Ultimate Buy and Hold - 8 slices vs 4

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cb474
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by cb474 »

RNJ wrote:Your welcome. It's a handy site.

Recently, in other threads, I've been posting about how difficult it is to achieve meaningful value loadings using VG funds, especially when one has a TSM fund at the core of a portfolio. There are those out there who can stick with a research-based, rational rationale for holding only USSV, or beginning with a MCV fund at the core and foregoing TSM. To my mind, very tough to do simply from an emotional perspective.

Great discussion.
Yeah, I hold TSM, but I don't know that it's exactly the core of my holdings at this point, given the amount of Vanguard's USSV it takes to get the small and value loads I want. Don't know what I think about using MCV as a core. I'll track down some of your posts to see what you're saying about it.

I think I'm pretty rational about my choices, but not without my emotional limits. One of the things about researching the underlying concepts and principles that determine these investing strategies is that the more one understands, I think, the more one is able to keep the emotions in check. I'm defintely in a very different place than when I started researching these things. I also find it useful to keep reading and learning, even if it doesn't change anything I'm doing. It helps me stick to my plan.

So I guess I'm suggesting that emotions aren't a static thing. They can be relative to amount of knowledge and understanding. Which is why I keep saying people really need to understand things for themselves and make their own decisions. When they're ready to do that, then their ready.

It took me a year of researching, reading books, reading tons of threads, figuring out the handful of bogleheads who I think know what they're talking about, taking everyone else with a grain of salt, and even deciding which of the generally respected (here) authors I think understand things better than others.

Lastly, I suppose I think that the better one understands the strategies and concepts, the more one is able to recognize one's emotions and separate them from rational questions. So no amount of knowledge may allow one to completely overcome emotional effects, but it may help one recognize one's limits a lot better, which is also helpful in choosing a strategy which one can live with.

*

Speaking of how hard it is to achieve meaningful small and value loadings. I was just fiddling around with the x-ray tool (for what it's worth). If you go 50% VBR, 25% EFV, and 25% VEU (in other words 50% SV, 25% ILV, 25% ISB), I think that would to many people seem insanely strongly tilted to value and small. And yet, with those funds you don't quite have 50% value equities and still have slightly more than 50% core and growth equities. Just food for thought for those who may imagine that 25/25/25/25 portfolios are tilting halfway toward value. In addition, only 26% of the equities in that portfolio are small, the rest are midcap and large cap; that despite the appearance that 75% of one's funds are in small cap funds.
Flexo52
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by Flexo52 »

Can someone help me do this with Fidelity?

Large Blend:
FUSVX - Fidelity Spartan 500 fund Low ER, no fees, solid

Small Value
S&P Small-Cap 600 Value Index (IJS) ETF Commission Free trading

Intl Large Value
Spartan International Index Fund - Fidelity Advantage Class (FSIVX) - This is actually a large blend fund
Vanguard International Value Fund (VTRIX) However, this would cost a one time $75 fee to get into a non Fidelity mutual fund.

Intl Small Value
Vanguard FTSE All-World ex-US Small-Cap VSS....ETF, purchasing this through Fidelity would incur trade fees each time I buy/sell.
Vanguard FTSE All-World ex-US Small-Cap Index VFSVX $75 fee for non Fidelity mutual fund, + .025 Purchase fee + .025 Redemption fee.

I'd like to do this, but I'm fairly locked in with Fidelity. Paying a $8 trade fee each time I buy/rebalance Vanguard ETFs doesn't sound appealing, nor does paying a $75 bonus fee for buying their mutual funds.
livesoft
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by livesoft »

I would suggest something different:

FSTMX - total US index
FSGDX - total int'l index
VSS - total int'l small cap
IJS - US small-cap value

That's it for equities.

But if you insist on int'l large-cap value, use EFV
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Leif
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by Leif »

livesoft wrote:I would suggest something different:

FSTMX - total US index
FSGDX - total int'l index
VSS - total int'l small cap
IJS - US small-cap value

That's it for equities.

