Rick Ferri: "You have to stick with that plan for the rest of your life."

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simplesauce
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Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by simplesauce »

Rick Ferri was recently interviewed on The Investor's Podcast on Jan 22, 2020. He said something so brilliant, and I think it can be applied to any investment strategy that tilts away from a simple market-cap weighted approach:

(In this exchange, Ferri and the interviewer were discussing an equal-weighted vs cap-weighted S&P 500)

Rick Ferri: "It hasn't happened over the last several years where an equal weighted S&P 500 has outperformed a capitalization weighted, but it kind of goes one way and goes the other, and it goes this way and that way. I can just tell you, if you decided to do that, if you decided to do the equal weighting instead of a capitalization weighting, you have to stick with that plan for the rest of your life. Not a few years...not, give it a shot, see how it does next year, maybe how it does over the next two or three years...It is a life long decision. Because I guarantee you, if you decide you're going to do the equal weighting S&P 500 and it underperforms the S&P 500 capitalization weighted, or for a couple of years you underperform, you're going to get out of it. And if you get out of it, you've just locked in your underperformance for the rest of your life. 

So if you're going to do the equal weighting S&P 500, or the fundamentally weighting which is another different way of weighting it, you have to make a commitment doing that for the rest of your life, because it might take that long before you actually get a benefit from doing it."


https://www.theinvestorspodcast.com/mil ... ick-ferri/
Last edited by simplesauce on Wed Apr 29, 2020 10:18 am, edited 3 times in total.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by Phineas J. Whoopee »

simplesauce wrote: Wed Apr 29, 2020 10:06 am ...
So if you're going to do the equal weighting S&P 500, or the fundamentally weighting which is another different way of weighting it, you have to make a commitment doing that for the rest of your life, because it might take that long before you actually get a benefit from doing it."
https://www.theinvestorspodcast.com/mil ... ick-ferri/
I'm not arguing about whether Ferri said it, but presumably the rest of your life is how long it will, in a reliable manner, take to make up for the vastly higher transaction costs the fund incurs, even if it's in a tax-advantaged account.

I could be run over by a bus prior to market close today.

PJW
Last edited by Phineas J. Whoopee on Wed Apr 29, 2020 10:28 am, edited 1 time in total.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by rascott »

Equal weighted SP500 strategy might as well just be a mid-cap only strategy.

Returns over last 17 years identical to the extended market (VXF)

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by willthrill81 »

I don't know about "the rest of your life" because I do believe that justifiable changes to one's strategy are possible, but I've said for years now that if you go in for factors, which is what equal-weighting effectively does, then you have to be prepared to stick with them for the long-term and be ready to underperform the market (e.g. S&P 500) for a long time, potentially a decade or longer. Despite their higher long-term returns than the market, both the small and value factors have underperformed the market for over a decade. IIRC, the small factor once underperformed the market for over 30 years. If you're not prepared to stick with them, then don't go in for them.

The very real risk from factors, in my mind, is not the factor underperforming the market. It's an investor going through a long period of the factor underperforming the market, getting sick of it, and selling it. And if Murphy knows anything about it, the sale will probably occur right before the factor starts outperforming again.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by azanon »

That was a great point by Rick - kudos to him!
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by patrick013 »

In a way it is less risky. If the largest caps start to decline
it will only affect the index based on a .2% allocation. The other
large caps will still perform based on their equal allocations.

I think RSP lowered it's fee to .2% and EPS now has a fee of .08%
for it's unique allocation.

Over the long term TR's are comparable with the 500 having an edge.
age in bonds, buy-and-hold, 10 year business cycle
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by junior »

This is why people should not benchmark their portfolio and see how it did compared to anyone else's portfolio.

If you do something like an equal weighted S&P or small cap value tilt you should never look to see if you would have made more money with a different strategy. Same goes for 100% domestic vs an international portfolio. Don't look at how you did compared to others!

You can check once at the end of your life and tell others how it went! It's a lifetime experiment.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by rkhusky »

One side effect of an equal-weight fund is that it overweights sectors that tend to have smaller companies and underweights sectors that tend to have larger companies. Whether that is good or bad, I don't know.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by Northern Flicker »

I think the notion of committing to a strategy is important advice, but I think it is overly rigid to say that you have to commit for the rest of your life. If you implemented say a factor-based strategy, and did not like the volatility, you safely can move to a market cap strategy by making the change at a time when the factor strategy has overperformed the market cap strategy over your holding period. This of course would mean that you do not have control of the timing of the change, but if you follow that method, you will be locking in overperformance.

There is no particular difference between entering or exiting a strategy— that difference is only created by saying that one particular strategy like a market cap portfolio is sacred or the default strategy (which in fact it should be). Thus the point can be generalized to saying that portfolio changes should be very uncommon and only when motivated by a very compelling reason, and if a change is made, timing risk should be mitigated when possible by implementing the change from portfolio A to B when B has underperformed A over your holding period for A.

