"Beware of Sci-Fi Portfolios"

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Taylor Larimore
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"Beware of Sci-Fi Portfolios"

Post by Taylor Larimore »

Bogleheads:

Advisor Allan Roth shares one of the worst portfolios he has encountered. It provides us with an opportunity to learn "what not to do."

Beware of Sci-Fi Portfolios

Thank you, Allan.

Best wishes
Taylor
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james22
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Re: "Beware of Sci-Fi Portfolios"

Post by james22 »

You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?

:confused

Argue for your three-fund on behavioral reasons, you've much better evidence for that.
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Re: "Beware of Sci-Fi Portfolios"

Post by james22 »

This is really an offensive article.

How Do We Get To These Science-Based Portfolios?

The first culprit is academia. To be published, one must come up with new research of new discoveries. These discoveries are based on “backtesting” performance and developing theories on why the outperformance will persist. This methodology is flawed, and underperformance typically follows as reversion to the mean takes over.


Idiotic. Ignores all other criteria. The most important of which is Intuitive: There are logical, risk-based or behavioral-based explanations for the premium and why it should continue to exist.

https://www.etf.com/sections/index-inve ... nopaging=1

The second culprit is the advisor who is indirectly compensated for complexity. This is especially true if the advisor is a publicly held company or owned by one. They have their own shareholders as their masters.

The late Vanguard founder John Bogle stated “no man can serve two masters.” It’s hard for the advisor to charge much and retain the client for simplicity. Thus, complexity and costs become the advisor’s friends but the investor’s enemies.


Insulting. Do you believe Swede, for example, is trying to confuse clients when he spends so much time educating?

This article is nothing more than (deceptive) advertising for Roth.
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Re: "Beware of Sci-Fi Portfolios"

Post by Dale_G »

james22 wrote: Sat May 15, 2021 1:57 pm You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?
Data mining is not science. And yes, five years of serious underperformance of an alleged superior portfolio (compared to the broad market) is enough to chuck it to the wind.

Dale
Volatility is my friend
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

Dale_G wrote: Sat May 15, 2021 2:29 pm
james22 wrote: Sat May 15, 2021 1:57 pm You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?
Data mining is not science. And yes, five years of serious underperformance of an alleged superior portfolio (compared to the broad market) is enough to chuck it to the wind.

Dale
Academic research isn’t “data mining”.
"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: "Beware of Sci-Fi Portfolios"

Post by nisiprius »

vineviz wrote: Sat May 15, 2021 2:32 pm
Dale_G wrote: Sat May 15, 2021 2:29 pm
james22 wrote: Sat May 15, 2021 1:57 pm You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?
Data mining is not science. And yes, five years of serious underperformance of an alleged superior portfolio (compared to the broad market) is enough to chuck it to the wind.

Dale
Academic research isn’t “data mining”.
Some isn't and some is.

Why Most Published Research Findings are False

It's bad enough when all that is at stake is reputation, but when money is involved I suspect the problems are worse.

Economics is a social science.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: "Beware of Sci-Fi Portfolios"

Post by james22 »

Dale_G wrote: Sat May 15, 2021 2:29 pm
james22 wrote: Sat May 15, 2021 1:57 pm You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?
Data mining is not science. And yes, five years of serious underperformance of an alleged superior portfolio (compared to the broad market) is enough to chuck it to the wind.

Dale
There have been three periods of at least 13 years when the S&P 500 underperformed what is considered the riskless benchmark, one-month Treasury bills — the 15 years from 1929 to 1943, the 17 years from 1966-82, and the 13 years from 2000-12. That’s 45 total years out of the last 91.

https://www.evidenceinvestor.com/is-it- ... -long-run/

Chuck the broad market to the wind!
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Re: "Beware of Sci-Fi Portfolios"

Post by james22 »

nisiprius wrote: Sat May 15, 2021 2:52 pm
vineviz wrote: Sat May 15, 2021 2:32 pm
Dale_G wrote: Sat May 15, 2021 2:29 pm
james22 wrote: Sat May 15, 2021 1:57 pm You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?
Data mining is not science. And yes, five years of serious underperformance of an alleged superior portfolio (compared to the broad market) is enough to chuck it to the wind.

Dale
Academic research isn’t “data mining”.
Some isn't and some is.

Why Most Published Research Findings are False

It's bad enough when all that is at stake is reputation, but when money is involved I suspect the problems are worse.

Economics is a social science.
The datasets are certainly better in economics (as opposed to observation, surveys, interviews, "interpretive" analysis, etc.).
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

There is abundant academic research saying that factors are a way of increasing exposure to certain risks but not of increasing risk adjusted returns.

That does not sell funds.

So proponents ignore these results and focus on a period of high performance, found through back testing and imply that the results will persist.

Read some Campbell Harvey about consistent underestimation of the odds of an observed event occuring randomly.

https://www.nber.org/papers/w20592

He finds that academic papers typically overestimate the significance of their results. He develops alternative approaches to analyzing the data that account for problems with the measurements and datasets. He concludes that most of the results were due to chance and do not replicate.

Try telling that to a client to whom you are selling 1% AUM fee on top of 2% expense ratios!

The world is safe for those selling these products because most investors have never heard of Campbell Harvey, are never going to read his work and are never going to take even a single introductory course in probability and statistics.

Instead, they will look for a good story and not bother themselves with all those data and complicated analysis.

Coming up with a good story is the job of the marketing staff. Some are quite good at it.

All that advertising costs money, so one has to charge a lot to have a profit after paying the costs of selling the funds.