But if you insist on int'l large-cap value, use EFV
Love to see your graphs. Then we can compare. But those ETFs probably don't have much history, right?
livesoft
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by livesoft »

Leif wrote:But those ETFs probably don't have much history, right?
LOL! You must be talking about the Vanguard ETFs, right?
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Leif
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by Leif »

livesoft wrote:
Leif wrote:But those ETFs probably don't have much history, right?
LOL! You must be talking about the Vanguard ETFs, right?
No, not only that. VSS is more recent in 2009. IJS goes back further than I thought, 2000. Still not 1970 though.
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by livesoft »

And what does go back to 1970? :)
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Taylor Larimore
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"What goes back to 1970?"

Post by Taylor Larimore »

livesoft wrote:And what does go back to 1970? :)
livesoft:

I started investing in 1950 at the age of 26. :happy

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
livesoft
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by livesoft »

OK, Taylor Larimore goes back before 1970. What's your ticker symbol so that we can chart you? :)
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by placeholder »

Leif wrote:But those ETFs probably don't have much history, right?
Index funds so who cares?
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cfs
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by cfs »

Leaders, good morning/afternoon/evening

All good information.

Waiting for TREV H to update all his interesting charts.

Thanks for reading.
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Leif
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by Leif »

livesoft wrote:And what does go back to 1970? :)
You can check out Simba's spreadsheet. There are number of funds that start at 1972.
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by andreiz »

My company has recently set up a 401k plan with Great West Financial and I'm trying to duplicate the 25% LB/SV/ILV/ISB blend there. So far I've mapped the LB to Vanguard 500 Index Signal VIFSX and SV to Vanguard Small Cap Index Signal VSISX.

The international ones look like this:

AllianzGI NFJ International Value Instl ANJIX 0.87%
American Funds EuroPacific Gr R4 REREX 0.85%
Mutual Global Discovery Fund A TEDIX 1.32%
Oppenheimer Developing Markets Y ODVYX 1.01%
Vanguard Emerging Mkts Stock Idx Signal VERSX 0.15%
Vanguard Total Intl Stock Index Signal VTSGX 0.14%
Virtus Foreign Opportunities A JVIAX 1.46%

If I go with VTSGX for ILV, what about ISB? Clearly, a lot of these have high ER, so maybe I should just do a 3-fund portfolio then?
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by placeholder »

^^^You have no Roth or taxable accounts?
andreiz
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by andreiz »

placeholder wrote:^^^You have no Roth or taxable accounts?
I do. I just joined and haven't had the time to put together the "advice on portfolio" post. But wanted to know how to allocate the 401k contribution since that starts with the next paycheck.
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by placeholder »

But there's no point in trying to do a UBH in one account so for now pick a cheap fund and go with it until you put together the composite plan.
crabpaws
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by crabpaws »

Merriman has just published a series of articles on Marketwatch

http://www.marketwatch.com/story/bonds- ... 2014-03-26
http://www.marketwatch.com/story/6-step ... 2014-04-09
http://www.marketwatch.com/story/retire ... 2014-04-16 referring to this allocation table here http://paulmerriman.com/fine-tuning-you ... tion-2014/

and is answering comments on Marketwatch.

I still don't understand buying intermediate-term bond funds in this economic climate. What do you do to initiate the bond side of the portfolio if you're light in that area?
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

crabpaws wrote:Merriman has just published a series of articles on Marketwatch

http://www.marketwatch.com/story/bonds- ... 2014-03-26
http://www.marketwatch.com/story/6-step ... 2014-04-09
http://www.marketwatch.com/story/retire ... 2014-04-16 referring to this allocation table here http://paulmerriman.com/fine-tuning-you ... tion-2014/

and is answering comments on Marketwatch.

I still don't understand buying intermediate-term bond funds in this economic climate. What do you do to initiate the bond side of the portfolio if you're light in that area?
Anyone & everyone expects interest rates to rise this year and that's why they probably won't. The Fed is not going to allow the economy to
decline if they can help it. You need bonds to balance a portfolio to control risk and bonds have done just fine this year.
Buy them just like stocks and rebalance if one or the other declines. You'll thank yourself later...
RNJ
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by RNJ »

crabpaws wrote:Merriman has just published a series of articles on Marketwatch

http://www.marketwatch.com/story/bonds- ... 2014-03-26
http://www.marketwatch.com/story/6-step ... 2014-04-09
http://www.marketwatch.com/story/retire ... 2014-04-16 referring to this allocation table here http://paulmerriman.com/fine-tuning-you ... tion-2014/

and is answering comments on Marketwatch.