How is “hold the allocation the rest of your life” reconciled with retirement savings glide paths? Glide path changes should also be implemented using the timing risk mitigation rule stated above. Thus if portfolio A is 70% stocks and portfolio B is 60% stocks using the rule would prevent, say implementing the glide path change from A to B at the depths of a bear market because one’s age dictated it. And it also could be used to justify making a glide path change early (i.e. early if based on age) designed instead to take advantage of a long bull run to get the change done while the timing rule applied.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by nisiprius »

A few days ago, I thought I would look and see how other equal-weighted ETFs have performed compared to their cap-weighted equivalents. In every case, I set the endpoint of the data through the end of 2/2020 because I wasn't particularly interested in the question of how they were reacting to a crisis. I used PortfolioVisualizer. In every case, the data range was determined by "all available data up through 2/20" for the equal-weighted ETF.

I would have liked to include the "Equal-Weighted Russell 2000" ETF, EWRS, but it was discontinued. I'm putting the name in quotation marks because on inspection, the weightings in that ETF weren't remotely close to being equal.

I would say that the results aren't appealing to me. Notice that they aren't appealing on the basis of raw return. If I'd looked at risk-adjusted return they would have been even less appealing because of having higher volatility.

I started by looking at Invesco's equal-weighted ETFs because they offer a whole line fifteen of them. I added Direxion's NASDAQ-100 equal-weighted ETF.

In most cases, I compared them to the obvious Vanguard equivalent. There were three exceptions. I compared the Invesco S&P 100 to the iShares S&P 100 because Vanguard doesn't have an S&P 100 product; similarly, I compared Direxion NASDAQ-100 Equal Weighted to Invesco QQQ Trust. In the case of the venerable Invesco S&P 500 Equal Weight ETF, RSP, it is older than Vanguard's VOO so I compared it to the even more venerable SPY.

Results:

1) 7 equal-weighted ETFs outperformed their cap-weighted counterparts. Their CAGR was 0.64% higher on average..
2) 10 cap-weighted ETFs outperformed their equal-weighted counterparts. Their CAGR was 2.66% higher on average.
3) Overall, the cap-weighted ETFs outperformed their equal-weighted counterparts. Their CAGR was 1.31% higher on average.

Image



Sources:
Russell 1000: EQAL vs VONE (1/15-2/20)
S&P 100: EQWL vs OEF (1/07-2/20)
Comm. Services: EWCO vs VOX (12/18-2/20)
Consumer Discretionary: RCD vs VCR (12/06-2/20)
Consumer Staples: RHS vs VDC (12/06-2/20)
S&P 500: RSP vs SPY (10/10-2/20)
Energy: RYE vs VDE (12/06-2/20)
Financials: RYF vs VFH (12/06-2/20)
Health Care: RYH vs VHT (12/06-2/20)
Industrials: RGI vs VIS (12/06-2/20)
Materials: RTM vs VAW (12/06-2/20)
Real Estate: EWRE vs VNQ (9/15-2/20)
Technology: RYT vs VGT (12/06-2/20)
Utilities: RYU vs VPU (12/06-2/20)
S&P MidCap 400: EWMC vs IVOO (1/11-2/20)
S&P SmallCap 600: EWSC vs VIOO (1/11-2/20)
NASDAQ-100: QQQ vs QQQE (4/12-2/20)
Last edited by nisiprius on Wed Apr 29, 2020 1:02 pm, edited 1 time in total.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by simplesauce »

Northern Flicker wrote: Wed Apr 29, 2020 12:28 pm I think the notion of committing to a strategy is important advice, but I think it is overly rigid to say that you have to commit for the rest of your life. If you implemented say a factor-based strategy, and did not like the volatility, you safely can move to a market cap strategy by making the change at a time when the factor strategy has overperformed the market cap strategy over your holding period. This of course would mean that you do not have control of the timing of the change, but if you follow that method, you will be locking in overperformance.

There is no particular difference between entering or exiting a strategy— that difference is only created by saying that one particular strategy like a market cap portfolio is sacred or the default strategy (which in fact it should be). Thus the point can be generalized to saying that portfolio changes should be very uncommon and only when motivated by a very compelling reason, and if a change is made, timing risk should be mitigated when possible by implementing the change from portfolio A to B when B has underperformed A over your holding period for A.

