost 5 fund Boglehead portfolio
Re: A low-cost 5 fund Boglehead portfolio
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: A low-cost 5 fund Boglehead portfolio
That can be accomplished by the other ETF's that have loading on Profitability Factor unlike VSS so I don't see any special role for VSS in the Five Fund Portfolio. A better replacement would be AVDV which does not rely on the Size premium being statistically significant outside USA.vineviz wrote: ↑Sun Jan 10, 2021 7:04 am And I would still disagree, because the role of VSS is not merely to exposure to the factors you included in your regressions. Geographic diversification is also important, and you must account for that when constructing the portfolio. Just "excluding" a fund at random from a model portfolio is a good way to end up making a bet you didn't intend to make.
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Re: A low-cost 5 fund Boglehead portfolio
I think you'll find that if you replace VSS with AVDV in the portfolios, you'll have accomplished very little: the net (after expenses) expected return of AVDV is not greater than that of VSS.Anon9001 wrote: ↑Sun Jan 10, 2021 7:12 amThat can be accomplished by the other ETF's that have loading on Profitability Factor unlike VSS so I don't see any special role for VSS in the Five Fund Portfolio. A better replacement would be AVDV which does not rely on the Size premium being statistically significant outside USA.vineviz wrote: ↑Sun Jan 10, 2021 7:04 am And I would still disagree, because the role of VSS is not merely to exposure to the factors you included in your regressions. Geographic diversification is also important, and you must account for that when constructing the portfolio. Just "excluding" a fund at random from a model portfolio is a good way to end up making a bet you didn't intend to make.
"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: A low-cost 5 fund Boglehead portfolio
What do you think about simply:
VT
BLV
I wasn’t able to backtest the etfs since they only go back to May, 2007, but it seems to offer similar or better performance.
VT
BLV
I wasn’t able to backtest the etfs since they only go back to May, 2007, but it seems to offer similar or better performance.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
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Re: A low-cost 5 fund Boglehead portfolio
Would you mind elaborating on this? I've been trying to decide between SCHC and AVDV in my own portfolio. I already have a 20% allocation to EM, so I'd like to avoid the EM in VSS.vineviz wrote: ↑Sun Jan 10, 2021 8:44 amI think you'll find that if you replace VSS with AVDV in the portfolios, you'll have accomplished very little: the net (after expenses) expected return of AVDV is not greater than that of VSS.Anon9001 wrote: ↑Sun Jan 10, 2021 7:12 amThat can be accomplished by the other ETF's that have loading on Profitability Factor unlike VSS so I don't see any special role for VSS in the Five Fund Portfolio. A better replacement would be AVDV which does not rely on the Size premium being statistically significant outside USA.vineviz wrote: ↑Sun Jan 10, 2021 7:04 am And I would still disagree, because the role of VSS is not merely to exposure to the factors you included in your regressions. Geographic diversification is also important, and you must account for that when constructing the portfolio. Just "excluding" a fund at random from a model portfolio is a good way to end up making a bet you didn't intend to make.
Re: A low-cost 5 fund Boglehead portfolio
The point is really just that these international small cap funds are very similar in performance and risk exposures. Sure there are differences that look important in isolation, but once they are combined into portfolios at common allocation weights the differences between the funds just becomes noise.LaughingStoic wrote: ↑Sat Jan 23, 2021 7:35 amWould you mind elaborating on this? I've been trying to decide between SCHC and AVDV in my own portfolio. I already have a 20% allocation to EM, so I'd like to avoid the EM in VSS.vineviz wrote: ↑Sun Jan 10, 2021 8:44 amI think you'll find that if you replace VSS with AVDV in the portfolios, you'll have accomplished very little: the net (after expenses) expected return of AVDV is not greater than that of VSS.Anon9001 wrote: ↑Sun Jan 10, 2021 7:12 amThat can be accomplished by the other ETF's that have loading on Profitability Factor unlike VSS so I don't see any special role for VSS in the Five Fund Portfolio. A better replacement would be AVDV which does not rely on the Size premium being statistically significant outside USA.vineviz wrote: ↑Sun Jan 10, 2021 7:04 am And I would still disagree, because the role of VSS is not merely to exposure to the factors you included in your regressions. Geographic diversification is also important, and you must account for that when constructing the portfolio. Just "excluding" a fund at random from a model portfolio is a good way to end up making a bet you didn't intend to make.
VSS, SCHC, AVDV, and the DFA equivalents are so highly correlated with each other and with other funds in the portfolio that it would be unreasonable to expect that - at 25% or less of the total portfolio - that it will reliably matter whether you use SCHC or AVDV or VSS.
Imagine you need a full gallon of milk but the jug in your fridge only contains 120 ounces instead of 128 ounces so you need to get a cup of milk from a neighbor. Does it REALLY matter whether the neighbor is giving you whole milk or 2% milk when it will amount to only 1/16th of the total when you're done?
AVDV is obviously the new kid on the block, but I expect it to perform roughly similarly to the DFA International Small Cap Value (DISVX) so let's use the DFA fund to take advantage of its longer history. Compare three different 75/25 portfolios using 75% in Vanguard Total World Stock ETF and 25% in DISVX, VSS, and SCHC respectively.
Over more than a decade, the three portfolios had CAGRs of 9.48%, 9.50%, and 9.57%. Standard deviations were 15.74%, 15.50%, and 15.53%. That's a complete absence of either economic or statistical significance.
Conceptually, I like the construction of AVDV better than VSS or SCHC. I just don't think that it is clearly obvious that AVDV is ENOUGH better to overcome the 200% higher expense, and my personal heuristic is to use a cheaper alternative when I can find no clearly compelling reason to use a more expensive fund.
In my opinion, though, the bottom line is that it probably doesn't matter whether you use AVDV, SCHC, or VSS. Don't waste any time agonizing over the decision between SCHC and AVDV if those are the ones on your short list: it's counterproductive IMHO. Just flip a coin or simply split the difference and buy some of each.