I still don't understand buying intermediate-term bond funds in this economic climate. What do you do to initiate the bond side of the portfolio if you're light in that area?
Not that I'm agreeing with you, but if longer duration scares you then you might just want to go with short(er) term bonds. Try BSV or VFIRX in tax advantaged and/or VMLUX in taxable. If you enter into your plan with doubts you are much more likely to abandon ship when/if things get tough (kinda like a marriage). Go with what you are confident you can stick with. The fact likelihood is either (short or intermediate) should be fine and it probably won't make too much of a difference. YMMV. Good luck.
folke123
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by folke123 »

Am I missing something here? I first have to say that I have not read every single post in the thread but.

25% of each LB, SV, ILV, ISB seems to totaly kick 50/50% tsm,ilb

and doing so over 40 years.

Is that not statistically significant?

why would you ever want 50/50 Tsm/ilb or 66/33 that I see more often.

Im guessing i am missing something important here? or why is not this 4 slice what is recommended? why reccomend only US total market and total international market?
Rebalancing 4 funds once a year is not doing much work so I can't belive you would want to loose so much for simplicity? Please help me understand this
livesoft
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by livesoft »

^ The proponents of just using 2 funds for the equity portion have stated that the 4-fund you described is riskier, so it should 'totaly kick' (sic). To get to the same risk level in their eyes, one would need to reduce total equities for the 4-fund or increase total equities for the 2-fund. For example, instead of having a 60:40 portfolio with the 4-fund option, one would need to have a 70:30 or 75:25 (numbers made up to make the point) portfolio with the 2-fund option.
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folke123
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by folke123 »

but how is it riskier if it has given a better return over 40 years? I mean that is a long term investment.

Also, how do this differ from just adding a small cap fund to a 66/33 in US total/international total. I.E doing say 60/30/10 US total/interinational/small cap
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Kevin M
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by Kevin M »

folke123 wrote:but how is it riskier if it has given a better return over 40 years? I mean that is a long term investment.
The risk is that the future may not resemble the past. I think our statisticians will point out that no statistically significant conclusions can be drawn from a single observation (one 40-year period). And there are only four independent 10-year periods within a 40-year period, which still is way too few for statistical significance.

I'm not saying that the UBH-4 might not be a good portfolio--just that you can't determine that it's a good portfolio solely from past performance, and certainly not from one 40-year period.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

Not trying to quibble but you can look at 40 annual returns vs market vs other portfolios and you can look at 480 monthly returns vs market vs other portfolios to get a feel for how any portfolio might perform and that many observations would be statistically significant. Will the UBH outperform in the future...who knows...
But is suspect it might just perform just as well or better than any other diversified portfolio. We just won't know for sure for another 40 years...Right?
folke123
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by folke123 »

Another question, are you "supposed" to add REIT to this if you use it to substitue the ultimate buy and hold?
Beacause the ultimate buy and hold have 10 categories in the stock part.

this one showed that for past performance the 4 slices was just as good as the 8.

but what about emerging markets and reit? do you need them to get the same returns as "the ultimate buy and hold"?
(I can kinda see that the EM is a part about the international stocks, but reit? why not include it?
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Kevin M
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by Kevin M »

LittleD wrote:Not trying to quibble but you can look at 40 annual returns vs market vs other portfolios and you can look at 480 monthly returns vs market vs other portfolios to get a feel for how any portfolio might perform and that many observations would be statistically significant.
It's a good thought, but you have to relate the observations to your holding period. If your holding period is one year or one month, then at least you have enough observations for statistical significance. If your holding period is 40 years, you have one observation. At least that's the way I understand it.

