Aggressive Bogleheads Portfolio

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coldman
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Aggressive Bogleheads Portfolio

Post by coldman »

I have a lot of time on my side before I retire. What would an aggressive Bogleheads portfolio look like? Using relatively priced ETFs what you portfolio would you use? What relatively priced mutual funds would you use? Try to limit the number funds or ETFs to 6 or less. Please give both EFTs and mutual funds. Thank you for sharing your thoughts/opinions.
Last edited by coldman on Fri Jun 29, 2012 9:04 am, edited 1 time in total.
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hoppy08520
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Re: Agressive Bogleheads Portfolio

Post by hoppy08520 »

Why not start with the Three-fund portfolio with stocks/bond split at your desired asset allocation to make it suitably "aggressive"?
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Re: Agressive Bogleheads Portfolio

Post by Grt2bOutdoors »

An aggressive portfolio would have a high tilt away from the benchmark total market - so something like small value, small international value, emerging market value coupled with short term fixed income - Treasury. You pick the allocation percentages. Be mindful though, there will be periods where you might severely underperform the market. Most folks would not do this, but might take a slight tilt of 5-10% to avoid severe tracking error.
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coldman
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Re: Argressive Bogleheads Portfolio

Post by coldman »

What do you think of a portfolio such as this? Looking for a long term hold. My idea of aggressive is not to gamble, but take a little bit of a chance.

Equity %
12.5 500 Index
12.5 Value Index
12.5 Small Cap Index
12.5 Small Cap Value Index
20.0 Developed Markets Index
20.0 International Value
10.0 Emerging Mkt. Stock Index
Fixed income %
50.0 Short-term Investment Grade
50.0 Total Bond Index
earlyout
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Re: Aggressive Bogleheads Portfolio

Post by earlyout »

What's your split between equity and fixed? That's the most important factor in determining whether your "agressive" or not.
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coldman
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Re: Aggressive Bogleheads Portfolio

Post by coldman »

For me 10%.
dbr
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Re: Aggressive Bogleheads Portfolio

Post by dbr »

If you are going to be 90% equities, wanting to be aggressive, you could consider long bonds for the bond allocation.
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Re: Aggressive Bogleheads Portfolio

Post by mptfan »

dbr wrote:If you are going to be 90% equities, wanting to be aggressive, you could consider long bonds for the bond allocation.
:thumbsup

I am constantly amazed at how some people are willing to take risks with stocks, including international stocks, emerging market stocks, small cap value stocks.... but then when it comes to bonds, they avoid all risk except for short term bonds and treasuries. To each his own, but I will never understand this.
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Re: Aggressive Bogleheads Portfolio

Post by NoRoboGuy »

Being young, long bonds are the way to go. For asset allocation, why not do 20% or 30% bonds instead of 10%? It's not that I think you should take less risk, but because you may want to consider having more room for rebalancing opportunities over the long haul. I think it could help you if, like me, you are otherwise inclined to "tinker."
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Rainier
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Re: Aggressive Bogleheads Portfolio

Post by Rainier »

What do you suggest for long bonds?
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NoRoboGuy
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Re: Aggressive Bogleheads Portfolio

Post by NoRoboGuy »

Rainier wrote:What do you suggest for long bonds?
BLV: "Vanguard Long-Term Bond ETF (the Fund) seeks to track the performance of a market-weighted bond index with a long-term, dollar-weighted average maturity. The Fund employs a passive management or indexing strategy designed to track the performance of the Barclays Capital U.S.Long Government/Credit Bond Index (the Index). The Index includes all medium and larger issues of the United States Government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of greater than 10 years and are publicly issued."
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Rainier
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Re: Aggressive Bogleheads Portfolio

Post by Rainier »

Thanks, I was just looking at BLV. What are the general duration bands for a long bond fund? Anything over 10 years? Or is it less?
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Re: Aggressive Bogleheads Portfolio

Post by NoRoboGuy »

Intermediate: 5-10 years
Long: > 10 years
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Re: Aggressive Bogleheads Portfolio

Post by Jerry_lee »

mptfan wrote:
dbr wrote:If you are going to be 90% equities, wanting to be aggressive, you could consider long bonds for the bond allocation.
:thumbsup

I am constantly amazed at how some people are willing to take risks with stocks, including international stocks, emerging market stocks, small cap value stocks.... but then when it comes to bonds, they avoid all risk except for short term bonds and treasuries. To each his own, but I will never understand this.
Well, the reason is because, on the equity side, market/size/value portfolios all have relatively high risk, but less than perfect correlations. In fact, the premiums for small over large and value over growth have almost no correlation with the equity premium itself, especially over intermediate/long periods. So you position yourself to generate returns from multiple factors without substantially increasing portfolio variability or long term risk (as low/negative correlations suggest a poor outcome from one factor, i.e. equities, could be offset by an above average size or value premiums -- as we saw in the 60s/70s and since 2000).

