A more granular approach...

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kjm
Posts: 54
Joined: Wed Aug 26, 2009 1:05 pm

A more granular approach...

Post by kjm »

I discovered bogleheads earlier today, and have spent the past hour lurking. I think this is a terrific resource, and I'll be coming back regularly. So far, I'm struck by the lack of granularity in many of your asset allocations. Here's what I mean...

Let's say your goal is retirement, and you decide to allocate 35% (or whatever) of your overall portfolio to domestic equities. From what I see, the bogleheads approach is to buy a Vanguard index fund or ETF that tracks the S&P 500. Maybe I'll see someone divide the domestic equity portion among large, mid and small caps. I'm wondering, why not buy a collection of sector-specific ETFs instead? I see two major benefits of doing this:

1. You can overweight or underweight individual sectors based on how you believe they're likely to preform. (Maybe this approach is too active for general population here.)

2. When you rebalance your portfolio every year, you're rebalancing among individual sectors. This should enable you to take advantage unequal preformance among sectors. For example, if industrials stagnate and consumer discretionary does well, you're selling a portion of the consumer discretionary when it's expensive and buy the industrials ETF when it's cheap.

Of course there are drawbacks - among them, the added complexity of managing such a portfolio. But the drawbacks seem minor compared to potential to outperform.

I bet I'm not the first person to bring this up. Someone tell me why it's a bad idea :)
linuxizer
Posts: 1664
Joined: Wed Jan 02, 2008 7:55 am

Re: A more granular approach...

Post by linuxizer »

kjm wrote:From what I see, the bogleheads approach is to buy a Vanguard index fund or ETF that tracks the S&P 500.
S&P 500 indices are rarely recommended around here any more. Total Stock Market (which also includes mid/small cap) is a far more common recommendation. Most people also suggest a whole world ex-US type fund to add 10-50% of your stock portfolio in international.

A key tenent of the philosophy is the stock/bond mix, which I don't recall seeing in your explanation. In many ways, this matters more than anything else.

Plenty of people have suggested what you are talking about. It is often referred to as "slice and dice," and a search of those terms will turn up dozens if not hundreds of posts on the subject. There is even some discussion of your point #1, in the form of a "small/value" tilt, where research from Fama and French has indicated those are separate risk factors and therefore add a nice little boost to a portfolio.

For most personal portfolios, the benefits of splitting something that can be bought by a single fund into its components so that you can rebalance is pretty small. Swensen rebalances daily, but he is dealing with an endowment, not an individual portfolio. Rebalancing also is primarily there to control risk, not to gain a return benefit, although it can from time to time.

For most sectors (excepting small/value), deviating from the market weights is a form of trying to beat the market and unlikely to succeed beyond simple dumb luck. There was a post on sector weighting yesterday if you're curious. Small/value may be different given the preponderance of solid academic research behind it--or it may not...that's the risk you're being rewarded for.
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Blue
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Post by Blue »

The market is generally efficient. Taking sector bets against the market is not likely to bear fruit.

What do you know that the market does not already know and has factored in?
Gekko
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Joined: Fri May 11, 2007 5:00 pm
Location: USA

Post by Gekko »

1. i buy all the time and funds are cheaper than ETFs if you buy all of the time given low expense ratio vs. constant commissions costs.
2. i'm not smart enough to continuously predict sector outperformance and jump in and out of sectors.
3. i like to keep it simple and "set it and forget it".

current allocation -

20% VG Muni Money Market
20% VG Muni Bond
40% VG Index 500
20% VG Health Care
100% Total

yeah i have VG Health Care and it's done well but i've owned it since 1995 and just let it run.
JasonR
Posts: 571
Joined: Mon Nov 26, 2007 5:06 pm

Post by JasonR »

This is the thread from two days ago:

http://www.bogleheads.org/forum/viewtop ... 1251293495
Topic Author
kjm
Posts: 54
Joined: Wed Aug 26, 2009 1:05 pm

Post by kjm »

I appreciate the responses. I was expecting to hear, "What you're suggest is too difficult and requires too much effort". And that's exactly what I got :)

linux:
The point wasn't to discuss an overall asset allocation, but to talk about ways to approach the domestic equities portion of a portfolio. Sorry if I wasn't clear.

It would great if there were some hard data we could look at regarding rebalancing between sectors. A comparison between that approach and a less "aggressive" approach would be interesting.


Blue:
I agree that over the very long term, the market tends look pretty efficient. But sometimes the long term is several years or more.

Unfortunately, I don't know anything that's not already priced into the market. But I do have other things going for me, among them: a longer time horizon than "the market" and a temperament very well-suited to investing.


JasonR:
That article looks interesting, I'm about to dive in.
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