Either way, I'm hesitant to place too much weight on historical results if it leads me to deviating too much from the market and from my home bias. I deviate from both (tilted pretty heavily to US small and US value and 40% of equities in international), but not to the extent of this portfolio, although I understand the rationale for doing so. Maybe if I had been exposed more to this line of thinking before settling in on my AA things would have been different.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
folke123
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by folke123 »

I am thinking of going 40/20/20/20 with the 40 being S&P 500 that should make me a bit more like index :)
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

folke123 wrote:Another question, are you "supposed" to add REIT to this if you use it to substitue the ultimate buy and hold?
Beacause the ultimate buy and hold have 10 categories in the stock part.

this one showed that for past performance the 4 slices was just as good as the 8.

but what about emerging markets and reit? do you need them to get the same returns as "the ultimate buy and hold"?
(I can kinda see that the EM is a part about the international stocks, but reit? why not include it?
It you want to add a small amount...maybe 5% that would not break the world but if you own US and Int small value
stocks you have a pretty good slice of Reits included in the portfolio. They have been good diversifiers in the past
because they are not totally correlated with other classes of stocks. I would hold that US and Int small value
stocks add more return per unit of risk and also add diversification. That is why the UB&H portfolio works.
Just remember to create your IPS and allocate bonds to minimize your volatility and risk to your acceptance level.
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

Kevin M wrote:
LittleD wrote:Not trying to quibble but you can look at 40 annual returns vs market vs other portfolios and you can look at 480 monthly returns vs market vs other portfolios to get a feel for how any portfolio might perform and that many observations would be statistically significant.
It's a good thought, but you have to relate the observations to your holding period. If your holding period is one year or one month, then at least you have enough observations for statistical significance. If your holding period is 40 years, you have one observation. At least that's the way I understand it.

Either way, I'm hesitant to place too much weight on historical results if it leads me to deviating too much from the market and from my home bias. I deviate from both (tilted pretty heavily to US small and US value and 40% of equities in international), but not to the extent of this portfolio, although I understand the rationale for doing so. Maybe if I had been exposed more to this line of thinking before settling in on my AA things would have been different.

Kevin
We only have so much good history in the modern stock market world. If you look at a holding period of 40 years as one observation you must plan on
at least 3 periods of volatility where the portfolio would likely decline as much as 35% and at least one period where the portfolio would decline 50% or more.
If you have 50% bonds in the portfolio, you can likely cut that decline in half. Will the future look like the past given the advances in technology...who knows for sure but if you stand still and do nothing you are most likely to die poor...
folke123
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by folke123 »

Anyone here who uses this simplified 4 slice portfolio? Have you added reit as well to simulate the 8 part one?
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

Okay...Here is one portfolio that follows UB&H just using Schwab ETF's with no transaction fees:
% ofAssets Holding Name Stock Industry/
49.15 Schwab US Aggregate Intermediate-Term Bond
12.89 Schwab US Broad Mark Large Blend
12.67 Schwab Fundamental U Small Blend
12.63 Schwab Fundamental I Foreign Large Value
9.02 Schwab International Foreign Small/Mid Blend
3.64 Schwab Emerging Mark Diversified Emerging Mkts

It would have this diversification:

Total Exposure
(% of Stocks)
North America 54.44
Latin America 1.47
United Kingdom 9.14
Europe Developed 17.14
Europe Emerging 0.65
Africa/Middle East 0.92
Japan 7.77
Australasia 2.38
Asia Developed 2.85
Asia Emerging 3.24

It would have this allocation to asset classes:

Stock Style Diversification
| Holdings Detail
18 17 13 Large Cap Value Blend Growth
9 10 10 Mid Cap Value Blend Growth
10 8 5 Small Cap Value Blend Growth

Portfolio cost would be about 14 basis points...


This portfolio would have 4.82% allocated to World Wide Reits... which is 3 times more than the S&P.
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by grap0013 »

^ You lost me with 2 decimal place allocations. We are not cooking meth here. Probably more art involved than science in investing.
There are no guarantees, only probabilities.
folke123
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by folke123 »

LittleD wrote:Okay...Here is one portfolio that follows UB&H just using Schwab ETF's with no transaction fees:
% ofAssets Holding Name Stock Industry/
49.15 Schwab US Aggregate Intermediate-Term Bond
12.89 Schwab US Broad Mark Large Blend
12.67 Schwab Fundamental U Small Blend
12.63 Schwab Fundamental I Foreign Large Value
9.02 Schwab International Foreign Small/Mid Blend
3.64 Schwab Emerging Mark Diversified Emerging Mkts

It would have this diversification:

Total Exposure
(% of Stocks)
North America 54.44
Latin America 1.47
United Kingdom 9.14
Europe Developed 17.14
Europe Emerging 0.65
Africa/Middle East 0.92
Japan 7.77
Australasia 2.38
Asia Developed 2.85
Asia Emerging 3.24

It would have this allocation to asset classes:

Stock Style Diversification
| Holdings Detail
18 17 13 Large Cap Value Blend Growth
9 10 10 Mid Cap Value Blend Growth
10 8 5 Small Cap Value Blend Growth

Portfolio cost would be about 14 basis points...