Or, one could buy a 3-fund portfolio with fees close to zero. Difficult to discuss at a cocktail party unless the room is filled with quantitatively oriented people. Those people would be far more interested in the data and analysis than in the simplistic story.
Last edited by afan on Sat May 15, 2021 3:59 pm, edited 1 time in total.
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Re: "Beware of Sci-Fi Portfolios"

Post by Tony-S »

nisiprius wrote: Sat May 15, 2021 2:52 pm
vineviz wrote: Sat May 15, 2021 2:32 pm
Dale_G wrote: Sat May 15, 2021 2:29 pm
james22 wrote: Sat May 15, 2021 1:57 pm You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?
Data mining is not science. And yes, five years of serious underperformance of an alleged superior portfolio (compared to the broad market) is enough to chuck it to the wind.

Dale
Academic research isn’t “data mining”.
Some isn't and some is.

Why Most Published Research Findings are False

It's bad enough when all that is at stake is reputation, but when money is involved I suspect the problems are worse.

Economics is a social science.
I wouldn’t pay too much attention to Ioannidis‘ opinion piece.
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

nisiprius wrote: Sat May 15, 2021 2:52 pm
vineviz wrote: Sat May 15, 2021 2:32 pm Academic research isn’t “data mining”.
Some isn't and some is.
The fact that some research isn’t reproducible isn’t evidence that the research was “data mined”.
"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: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

james22 wrote: Sat May 15, 2021 2:15 pm This is really an offensive article.

Idiotic. Ignores all other criteria. The most important of which is Intuitive: There are logical, risk-based or behavioral-based explanations for the premium and why it should continue to exist.

Insulting. Do you believe Swede, for example, is trying to confuse clients when he spends so much time educating?

This article is nothing more than (deceptive) advertising for Roth.


I accept your opinion that my view that factor investing isn't a free lunch is "idiotic." It happens to be consistent with that of Fama, French, and DFA that these factors are compensation for taking on more risk. I did not state who the advisor or the firm was that used these funds. I've had a wait list for over a decade and do not advertise.

James22 - I accept your opinions and wouldn't want to change them. By picking parts of the market, you give me and many other Bogleheads a free lunch, keeping markets efficient. Thank you!
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

Much of it is data mined by accident.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: "Beware of Sci-Fi Portfolios"

Post by james22 »

afan wrote: Sat May 15, 2021 3:57 pm There is abundant academic research saying that factors are a way of increasing exposure to certain risks but not of increasing risk adjusted returns.

That does not sell funds.

So proponents ignore these results and focus on a period of high performance, found through back testing and imply that the results will persist.
Ignore? Imply?
Random Walker wrote: Tue Feb 07, 2017 1:34 pmI believe some young advisors at Larry's firm are 100% equity all in SV, ISV, EMV.
viewtopic.php?t=210208

You don't believe Larry and his firm believe what they sell?

I don't use an advisor - who sold me on factor investing?
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Re: "Beware of Sci-Fi Portfolios"

Post by ScubaHogg »

james22 wrote: Sat May 15, 2021 2:15 pm
The second culprit is the advisor who is indirectly compensated for complexity. This is especially true if the advisor is a publicly held company or owned by one. They have their own shareholders as their masters.

The late Vanguard founder John Bogle stated “no man can serve two masters.” It’s hard for the advisor to charge much and retain the client for simplicity. Thus, complexity and costs become the advisor’s friends but the investor’s enemies.


Insulting. Do you believe Swede, for example, is trying to confuse clients when he spends so much time educating?

This article is nothing more than (deceptive) advertising for Roth.
Well if you believe in “evidence” and “science” then you have to accept that incentives change both behavior and indeed what one even believes. It doesn’t require thinking someone is knowingly lying to you. So yes, people will have a tendency to believe that the product that compensates them the highest is what their client “needs.” That applies to everyone. Insurance sales folks, doctors, builders, and (gasp) financial advisors.

“Never, ever, think about something else when you should be thinking about the power of incentives.”

— Charlie Munger
There are more things in Heaven and Earth, Horatio, than are dreamt of in your Expected Returns
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Re: "Beware of Sci-Fi Portfolios"

Post by 1789 »

I read Larry’ s books as i read alot of books. How come all these alternative investment have been doing terrible? Is there really a time in history they performed well. Overall good article Allan Roth. One can just invest in a single fund like sp500 fund and most likely come out ahead of this portfolio.
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Re: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

ScubaHogg wrote: Sat May 15, 2021 4:24 pm
Well if you believe in “evidence” and “science” then you have to accept that incentives change both behavior and indeed what one even believes. It doesn’t require thinking someone is knowingly lying to you. So yes, people will have a tendency to believe that the product that compensates them the highest is what their client “needs.” That applies to everyone. Insurance sales folks, doctors, builders, and (gasp) financial advisors.

“Never, ever, think about something else when you should be thinking about the power of incentives.”

— Charlie Munger
I agree with you on incentives. If it meant bringing food home to my family or paying my son's college tuition, I would likely have chosen a different model than hourly and try to sell some pretty ugly stuff. We are all human.

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

― Upton Sinclair,
Last edited by Allan Roth on Sat May 15, 2021 4:48 pm, edited 1 time in total.
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Re: "Beware of Sci-Fi Portfolios"

Post by james22 »

Allan Roth wrote: Sat May 15, 2021 4:13 pm
james22 wrote: Sat May 15, 2021 2:15 pm This is really an offensive article.

Idiotic. Ignores all other criteria. The most important of which is Intuitive: There are logical, risk-based or behavioral-based explanations for the premium and why it should continue to exist.