How is “hold the allocation the rest of your life” reconciled with retirement savings glide paths? Glide path changes should also be implemented using the timing risk mitigation rule stated above. Thus if portfolio A is 70% stocks and portfolio B is 60% stocks using the rule would prevent, say implementing the glide path change from A to B at the depths of a bear market because one’s age dictated it. And it also could be used to justify making a glide path change early (i.e. early if based on age) designed instead to take advantage of a long bull run to get the change done while the timing rule applied.
Maybe it is best to “hear it” instead of “read it,” so I provided the link, but it was very clear to me that Mr. Ferri was making an important and powerful point, rather than necessarily meaning for it to be taken 100% literally. His point was if you are going to choose to tilt away from the cap-weighted market, you need to truly believe in that strategy and stick with it throughout your investing life, because it may take that long to actually pay off! To say that you can safely abandon a factor strategy when that factor’s performance is up, is not prudent. What if it never outperforms? And if you exit the strategy, you have now locked in that underperformance for life. Now if you go back to a market-cap weighted portfolio, you are lagging behind where you would have been if you stuck with it all along.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by GaryA505 »

I'm not interested in something that might outperform a cap-weighted fund in 50 years or so. Probably because I'll BE DEAD IN 50 YEARS! :annoyed
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by RadAudit »

GaryA505 wrote: Wed Apr 29, 2020 1:10 pm I'm not interested in something that might outperform a cap-weighted fund in 50 years or so. Probably because I'll BE DEAD IN 50 YEARS! :annoyed
That's not a discussion I'd wish to continue in to the after life. :wink:
Last edited by RadAudit on Thu Apr 30, 2020 6:36 am, edited 1 time in total.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by oneleaf »

Meb Faber had a good podcast recently talking about how long people can handle underperforming. Most people fall into the 0-10 years camp, and I don't find that surprising given how many people are bailing on international and value stocks. There are a couple of international threads where there are pretty seasoned bogleheads that are abandoning international stocks.

Make no mistake... there is a LOT of performance chasing going on, and I strongly believe that excuses to abandon strategies is always going to be highest when US large caps dominate. The cognitive dissonance that happens during this time allows people to pretend they are not performance chasing. I am seeing excuses like:
  • I am simplifying my portfolio for my myself.
  • I am simplifying my portfolio for my beneficiaries.
  • I am grateful to be American and want my portfolio to reflect it as a way of saying "Thanks".
  • I agree with Jack.
  • I don't want to use spreadsheets to track finances anymore.
All of these excuses/reasons are legitimate, except it's also convenient that it pops up after a multi-year run where US large caps outperform.

The Meb Faber podcast was good because it reminded us that we need to be prepared for MUCH more than 10 years of underperforming if we are going to adopt a strategy.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by Phineas J. Whoopee »

simplesauce wrote: Wed Apr 29, 2020 1:02 pm ...
Maybe it is best to “hear it” instead of “read it,” so I provided the link, but it was very clear to me that Mr. Ferri was making an important and powerful point, rather than necessarily meaning for it to be taken 100% literally.
...
Obviously sarcasm.

PJW
Last edited by Phineas J. Whoopee on Wed Apr 29, 2020 2:37 pm, edited 2 times in total.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by targetconfusion »

Not endorsing frequent strategy-switching, but: Is Rick Ferri succumbing here to the gambler's fallacy?
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by apex84 »

I think Rick Ferri's point is well taken. If you want to deviate from the market, you have to stick to your allocation. The forum is full of people asking why they should invest in international stocks. A question that I think is based on the rearview mirror rather than an interest in diversification, efficient frontier, or opportunity set.
Northern Flicker wrote: Wed Apr 29, 2020 12:28 pm I think the notion of committing to a strategy is important advice, but I think it is overly rigid to say that you have to commit for the rest of your life. If you implemented say a factor-based strategy, and did not like the volatility, you safely can move to a market cap strategy by making the change at a time when the factor strategy has overperformed the market cap strategy over your holding period.
oneleaf wrote: Wed Apr 29, 2020 2:18 pm All of these excuses/reasons are legitimate, except it's also convenient that it pops up after a multi-year run where US large caps outperform.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by oneleaf »

Northern Flicker wrote: Wed Apr 29, 2020 12:28 pm I think the notion of committing to a strategy is important advice, but I think it is overly rigid to say that you have to commit for the rest of your life. If you implemented say a factor-based strategy, and did not like the volatility, you safely can move to a market cap strategy by making the change at a time when the factor strategy has overperformed the market cap strategy over your holding period. This of course would mean that you do not have control of the timing of the change, but if you follow that method, you will be locking in overperformance.
I think this is important, and I agree with the part in bold. It's not so much about needing to win, but I think that if you can abandon a strategy when it is outperforming, then you know you are doing it for the right reasons.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by bling »

nisiprius wrote: Wed Apr 29, 2020 1:01 pm ...
i guess at the end everyone's definition of "equal weight" is different. when i think of "equal weight", i'm thinking of the morning star boxes.

the funds you mentioned are anything but...