This portfolio would have 4.82% allocated to World Wide Reits... which is 3 times more than the S&P.
is it possible to just add 1 fund to the 4 slice portfolio to get the 10% reit?

Also In the "ultimate buy and hold 8 slices" does merriman count that his other funds have no reit, aka all the reit should come from a reit fund. Or is he proposing 10% reit total I.e you should see how much reit your other funds already have and then see how much more you would have to add to get to 10%?
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

grap0013 wrote:^ You lost me with 2 decimal place allocations. We are not cooking meth here. Probably more art involved than science in investing.

You don't have to overthink this...What I provided was my personal allocation as it stands today. I will be rebalancing but not right now.
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

folke123 wrote:
LittleD wrote:Okay...Here is one portfolio that follows UB&H just using Schwab ETF's with no transaction fees:
% ofAssets Holding Name Stock Industry/
49.15 Schwab US Aggregate Intermediate-Term Bond
12.89 Schwab US Broad Mark Large Blend
12.67 Schwab Fundamental U Small Blend
12.63 Schwab Fundamental I Foreign Large Value
9.02 Schwab International Foreign Small/Mid Blend
3.64 Schwab Emerging Mark Diversified Emerging Mkts

It would have this diversification:

Total Exposure
(% of Stocks)
North America 54.44
Latin America 1.47
United Kingdom 9.14
Europe Developed 17.14
Europe Emerging 0.65
Africa/Middle East 0.92
Japan 7.77
Australasia 2.38
Asia Developed 2.85
Asia Emerging 3.24

It would have this allocation to asset classes:

Stock Style Diversification
| Holdings Detail
18 17 13 Large Cap Value Blend Growth
9 10 10 Mid Cap Value Blend Growth
10 8 5 Small Cap Value Blend Growth

Portfolio cost would be about 14 basis points...


This portfolio would have 4.82% allocated to World Wide Reits... which is 3 times more than the S&P.
is it possible to just add 1 fund to the 4 slice portfolio to get the 10% reit?

Also In the "ultimate buy and hold 8 slices" does merriman count that his other funds have no reit, aka all the reit should come from a reit fund. Or is he proposing 10% reit total I.e you should see how much reit your other funds already have and then see how much more you would have to add to get to 10%?


Yes...just pick a reit etf if you want it and add a percentage to a proposed portfolio to see how it might look. Merriman just adds a slice of reit fund
to his portfolio. I think if you put his portfolio into Morningstar you would see that his allocation to reits is above his 6% slice.
artbug
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by artbug »

folke123 wrote:is it possible to just add 1 fund to the 4 slice portfolio to get the 10% reit?

Also In the "ultimate buy and hold 8 slices" does merriman count that his other funds have no reit, aka all the reit should come from a reit fund. Or is he proposing 10% reit total I.e you should see how much reit your other funds already have and then see how much more you would have to add to get to 10%?
Would it matter? Let me explain:

I'm confident that Paul Merriman is aware that the non-REIT equity funds also hold REITs. Merriman simply believes that the data supports overweighting REITs to improve the returns of a stock-bond portfolio. The amount by which REITs are overweight is determined by a fairly arbitrary application of reasonable guesses in an effort to make room for a lot of different sub-asset class overweights. Note that Step 3 of his explanation of the strategy here starts out with the separate REIT allocation being 20% of equity (12.5% of the whole portfolio). That 20% is still there when Step 4 adds small caps, resulting an additional (slightly) aboveweight position in REITs; Step 5 adds small value, resulting in yet another addition of a slightly-aboveweight position via small value. I haven't checked, but consider that there may also be slightly-aboveweight REIT positions in the International SC, International SV and perhaps even the Large Value and International Large Value categories.

Then, Step 6 cuts the REIT fund in half to 10% of equity (6% of the whole portfolio), and returns continue to improve. When we look at his fund suggestions to put the portfolio into practice, the REIT fund is now as low as 5% of equity in the Vanguard portfolio.