But that only takes us so far. At some point, you just want to drastically reduce portfolio risk or add a component of liquidity for withdrawals/emergencies or rebalancing to your mix. And for that, you have to accept low returns to get a truly low risk asset: short term bonds. By their very nature, short term bonds have no correlation to equities (on is a long term asset, the other a short term asset with opposite responses to changes in the discount rate) and most reliably dampen equity risk.

Some have convinced themselves that LT bonds are a better vehicle for this purpose. But that view is built on a foundation of recency bias...the last 10 years (since 2000) has seen phenomenal returns to LT bonds when equities tank. ST has done fine, and about the same as it's always done...but LT has done much better.

The evidence from 1926-1999, however reveals the following average returns during all years when TSM lost value (18 years total):

1mo t-bills = +4.1%
5yr t-notes = +3.8%
20yr t-bonds = +2.4%

So its likely that the sweet spot over this 75 year period where interest rates started and ended at about the same place was 2-3 years, with higher returns to longer term bonds mostly when the yield curve was upwardly sloped, and negative returns relative to cash when the yield curve was flat or inverted.

Plus, in the returns department, you have had to wait a long, long time in many cases to get any additional returns (above cash) for buying long term bonds. A look at the history of the world reveals since 1900, about 30% of countries have seen 0% higher returns to long bonds vs. cash, and almost 50% haven't seen statistically significant higher returns. In those countries that have had long term bond premiums, they've all come at the expense of much greater risk, and we are only talking about ~1% or so.

To contrast, premiums for equities over cash have averaged 4-5% or so, with additional benefit from size over the market and value over the market.

So if you think the last 10 years will continue indefinitely (rates will continue to drop unabated), then load up on LT bonds. If you think interest rate cycles haven't completely disappeared (meaning falling and rising rates), and you find 80 years more convincing than 10, keep it short and take your risk in equities.
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Re: Argressive Bogleheads Portfolio

Post by ddb »

coldman wrote:What do you think of a portfolio such as this? Looking for a long term hold. My idea of aggressive is not to gamble, but take a little bit of a chance.

Equity %
12.5 500 Index
12.5 Value Index
12.5 Small Cap Index
12.5 Small Cap Value Index
20.0 Developed Markets Index
20.0 International Value
10.0 Emerging Mkt. Stock Index
Fixed income %
50.0 Short-term Investment Grade
50.0 Total Bond Index
I thought you were trying to keep # of holdings to 6 or fewer?

"Aggressive" has many levels. It sounds like you're talking about aggressive in the sense of an unleveraged portfolio. Even so, do you have a mortgage on your house, or a vehicle loan, or student loans while you're investing in taxable accounts? If so, you're effectively buying stocks on margin, without the risk of a margin call.

Within the constraint of a non-leveraged, long-only portfolio, aggressive would mean 100% in stocks with no other debt holdings. Within stocks, being aggressive means buying those assets with the highest expected returns. If you believe the research of Fama and French, this means buying small-company stocks that are trading at low prices relative to some sort of fundamental measure (earnings, book value, sales, cash flow, etc.), A.K.A. small value stocks. The most aggressive (i.e. highest expected return) portfolio would therefore consist of a fund or some funds that provide access to very small companies with very low prices. There are several ETFs and mutual funds that cover this category well. I try to avoid mentioning specific securities in a discussion like this, for fear somebody will actually buy a fund that I reference without doing his/her own due diligence and suitability analysis.

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Charybdis
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Re: Aggressive Bogleheads Portfolio

Post by Charybdis »

I don't know what do you mean by "aggressive".

There is a portfolio by Rick Ferri which has the potential to outperform the simple three-fund portfolio, at a lower risk level (higher Sharpe-ratio). Of course, the outperformance and lower risk level is not guaranteed, but you wanted an aggressive portfolio :) Here is it:
http://www.portfoliosolutions.com/total ... portfolio/

Basically you just add 25% small-cap value and 10%REIT to the three-fund portfolio. You could even add international REIT and international small-cap value to make it "more aggressive". You could also add a micro-cap fund (not too much) to make it über-aggressive :D

I suggest not to go beyond that 25% and 10% thresholds.