Insulting. Do you believe Swede, for example, is trying to confuse clients when he spends so much time educating?

This article is nothing more than (deceptive) advertising for Roth.


I accept your opinion that my view that factor investing isn't a free lunch is "idiotic." It happens to be consistent with that of Fama, French, and DFA that these factors are compensation for taking on more risk.


What? I made no claim of "free lunch." Just that one cannot represent the research as merely back-testing. That's simply not so. Only because you must know that did I describe the article as deceptive.
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Re: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

james22 wrote: Sat May 15, 2021 4:48 pm
What? I made no claim of "free lunch." Just that one cannot represent the research as merely back-testing. That's simply not so. Only because you must know that did I describe the article as deceptive.
You stated the premiums were behavioral based. Rather than use words like "offensive" and "idiotic" to attack people, consider stating why you disagree. I'm making the claim that the only free lunch comes from investors picking parts of the market and. Happy to be called names so thanks again.
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

Allan Roth wrote: Sat May 15, 2021 4:57 pm I'm making the claim that the only free lunch comes from investors picking parts of the market and. Happy to be called names so thanks again.
If the multifactor portfolio is called the “Sci-Fi” portfolio, does that make a single factor portfolio the “Fantasy” portfolio?

I ask because the notion that the total market portfolio is a “free lunch” seems to be less grounded in reality than the strawman being attacked here.
"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: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

vineviz wrote: Sat May 15, 2021 5:16 pm
If the multifactor portfolio is called the “Sci-Fi” portfolio, does that make a single factor portfolio the “Fantasy” portfolio?

I ask because the notion that the total market portfolio is a “free lunch” seems to be less grounded in reality than the straw am being attacked here.
A Jack Bogle Total Market free lunch is based on arithmetic. When you add one or two extra digits to expense ratios, you go against arithmetic. Read the very short and simple paper below.

https://web.stanford.edu/~wfsharpe/art/ ... active.htm

I'm on record as stating a low cost DFA factor tilting portfolio is a reasonable active strategy that I experimented with but decided it was less tax-efficient than I had hoped. The AQR and private funds with expense ratios well over 1% are flawed, IMO.
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Re: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

vineviz wrote: Sat May 15, 2021 5:16 pm
If the multifactor portfolio is called the “Sci-Fi” portfolio, does that make a single factor portfolio the “Fantasy” portfolio?

I ask because the notion that the total market portfolio is a “free lunch” seems to be less grounded in reality than the straw am being attacked here.
A Jack Bogle Total Market free lunch is based on arithmetic. When you add one or two extra digits to expense ratios, you go against arithmetic. Read the very short and simple paper below. A low cost total stock market portfolio must beat the average active dollar invested in US stocks.

https://web.stanford.edu/~wfsharpe/art/ ... active.htm

I'm on record as stating a low cost DFA factor tilting portfolio is a reasonable active strategy that I experimented with but decided it was less tax-efficient than I had hoped. The AQR and private funds with expense ratios well over 1% are badly flawed, IMO.
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

A good story does not make something true. Again, that is the job of the marketing department. "Come up with a reason why people should pay 2.8%.of assets". It is not even relevant.

Support for a claim comes from evidence.

Much of the evidence for factor investing as a way to improve returns ignores risk (read the papers, "ignore" is the correct word when risk is not discussed), is confounded by data mining, some inadvertent. Many of the papers have both problems.

Read Harvey and get back to us about
why he is wrong
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Re: "Beware of Sci-Fi Portfolios"

Post by abuss368 »

Taylor Larimore wrote: Sat May 15, 2021 9:52 am Bogleheads:

Advisor Allan Roth shares one of the worst portfolios he has encountered. It provides us with an opportunity to learn "what not to do."

Beware of Sci-Fi Portfolios

Thank you, Allan.

Best wishes
Taylor
Jack Bogle's Words of Wisdom: “The marketing colossus known as the mutual fund industry provides the weaponry which enables investors’ to indulge their suicidal instincts.”
Taylor -

Hard to even comprehend or get my mind around a 15 fund portfolio!

Wow! Layer on1% management fees!

INCREDIBLE!
Tony
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Re: "Beware of Sci-Fi Portfolios"

Post by abuss368 »

1789 wrote: Sat May 15, 2021 4:25 pm I read Larry’ s books as i read alot of books. How come all these alternative investment have been doing terrible? Is there really a time in history they performed well. Overall good article Allan Roth. One can just invest in a single fund like sp500 fund and most likely come out ahead of this portfolio.
That is a WINNING strategy!

Jack Bogle would refer to Occam’s razor. When presented with multiple choices, chose the simplest.

Tony
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Re: "Beware of Sci-Fi Portfolios"

Post by Ferdinand2014 »

“Minimizing expenses and emotions; maximizing diversification and discipline.”

Excellent quote and the cornerstone of my investing philosophy. Thank you Allan Roth and Taylor Larimore for reminding me!
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
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Re: "Beware of Sci-Fi Portfolios"

Post by james22 »

afan wrote: Sat May 15, 2021 6:12 pmRead Harvey and get back to us about
why he is wrong
Do you know how I know you didn't read Swedroe's article?

Because he references Harvey's work in it:

For example, Campbell Harvey (past editor of The Journal of Finance), Yan Liu and Heqing Zhu, in their paper “…and the Cross-Section of Expected Returns,” which was published in the January 2016 issue of The Review of Financial Studies, reported that 59 new factors were discovered between 2010 and 2012 alone.

https://www.etf.com/sections/index-inve ... nopaging=1

Read the article. It is all about minimizing the risk of results being due to chance.