There's a big difference between 20% of equity and 5% of the same. And consider this: 5% of equity is 3% of a classic 60/40 allocation , and 2% with a 40/60 portfolio. Perhaps most, if not all of the benefit, is eventually happening outside of the REIT-specific fund because of the naturally occurring overweights of the other sub-classes. Since TrevH's 4-fund UB&H has the same (or close to the same) overweights to small and value, it probably holds ample REITs for the portfolio to benefit without the need for an REIT-specific fund.

Simply put: there is a lot of wiggle room.
Last edited by artbug on Wed Nov 26, 2014 10:33 pm, edited 4 times in total.
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

Very good explanation...I think we both spent a lot of time studying Merriman and Trev-H's portfolios.
Little % changes in allocation won't matter that much in the long run.
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by rca1824 »

While historically, 4 slices have performed as well as 8, why do we assume this will continue to be true in the future?

Isn't it possible that the small-cap premium may materialize predominantly among growth firms rather than value firms?

Isn't it possible that the value premium may materialize predominantly among large cap firms?

Thus by holding all 4 boxes as opposed to just 2, you are hedging your bets more.

The traditional econometric model assumes that returns are additively separable. That is, your portfolio returns is simply a linear function of your exposures to market, small, and value factors, plus some random noise.

But this *assumes* that the factors are additive. There may be, in reality, some cross-interaction terms. If there are, then you can no longer assume that SV is equivalent to holding 50/50 SB and LV just because the factors are the same.

Further, what about mid caps? In the past few years, mid caps have actually performed better than either small or large caps, suggesting that they hold a unique risk factor. If the goal is to diversify across as many unique risk factors to increase risk-adjusted returns, it seems best to hold 12 slices as opposed to 8.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

What you say is absolutely true. None of us knows how the future will unfold.
Everything could and possibly will change materially. The reasoning behind
Merriman's & TrevH's portfolios is to provide workable portfolios with a
substantial amount of world diversification to minimize risk per unit of
return such that if the world does change, you might also profit from that change.
There approach is to find uncorrelated asset classes such that you benefit from
whatever growth or asset market does well in the future. Can you find
sonmething that works better... If you have perfect foresight you probably can.

These portfolios work and to some extent will likely work in the future unless
all financial markets falter or the world ceases to exist.
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Kevin M
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by Kevin M »

rca1824 wrote:Thus by holding all 4 boxes as opposed to just 2, you are hedging your bets more.

The traditional econometric model assumes that returns are additively separable. That is, your portfolio returns is simply a linear function of your exposures to market, small, and value factors, plus some random noise.

But this *assumes* that the factors are additive. There may be, in reality, some cross-interaction terms. If there are, then you can no longer assume that SV is equivalent to holding 50/50 SB and LV just because the factors are the same.
I tend to agree about hedging your bets with more of a 4-corners approach (maybe using blend instead of growth), but my understanding is that the value effect historically as been much stronger in the smaller-cap stocks. This would argue for focusing more on small-value.

I tilt equally to large-value, small-value and small-blend in US stocks, but if starting over would be tempted to just use small value. I also didn't slice international much due to lack of low-cost index funds at Vanguard when I started, but have since added a slice of international small (VSS). I'll revisit more international slicing when when rebalancing into international stocks is warranted; will at least add to VSS.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
Trader Joe
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by Trader Joe »

This is an excellent thread and very informative. Merriman now recommends 10 funds (adding domestic and international REIT). I wonder how the 4 fund approach recommended by Trev performs vs. the 10 fund recommendation. Perhaps there is little material difference.

http://paulmerriman.com/pauls-mutual-fu ... /#vanguard
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Leif
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by Leif »

Trader Joe wrote:This is an excellent thread and very informative. Merriman now recommends 10 funds (adding domestic and international REIT). I wonder how the 4 fund approach recommended by Trev performs vs. the 10 fund recommendation. Perhaps there is little material difference.

http://paulmerriman.com/pauls-mutual-fu ... /#vanguard
I did send an email to Paul a couple of years ago. I also sent him a link to this thread. I was interested to get his take on it. He has written that he is open to improving his ultimate portfolio. He called and we talked briefly. He said he would discuss on an upcoming podcast. However, as far as I know, that never happened.