"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: A low-cost 5 fund Boglehead portfolio
It is interesting how similar the funds seem to be so far. That said, a few points:
1. These past 3 years have been incredibly bad for value. Whether that persists or not is anyone's guess, but it's worth nothing that from VSS's inception to January 2018 it underperformed DISVX by 2% per year.
2. It's been a short time period, but both the Avantis funds have outperformed their DFA counterparts thus far. As far as I can tell, any part of this that isn't random is due to having more factor exposure, rather than temporarily benefiting from having less.
All that said, I hold almost 20% of my portfolio in VSS. I do think AVDV will outperform it in the long run, but being limited by 401k constraints, I think it's the smallest trade off.
Re: A low-cost 5 fund Boglehead portfolio
vineviz portfolio.
32.00% Vanguard Total Stock Market ETF (VTI)
16.00% Vanguard S&P Small-Cap 600 Value ETF (VIOV)
16.00% Vanguard FTSE All-Wld ex-US SmCp ETF (VSS)
16.00% Vanguard FTSE Emerging Markets ETF (VWO)
20.00% Vanguard Long-Term Bond ETF (BLV)
80% stocks 20% bonds
The equity portion can be separated into U.S. and all world except U.S.
Domestic
2/5 of equity is Total U.S Stock Market
1/5 of equity Small Cap Value - fairly hefty tilt.
Foreign
1/5. All-world ex-US small cap
1/5 emerging markets.
Domestic / foreign Ratio is 60/40.
Bonds are 20%
I think if one wanted to be more conservative a change of stock to bond ratio would work well. Just divide the stock percent by five. Give 2/5 to U.S. Stock market. And 1/5 each to remaining slices.
I like the ratios and they make sense.
32.00% Vanguard Total Stock Market ETF (VTI)
16.00% Vanguard S&P Small-Cap 600 Value ETF (VIOV)
16.00% Vanguard FTSE All-Wld ex-US SmCp ETF (VSS)
16.00% Vanguard FTSE Emerging Markets ETF (VWO)
20.00% Vanguard Long-Term Bond ETF (BLV)
80% stocks 20% bonds
The equity portion can be separated into U.S. and all world except U.S.
Domestic
2/5 of equity is Total U.S Stock Market
1/5 of equity Small Cap Value - fairly hefty tilt.
Foreign
1/5. All-world ex-US small cap
1/5 emerging markets.
Domestic / foreign Ratio is 60/40.
Bonds are 20%
I think if one wanted to be more conservative a change of stock to bond ratio would work well. Just divide the stock percent by five. Give 2/5 to U.S. Stock market. And 1/5 each to remaining slices.
I like the ratios and they make sense.
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Re: A low-cost 5 fund Boglehead portfolio
Any thoughts on using VFVA as a core holding in a 4 or 5 fund portfolio?
Re: A low-cost 5 fund Boglehead portfolio
VFVA is nice if you want a deeper value exposure than Vanguard's other funds and don't mind being split between small, mid and large cap. In fact, if you want all 3, it's a nice way to get them in one simple package.lisaneedsbraces wrote: ↑Sun Jan 24, 2021 4:50 pm Any thoughts on using VFVA as a core holding in a 4 or 5 fund portfolio?
However, since small size seems to amplify the value factor, I personally like VIOV and AVUV more.
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Re: A low-cost 5 fund Boglehead portfolio
SCZ seems to have a slight advantage over the past 10 years. Does anybody know why is the reason for that and if it'd be expected to continue?
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Re: A low-cost 5 fund Boglehead portfolio
I’m thinking about Vanguard Total World, so some combination of VT/VFVA/Bond Fund, but still unsure if I can get over the higher ER of VT (compared to total US and total international) and the current loss of the foreign tax credit.lisaneedsbraces wrote: ↑Sun Jan 24, 2021 4:50 pm Any thoughts on using VFVA as a core holding in a 4 or 5 fund portfolio?
Re: A low-cost 5 fund Boglehead portfolio
I'd like to compare this portfolio for educational purposes :
AVUS - 30
AVUV - 15
AVDV - 15
AVEM - 15
SPTL - 25
How can I compare this portfolio to others mentioned previously to see diversification differences? I know this portfolio is .20 compared to .10. How could I see if this was a portfolio I was okay paying extra for?
AVUS - 30
AVUV - 15
AVDV - 15
AVEM - 15
SPTL - 25
How can I compare this portfolio to others mentioned previously to see diversification differences? I know this portfolio is .20 compared to .10. How could I see if this was a portfolio I was okay paying extra for?
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Re: A low-cost 5 fund Boglehead portfolio
Interesting portfolio but I disagree with the amount of tilt towards EM and lack of exUS LC
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: A low-cost 5 fund Boglehead portfolio
Put them into Portfolio Visualizer, the issue with the Avantis ETFs is they are new. I suppose if you felt the Avantis ETFs were comparable enough to DFA you could use DFA funds instead that would give you decades of data to compare against passive index based approach.17outs wrote: ↑Fri Feb 12, 2021 7:48 pm I'd like to compare this portfolio for educational purposes :
AVUS - 30
AVUV - 15
AVDV - 15
AVEM - 15
SPTL - 25
How can I compare this portfolio to others mentioned previously to see diversification differences? I know this portfolio is .20 compared to .10. How could I see if this was a portfolio I was okay paying extra for?
Re: A low-cost 5 fund Boglehead portfolio
One thing to keep in mind that when assets are highly correlated, you don't need own them all.Nathan Drake wrote: ↑Sat Feb 13, 2021 12:28 pm Interesting portfolio but I disagree with the amount of tilt towards EM and lack of exUS LC
There's a concept in information theory called information content, which in some contexts is called entropy. In investing, entropy is a measure of the maximum amount of available diversification that a set of assets contains. Basically entropy measures the "effective number of independent bets" available from a given group of assets. Link to a discussion on the topic.