Code: Select all

EQAL:
13 9  5
19 16 13
13 5  2

EQWL
51 29 14
4  0  0
0  0  0

RSP
20 15 9
24 17 8
3  0  0
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by papito23 »

Concur. I think he hits on one of the main pitfalls, tinkering and performance chasing. It is a bigger deal than a lot of other things we worry about.

I added a REIT tilt when I first learned about bogleheads in 2010. For simplicity's sake, I've kind of like to get rid of it. But OTOH, I want to tinker as little as possible and have decided to just leave it.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by nisiprius »

bling wrote: Wed Apr 29, 2020 2:39 pm
nisiprius wrote: Wed Apr 29, 2020 1:01 pm ...
i guess at the end everyone's definition of "equal weight" is different. when i think of "equal weight", i'm thinking of the morning star boxes.

the funds you mentioned are anything but...
Given any asset class you wish to hold, you can decide how to weight the individual securities within that class. Two choices are cap-weighting and equal weighting. I don't really know why one would want to hold an individual sector, and if you did I don't know why you'd equal weight within it, but Invesco provides the tools for doing it.

Call an "S&P 500 equal weighted" fund "equal weighted" seems like a misnomer to me, too, because you have actually decided to give 500 stocks a weight of 0.2% each, and give 3,000 stocks a weight of exactly zero. Not equal at all.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by Northern Flicker »

simplesauce wrote: Maybe it is best to “hear it” instead of “read it,” so I provided the link, but it was very clear to me that Mr. Ferri was making an important and powerful point, rather than necessarily meaning for it to be taken 100% literally. His point was if you are going to choose to tilt away from the cap-weighted market, you need to truly believe in that strategy and stick with it throughout your investing life, because it may take that long to actually pay off! To say that you can safely abandon a factor strategy when that factor’s performance is up, is not prudent. What if it never outperforms? And if you exit the strategy, you have now locked in that underperformance for life. Now if you go back to a market-cap weighted portfolio, you are lagging behind where you would have been if you stuck with it all along.
If you re-read my post, you will see my first sentence was that Mr. Ferri’s advice was important advice.

To answer your questions: 1) I was not suggesting you should enter a strategy with the idea you can always exit when it has overperformed as it may never do so; I was merely saying that if you do want to get out of it, this strategy is a way to avoid locking in underperformance; 2) as far as exiting something that later overperforms, as long as I’m moving to a portfolio appropriate for my life circumstance, and not because I believed the portfolio being exited subsequently would underperform, why should I care?

I actually make very few allocation changes, and most are from tax-loss harvesting from an asset class to a very similar but not identical asset class.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by Kenkat »

apex84 wrote: Wed Apr 29, 2020 2:26 pm I think Rick Ferri's point is well taken. If you want to deviate from the market, you have to stick to your allocation. The forum is full of people asking why they should invest in international stocks. A question that I think is based on the rearview mirror rather than an interest in diversification, efficient frontier, or opportunity set.
Likewise, however, If you want to match the market, you have to stick to your allocation. Wait to see what happens on the forum if value has a period of outperformance, or if international has a period of outperformance, or if small and mid-cap has a period of outperformance. I know exactly what will happen - there will be high interest in that category, people looking to switch to that, and justification as to why.

We see it now with long term treasuries. For every poster who has held these long term and in line with their plan, it seems that there are 5 asking “is now a good time?” or saying “I’ve seen the light, I’m switching” or etcetera, etcetera, etcetera*.

* https://youtu.be/1JHH6iwgIek
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by galeno »

We were a successful factor investors for 11 years. From 1995-2005 our 80/20 port beat 100% VTI by a CAGR = 5%. We started the year with 18 equally weighed stocks. By years end we'd have 12-15.

Going thru the 2000-2002 BEAR with that strategy was stressful as heck. Thankfully because we beat VTI by such a margin our port fully recuperated in 2005.

In Jan 2006 we lowered our AA to 60/40 and switched to a Boglehead strategy. What a relief! We'll be Boglehads until we die.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by goonie »

oneleaf wrote: Wed Apr 29, 2020 2:18 pm Meb Faber had a good podcast recently talking about how long people can handle underperforming. Most people fall into the 0-10 years camp, and I don't find that surprising given how many people are bailing on international and value stocks. There are a couple of international threads where there are pretty seasoned bogleheads that are abandoning international stocks.

Make no mistake... there is a LOT of performance chasing going on, and I strongly believe that excuses to abandon strategies is always going to be highest when US large caps dominate. The cognitive dissonance that happens during this time allows people to pretend they are not performance chasing. I am seeing excuses like:
  • I am simplifying my portfolio for my myself.
  • I am simplifying my portfolio for my beneficiaries.
  • I am grateful to be American and want my portfolio to reflect it as a way of saying "Thanks".
  • I agree with Jack.
  • I don't want to use spreadsheets to track finances anymore.
All of these excuses/reasons are legitimate, except it's also convenient that it pops up after a multi-year run where US large caps outperform.