I tried a search on Trev and 8 slices vs 4 on his website, but nothing found.
Last edited by Leif on Mon Jul 21, 2014 10:50 am, edited 1 time in total.
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

I think TrevH has not posted in these forums for a couple of years and I have not found
any postings under that user name. I will say that if you do a search, there is a large
thread on the TrevH portfolio and backtesting that was done a couple of years ago.

I know Paul Merriman has made a few changes to his UB&H portfolio over the years and
because the slices are pretty small, each slice has less impact on the portfolio by itself.

Just to help, I use Schwab's new Fundamental ETF's to built my TrevH portfolio because
they tend to tilt to the value side on large and small cap. The other benefit is because
the small FNDA and FNDC tilt value, they have a healthy percentage of Reits
included. Find an allocation you can stick with in good and bad times with
consistant rebalancing and you will be miles ahead of the traders.
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Kevin M
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by Kevin M »

LittleD wrote:I think TrevH has not posted in these forums for a couple of years and I have not found
any postings under that user name. I will say that if you do a search, there is a large
thread on the TrevH portfolio and backtesting that was done a couple of years ago.
Trev H doesn't post as much as in the past, but has posted in the forum as recently as two days ago.

This thread is the large thread you mention. Note that this is page 12 we are posting on now!

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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retiredjg
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by retiredjg »

It is true that Trev is not as active as in the past, but he is still posting - as recently as last Friday. :happy
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

I didn't catch it but I hope he sticks with us... He did some fantastic research.

On Merriman, he is becoming less active due to the investing course he is working
on for a Washington State College and he spends 1/2 the year in Mexico with his
family. I think his wife wants him to slow down and spend more family time.
I listen to his podcasts on his website every week...

He had no axe to grind because he is no longer in the RIA business and just
tries to help investors.
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by placeholder »

It's Trev H not TrevH and you didn't need to search you could have just gone to the start of this thread and clicked his username there to get his profile.
rca1824
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by rca1824 »

Kevin M wrote:
rca1824 wrote:Thus by holding all 4 boxes as opposed to just 2, you are hedging your bets more.

The traditional econometric model assumes that returns are additively separable. That is, your portfolio returns is simply a linear function of your exposures to market, small, and value factors, plus some random noise.

But this *assumes* that the factors are additive. There may be, in reality, some cross-interaction terms. If there are, then you can no longer assume that SV is equivalent to holding 50/50 SB and LV just because the factors are the same.
I tend to agree about hedging your bets with more of a 4-corners approach (maybe using blend instead of growth), but my understanding is that the value effect historically as been much stronger in the smaller-cap stocks. This would argue for focusing more on small-value.

I tilt equally to large-value, small-value and small-blend in US stocks, but if starting over would be tempted to just use small value. I also didn't slice international much due to lack of low-cost index funds at Vanguard when I started, but have since added a slice of international small (VSS). I'll revisit more international slicing when when rebalancing into international stocks is warranted; will at least add to VSS.

Kevin
The argument that the small and value tilts multiply and make SV better than combinations of LV and SB does not mean you should put everything in SV. It just means you bias SV. For the same reason that stocks outperform bonds does not make 100% stocks optimal, nor does the reason that SV outperforms TSM mean you should hold 100% SV.

So something like 35/15/15/35 LB/LV/SB/SV might be a better approach. You still bias SV, but you're still diversifying across all 4 corners and getting that proper hedge. And the value and small factors still sum 50 each.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
LittleD
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Re: Ultimate Buy and Hold - 8 slices vs 4

Post by LittleD »

You are correct. ISV & SV provide the premium kick that is needed over a lifetime to properly
diversify while mitigating risk. Bonds in such a portfolio also provide that safety factor
so that any risk profile can be achieved. The unknown hope is that the small and value
premiums will continue into the future and not become relics of the past.
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Re:

Post by MichaelRpdx »

Triple digit golfer wrote:This is all fine and dandy, but good luck to the average investor in having access to these funds in their 401(k)s.

Like me. 50% of my retirement money is in my 401(k), the other half an IRA at Vanguard.
You need to switch employers more often. :D
I know your pain. Fortunately, my employer offers VG Target retirement and VG International funds in the 401(k). As it is, only 25% of my savings are there. Lobbying with HR to get a change in the 401(k) plan sounds like your only real option.
Be Appropriate && Follow Your Curiosity
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