Does it really sound to you like it was written by someone cherry-picking the data to find something to sell to gullible clients?
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

I’m going to try to make a defense of the portfolio. I understand that costs are certain and potential benefits are only possibilities, so I have a high hurdle to jump. I have a portfolio that is basically the exact portfolio that Alan describes. First, this is my portfolio: 40% equity / 25% alternatives / 35% bonds.

40% Equity equally split US/Int heavily tilted to SV
DFA Tax Advantaged US Core 2 (market tilted to SV) 4.0%
DFA Market Wide Value 2 (US Large Value) 2.5%
DFA Tax Managed Targeted Value and Bridgeway Tax Managed Small Value 13.5%

DFA Tax Managed World Ex US (Int market tilted to SV) 2.5%
DFA Int SV, DFA World ex US Targeted Value, DFA Int Vector (Int SV) 12.5%
DFA Emerging Markets Core and DFA Emerging Markets Value 5.0%

25% Alternatives
Stone Ridge Alternative Lending 4.0%
Clearwater Mid Market Corporate Lending 4.0%
Stone Ridge Reinsurance 4.0%
AQR Style Premia 10.0%
DFA US REIT 2.0%
DFA Int REIT 1.0%

35% Bonds
Ladder individual high quality muni bonds with average 5-6 year maturity
About 10% of bond allocation in DFA muni bond fund to have available for rebalancing

The basic beliefs upon which this portfolio is founded include market efficiency, increased compensated risk yields increased expected return, human behavior is tenaciously persistent, modern portfolio theory. I strongly believe in diversifying as broadly as possible across unique and independent sources of risk and return. Most all of our portfolios, even this portfolio, are dominated by the single equity market factor. The goal in creating a more efficient portfolio is to diversify away from this dominant factor to create a portfolio with it’s risks more evenly spread across multiple uncorrelated risks; a move in the direction of risk parity.

A basic tenet of individual investing is that total market or core funds are the cheapest and highly tax efficient. So on the equity side we start with these. These DFA core funds have some tilt toward size and value. They are highly tax efficient. To gain more tilt towards the size and value factors, I add specific small value funds. These are more expensive. But sometimes a more expensive fund can be worthwhile for deeper factor tilts. There are potentially good reasons for an investor to choose a more expensive factor fund. First, deeper exposures mean the investor needs less of the more expensive factor fund to achieve the tilts he is trying to achieve. It is cost per unit factor exposure that matters, not cost alone. Second, with deeper tilts, the investor needs to take on less market beta risk to achieve the tilts he wants, and after all, it is market beta risk he is trying to diversify away from.

Why large value funds and multiple small value equity funds? This answer is easy. First of all, as an investor I’ve evolved over time. I’ve moved toward lower overall equity exposure and increasing tilt to size and value. So, I have some legacy exposure to large value that makes more sense to hold than sell and pay capital gains now. Second, the investing industry evolves too, and new funds can become available over time that might be better. They coud have deeper exposure to desired factors and less cost per unit factor exposure. Third, some funds serve as tax loss harvesting partners for other similar funds.

I expect Alan’s and Bogleheads biggest beef is with the alternatives. Yes they are expensive, but some not as expensive as Alan states. They do provide truly unique, independent, uncorrelated sources of expected return. LENDX, CCLFX, SRRIX are really direct participation in businesses. Some of the alternatives use leverage and the investor’s expense ratio is only on his own investment, yet he potentially benefits from the leverage, so the effective expense ratio on invested money for the investor is less than initially appears.

Anyways, I thought this a reasonable opportunity to make a defense of my highly atypical Boglehead portfolio. As I have written many times, the best and cheapest diversifier of equity risk is high quality bonds. Everything else down the road of what I perceive as increased portfolio efficiency comes at increasing marginal cost and decreasing marginal benefit. That being said, if one thinks a portfolio addition yields net increased marginal benefit, then why not make it? Sometimes people scoff at small 3% allocations, but if it likely makes for a better portfolio, why not make the incremental change? Once again, costs are certain, and improved portfolio efficiency only potential. Each investor needs to decide when potential improvements look large enough to warrant the certain increased costs.

Dave
Last edited by Random Walker on Sat May 15, 2021 8:33 pm, edited 2 times in total.
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Re: "Beware of Sci-Fi Portfolios"

Post by LadyGeek »

The discussion is getting contentious. I removed an off-topic post. See: General Etiquette
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Re: "Beware of Sci-Fi Portfolios"

Post by LadyGeek »

FYI - Allan Roth is the article's author. See the wiki: Allan Roth
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

james22 wrote: Sat May 15, 2021 2:15 pm

How Do We Get To These Science-Based Portfolios?

The first culprit is academia. To be published, one must come up with new research of new discoveries. These discoveries are based on “backtesting” performance and developing theories on why the outperformance will persist. This methodology is flawed, and underperformance typically follows as reversion to the mean takes over.


Yes academia can find stuff in backtesting. Yes they can find intuitive explanations for the premia to persist in the future. But the article does not mention one huge point. After these premia are "discovered", they are shown to be present in lots of out of sample tests. One can look for the premia in different markets, different geographies, different time periods, and sometimes even different asset classes. Out of sample tests add a lot of credibility to what is initially found in a single backtest.