The Meb Faber podcast was good because it reminded us that we need to be prepared for MUCH more than 10 years of underperforming if we are going to adopt a strategy.
I agree. I immediately started thinking about international while reading the original post in this thread.
Last edited by goonie on Wed Apr 29, 2020 7:44 pm, edited 1 time in total.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by abuss368 »

I would agree. If most investors simply invested in an S&P 500 fund that is cap weighted (or a Total Stock fund) and added to it during their working career they will be very happy at retirement time.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by ARoseByAnyOtherName »

abuss368 wrote: Wed Apr 29, 2020 7:44 pm I would agree. If most investors simply invested in an S&P 500 fund that is cap weighted (or a Total Stock fund) and added to it during their working career they will be very happy at retirement time.
This is the simplest of all strategies:

1) When you start working buy as much VTI (Vanguard Total Stock Market Index Fund ETF) as you can.
2) Every month buy a little more VTI.
3) Other than your monthly buys never think about your account.
3a) Like, never look at your account balance.
3b) For real!
3c) No peeking!
4) Also never, ever read Bogleheads. Remain ignorant of factor investing, 3x leveraged ETFs, bonds, international bonds, oil ETFs, bitcoin, whatever. Tune out the noise!
5) When you're say 10 years out from retirement take a look at your portfolio and start thinking about your AA and moving gradually over to bonds.

Say you were 23 years old in 1993 (backtest alert!) and you did just that. You buy $10,000 of VTSMX (mutual fund version of VTI) and then buy another $200 of VTSMX a month, not inflation adjusted.

27 years later, when you're 50 years old, you've got $311,773.

Now $311,773 isn't gonna buy you a yacht. But it's still a lot of money, and you've still got around 15 years to Social Security and retirement age.

And here's the thing. You didn't work very hard to get that money. All you did, after that initial buy, was by another $200 a month. You didn't even increase that amount as you got older! Just clicking a couple buttons (well, mailing a check in the early days) every month.

This is the difference between simple and easy. The simplest thing is to tune out the noise and do very little, but sometimes the simple things are the hardest things of all to do.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by simplesauce »

ARoseByAnyOtherName wrote: Wed Apr 29, 2020 8:42 pm
abuss368 wrote: Wed Apr 29, 2020 7:44 pm I would agree. If most investors simply invested in an S&P 500 fund that is cap weighted (or a Total Stock fund) and added to it during their working career they will be very happy at retirement time.
This is the simplest of all strategies:

1) When you start working buy as much VTI (Vanguard Total Stock Market Index Fund ETF) as you can.
2) Every month buy a little more VTI.
3) Other than your monthly buys never think about your account.
3a) Like, never look at your account balance.
3b) For real!
3c) No peeking!
4) Also never, ever read Bogleheads. Remain ignorant of factor investing, 3x leveraged ETFs, bonds, international bonds, oil ETFs, bitcoin, whatever. Tune out the noise!
5) When you're say 10 years out from retirement take a look at your portfolio and start thinking about your AA and moving gradually over to bonds.

Say you were 23 years old in 1993 (backtest alert!) and you did just that. You buy $10,000 of VTSMX (mutual fund version of VTI) and then buy another $200 of VTSMX a month, not inflation adjusted.

27 years later, when you're 50 years old, you've got $311,773.

Now $311,773 isn't gonna buy you a yacht. But it's still a lot of money, and you've still got around 15 years to Social Security and retirement age.

And here's the thing. You didn't work very hard to get that money. All you did, after that initial buy, was by another $200 a month. You didn't even increase that amount as you got older! Just clicking a couple buttons (well, mailing a check in the early days) every month.

This is the difference between simple and easy. The simplest thing is to tune out the noise and do very little, but sometimes the simple things are the hardest things of all to do.
Well said!
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by goonie »

abuss368 wrote: Wed Apr 29, 2020 7:44 pm I would agree. If most investors simply invested in an S&P 500 fund that is cap weighted (or a Total Stock fund) and added to it during their working career they will be very happy at retirement time.
Didn't you recently bail on international after a long period of underperformance?

viewtopic.php?f=10&t=188176

I know you give a lot of reasons and justifications for it but doesn't it still contradict what Rick said about sticking with your plan for the rest of your life and not locking in underperformance?
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by abuss368 »

ARoseByAnyOtherName wrote: Wed Apr 29, 2020 8:42 pm
abuss368 wrote: Wed Apr 29, 2020 7:44 pm I would agree. If most investors simply invested in an S&P 500 fund that is cap weighted (or a Total Stock fund) and added to it during their working career they will be very happy at retirement time.
This is the simplest of all strategies:

1) When you start working buy as much VTI (Vanguard Total Stock Market Index Fund ETF) as you can.
2) Every month buy a little more VTI.
3) Other than your monthly buys never think about your account.
3a) Like, never look at your account balance.
3b) For real!
3c) No peeking!
4) Also never, ever read Bogleheads. Remain ignorant of factor investing, 3x leveraged ETFs, bonds, international bonds, oil ETFs, bitcoin, whatever. Tune out the noise!
5) When you're say 10 years out from retirement take a look at your portfolio and start thinking about your AA and moving gradually over to bonds.