A three-asset portfolio consisting of US stocks, ex-US developed markets stocks, and emerging markets stocks contains about 1.42 independent sources of risk when measured using covariances from 2005 to 2020. A two-asset portfolio consistent of just US stocks and emerging markets stock contains 1.37 of those independent bets, which means a 33% reduction in the number of assets reduces the diversification potential of the portfolio by only about 3.5%.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: A low-cost 5 fund Boglehead portfolio
No guarantee (or even a good reason, really) to expect the continuation of past correlations such as this.vineviz wrote: ↑Sun Feb 14, 2021 5:13 pmOne thing to keep in mind that when assets are highly correlated, you don't need own them all.Nathan Drake wrote: ↑Sat Feb 13, 2021 12:28 pm Interesting portfolio but I disagree with the amount of tilt towards EM and lack of exUS LC
There's a concept in information theory called information content, which in some contexts is called entropy. In investing, entropy is a measure of the maximum amount of available diversification that a set of assets contains. Basically entropy measures the "effective number of independent bets" available from a given group of assets. Link to a discussion on the topic.
A three-asset portfolio consisting of US stocks, ex-US developed markets stocks, and emerging markets stocks contains about 1.42 independent sources of risk when measured using covariances from 2005 to 2020. A two-asset portfolio consistent of just US stocks and emerging markets stock contains 1.37 of those independent bets, which means a 33% reduction in the number of assets reduces the diversification potential of the portfolio by only about 3.5%.
Maybe US and EM are overvalued right now (actually quite plausible considering how much tech is in US, Chinese, and Taiwanese indices) but ex-US Developed is undervalued.
Re: A low-cost 5 fund Boglehead portfolio
There are never any guarantees in investing, but in addition to many theoretical reasons to "expect the continuation of past correlations such as this" there is a tremendous amount of empirical evidence which can inform us about how stable (or not) correlations are over time.
Valuations have nothing to do with 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: A low-cost 5 fund Boglehead portfolio
vineviz wrote: ↑Sun Feb 14, 2021 5:37 pmThere are never any guarantees in investing, but in addition to many theoretical reasons to "expect the continuation of past correlations such as this" there is a tremendous amount of empirical evidence which can inform us about how stable (or not) correlations are over time.
Valuations have nothing to do with it.
Why wouldn’t valuations play a role?
I understand that US TSM and exUS TSM probably capture a similar “risk” classification, but when valuations tend to deviate dramatically there can be a wide dispersion.
I just don’t think omitting such a huge portion of investable assets make sense to me from a diversification basis, even if in theory the additional diversification benefits don’t appear to be as high when you are owning 5 different funds that comprise of different risk criteria.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: A low-cost 5 fund Boglehead portfolio
Valuation gives you information about expected return, which is useful information for many decisions. But expected returns don’t have any bearing on diversification.
Nathan Drake wrote: ↑Sun Feb 14, 2021 5:59 pm I understand that US TSM and exUS TSM probably capture a similar “risk” classification, but when valuations tend to deviate dramatically there can be a wide dispersion.
I just don’t think omitting such a huge portion of investable assets make sense to me from a diversification basis, even if in theory the additional diversification benefits don’t appear to be as high when you are owning 5 different funds that comprise of different risk criteria.
It’s not only US TSM and exUS TSM which matter here. Remember, the question is whether a portfolio which already has BOTH US stocks AND emerging markets stocks will benefit from ALSO owning ex-US developed markets stocks. As it happens, the answer is “not very much”.
Imagine you are mixing paint colors: if you already have red pigment and yellow pigment, is it really crucial that you also have orange pigment?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: A low-cost 5 fund Boglehead portfolio
You don't have enough information to know that answer. Past correlations between these three slices are not guaranteed or likely to persist. There is no fundamental reason that owning two out of three should be similar to owning all three.vineviz wrote: ↑Sun Feb 14, 2021 6:10 pm It’s not only US TSM and exUS TSM which matter here. Remember, the question is whether a portfolio which already has BOTH US stocks AND emerging markets stocks will benefit from ALSO owning ex-US developed markets stocks. As it happens, the answer is “not very much”.
This analogy is irrelevant because all the reasons you've presented for eschewing ex-US Developed are publicly known to global capital markets. You don't know what the color differences will be.
-----
Interestingly, computing the sector distances of ex-US Developed (VEA) and Emerging Markets (VWO) to US (VTI), we obtain 16.68 for VEA - VTI and 15.80 for VWO - VTI. VWO's sector makeup is MORE similar to US, though the difference is small. VWO is also more similar to VTI than is VEA in terms of P/B, RoE, earnings growth rate, and top country concentration.
-----
The portfolio indicated in the OP is a good example of over-engineering. Since you started this thread, it has mildly underperformed with more volatility and a deeper max drawdown. Of course it also took more concentration risk, specifically in EM. We don't know how this portfolio will do in the future, but so far it has pretty much tracked the broad market just in a slightly worse way.
Re: A low-cost 5 fund Boglehead portfolio
I do have enough information to know that answer, which is how I was able to PROVIDE the answer.000 wrote: ↑Sun Feb 14, 2021 6:52 pmYou don't have enough information to know that answer.vineviz wrote: ↑Sun Feb 14, 2021 6:10 pm It’s not only US TSM and exUS TSM which matter here. Remember, the question is whether a portfolio which already has BOTH US stocks AND emerging markets stocks will benefit from ALSO owning ex-US developed markets stocks. As it happens, the answer is “not very much”.