My equity portfolio looks like this: 90% MSCI ACWI IMI (which is global developed and emerging markets, large-, mid- and small-cap stocks), and 10% global REIT (but the MSCI ACWI IMI already contains about 2.3% global REIT, so my total REIT allocation is about 12.3%).

I would also add the small-cap value tilt, but there aren't any small-cap value ETFs available in the EU yet.
But there are small-cap value ETFs available in the US for you.
Same case with micro-cap funds.

I would advise against the 100% stocks portfolio. If you want an aggressive portfolio, create a 80% stocks/20% bonds mix, using the equity portfolio I described above.
Last edited by Charybdis on Fri Jun 29, 2012 11:43 am, edited 1 time in total.
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Re: Aggressive Bogleheads Portfolio

Post by Jerry_lee »

^
That portfolio comes up short. Adding 25% of a total equity portfolio to a small value ETF that has amongst the lowest exposures to small and value isn't going to move the lever very far.

Bill Bernstein talks about appropriate "aggressive" portfolios in his new book for young investors. Instead of using margin or leverage, he suggests the DFA Vector funds, which are basically 50% Total Stock Index, 50% pure small value. To get there with VTI and IJS, you need to go roughly 33% Total Stock Index, 67% S&P 600 Value. Realizing the watered down nature of the small value index, this isn't that extreme as the 67% non-TSM weighting would imply.

You could do something as simple as 20% Vanguard Total Stock Index, 40% Vanguard Small Value Index, and 40% Vanguard FTSE ex.US Small Cap. This portfolio isn't trademarked or anything , but it'll do what you are trying to accomplish.
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Re: Aggressive Bogleheads Portfolio

Post by mptfan »

Jerry_lee wrote: So if you think the last 10 years will continue indefinitely (rates will continue to drop unabated), then load up on LT bonds. If you think interest rate cycles haven't completely disappeared (meaning falling and rising rates), and you find 80 years more convincing than 10, keep it short and take your risk in equities.
Jerry, to the extent that you argue in favor of short term bonds over long term bonds in today's interest rate environment, I agree with you. However, to the extent that you argue that taking any risks over and above short term treasuries is a mistake, because "you should take your risks on the equity side," I respectfully disagree.

On this point, some argue that you should not invest in corporate bonds of any duration, especially high yield corporate bonds, because you are taking on equity risk in the bond portion of your portfolio, and this is a mistake. I understand the argument, but I respectfully disagree.
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Re: Aggressive Bogleheads Portfolio

Post by Jerry_lee »

mptfan wrote:
Jerry_lee wrote: So if you think the last 10 years will continue indefinitely (rates will continue to drop unabated), then load up on LT bonds. If you think interest rate cycles haven't completely disappeared (meaning falling and rising rates), and you find 80 years more convincing than 10, keep it short and take your risk in equities.
Jerry, to the extent that you argue in favor of short term bonds over long term bonds in today's interest rate environment, I agree with you. However, to the extent that you argue that taking any risks over and above short term treasuries is a mistake, because "you should take your risks on the equity side," I respectfully disagree.

On this point, some argue that you should not invest in corporate bonds of any duration, especially high yield corporate bonds, because you are taking on equity risk in the bond portion of your portfolio, and this is a mistake. I understand the argument, but I respectfully disagree.
OK, that's cool. The research shows, however, that anything special (above ST bonds) you get with junk or EM debt can be manufactured just as easily with an increase in equity exposure, and small/value tilt in particular. Same goes for REITS: great compliment to TSM, but nothing great in the presence of a small/value tilted equity portfolio.

Also, I didn't say no corporates, just try to stick with AA/AAA of 5yrs or less. Not a lot of equity risk there, just a tax arbitrage opportunity for those putting bonds in IRAs.
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Re: Aggressive Bogleheads Portfolio

Post by mptfan »

Jerry_lee wrote: OK, that's cool. The research shows, however, that anything special (above ST bonds) you get with junk or EM debt can be manufactured just as easily with an increase in equity exposure, and small/value tilt in particular.
That may be true, but it does not lead to the conclusion that you should avoid corporate bonds, including high yield corporate bonds. The fact that I can "manufacture" something similar in other ways does not mean that the way I choose is bad.
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Re: Aggressive Bogleheads Portfolio

Post by Jerry_lee »

mptfan wrote:
Jerry_lee wrote: OK, that's cool. The research shows, however, that anything special (above ST bonds) you get with junk or EM debt can be manufactured just as easily with an increase in equity exposure, and small/value tilt in particular.
That may be true, but it does not lead to the conclusion that you should avoid corporate bonds, including high yield corporate bonds. The fact that I can "manufacture" something similar in other ways does not mean that the way I choose is bad.
I should have said "manufacture" with generally superior risk adjusted and after-tax results. Coupling safe, short term debt with high risk small and value stocks produced an added diversification benefit, and allows for greater customization across accounts (bonds in IRAs, tax-managed equities in taxable) or plain lower tax drag in fully taxable accounts.