Say you were 23 years old in 1993 (backtest alert!) and you did just that. You buy $10,000 of VTSMX (mutual fund version of VTI) and then buy another $200 of VTSMX a month, not inflation adjusted.

27 years later, when you're 50 years old, you've got $311,773.

Now $311,773 isn't gonna buy you a yacht. But it's still a lot of money, and you've still got around 15 years to Social Security and retirement age.

And here's the thing. You didn't work very hard to get that money. All you did, after that initial buy, was by another $200 a month. You didn't even increase that amount as you got older! Just clicking a couple buttons (well, mailing a check in the early days) every month.

This is the difference between simple and easy. The simplest thing is to tune out the noise and do very little, but sometimes the simple things are the hardest things of all to do.
I like your message. Many investors would be wise to follow.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by SemiTech11 »

ARoseByAnyOtherName wrote: Wed Apr 29, 2020 8:42 pm
abuss368 wrote: Wed Apr 29, 2020 7:44 pm I would agree. If most investors simply invested in an S&P 500 fund that is cap weighted (or a Total Stock fund) and added to it during their working career they will be very happy at retirement time.
This is the simplest of all strategies:

1) When you start working buy as much VTI (Vanguard Total Stock Market Index Fund ETF) as you can.
2) Every month buy a little more VTI.
3) Other than your monthly buys never think about your account.
3a) Like, never look at your account balance.
3b) For real!
3c) No peeking!
4) Also never, ever read Bogleheads. Remain ignorant of factor investing, 3x leveraged ETFs, bonds, international bonds, oil ETFs, bitcoin, whatever. Tune out the noise!
5) When you're say 10 years out from retirement take a look at your portfolio and start thinking about your AA and moving gradually over to bonds.

...
Excellent advice!! I wish I had done that when I started investing in the nineties. I am trying to get my teenage children to internalize this simple investing strategy.

If you want to play it safe (and accept a possible lower return), replace VT (Vanguard Total World Stock ETF - ER: 0.08%) with VTI above. You cannot go wrong either way.
Plus ca change, plus c'est la meme chose
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by geerhardusvos »

ARoseByAnyOtherName wrote: Wed Apr 29, 2020 8:42 pm
abuss368 wrote: Wed Apr 29, 2020 7:44 pm I would agree. If most investors simply invested in an S&P 500 fund that is cap weighted (or a Total Stock fund) and added to it during their working career they will be very happy at retirement time.
This is the simplest of all strategies:

1) When you start working buy as much VTI (Vanguard Total Stock Market Index Fund ETF) as you can.
2) Every month buy a little more VTI.
3) Other than your monthly buys never think about your account.
3a) Like, never look at your account balance.
3b) For real!
3c) No peeking!
4) Also never, ever read Bogleheads. Remain ignorant of factor investing, 3x leveraged ETFs, bonds, international bonds, oil ETFs, bitcoin, whatever. Tune out the noise!
5) When you're say 10 years out from retirement take a look at your portfolio and start thinking about your AA and moving gradually over to bonds.

Say you were 23 years old in 1993 (backtest alert!) and you did just that. You buy $10,000 of VTSMX (mutual fund version of VTI) and then buy another $200 of VTSMX a month, not inflation adjusted.

27 years later, when you're 50 years old, you've got $311,773.

Now $311,773 isn't gonna buy you a yacht. But it's still a lot of money, and you've still got around 15 years to Social Security and retirement age.

And here's the thing. You didn't work very hard to get that money. All you did, after that initial buy, was by another $200 a month. You didn't even increase that amount as you got older! Just clicking a couple buttons (well, mailing a check in the early days) every month.