[OT comment removed by admin LadyGeek]
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: A low-cost 5 fund Boglehead portfolio
No, you don't know what the answer to "the question is whether a portfolio which already has BOTH US stocks AND emerging markets stocks will benefit from ALSO owning ex-US developed markets stocks" will be. You don't know where future benefits will come from. DM could outperform the other two for a long time. EM doesn't have to rise along with it.vineviz wrote: ↑Sun Feb 14, 2021 6:58 pmI do have enough information to know that answer, which is how I was able to PROVIDE the answer.000 wrote: ↑Sun Feb 14, 2021 6:52 pmYou don't have enough information to know that answer.vineviz wrote: ↑Sun Feb 14, 2021 6:10 pm It’s not only US TSM and exUS TSM which matter here. Remember, the question is whether a portfolio which already has BOTH US stocks AND emerging markets stocks will benefit from ALSO owning ex-US developed markets stocks. As it happens, the answer is “not very much”.
[OT comment removed by admin LadyGeek]
[OT comment removed by admin LadyGeek]
Re: A low-cost 5 fund Boglehead portfolio
I removed some off-topic comments. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters.
Re: A low-cost 5 fund Boglehead portfolio
The human brain has a very hard time processing information sets which involve uncertainty, which is why it's important to avoid trying to use intuition and instead rely on fundamental economic principles and empirical evidence wherever possible.000 wrote: ↑Sun Feb 14, 2021 7:10 pm No, you don't know what the answer to "the question is whether a portfolio which already has BOTH US stocks AND emerging markets stocks will benefit from ALSO owning ex-US developed markets stocks" will be. You don't know where future benefits will come from. DM could outperform the other two for a long time. EM doesn't have to rise along with it.
All the forces that affect broad market returns are not completely independent, so it is not (and in fact CAN not be) optimal to treat them as being completely independent. It is not necessary to "know the future" in order to evaluate the degree of independence between different groups of stocks.
It's true that a combination of US stocks and emerging market stocks does not, and can not, completely capture precisely the risk exposure profile of ex-US developed market stocks. But it can, and must, capture the vast majority of that profile because most of the factors that impact the relative returns of US vs ex-US developed market stocks ALSO impact the relative returns of US vs emerging market stocks: demographic differences, interest rates, exchange rates, GDP growth, commodity prices, etc.
If you don't trust the quantitative measures of independence, at the very least you can see it graphically: a portfolio of US Stocks + Developed Market Stocks + Emerging Market Stocks + Bonds has deviated only slightly from a simpler portfolio of US + Emerging + Bonds for as long as we can see.
If the goal is to closely track a global market-cap weighted benchmark, including an allocation to ex-US developed market stocks is sensible. But if the goal is to build a diversified portfolio such an allocation is more likely to be a hindrance than a help.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: A low-cost 5 fund Boglehead portfolio
That's a pretty impressive graph, although rolling returns can look very similar even with substantially different CARGs. It seems to me though that there's little harm in including international developed and perhaps some upside.vineviz wrote: ↑Mon Feb 15, 2021 8:41 amThe human brain has a very hard time processing information sets which involve uncertainty, which is why it's important to avoid trying to use intuition and instead rely on fundamental economic principles and empirical evidence wherever possible.000 wrote: ↑Sun Feb 14, 2021 7:10 pm No, you don't know what the answer to "the question is whether a portfolio which already has BOTH US stocks AND emerging markets stocks will benefit from ALSO owning ex-US developed markets stocks" will be. You don't know where future benefits will come from. DM could outperform the other two for a long time. EM doesn't have to rise along with it.
All the forces that affect broad market returns are not completely independent, so it is not (and in fact CAN not be) optimal to treat them as being completely independent. It is not necessary to "know the future" in order to evaluate the degree of independence between different groups of stocks.
It's true that a combination of US stocks and emerging market stocks does not, and can not, completely capture precisely the risk exposure profile of ex-US developed market stocks. But it can, and must, capture the vast majority of that profile because most of the factors that impact the relative returns of US vs ex-US developed market stocks ALSO impact the relative returns of US vs emerging market stocks: demographic differences, interest rates, exchange rates, GDP growth, commodity prices, etc.
If you don't trust the quantitative measures of independence, at the very least you can see it graphically: a portfolio of US Stocks + Developed Market Stocks + Emerging Market Stocks + Bonds has deviated only slightly from a simpler portfolio of US + Emerging + Bonds for as long as we can see.
If the goal is to closely track a global market-cap weighted benchmark, including an allocation to ex-US developed market stocks is sensible. But if the goal is to build a diversified portfolio such an allocation is more likely to be a hindrance than a help.
For example, many people believe US valuations are very high and 10-year return prospects look pretty grim. If this is in fact the case, those wishing to tilt internationally might hold only 50% US stocks. Given that EM is almost 50% China, investors might be understandably cautious about having a 50% EM holding. There seems to be little downside to including International Developed.
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Re: A low-cost 5 fund Boglehead portfolio
vineviz wrote: ↑Mon Feb 15, 2021 8:41 amThe human brain has a very hard time processing information sets which involve uncertainty, which is why it's important to avoid trying to use intuition and instead rely on fundamental economic principles and empirical evidence wherever possible.000 wrote: ↑Sun Feb 14, 2021 7:10 pm No, you don't know what the answer to "the question is whether a portfolio which already has BOTH US stocks AND emerging markets stocks will benefit from ALSO owning ex-US developed markets stocks" will be. You don't know where future benefits will come from. DM could outperform the other two for a long time. EM doesn't have to rise along with it.
All the forces that affect broad market returns are not completely independent, so it is not (and in fact CAN not be) optimal to treat them as being completely independent. It is not necessary to "know the future" in order to evaluate the degree of independence between different groups of stocks.
It's true that a combination of US stocks and emerging market stocks does not, and can not, completely capture precisely the risk exposure profile of ex-US developed market stocks. But it can, and must, capture the vast majority of that profile because most of the factors that impact the relative returns of US vs ex-US developed market stocks ALSO impact the relative returns of US vs emerging market stocks: demographic differences, interest rates, exchange rates, GDP growth, commodity prices, etc.
If you don't trust the quantitative measures of independence, at the very least you can see it graphically: a portfolio of US Stocks + Developed Market Stocks + Emerging Market Stocks + Bonds has deviated only slightly from a simpler portfolio of US + Emerging + Bonds for as long as we can see.