A simple example should suffice. Lets take the portfolio designed and trademarked by Portfolio Solutions and strip it down to US stocks and bonds. Approximately 39% US Total Stock Index, 15% Small Value Index, 6% REITS, 20% Total Bond Index, 20% Junk Bonds. Instead, we could simplify it and just use 18% Total Stock, 18% large value, 24% small value, 40% 5yr t-notes.

The difference since 1984 is the portfolio with junk and scaled back small value (but with the REIT sector fund) trailed the much simpler "3 Factor" portfolio by about 0.3% but had almost 0.75% higher standard deviation. Obviously not a huge difference...but why go to all that trouble with junk bonds when the market tells us a better combo of risk and return can be had with low risk bonds and meaningfully tilted equity mixes?

Looked at another way, for the same level of volatility, you could punt LG, and flip the small/large weighting by going 24% large value, 36% small value, 40% 5yr bonds for an historical advantage of 0.7% annually.
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Re: Aggressive Bogleheads Portfolio

Post by mptfan »

Jerry_lee wrote:The difference since 1984 is the portfolio with junk and scaled back small value (but with the REIT sector fund) trailed the much simpler "3 Factor" portfolio by about 0.3% but had almost 0.75% higher standard deviation. Obviously not a huge difference...but why go to all that trouble with junk bonds when the market tells us a better combo of risk and return can be had with low risk bonds and meaningfully tilted equity mixes?
I agree that your view has more justification for taxable accounts. But putting the tax issue aside, and assuming tax deferred accounts, I have the following thoughts:

First, 28 years of history is a good guide, but I don't think it's long enough to make a definitive conclusion because the results may be different over the next 28 years, especially given such a small difference...it may be statistical noise. I would be surprised if the results were identical.

Second, human beings are not computers, we are motivated by things other than standard deviations computed over 3 decades of data. For example, we are affected by tracking error, and short term deviations within our portfolio. Watching the small cap value part of our portfolio "deviate" downwards for a few years would likely cause most people to give up and bail out at exactly the wrong time. So, getting almost the same result by spreading out some of the risk with relatively less risky high yield bonds (as compared to small cap stocks or stocks in general) is a good thing for many people.

Third, there are obviously many people who invest in high yield corporate bonds, so much so that Vanguard has a mutual fund devoted exclusively to that asset class, so it is clearly a part of the overall investable bond market. Therefore, if you exclude this asset class from consideration, you are ignoring the principle that you should "invest in the market" when it comes to the bond market. Why? Do you know something that the market does not? This question is often posed to people who suggest to overweight certain stock sectors as if to say that it is wise to invest your stock portfolio to match the overall allocation of stocks as reflected by the market. So why does this principle not apply to the bond market? Do you accept that you are not smarter than the market when it comes to investing in stocks, but you think you are smarter than the market when it comes to investing in bonds? I have never gotten a satisfactory answer to this contradiction.

Fourth, the riskiest bond fund available at Vanguard is safer than the safest stock fund. So what is the justification for taking on more risk with some equities, like small cap stocks and emerging market stocks, as compared to other equities, like large cap U.S. stocks, if you can't do the same with bonds? Is equity risk special? If so, why is it special? Stocks are riskier than bonds, so if it is appropriate to take risks with various classes of stocks, why is not not appropriate to take risks with various classes of bonds, given that the riskiest bond fund risk is lower than the safest stock fund risk?

I don't see any real justification for the canard that you should "avoid taking risks on the bond side" in tax deferred accounts, as some people suggest.
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Re: Aggressive Bogleheads Portfolio

Post by Jerry_lee »

Mptfan,

I agree that 28 years isn't enough to close the case on anything. But you need to have a good reason to ignore almost 3 decades as well. And I cannot think of any. Are the junk bond spreads wide compared to treasuries? Sure, as are SV spreads relative to LG. After all, value stocks and junk bonds are the same businesses, so to own either you are banking on an improvement in operating profitability (in a sense). Under this scenario, I'd much rather be an owner than a creditor. Irrespective of the data, that is the philosophy that underpins my decisons.