This is the difference between simple and easy. The simplest thing is to tune out the noise and do very little, but sometimes the simple things are the hardest things of all to do.
Great post. This is exactly what I have been doing; my portfolio is almost exclusively in the VTSAX for now (have a little international). I am 30 years old with >$750K invested. Hoping to be 30x expenses before I turn 40.
VTSAX and chill
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by rbaldini »

This strikes me as sloppy thinking. From a statistical perspective, yes, perhaps to reliably *distinguish* the returns of one strategy from another would require a large sample size, and therefore a long period of no changing. But that’s not really the point. If strategy A is superior to strategy B (in a per-risk sense), then doing 5 years of strategy A and then switching to B is still better than just doing B. Conversely, if B is superior, switching to B after 5 years is superior to sticking with A “for the rest of your life”.
In other words, I know of no theory that says the relative performance of an investment strategy depends on how long you stick with it. If an equal-weighted fund is better (not my opinion), even if ever so slightly, then any amount of time using that strategy is a net positive.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by Independent George »

Replace 'factors' with 'international', and you're describing my portfolio.

I will be sticking with it as I have for this past decade, but I'd be lying if I said it didn't bother me at times.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by FlyingMoose »

Independent George wrote: Thu Apr 30, 2020 12:49 am Replace 'factors' with 'international', and you're describing my portfolio.

I will be sticking with it as I have for this past decade, but I'd be lying if I said it didn't bother me at times.
Same here. I’ve been 50% international since I started investing, but once I had a decent amount of money it really started to underperform.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by Independent George »

FlyingMoose wrote: Thu Apr 30, 2020 2:06 am Same here. I’ve been 50% international since I started investing, but once I had a decent amount of money it really started to underperform.
I'm at 40% international. What's been difficult for me isn't that it's been lagging (which you'd expect), but that it's been outright stagnant (actually, negative when you factor in inflation) over the last decade. From 2011-2020, US has averaged about 9.7% versus 1.2% for international. If, instead, it were 12% vs 3%, it would be less painful even though the numerical difference is the same, because I'd be that much richer.

The problem, of course, is endpoints - from 2001-2010, US averaged a paltry 2.4% to International's 5.1%. And, of course, there's no good reason to measure by decade; it's just a convenient method of mental accounting.

I've got another 15-25 years of accumulation left in me. Maybe international will continue to be a drag, and maybe it won't. I'll be sticking with the plan.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by abuss368 »

Independent George wrote: Thu Apr 30, 2020 9:41 am
FlyingMoose wrote: Thu Apr 30, 2020 2:06 am Same here. I’ve been 50% international since I started investing, but once I had a decent amount of money it really started to underperform.
I'm at 40% international. What's been difficult for me isn't that it's been lagging (which you'd expect), but that it's been outright stagnant (actually, negative when you factor in inflation) over the last decade. From 2011-2020, US has averaged about 9.7% versus 1.2% for international. If, instead, it were 12% vs 3%, it would be less painful even though the numerical difference is the same, because I'd be that much richer.

The problem, of course, is endpoints - from 2001-2010, US averaged a paltry 2.4% to International's 5.1%. And, of course, there's no good reason to measure by decade; it's just a convenient method of mental accounting.

I've got another 15-25 years of accumulation left in me. Maybe international will continue to be a drag, and maybe it won't. I'll be sticking with the plan.
Looking at international it will need to outperform US by a large amount over the next decade to make up for this underperformance. I am not convinced if that is possible.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by Independent George »

abuss368 wrote: Thu Apr 30, 2020 9:46 am Looking at international it will need to outperform US by a large amount over the next decade to make up for this underperformance. I am not convinced if that is possible.
This is true - but the relevant question that Rick Ferri asks is, how will it perform if I cash out international now (following a decade of 1% growth) and it outperforms US over the next 10 years?

That may or may not happen. It might continue to be a drag on growth, right until the day I retire. Or it might start outperforming next year. I have no way of knowing. I bought into 40% international for diversification; it has not paid off so far. But changing my asset allocation now is straight performance chasing. The same logic applies if we're talking factors, or REITs, or international.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by abuss368 »

Independent George wrote: Thu Apr 30, 2020 11:19 am
abuss368 wrote: Thu Apr 30, 2020 9:46 am Looking at international it will need to outperform US by a large amount over the next decade to make up for this underperformance. I am not convinced if that is possible.
This is true - but the relevant question that Rick Ferri asks is, how will it perform if I cash out international now (following a decade of 1% growth) and it outperforms US over the next 10 years?

That may or may not happen. It might continue to be a drag on growth, right until the day I retire. Or it might start outperforming next year. I have no way of knowing. I bought into 40% international for diversification; it has not paid off so far. But changing my asset allocation now is straight performance chasing. The same logic applies if we're talking factors, or REITs, or international.
Reasonable points.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by bling »

my very first portfolio had a 10% allocation towards commodities. the reasoning back then was that it had low correlation with stocks and bonds and thus improved diversification. that was true back then, and it is true today. i'm also glad i ditched this plan 10 years ago because commodities has returned -11% CAGR for the past decade.