If the goal is to closely track a global market-cap weighted benchmark, including an allocation to ex-US developed market stocks is sensible. But if the goal is to build a diversified portfolio such an allocation is more likely to be a hindrance than a help.
What are the percentages of allocation in that chart? Without knowing it, it could have a huge influence in the dispersion of returns.
Suppose one is 100% stocks, due to various reasons (time horizon, risk taking ability, etc). How much different would that chart look? Substantially so. Again, you can look at the 2000-2009 period for US vs ExUS vs Emerging Markets to see some wildly different outcomes across all three groups.
That seems to be diversity at work to me. Again, I would not feel particularly comfortable omitting such a large asset class just because it has a similar risk profile as another fund. There's geographical/valuation risk that it's not capturing in my view. There's sector risk that may not be adequately accounted for, as US TSM has quite a difference in sector profiles vs. exUS TSM.
I fail to see how including a heavy portion of cap-weighted global funds is somehow NOT diverse even if you want to have a slight tilt to other factors. For your argument to be true, it would also need to be true that there's no reason to buy a fund other than the US TSM if your goal is to simply capture the risk factor for the market. But clearly from the data we can see it is advantageous to include exUS for mitigating downside risk because even though expected returns may be similar for long time horizons, it can be disastrous from a sequence-of-return risk scenario to only invest in fewer markets rather than more.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: A low-cost 5 fund Boglehead portfolio
The "harm" would be that any capital allocated to ex-US developed market stocks is capital that can't be allocated to something more effective at diversifying the portfolio.
Clearly, diversification shouldn't be the ONLY criteria by which we judge a portfolio. Expected return plays a role as well, and it may be entirely reasonable to accept a portfolio with less diversification in exchange for a higher expected return.
"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: A low-cost 5 fund Boglehead portfolio
Taking the early post and adding 100% VIG to the third portfolio input, one finds a very interesting result. At least for the timeframe with VXUS.
Portfolio Returns
Portfolio performance statistics
Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio US Mkt Correlation
Portfolio 1 $10,000 $21,535 10.06% 9.55% 24.26% -9.87% -12.98% 0.98 1.57 0.93
Portfolio 2 $10,000 $21,376 9.96% 9.03% 23.45% -7.14% -10.80% 1.03 1.63 0.96
Portfolio 3 $10,000 $26,974 13.21% 10.25% 29.62% -2.08% -11.00% 1.20 1.97 0.95
Portfolio Returns
Portfolio performance statistics
Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio US Mkt Correlation
Portfolio 1 $10,000 $21,535 10.06% 9.55% 24.26% -9.87% -12.98% 0.98 1.57 0.93
Portfolio 2 $10,000 $21,376 9.96% 9.03% 23.45% -7.14% -10.80% 1.03 1.63 0.96
Portfolio 3 $10,000 $26,974 13.21% 10.25% 29.62% -2.08% -11.00% 1.20 1.97 0.95
Re: A low-cost 5 fund Boglehead portfolio
Here's a similar graph, without any bonds and using rolling 5-year returns instead of rolling 3-year returns. linkNathan Drake wrote: ↑Mon Feb 15, 2021 3:22 pm What are the percentages of allocation in that chart? Without knowing it, it could have a huge influence in the dispersion of returns.
Suppose one is 100% stocks, due to various reasons (time horizon, risk taking ability, etc). How much different would that chart look? Substantially so. Again, you can look at the 2000-2009 period for US vs ExUS vs Emerging Markets to see some wildly different outcomes across all three groups.
You can see that you get essentially the same result: there are no five-year periods in the data set where the portfolio with developed markets produced a significantly different outcome than the ones without.
On the contrary, quantitative and objective measures of diversification (including entropy-based measures) do a good job at capturing ALL sources of risk embedded in the asset. Not just the ones for which we have convenient labels.Nathan Drake wrote: ↑Mon Feb 15, 2021 3:22 pm That seems to be diversity at work to me. Again, I would not feel particularly comfortable omitting such a large asset class just because it has a similar risk profile as another fund. There's geographical/valuation risk that it's not capturing in my view. There's sector risk that may not be adequately accounted for, as US TSM has quite a difference in sector profiles vs. exUS TSM.
Using ad hoc risk categories (e.g. "currency risk", "sector risk", "geographic risk") can be dangerous because describing risks this way implies both a degree of both equivalence and independence which may not necessarily be true.
A portfolio containing three funds (US stocks, developed market stocks, and emerging market stocks) doesn't provide the investor with three completely unrelated sources of risk, despite the fact that each fund has different stocks. Being able to quantify how many different sources of risk the portfolio effectively provides is the key to understanding its diversification level.
To clarify, I'm not saying that a global market cap weighted portfolio is "NOT diverse". I'm merely pointing out that it is possible to construct a portfolio that is MORE diverse.Nathan Drake wrote: ↑Mon Feb 15, 2021 3:22 pm I fail to see how including a heavy portion of cap-weighted global funds is somehow NOT diverse even if you want to have a slight tilt to other factors.
"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: A low-cost 5 fund Boglehead portfolio
What do you consider a "source of risk"?vineviz wrote: ↑Mon Feb 15, 2021 4:48 pmHere's a similar graph, without any bonds and using rolling 5-year returns instead of rolling 3-year returns. linkNathan Drake wrote: ↑Mon Feb 15, 2021 3:22 pm What are the percentages of allocation in that chart? Without knowing it, it could have a huge influence in the dispersion of returns.
Suppose one is 100% stocks, due to various reasons (time horizon, risk taking ability, etc). How much different would that chart look? Substantially so. Again, you can look at the 2000-2009 period for US vs ExUS vs Emerging Markets to see some wildly different outcomes across all three groups.
You can see that you get essentially the same result: there are no five-year periods in the data set where the portfolio with developed markets produced a significantly different outcome than the ones without.