You also bring up a good point about the behavioral issues of managing a portfolio. Its tough when SV goes through a 5/10 year drought compared to TSM. But its equally hard to go through a 5/10 year period when junk bonds, despite their higher risk, trail treasuries or total bond index. Further, in the short run, seeing the bond side of your portfolio shed 25% of its value (as it did in 2008) when most people view bonds as the lower risk part of a balanced portfolio can be a deal breaker. I mean, that was a stock-like collapse and we've seen similar behavior in the recent summer swoons of 2010 and 2011. So tracking error is tough no matter how you deviate from the market. I'd rather get the most bank for my deviation $.

As for Vanguard, they offer a lot of things I don't agree with: sector funds, market neutral strategies, etc. They are in the fund business and their job is to attract assets to their funds. I don't use their lineup (or anyone else's) as a gauge for portfolio decisions. A lot of people buy high-cost active funds as well, that doesn't mean those are good either.

Finally, I think the "own the market" argument is a weak one. It fails on many levels. First, never was it written that we have to all hold the total market portfolio -- only that it will be the average of all investors collectively. Instead, modern capital markets allow you to diversify your capital in a way that is most optimal for your particular circumstances. And thanks to modern portfolio theory, we know that the way that assets work together is as important as their stand-alone characteristics.

I am not in any way saying Junk bonds are mis-priced. Indeed, they have higher risk and have had higher returns than safer bonds. The problem is, due to the "hybrid" nature of the asset class, you don't get the diversification benefit in a total portfolio that has been available by holding more pure asset classes. All investors should not feel shackled by arbitrary market weights of anything. You should pay close attention to the relationship between risk and return across asset classes, as well as how those assets correlate with one another. In doing so, you are free to exclude certain investments that don't accomplish your unique objectives (produce high returns -- market/size/value, or reliably dampen risk -- high quality bonds). Its not that I am smarter or dumber than the market, it is that I have a better understanding of what I am trying to accomplish, and the unique blend of broadly diversified asset classes that will combine together to produce the most favorable expected outcomes for my situation. You can respect the market without needing to imitate it.

And "taking risks in equities/avoiding risk in bonds" certainly isn't a canard, in that I have showed you it has actually been the most profitable approach, at least historically. It is the "put everything in the pot and mix it up" school of own a little bit of everything because we don't know anything that has been a disappointment.
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Re: Aggressive Bogleheads Portfolio

Post by mptfan »

Jerry_lee wrote: You also bring up a good point about the behavioral issues of managing a portfolio. Its tough when SV goes through a 5/10 year drought compared to TSM. But its equally hard to go through a 5/10 year period when junk bonds, despite their higher risk, trail treasuries or total bond index. Further, in the short run, seeing the bond side of your portfolio shed 25% of its value (as it did in 2008) when most people view bonds as the lower risk part of a balanced portfolio can be a deal breaker. I mean, that was a stock-like collapse and we've seen similar behavior in the recent summer swoons of 2010 and 2011. So tracking error is tough no matter how you deviate from the market. I'd rather get the most bank for my deviation $.
It is true that Vanguard's High Yield Corporate Bond fund lost 21.29% during 2008. But, in 2009, it gained 39%. So, if you held it for those 2 years, you would have gotten a total positive return of 8.9%, which is approximately 4.5% per year for those two years, and that's taking into account the worst year for equities in the last 50 years, and probably the worst year for equities since the Great Depression! I challenge you to show me a period, of longer than 1 single year, when high yield corporate bonds had significant tracking error. By contrast, there have been long periods of underperformance of small cap value.

High yield bond funds are safer than the safest stock funds, plain and simple.

I understand what you are saying, but I will have to agree to disagree.
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Re: Aggressive Bogleheads Portfolio

Post by mptfan »

Jerry_lee wrote:All investors should not feel shackled by arbitrary market weights of anything.
You think market weights are arbitrary, and investors should not be shackled by them? Wow, that goes against the Boglehead philosophy, as espoused by Jack Bogle:

"Rather than trying to pick the specific securities or sectors of the market (US stocks, international stocks, and US bonds) that will outperform in the future, Bogleheads buy funds that are widely diversified, or even approximate the whole market. This guarantees they will receive the average return of all investors. Being average sounds bad, but it is actually a great thing. That's because most investors perform worse than average after taking into account the high fees they can pay for actively managed funds. If there were no fees, then every year, half of all actively managed funds would outperform the index (because the index is the average). It might seem like an investor would just want to invest in those outperforming funds. But there is no persistence to the results. Funds that outperform one year tend to underperform in the next."