Dave
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Re: "Beware of Sci-Fi Portfolios"

Post by james22 »

Allan Roth wrote: Sat May 15, 2021 4:57 pm
james22 wrote: Sat May 15, 2021 4:48 pmWhat? I made no claim of "free lunch." Just that one cannot represent the research as merely back-testing. That's simply not so.
You stated the premiums were behavioral based.
No, I quoted one of (a number of) Swedroe's conditions for factor consideration:
james22 wrote: Sat May 15, 2021 2:15 pmIntuitive: There are logical, risk-based or behavioral-based explanations for the premium and why it should continue to exist.

https://www.etf.com/sections/index-inve ... nopaging=1
JamesDean44
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Re: "Beware of Sci-Fi Portfolios"

Post by JamesDean44 »

james22 wrote: Sat May 15, 2021 2:15 pm This is really an offensive article.

How Do We Get To These Science-Based Portfolios?

The first culprit is academia. To be published, one must come up with new research of new discoveries. These discoveries are based on “backtesting” performance and developing theories on why the outperformance will persist. This methodology is flawed, and underperformance typically follows as reversion to the mean takes over.


Idiotic. Ignores all other criteria. The most important of which is Intuitive: There are logical, risk-based or behavioral-based explanations for the premium and why it should continue to exist.

https://www.etf.com/sections/index-inve ... nopaging=1

The second culprit is the advisor who is indirectly compensated for complexity. This is especially true if the advisor is a publicly held company or owned by one. They have their own shareholders as their masters.

The late Vanguard founder John Bogle stated “no man can serve two masters.” It’s hard for the advisor to charge much and retain the client for simplicity. Thus, complexity and costs become the advisor’s friends but the investor’s enemies.


Insulting. Do you believe Swede, for example, is trying to confuse clients when he spends so much time educating?

This article is nothing more than (deceptive) advertising for Roth.
Agreed.
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Re: "Beware of Sci-Fi Portfolios"

Post by Allan Roth »

james22 wrote: Sat May 15, 2021 8:43 pm
Allan Roth wrote: Sat May 15, 2021 4:57 pm
james22 wrote: Sat May 15, 2021 4:48 pmWhat? I made no claim of "free lunch." Just that one cannot represent the research as merely back-testing. That's simply not so.
You stated the premiums were behavioral based.


No, I quoted one of (a number of) Swedroe's conditions for factor consideration:

james22 wrote: Sat May 15, 2021 2:15 pmIntuitive: There are logical, risk-based or behavioral-based explanations for the premium and why it should continue to exist.

https://www.etf.com/sections/index-inve ... nopaging=1
Please read your own post - you did state factors were behavioral-based. You hit the nail on the head when you referred to intuitive - that intuition is what leads us to buy high and sell low and chase past performance. If I were going to data mine, this is the approach I would use:
https://www.financial-planning.com/news ... allan-roth
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Re: "Beware of Sci-Fi Portfolios"

Post by afan »

james22 wrote: Sat May 15, 2021 7:27 pm
afan wrote: Sat May 15, 2021 6:12 pmRead Harvey and get back to us about
why he is wrong
Do you know how I know you didn't read Swedroe's article?

Because he references Harvey's work in it:

For example, Campbell Harvey (past editor of The Journal of Finance), Yan Liu and Heqing Zhu, in their paper “…and the Cross-Section of Expected Returns,” which was published in the January 2016 issue of The Review of Financial Studies, reported that 59 new factors were discovered between 2010 and 2012 alone.

https://www.etf.com/sections/index-inve ... nopaging=1

Read the article. It is all about minimizing the risk of results being due to chance.

Does it really sound to you like it was written by someone cherry-picking the data to find something to sell to gullible clients?
How does suggesting you read Harvey imply that I did not read Swedroe?
More importantly, what does reading Swedroe's article have to do with reading Harvey's work?
Is Harvey wrong? If so, show where he makes his mistakes.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: "Beware of Sci-Fi Portfolios"

Post by averagedude »

I am a big believer in simplicity. Total US, Total International, and Total bond is a reasonable investment strategy. I do have a problem with "academic research". Is their research a proven fact, or is it a flawed academic exercise that is based on the past that in no way would be replicated in a real world example? Could investors have really been able to invest in the micro cap stocks in the past with rock bottom trading costs like they are able to do now? Could investors in the past know what the real value stock companies are and actually invest in them like we all know today? I believe that your asset allocation is the real driver of long term investment returns. Tilting your portfolio to factors that "academic research" have shown to produce alpha will more than likely not produce higher returns, compared to a portfolio that is just simply tilted heavier to equities.
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Re: "Beware of Sci-Fi Portfolios"

Post by james22 »

Allan Roth wrote: Sat May 15, 2021 9:39 pm
james22 wrote: Sat May 15, 2021 8:43 pm
Allan Roth wrote: Sat May 15, 2021 4:57 pm
james22 wrote: Sat May 15, 2021 4:48 pmWhat? I made no claim of "free lunch." Just that one cannot represent the research as merely back-testing. That's simply not so.
You stated the premiums were behavioral based.


No, I quoted one of (a number of) Swedroe's conditions for factor consideration:

james22 wrote: Sat May 15, 2021 2:15 pmIntuitive: There are logical, risk-based or behavioral-based explanations for the premium and why it should continue to exist.

https://www.etf.com/sections/index-inve ... nopaging=1
Please read your own post - you did state factors were behavioral-based. You hit the nail on the head when you referred to intuitive - that intuition is what leads us to buy high and sell low and chase past performance. If I were going to data mine, this is the approach I would use:
https://www.financial-planning.com/news ... allan-roth
afan wrote: Sat May 15, 2021 10:19 pm
james22 wrote: Sat May 15, 2021 7:27 pm
afan wrote: Sat May 15, 2021 6:12 pmRead Harvey and get back to us about
why he is wrong
Do you know how I know you didn't read Swedroe's article?