On the contrary, quantitative and objective measures of diversification (including entropy-based measures) do a good job at capturing ALL sources of risk embedded in the asset. Not just the ones for which we have convenient labels.Nathan Drake wrote: ↑Mon Feb 15, 2021 3:22 pm That seems to be diversity at work to me. Again, I would not feel particularly comfortable omitting such a large asset class just because it has a similar risk profile as another fund. There's geographical/valuation risk that it's not capturing in my view. There's sector risk that may not be adequately accounted for, as US TSM has quite a difference in sector profiles vs. exUS TSM.
Using ad hoc risk categories (e.g. "currency risk", "sector risk", "geographic risk") can be dangerous because describing risks this way implies both a degree of both equivalence and independence which may not necessarily be true.
A portfolio containing three funds (US stocks, developed market stocks, and emerging market stocks) doesn't provide the investor with three completely unrelated sources of risk, despite the fact that each fund has different stocks. Being able to quantify how many different sources of risk the portfolio effectively provides is the key to understanding its diversification level.
To clarify, I'm not saying that a global market cap weighted portfolio is "NOT diverse". I'm merely pointing out that it is possible to construct a portfolio that is MORE diverse.Nathan Drake wrote: ↑Mon Feb 15, 2021 3:22 pm I fail to see how including a heavy portion of cap-weighted global funds is somehow NOT diverse even if you want to have a slight tilt to other factors.
Why does large cap EM, ex-US, and US constitute related risk, yet you include ex-US SCV and US SCV in your 5 fund portfolio? Wouldn't the SCV risk in US capture the same risk as exUS or EM?
Last edited by Nathan Drake on Mon Feb 15, 2021 6:06 pm, edited 1 time in total.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: A low-cost 5 fund Boglehead portfolio
That chart has insufficient predictive power which is the crux of the whole issue. We can find all kinds of spurious correlations, even correlations between broad asset classes that hold up for a long time, until they don't anymore.vineviz wrote: ↑Mon Feb 15, 2021 8:41 amThe human brain has a very hard time processing information sets which involve uncertainty, which is why it's important to avoid trying to use intuition and instead rely on fundamental economic principles and empirical evidence wherever possible.000 wrote: ↑Sun Feb 14, 2021 7:10 pm No, you don't know what the answer to "the question is whether a portfolio which already has BOTH US stocks AND emerging markets stocks will benefit from ALSO owning ex-US developed markets stocks" will be. You don't know where future benefits will come from. DM could outperform the other two for a long time. EM doesn't have to rise along with it.
All the forces that affect broad market returns are not completely independent, so it is not (and in fact CAN not be) optimal to treat them as being completely independent. It is not necessary to "know the future" in order to evaluate the degree of independence between different groups of stocks.
It's true that a combination of US stocks and emerging market stocks does not, and can not, completely capture precisely the risk exposure profile of ex-US developed market stocks. But it can, and must, capture the vast majority of that profile because most of the factors that impact the relative returns of US vs ex-US developed market stocks ALSO impact the relative returns of US vs emerging market stocks: demographic differences, interest rates, exchange rates, GDP growth, commodity prices, etc.
If you don't trust the quantitative measures of independence, at the very least you can see it graphically: a portfolio of US Stocks + Developed Market Stocks + Emerging Market Stocks + Bonds has deviated only slightly from a simpler portfolio of US + Emerging + Bonds for as long as we can see.
If the goal is to closely track a global market-cap weighted benchmark, including an allocation to ex-US developed market stocks is sensible. But if the goal is to build a diversified portfolio such an allocation is more likely to be a hindrance than a help.
Missing out on a handful of securities can have a HUGE impact on returns. Remove a half dozen mega cap tech stocks from Total US or Total World and you get vastly different results. Maybe next time the huge winners will be in DM large caps.
Re: A low-cost 5 fund Boglehead portfolio
In the context of this discussion, the number of independent source of risk is simply estimated using statistical methods. They don’t get labels, per se, though often they can be associated with conventional risk factors like market beta, size, value etc.Nathan Drake wrote: ↑Mon Feb 15, 2021 5:31 pm What do you consider a "source of risk"?
Why does large cap EM, ex-US, and US constitute unrelated risk, yet you include ex-US SCV and US SCV in your 5 fund portfolio? Wouldn't the SCV risk in US capture the same risk as exUS or EM?
When constructing a portfolio, the investor is balancing multiple competing goals: expected return, diversification, cost, complexity, etc
Personally, I find that this balance can be achieved with between three to eight funds. US SCV typically helps because these funds reliably introduce reasonable amounts of diversification at low cost. For most US-based investors, two or three US equity funds can easily be accommodated without having such tiny allocations that they add complexity without impact.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: A low-cost 5 fund Boglehead portfolio
That sounds like a claim that would be easy to test.
How do you measure predictive power? How much does this relationship possess? How much would it take to be “sufficient”?
"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: A low-cost 5 fund Boglehead portfolio
Thanks. I'm a new-comer to SCV investing, though I have been well aware of the size/value factor investing for quite some time before recently adding a position. Right now my portfolio consists 60% exUS TSM, 30% US TSM, and 10% US SCV. I'm really just trying to decide if it's worth increasing my SCV allocation, or trying to incorporate international SCV. The issue I have with tilting is that it can get fairly complicated if you want it to be. My main goal is to achieve market returns (or slightly above with SCV tilts), while simultaneously preventing black-swan type events and bad outcomes from the tail end of the distribution scale; Ideally, I'd also like to avoid prolonged periods (deacade+) of negative or no-returns which are clearly exhibited in more concentrated investment strategies.vineviz wrote: ↑Mon Feb 15, 2021 5:51 pmIn the context of this discussion, the number of independent source of risk is simply estimated using statistical methods. They don’t get labels, per se, though often they can be associated with conventional risk factors like market beta, size, value etc.Nathan Drake wrote: ↑Mon Feb 15, 2021 5:31 pm What do you consider a "source of risk"?