http://www.bogleheads.org/wiki/Boglehea ... philosophy

"In practice, diversification is a rigorously tested
application of common sense: Markets and asset
classes will behave differently from each other at
any given point in time. Owning a portfolio with at
least some exposure to all key market components
ensures the portfolio of some participation in
stronger sectors while also mitigating the negative
impact of weaker-performing sectors."

https://global.vanguard.com/internation ... 042006.pdf

This common sense apparently only applies to stocks?
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Re: Aggressive Bogleheads Portfolio

Post by Jerry_lee »

mptfan wrote:
Jerry_lee wrote: You also bring up a good point about the behavioral issues of managing a portfolio. Its tough when SV goes through a 5/10 year drought compared to TSM. But its equally hard to go through a 5/10 year period when junk bonds, despite their higher risk, trail treasuries or total bond index. Further, in the short run, seeing the bond side of your portfolio shed 25% of its value (as it did in 2008) when most people view bonds as the lower risk part of a balanced portfolio can be a deal breaker. I mean, that was a stock-like collapse and we've seen similar behavior in the recent summer swoons of 2010 and 2011. So tracking error is tough no matter how you deviate from the market. I'd rather get the most bank for my deviation $.
It is true that Vanguard's High Yield Corporate Bond fund lost 21.29% during 2008. But, in 2009, it gained 39%. So, if you held it for those 2 years, you would have gotten a total positive return of 8.9%, which is approximately 4.5% per year for those two years, and that's taking into account the worst year for equities in the last 50 years, and probably the worst year for equities since the Great Depression! I challenge you to show me a period, of longer than 1 single year, when high yield corporate bonds had significant tracking error. By contrast, there have been long periods of underperformance of small cap value.

High yield bond funds are safer than the safest stock funds, plain and simple.

I understand what you are saying, but I will have to agree to disagree.
Sure, that's easy. 1984-1990, US Treasury Index outperformed the HY Bond Index by 350bps per year, including 18% in 1990. From 2000-2002, US Treasury Index outperformed HY Bond Index by 11.5% per year. And then, of course, we have '07-'08, when the total 2 year difference was almost 50%. All this for a 1.4% per year higher return from the Barclays HY Bond Index since 1983. And on a risk adjusted basis in a simple S&P 500/bond portfolio, this return advantage completely disappears:

75/25 S&P 500/treasury index = +10.1%
60/40 S&P 500/junk = +10.1%

or looking at just junk:

Barclays HY Index = +9.4%
45/55 S&P 500/treasury index = +9.4%

And of course, you have to adjust for the fact that any allocation that includes junk is that much more illiquid due to poor returns (and sometimes large losses) during downturns and simultaneous equity declines. For example, in 2008, while HY lost ~25%, the 45/55 lost -9%. The 60/40 with junk lost 33% vs. 24% for the 75/25 with treasuries.
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Re: Aggressive Bogleheads Portfolio

Post by mptfan »

Jerry_lee wrote: Sure, that's easy. 1984-1990, US Treasury Index outperformed the HY Bond Index by 350bps per year, including 18% in 1990. From 2000-2002, US Treasury Index outperformed HY Bond Index by 11.5% per year. And then, of course, we have '07-'08, when the total 2 year difference was almost 50%. All this for a 1.4% per year higher return from the Barclays HY Bond Index since 1983.
Can you show me the source of this data?
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Re: Aggressive Bogleheads Portfolio

Post by Jerry_lee »

mptfan wrote:
Jerry_lee wrote:All investors should not feel shackled by arbitrary market weights of anything.
You think market weights are arbitrary, and investors should not be shackled by them? Wow, that goes against the Boglehead philosophy, as espoused by Jack Bogle:

"Rather than trying to pick the specific securities or sectors of the market (US stocks, international stocks, and US bonds) that will outperform in the future, Bogleheads buy funds that are widely diversified, or even approximate the whole market. This guarantees they will receive the average return of all investors. Being average sounds bad, but it is actually a great thing. That's because most investors perform worse than average after taking into account the high fees they can pay for actively managed funds. If there were no fees, then every year, half of all actively managed funds would outperform the index (because the index is the average). It might seem like an investor would just want to invest in those outperforming funds. But there is no persistence to the results. Funds that outperform one year tend to underperform in the next."

http://www.bogleheads.org/wiki/Boglehea ... philosophy

"In practice, diversification is a rigorously tested
application of common sense: Markets and asset
classes will behave differently from each other at
any given point in time. Owning a portfolio with at
least some exposure to all key market components
ensures the portfolio of some participation in
stronger sectors while also mitigating the negative
impact of weaker-performing sectors."

https://global.vanguard.com/internation ... 042006.pdf

This common sense apparently only applies to stocks?
I am registered here, but I don't believe in much of the Boglehead creed beyond diversify with in each asset class you own (which is different than diversify across everything) and keep costs low (and even here, there is more to it than just low expense ratios).