Because he references Harvey's work in it:

For example, Campbell Harvey (past editor of The Journal of Finance), Yan Liu and Heqing Zhu, in their paper “…and the Cross-Section of Expected Returns,” which was published in the January 2016 issue of The Review of Financial Studies, reported that 59 new factors were discovered between 2010 and 2012 alone.

https://www.etf.com/sections/index-inve ... nopaging=1

Read the article. It is all about minimizing the risk of results being due to chance.

Does it really sound to you like it was written by someone cherry-picking the data to find something to sell to gullible clients?
How does suggesting you read Harvey imply that I did not read Swedroe?
More importantly, what does reading Swedroe's article have to do with reading Harvey's work?
Is Harvey wrong? If so, show where he makes his mistakes.
Sorry, I don't believe I can reply to these without risking another Warning from the Moderators.

Maybe someone else can.
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Re: "Beware of Sci-Fi Portfolios"

Post by Alchemist »

1789 wrote: Sat May 15, 2021 4:25 pm I read Larry’ s books as i read alot of books. How come all these alternative investment have been doing terrible? Is there really a time in history they performed well. Overall good article Allan Roth. One can just invest in a single fund like sp500 fund and most likely come out ahead of this portfolio.
Over the last 17 years you would have done better with VFIAX than with a Buckingham / Swedroe portfolio as DFA SCV has trailed TSM by 1.6% CAGR. If you add the advisor fee and the dead weight of the Alts (and commodities fund he advocated prior to the Alts) then you would have lagged VFIAX by a significant margin. Oh yeah, and would have done so while experiencing higher risk (as measured by volatility and draw downs).

https://www.portfoliovisualizer.com/bac ... ion3_3=100

A simple S&P500 index fund has all the necessary diversification for an equity portfolio. TSM is a tiny bit better. For diversification beyond equities add high quality bonds via TBM. If you also feel strongly about international diversification then throw in some VTIAX. Boom, you're done.

No advisor, 'factor models', or crazy expensive "alternatives" required.
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Re: "Beware of Sci-Fi Portfolios"

Post by nedsaid »

It is pretty clear to me that Alan Roth's article was a critique of Academic Research, Factor Investing, Alternative Investments, and Advisory firms in general. We don't need a decoder ring to know which advisory firm and which two well known factor investing practitioners he was criticizing specifically. Saying that other people in the business were wrong is fair game but the article seemed too much like a cheap shot personal attack and the words were pretty loaded. I expected better.

"Sci-Fi Portfolios", "science fiction", "brokers gut feeling", "so called research" was a really disappointing use of language and to be honest, I lost a lot of respect for Alan here. After critiquing a portfolio that a certain advisory firm recommended, Alan says this.
The second culprit is the advisor who is indirectly compensated for complexity. This is especially true if the advisor is a publicly held company or owned by one. They have their own shareholders as their masters.
What Alan did here was the equivalent of mixing of metaphors or the equivalent of malapropism. He was comparing brokerage firms with a suitability requirement to advisory firms with legal fiduciary responsibilities. A stock broker at UBS will not likely recommend a factor tilted portfolio and Alan knows this.

As far as I know neither Buckingham or AQR or DFA are publicly owned to my knowledge. What Alan is implying here is just factually incorrect.

Some good points in the article but sloppily written and implying public ownership of companies that are in fact privately owned. I like Alan and much of what he writes, but this article was awful in several ways.
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Re: "Beware of Sci-Fi Portfolios"

Post by Alchemist »

nedsaid wrote: Sun May 16, 2021 12:33 am It is pretty clear to me that Alan Roth's article was a critique of Academic Research, Factor Investing, Alternative Investments, and Advisory firms in general. We don't need a decoder ring to know which advisory firm and which two well known factor investing practitioners he was criticizing specifically. Saying that other people in the business were wrong is fair game but the article seemed too much like a cheap shot personal attack and the words were pretty loaded. I expected better.
Obviously this is a Buckingham portfolio. It is also a dumpster fire of 15 different funds with an average expense ratio of 1.05% before you slap on the advisor fee. Any advisor that suggest this kind of an absolute mess of an expensive portfolio deserves to be raked over the metaphorical coals. This kind of needless complexity and extreme costs is the antithesis of Boglehead. What do you think John Bogle would say about it?
nedsaid wrote:"Sci-Fi Portfolios", "science fiction", "brokers gut feeling", "so called research" was a really disappointing use of language and to be honest, I lost a lot of respect for Alan here. After critiquing a portfolio that a certain advisory firm recommended, Alan says this.
Alan is spot on with his critique and it is far overdue for people around here to call a spade a spade when it comes to a specific high cost advisory firm that inexplicably gets a free pass around here.
nedsaid wrote: As far as I know neither Buckingham or AQR or DFA are publicly owned to my knowledge. What Alan is implying here is just factually incorrect.
Public or private, there are still shareholders. This is kind of an odd complaint.
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Re: "Beware of Sci-Fi Portfolios"

Post by nedsaid »