Why does large cap EM, ex-US, and US constitute unrelated risk, yet you include ex-US SCV and US SCV in your 5 fund portfolio? Wouldn't the SCV risk in US capture the same risk as exUS or EM?
When constructing a portfolio, the investor is balancing multiple competing goals: expected return, diversification, cost, complexity, etc
Personally, I find that this balance can be achieved with between three to eight funds. US SCV typically helps because these funds reliably introduce reasonable amounts of diversification at low cost. For most US-based investors, two or three US equity funds can easily be accommodated without having such tiny allocations that they add complexity without impact.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: A low-cost 5 fund Boglehead portfolio
I don't know if any backtesting has predictive power. There is so much uncertainty about the future. At a minimum I would like to see a statistically significant number of rolling lifetime (~50yr) periods.
In this particular case, you are using a period of time that is actually quite short and fairly unrepresentative temporally and geographically. The variables which caused high correlation of EM to DM vs US may have been unique; for example, the effect of the US dollar being the reserve currency.
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Re: A low-cost 5 fund Boglehead portfolio
If you add a portfolio 100% VTSMX, you will see that it's even closer to US + EM (and better). So you could argue that US+ Dev EX-US + EM would provide better diversification over longer periods. What would be better if you assume the expected return of all US, Dev EX-US, EM is the same.vineviz wrote: ↑Mon Feb 15, 2021 4:48 pm
Here's a similar graph, without any bonds and using rolling 5-year returns instead of rolling 3-year returns. link
You can see that you get essentially the same result: there are no five-year periods in the data set where the portfolio with developed markets produced a significantly different outcome than the ones without.
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Re: A low-cost 5 fund Boglehead portfolio
I'm starting to think I may come around to something like this. I completely understand the argument for a simple 1, 2, or 3 fund portfolio. It will do well over very long periods of time. But I do think with a little bit more slicing/dicing, you can achieve better, more consistent outcomes (with some increased risk).
I've simplified it to a 4-fund portfolio in my case with the following allocations:
25% VTSAX - Vanguard Total Stock Market
35% VTIAX - Vanguard Total International
20% VSIAX - Vanguard Small Cap Value
20% VEMAX - Vanguard Emerging Markets
This is lacking Small Cap Value for international, but they are notoriously difficult to find good funds for. International right now may be entirely a value play. I do not see a convincing need for International Small Cap as the performance seems to be almost identical to LC in the international space. I am also double-dipping a bit by holding VTIAX which is already 25% emerging markets.
The overall portfolio has the following characteristics:
I've simplified it to a 4-fund portfolio in my case with the following allocations:
25% VTSAX - Vanguard Total Stock Market
35% VTIAX - Vanguard Total International
20% VSIAX - Vanguard Small Cap Value
20% VEMAX - Vanguard Emerging Markets
This is lacking Small Cap Value for international, but they are notoriously difficult to find good funds for. International right now may be entirely a value play. I do not see a convincing need for International Small Cap as the performance seems to be almost identical to LC in the international space. I am also double-dipping a bit by holding VTIAX which is already 25% emerging markets.
The overall portfolio has the following characteristics:
- 20% Tilt to SCV (US ONLY)
- 45% US Based / 55% International
- The bulk of the portfolio (60%) is split between the bread and butter VTSAX/VTIAX found in a 2 fund portfolio.
- Emerging Markets represent ~28.75% of the portfolio total.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: A low-cost 5 fund Boglehead portfolio
What do you think of the following approach for increasing the equity leverage a bit? Is it any more or less diversified than your above suggestion?
15% ProShares UltraPro S&P500 (UPRO)
15% ProShares UltraPro MidCap400 (UMDD)
10% ProShares Ultra MSCI Emerging Markets (EET)
5% ProShares Ultra MSCI EAFE (EFO)
55% Direxion Daily 20+ Yr Trsy Bull 3X ETF (TMF)
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Re: A low-cost 5 fund Boglehead portfolio
cos:
55% Direxion Daily 20+ Yr Trsy Bull 3X ETF (TMF)
I'm confused. Morningstar reports that "TMF" is Toyota Motor Corp ADR?
Are you sure about the ticker symbol?
Taylor
55% Direxion Daily 20+ Yr Trsy Bull 3X ETF (TMF)
I'm confused. Morningstar reports that "TMF" is Toyota Motor Corp ADR?
Are you sure about the ticker symbol?
Taylor
Jack Bogle's Words of Wisdom: “The greatest enemy of a good plan is the dream of a perfect plan."
"Simplicity is the master key to financial success." -- Jack Bogle
Re: A low-cost 5 fund Boglehead portfolio
Looked fine to me.Taylor Larimore wrote: ↑Wed May 05, 2021 2:20 pm cos:
55% Direxion Daily 20+ Yr Trsy Bull 3X ETF (TMF)
I'm confused. Morningstar reports that "TMF" is Toyota Motor Corp ADR?
Are you sure about the ticker symbol?
TaylorJack Bogle's Words of Wisdom: “The greatest enemy of a good plan is the dream of a perfect plan."
https://finance.yahoo.com/quote/tmf/
Re: A low-cost 5 fund Boglehead portfolio
Yep! I've been invested in it for going on two years now. Here's a link to the appropriate Morningstar page: https://www.morningstar.com/etfs/arcx/tmf/quoteTaylor Larimore wrote: ↑Wed May 05, 2021 2:20 pm cos:
55% Direxion Daily 20+ Yr Trsy Bull 3X ETF (TMF)
I'm confused. Morningstar reports that "TMF" is Toyota Motor Corp ADR?
Are you sure about the ticker symbol?
TaylorJack Bogle's Words of Wisdom: “The greatest enemy of a good plan is the dream of a perfect plan."