SOURCE OF DATA = Barclays Bond Indexes. Barclays US Treasury Index, Barclays Capital Corporate High Yield Index, S&P 500 Index. Available through Morningstar Principia, any decent portfolio management software program, and probably somewhere imbedded in the Barclays website, but I'm not sure.
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Re: Aggressive Bogleheads Portfolio

Post by pkcrafter »

coldman wrote:I have a lot of time on my side before I retire. What would an aggressive Bogleheads portfolio look like? Using relatively priced ETFs what you portfolio would you use? What relatively priced mutual funds would you use? Try to limit the number funds or ETFs to 6 or less. Please give both EFTs and mutual funds. Thank you for sharing your thoughts/opinions.
Having a lot of time is in itself not a very good reason to be very aggressive. Can you tolerate a lot of tracking error, periods where you are underperforming the market, and can you hold when you lose >50% of your assets? You may have a high emotional risk tolerance, but will you still have it under the pressure of panic selling all around you. Here's a suggestion for you,

Equity %
40% Total market
10% Small Cap Value Index
25% Total International
5% International small
Fixed income %
10% Short-term Investment Grade
10% Total Bond Index
OR
replace international large and small with 15% Total International, 15% EM

You can use either the funds if you have enough assets or use the corresponding ETFs


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Re: Aggressive Bogleheads Portfolio

Post by mptfan »

Jerry_lee wrote: I am registered here, but I don't believe in much of the Boglehead creed beyond diversify with in each asset class you own (which is different than diversify across everything) and keep costs low (and even here, there is more to it than just low expense ratios).
Fair enough. But there are Bogleheads who do espouse the "own the market" theory when it comes to stocks, but who simultaneously reject the same theory when it comes to bonds.
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Re: Aggressive Bogleheads Portfolio

Post by Jerry_lee »

mptfan wrote:
Jerry_lee wrote: I am registered here, but I don't believe in much of the Boglehead creed beyond diversify with in each asset class you own (which is different than diversify across everything) and keep costs low (and even here, there is more to it than just low expense ratios).
Fair enough. But there are Bogleheads who do espouse the "own the market" theory when it comes to stocks, but who simultaneously reject the same theory when it comes to bonds.
Oh, I know. There are a lot of inconsistencies like that. Such as the "own the market....but just the US market" points of view. Bogle himself admitted to being 0% international in his own portfolio.

Either you build a portfolio based on your preferences (and in doing so, it makes sense to keep costs low and diversify), or you hold the market (and in doing so, it makes sense to keep costs low and diversify). The low cost/diversify belief supersedes your views on portfolio construction.
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Re: Aggressive Bogleheads Portfolio

Post by Roy »

A lot of good talk going on here, and solid points being raised on both sides.

I agree with Mptfan about the potential challenge in owning heavily-tilted equities—tracking error regret and extra volatility over sustained periods. In my view, that is the biggest risk of such a position, especially for DIY investors, but perhaps anyone.

I tend towards Jerry_Lee's view when it comes to fixed income quality (similar to Larry's, I think). The last thing anyone wants is for bonds (the supposed rock of the portfolio) to plummet with the equities, as happened to many types of corporate bonds, even Short-term corporates in 2008. The interim risk of that degree of portfolio volatility, especially if in retirement, could be particularly devastating (perhaps pushing some over the edge to Plan B); and so maybe some folks didn't wait around for a rebound. Timing of volatility can matter a lot.

Larry has also made the point that if one does incur credit risk, that it is advisable to count portions of those holdings as equity, according to the degree of credit risk in those holdings. In that way, one may be better protected against the particular risks when they show up. Though, I wonder how many investors do that.

This is not about viewing any securities as being mis-priced—just preferences based on tastes or one's sense of historical correlations—and providing one understands the nature of the overall portfolio risks.
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Re: Aggressive Bogleheads Portfolio

Post by pingo »

What types of accounts do you/will have for investing? What are the available options in your tax-deferred accounts? What will be you're annual contributions to each account? First, one should consider one's rate of savings, taxation, costs and general asset allocation (such as your desired 90/10 stock-bond ratio) and build with the best options you have available. We can help.



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Re: Aggressive Bogleheads Portfolio

Post by Charybdis »

Don't ignore the psychological factor of investing.

If you are just starting out, you probably shouldn't allocate too much to equities. You can only measure your true risk tolerance, when you see your equity portfolio drop 20-30%.