Alchemist wrote: Sun May 16, 2021 12:56 am
nedsaid wrote: Sun May 16, 2021 12:33 am It is pretty clear to me that Alan Roth's article was a critique of Academic Research, Factor Investing, Alternative Investments, and Advisory firms in general. We don't need a decoder ring to know which advisory firm and which two well known factor investing practitioners he was criticizing specifically. Saying that other people in the business were wrong is fair game but the article seemed too much like a cheap shot personal attack and the words were pretty loaded. I expected better.
Obviously this is a Buckingham portfolio. It is also a dumpster fire of 15 different funds with an average expense ratio of 1.05% before you slap on the advisor fee. Any advisor that suggest this kind of an absolute mess of an expensive portfolio deserves to be raked over the metaphorical coals. This kind of needless complexity and extreme costs is the antithesis of Boglehead. What do you think John Bogle would say about it?
nedsaid wrote:"Sci-Fi Portfolios", "science fiction", "brokers gut feeling", "so called research" was a really disappointing use of language and to be honest, I lost a lot of respect for Alan here. After critiquing a portfolio that a certain advisory firm recommended, Alan says this.
Alan is spot on with his critique and it is far overdue for people around here to call a spade a spade when it comes to a specific high cost advisory firm that inexplicably gets a free pass around here.
nedsaid wrote: As far as I know neither Buckingham or AQR or DFA are publicly owned to my knowledge. What Alan is implying here is just factually incorrect.
Public or private, there are still shareholders. This is kind of an odd complaint.
It was Roth who used the term publicly held. I stand by my comments.

Buckingham does not get a free pass here. I have commented a lot here regarding the Liquid Alts and the Interval funds. I do have concerns about these investments. While I have a lot of respect for Larry Swedroe, I have disagreed with him here on some certain points.

Random Walker has shared some things here regarding the performance of his Buckingham Portfolio and it seems to have performed remarkably well despite the disappointment of the Liquid Alts and Interval Funds. Pretty much Value had underperformed the market for years after the 2008-2009 bear market and financial crisis. Only during the last year or so have we seen Value start to outperform again. During a period of Value underperformance, it isn't a mystery as to why factor tilted portfolios have underperformed the Taylor Larimore 3 Fund Portfolio.

It is interesting that the AQR Style Premia Fund, QSPIX, which was greatly discussed here is showing signs of life in 2021 after having been given up for dead on this forum. It had a good start, floundered badly for a while, and now in 2021 is up over 20% last I looked. It might be that the cause of QSPIX's problems was the Value factor and not the trading techniques and strategies. Let's see what happens. By the way, I do not own the fund and I don't own any StoneRidge funds. I am not a Buckingham client.

If we see an extended period of where Value outperforms the rest of the market, a lot of things Roth brings up in this article would have to be re-examined. The difference is that I am not going to say that the 3 Funders are a bunch of idiots if this happens, I would just say that Value had been outperforming the market in general. I have spoken highly of the 3 Fund portfolio. In addition, I have said that I would be happy if I could capture a 0.50% to 1.00% annual premium with my Size and Value tilts. Not sure I will actually get it but that is what I am aiming for.

What I will say is that there are several good long term strategies that do well over time. Even the best strategies don't seem to work all of the time, even the 3 fund strategy. But a good strategy based upon good principles will do well eventually given enough time.
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Re: "Beware of Sci-Fi Portfolios"

Post by nedsaid »

Alan also critique the Bridgeway Omni Tax-Managed Small Cap fund. It does have a higher expense ratio than other Small Cap funds but it gives you deeper Small-Cap and Value exposure. The expense ratio was a factor in underperformance but a bigger issue was that deep Value just had not performed very well. The "sort of" Small Value fund that Vanguard uses is based on a CRSP Index which has a lot of Mid-Caps and has a milder Value factor loading. Not a surprise that a "sort of Value" fund would outperform a "deep Value" fund during a Growth trend in the market. So again, you have to look under the hood and do a deeper dive into the data.
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Re: "Beware of Sci-Fi Portfolios"

Post by Alchemist »

Set aside the Alternatives and even the Factor Funds for a moment.

Any advisor that puts their clients in a 15 fund portfolio with an average ER or 1.05% plus their advisor fee; is not a good advisor. Certainly not one that is boglehead friendly.

Just to break even the portfolio will have to outperform by at least 2%
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Re: "Beware of Sci-Fi Portfolios"

Post by Stinky »

Alchemist wrote: Sun May 16, 2021 12:56 am
It is also a dumpster fire of 15 different funds with an average expense ratio of 1.05% before you slap on the advisor fee. Any advisor that suggest this kind of an absolute mess of an expensive portfolio deserves to be raked over the metaphorical coals. This kind of needless complexity and extreme costs is the antithesis of Boglehead. What do you think John Bogle would say about it?
Well stated.

To me, this pretty much seals the deal without getting into a high-falutin' conversation about scientific research, back testing, etc.
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

Alchemist wrote: Sun May 16, 2021 3:20 am Set aside the Alternatives and even the Factor Funds for a moment.

Any advisor that puts their clients in a 15 fund portfolio with an average ER or 1.05% plus their advisor fee; is not a good advisor. Certainly not one that is boglehead friendly.

Just to break even the portfolio will have to outperform by at least 2%
That average ER is not accurate. In a portfolio such as Alan describes the biggest allocations go to the cheapest funds for a typical investor. The much more expensive and esoteric funds have much smaller allocations. Thus the overall weighted expense ratio for the portfolio is much less.

Dave
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Re: "Beware of Sci-Fi Portfolios"

Post by Random Walker »

Stinky wrote: Sun May 16, 2021 5:51 am
Alchemist wrote: Sun May 16, 2021 12:56 am
It is also a dumpster fire of 15 different funds with an average expense ratio of 1.05% before you slap on the advisor fee. Any advisor that suggest this kind of an absolute mess of an expensive portfolio deserves to be raked over the metaphorical coals. This kind of needless complexity and extreme costs is the antithesis of Boglehead. What do you think John Bogle would say about it?
Well stated.