Re: A low-cost 5 fund Boglehead portfolio
It's a tiny bit less diversified, but pretty close. If you're aiming for a bit more leverage, maybe something like this?cos wrote: ↑Wed May 05, 2021 2:04 pmWhat do you think of the following approach for increasing the equity leverage a bit? Is it any more or less diversified than your above suggestion?
15% ProShares UltraPro S&P500 (UPRO)
15% ProShares UltraPro MidCap400 (UMDD)
10% ProShares Ultra MSCI Emerging Markets (EET)
5% ProShares Ultra MSCI EAFE (EFO)
55% Direxion Daily 20+ Yr Trsy Bull 3X ETF (TMF)
50.00% Direxion Daily 20+ Yr Trsy Bull 3X ETF ( TMF )
10.00% ProShares UltraPro S&P500 ( UPRO )
10.00% ProShares UltraPro MidCap400 ( UMDD )
10.00% ProShares Ultra SmallCap600 ( SAA )
10.00% ProShares Ultra MSCI Emerging Markets ( EET )
10.00% ProShares Ultra MSCI EAFE ( EFO )
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Re: A low-cost 5 fund Boglehead portfolio
As a rule of thumb, assuming quarterly rebalancing, what are the expected returns of this Excellent Adventure portfolio when compared to a similar portfolio of 100% equities? In other words, if you plan for equities to return, say, 4% per year, what might the above portfolio return?vineviz wrote: ↑Wed May 05, 2021 4:10 pm
It's a tiny bit less diversified, but pretty close. If you're aiming for a bit more leverage, maybe something like this?
50.00% Direxion Daily 20+ Yr Trsy Bull 3X ETF ( TMF )
10.00% ProShares UltraPro S&P500 ( UPRO )
10.00% ProShares UltraPro MidCap400 ( UMDD )
10.00% ProShares Ultra SmallCap600 ( SAA )
10.00% ProShares Ultra MSCI Emerging Markets ( EET )
10.00% ProShares Ultra MSCI EAFE ( EFO )
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Re: A low-cost 5 fund Boglehead portfolio
Is EFO for Developed non-US ? Morningstar site seems wrong https://www.morningstar.com/etfs/arcx/efo/quote
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Re: A low-cost 5 fund Boglehead portfolio
I don’t see the reason to include MCW funds when there are much better counterweights to Small Value like Momentum, Min Volatility, Long Duration bonds.
MCW is dilution, not balance.
MCW is dilution, not balance.
Small/Value/Profitability: |
30% AVUV |
30% AVDV |
30% AVES |
Momentum: |
5% QMOM |
5% IMOM |
Volatility: |
0.1% PUTW |
Term: |
0.1% BND
Re: A low-cost 5 fund Boglehead portfolio
I thought this comparison clearly wasn't fair. 2012-2021 is just too short time period. Please take a look slightly longer duration.Sandtrap wrote: ↑Mon Jul 29, 2019 9:55 pmNice work.noraz123 wrote: ↑Mon Jul 29, 2019 9:40 pmIs this 5 fund portfolio more diversified than the typical 3 fund portfolio (Total Stock, Total International, and Total Bond)?vineviz wrote: ↑Mon Jul 29, 2019 6:48 pm ...
My goal was to keep expenses low (less than 0.10% if possible), rely on Vanguard-issued market-cap weighted index funds as much as possible, and to create a significantly more diversified portfolio than is possible using the the typical total market funds.
...
I can see in a taxable account that a 5-fund portfolio allows for more tax loss harvesting, but unclear to me that that there is more diversification, especially "significantly" more.
A quick run through PortfolioVisualizer of your portfolio vs corresponding 3 fund (48% Total Stock, 32% Total International, 20% Total Bond), show remarkably similar results.
Link: https://www.portfoliovisualizer.com/bac ... 0&total3=0
Thanks for the link.
Does question the logic of making something more complex vs simple if the results are similar.
j
https://www.portfoliovisualizer.com/bac ... tion7_2=20
Re: A low-cost 5 fund Boglehead portfolio
Aren't bid/ask spreads irrelevant when it comes to buying and selling ETFs? Don't market makers take care of the difference?
Is even 80-20 over-investing in fixed income?
Bogle made an astute remark in a convo I found here on this site (and I can dig it up but I assume everyone knows it.)
Bogle said that one should/could include Social Security payments as part of overall financial planning.
He suggests capitalizing the income one receives from Social Security, which could amount to a considerable increase in a fixed income portfolio…..Suppose you get $1500/mo ($18,000/yr.)
What fixed income bond, bond fund, bank account etc would be needed to get $1500/mo?
I don't know but so far as I can tell you can't find anything close to 5% with a gilt-edge rating. But even if you could get 5% that's $360,000.
If it was 2% on a fixed income the value would be $900,000.
Bogle suggests adding that $360,000 (or whatever number you chose) to your overall equity vs.fixed income split you prefer.
That calculus change the basic equity vs.fixed income rule for many people. Pretty insightful and makes a difference in financial planning for most people.
(A government sponsored pension program, such as teachers, police etc receive, might also be included though he didn’t mention that.)
Btw, if I didn't understand him correctly, I'd like to hear otherwise.
Bogle said that one should/could include Social Security payments as part of overall financial planning.
He suggests capitalizing the income one receives from Social Security, which could amount to a considerable increase in a fixed income portfolio…..Suppose you get $1500/mo ($18,000/yr.)
What fixed income bond, bond fund, bank account etc would be needed to get $1500/mo?
I don't know but so far as I can tell you can't find anything close to 5% with a gilt-edge rating. But even if you could get 5% that's $360,000.
If it was 2% on a fixed income the value would be $900,000.
Bogle suggests adding that $360,000 (or whatever number you chose) to your overall equity vs.fixed income split you prefer.
That calculus change the basic equity vs.fixed income rule for many people. Pretty insightful and makes a difference in financial planning for most people.
(A government sponsored pension program, such as teachers, police etc receive, might also be included though he didn’t mention that.)
Btw, if I didn't understand him correctly, I'd like to hear otherwise.