i'm currently debating whether to remove my 15% REIT tilt. it's kind of ironic because REITs have done just fine for the past decade, returning a respectable ~8-9% CAGR since 2010. if anything, i should be looking at my market-cap allocation towards international for its abysmal performance this past decade, but i know that if i switch now it would be the worst time possible so i'm staying the course there.
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Post by Taylor Larimore »

oneleaf wrote: The Meb Faber podcast was good because it reminded us that we need to be prepared for MUCH more than 10 years of underperforming if we are going to adopt a strategy.
Bogleheads:

The beauty of a total market index fund is that it can be held 'forever' and never underperforms the market. The resulting peace of mind is priceless.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "We say stay the course. But before you stay the course, make sure you're on the right course.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by Nate79 »

I disagree with Rick. All strategies require life long commitment. We see countless examples of people bailing on cap weighted TSM investing for a tilt in any direction. That's no different than tilting and bailing to a cap weight strategy. If you can't stick with a strategy and sell when it is down you have lost no matter which strategy you were using.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by ARoseByAnyOtherName »

Nate79 wrote: Thu Apr 30, 2020 7:27 pm I disagree with Rick. All strategies require life long commitment. We see countless examples of people bailing on cap weighted TSM investing for a tilt in any direction. That's no different than tilting and bailing to a cap weight strategy. If you can't stick with a strategy and sell when it is down you have lost no matter which strategy you were using.
I... think you’re actually agreeing with Rick’s point?
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by Nate79 »

ARoseByAnyOtherName wrote: Thu Apr 30, 2020 7:31 pm
Nate79 wrote: Thu Apr 30, 2020 7:27 pm I disagree with Rick. All strategies require life long commitment. We see countless examples of people bailing on cap weighted TSM investing for a tilt in any direction. That's no different than tilting and bailing to a cap weight strategy. If you can't stick with a strategy and sell when it is down you have lost no matter which strategy you were using.
I... think you’re actually agreeing with Rick’s point?

No, I disagree. He has used this argument against any tilting. But I have yet to hear him use this argument against market weight investing. The statement could as easily have been made that one should NOT invest in a market cap weighted investment because it requires a lifelong commitment as it can (and has) at times underperformed.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by aristotelian »

Doesn't the argument go both ways? If you buy VOO and it underperformed equal weight, then you would either switch or have to stick with it for the rest of your life. I don't see how buying VOO would solve the problem.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by ARoseByAnyOtherName »

Nate79 wrote: Thu Apr 30, 2020 7:36 pm
ARoseByAnyOtherName wrote: Thu Apr 30, 2020 7:31 pm
Nate79 wrote: Thu Apr 30, 2020 7:27 pm I disagree with Rick. All strategies require life long commitment. We see countless examples of people bailing on cap weighted TSM investing for a tilt in any direction. That's no different than tilting and bailing to a cap weight strategy. If you can't stick with a strategy and sell when it is down you have lost no matter which strategy you were using.
I... think you’re actually agreeing with Rick’s point?

No, I disagree. He has used this argument against any tilting. But I have yet to hear him use this argument against market weight investing. The statement could as easily have been made that one should NOT invest in a market cap weighted investment because it requires a lifelong commitment as it can (and has) at times underperformed.
The definition of the return of “the market” is the return of a cap-weighted total market index fund. Like, that is the baseline!

When people say “80% of hedge funds don’t beat the market” they aren’t baselining against your portfolio tilted with small value, emerging market bonds, 7x leveraged ETFs, or whatever. They baseline against the return of the cap weighted total market.

The whole point of being a Boglehead is that the majority of X (pick your X) done beat the baseline. So the baseline return is actually really good.

So it makes no sense for him to use that argument, and your argument that he should doesn’t make any sense either.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by perfectuncertainty »

I disagree with his philosophy.

What he is saying is that if you selected an investment that performs poorly you must stick with the investment otherwise you are admitting you lost. That’s a false choice. There aren't only 2 options.
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by tibbitts »

glenmalan wrote: Thu Apr 30, 2020 10:04 pm I disagree with his philosophy.

What he is saying is that if you selected an investment that performs poorly you must stick with the investment otherwise you are admitting you lost. That’s a false choice. There aren't only 2 options.
What are the other options?
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Re: Rick Ferri: "You have to stick with that plan for the rest of your life."

Post by perfectuncertainty »

tibbitts wrote: Thu Apr 30, 2020 10:19 pm
glenmalan wrote: Thu Apr 30, 2020 10:04 pm I disagree with his philosophy.

What he is saying is that if you selected an investment that performs poorly you must stick with the investment otherwise you are admitting you lost. That’s a false choice. There aren't only 2 options.
What are the other options?
I might be misunderstanding what he is saying, but you don't have to stay with a losing horse for the rest of your life in the hopes that it might catch up and outperform the other horses. There isn't only one other horse. You might sell the losing investment and invest in a real winner which beats the benchmark you were comparing the original investment to.
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