To me, this pretty much seals the deal without getting into a high-falutin' conversation about scientific research, back testing, etc.
As I showed above, the number of funds can be reasonably explained: investor preferences changing over time while locked in by capital gains, new funds available over time, tax loss harvesting partners. The 15 funds described really reflect maybe 10 or so funds if an investor were to build the portfolio at this single point in time.

Dave
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Re: "Beware of Sci-Fi Portfolios"

Post by vineviz »

Alchemist wrote: Sun May 16, 2021 3:20 am Set aside the Alternatives and even the Factor Funds for a moment.

Any advisor that puts their clients in a 15 fund portfolio with an average ER or 1.05% plus their advisor fee; is not a good advisor. Certainly not one that is boglehead friendly.

Just to break even the portfolio will have to outperform by at least 2%
The number of funds here is a complete red herring.

Although I could certainly make a strong argument that it is not NECESSARY to include all fifteen funds in a portfolio, it pretty clear that there is no HARM in doing so.

A competent professional advisor will have no trouble monitoring and managing a portfolio with that many holdings, so there’s no reason to expect them to use fewer. The advisor is being paid to mange the portfolio: it’s their job, so the standard of “simplicity” is just not relevant.

Guys like Ferri and Roth like to claim that some advisors “sell” complexity, and there’s probably an element of truth to the allegation. It’s also true that many clients SEEK complexity, however, do its no surprise that such clients often look for someone who will provide that.

If 11 herbs and spices isn’t “too many” for KFC to use in their chicken, I see no reason why Buckingham shouldn’t use 15 funds.

The average expense ratio is a much more salient criticism, IMHO.
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Re: "Beware of Sci-Fi Portfolios"

Post by Call_Me_Op »

Dale_G wrote: Sat May 15, 2021 2:29 pm
james22 wrote: Sat May 15, 2021 1:57 pm You believe one should ignore academia/science and judge portfolios on their last five year's performance, Taylor?
Data mining is not science. And yes, five years of serious underperformance of an alleged superior portfolio (compared to the broad market) is enough to chuck it to the wind.

Dale
Sorry, 5 years means nothing in the world of investing.
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Re: "Beware of Sci-Fi Portfolios"

Post by alex345 »

If the article title was "beware of high expense ratio portfolios" I think I'd agree. Calling it science fiction is an obvious stretch. We don't have all the facts since the weights are not included so objective analysis can't really be done.
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Re: "Beware of Sci-Fi Portfolios"

Post by nisiprius »

On inspection, it is Taylor Larimore, not Allan Roth, who said it was "one of the worst" Roth had ever seen. In any case, my comment is that good or bad it sure isn't "the worst." We fairly regularly get posts in the forum from people who say their advisors put them into... well, for example, things like this one. This isn't extreme. I found it by searching on "advisor" and the names of some fund families I associate with active funds and high expense ratios. Hey, it even includes two index ETFs. Oh, by the way, that "cash" allocation is nearly 25% of the portfolio.
% SYM Type expenses % value Gains/loss
Funds
IRA
1.6% FMILX FIDELITY NEW MILLENIUM 0.57 $40,343
0.9% FESGX FIRST EAGLE SOGEN GLOBAL FD CL C 1.86 $22,580
2.0% MGICX MFS SER TR X INT VALUE FUND CLASS c 1.76 $48,962
1.2% tedsx FRANKLIN MUTUAL GLOBAL DISCOVERY FUND CLASS C 1.98 $28,909
5.0% LGLCX LORD ABBETT SECS TR GROWTH LEADERS FD CL C 1.6 $125,181
0.6% OSMCX OPPENHEIMER INTL SMALL MID COMPANY FD CL C 2.03 $14,688
0.8% PONCX PIMCO INCOME FD CL C 1.6 $21,051
1.4% VGSTX VANGUARD STAR FUND INVESTOR SHARES . 0.32 $34,884.37
1.1% Cash $28,172.92
IRA Total $364,771
401K
4.0% 75bps Putnam Stable Value Fund .75 +.92 $99,448
5.9% VETAX Victory Sycamore Established Value Fund mid cap value 0.95 $147,952
9.5% GMXAX Nationwide Mid Cap Market Index Fund 0.27 $236,748
5.4% JGMAX Janus Henderson Triton Fund 1.15 $134,702
4.6% OIGAX Oppenheimer International Growth Fund Foreign large Growth 1.14 $113,673
4.8% IARAX Invesco Real Estate Fund reit 1.25 $119,845

401K Total $852,366
Taxable
1.8% fagax Fidelity Advisors Growth Opportunity large cap growth 0.6 $44,384 $ 24,253,34
1.1% FABLX faiox Fidelity Advisors seriiI lcg/bonds balanced .89 / 0.64 $26,893 $ 6,573.88
3.3% SGENX SGIIX First Eagle Global Fund Class I (a) 1.11 /0.94 $83,421 $ 11,437.00
1.4% AEPGX AEPFX American Funds EuroPacific Growth .82/0.58 $33,987 $ 13,313.61
3.3% FPACX FPA Crescant Fund large cap value 1.1 $81,359 $ 5,805.19
8.5% VDIGX Vanguard Dividend Growth 1 0.3 $212,232 $ 47,711.97
0.9% VMPAX wells fargi stat mun a $21,523 $ 293.79
Stocks
2.7% BRK/B Berkshire Hathaway $66,156 $28,227.60

ETF
2.2% RSP invesco tr etf ARCX_RSP Guggenheim ET s&p Equal weighted 0.4 $54,290 $ 14,192.44
2.0% SPHD splv Powershares S&P 500 ET 0.25 $50,808 $ 10,868.00

Bonds

0.6% mercer county due 8/15/20 $15,009

Cash $586,217
100.0%
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