Start small, get the hang of it, after that increase your equity exposure.
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Re: Argressive Bogleheads Portfolio

Post by retiredjg »

coldman wrote:What do you think of a portfolio such as this? Looking for a long term hold. My idea of aggressive is not to gamble, but take a little bit of a chance.

Equity %
12.5 500 Index
12.5 Value Index
12.5 Small Cap Index
12.5 Small Cap Value Index
20.0 Developed Markets Index
20.0 International Value
10.0 Emerging Mkt. Stock Index
Fixed income %
50.0 Short-term Investment Grade
50.0 Total Bond Index
I think this idea is fine on paper, but difficult to put into practice because 401k/403b/etc. plans rarely offer most of these types of funds.

Rather than try to put together the perfect theoretical portfolio, I think you should be putting together the best portfolio you can with the choices you have available.

If you want a small cap and a value tilt, I think there are better ways to do it. You might find this thread helpful.

http://www.bogleheads.org/forum/viewtopic.php?t=38374
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Re: Argressive Bogleheads Portfolio

Post by livesoft »

coldman wrote:What do you think of a portfolio such as this?
As I wrote in your other thread, this portfolio is a fancy old one that many folks have simplified to just
VTI, VBR, VXUS, VSS, and BND. So you should simplify as well. Please read my comments in your other thread.
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Re: Aggressive Bogleheads Portfolio

Post by Trev H »

Here you go..

20% Large Cap Index
20% Small Value Index
20% FTSE X-US Large
20% FTSE X-US Small
10% IT Treasurey
10% TIPS

Rebalance annually...

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Re: Aggressive Bogleheads Portfolio

Post by retiredjg »

So Trev, what happened to international value?
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Re: Aggressive Bogleheads Portfolio

Post by Charybdis »

And what happened to REIT? :)
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Re: Aggressive Bogleheads Portfolio

Post by Default User BR »

retiredjg wrote:So Trev, what happened to international value?
Yeah, I thought that was supposed to be Int Large Value, to give 50/50 blend/value, 50/50 large/small, and 50/50 domestic/international.


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Re: Aggressive Bogleheads Portfolio

Post by garlandwhizzer »

I agree with mptfan about high yield bonds and my opinion is that the strong biases against them in this forum are not entirely rational for all investors. I personally have held VWEHX for years and have never, even in the depths of the 2008 collapse, regretted it. In fact at that dire point, the fund was paying more than a 12% annualized dividend (due to the massive drop in share price) and at that point I merely sold some of my safer bond holdings, GNMAs, and bought more VWEHX, an investment which provided more than a 70% return in the next 18 months. In 18 months a long term holder of VWEHX recovered all his dollar losses from the peak, a 37% drop in value top to bottom of downslope. A holder of TSM or SCV even now almost 4 years later has not come back to his 2007 high in dollar terms. It recovers quickly, a point that is important to remember.

Vanguard's VWEHX holds both low grade and intermediate grade corporate credit and has a higher credit quality profile than most "junk" bond funds. It also has a shorter duration that most intermediate funds. It functions in my opinion as a separate asset class, riskier than high quality bond funds, but much, much less risky than any stock fund. Look at it's long term chart and you'll see that although it nose dives in times of crisis, it recovers much, much quicker than any stock fund, which is apparently where almost everyone on this forum wants to take risk.

We have been in a secular bear market for stocks for 12 years now, and although those who stuck with stocks (which I have) have managed fair returns, WHEHX has outperformed both TSM and Vanguard's SCV funds over the past 10 years. It has outperformed TBM year to date, I year, 5 years, and 10 years. In fact since it's inception in 1978, 34 years ago, it has averaged a 8.5% annual return, which isn't bad. It also tends to do better in inflationary times than do intermediate term high quality bonds, not as well as TIPS but on the other hand, with VWEHX you're not guaranteed a loss in real dollars if you hold them to maturity as you are in TIPS.

If you need someone to hold your hand and reassure you that the world isn't ending in the depths of a market crash, by all means avoid this fund. If you can't sleep at night having temporarily lost 40% of your assets, stick with TBM. If you are forced to sell at he bottom to make expenses, avoid it. I'm not arguing against that. But I think that there are two ways to look at it, and that for some investors who are willing to use the same strong market stomach that allows them to tolerate huge stock losses without selling, applying that same stomach to VWEHX, it can work effectively in a portfolio as a unique asset class.

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Re: Aggressive Bogleheads Portfolio

Post by no_name »

Trev H wrote:Here you go..

20% Large Cap Index
20% Small Value Index
20% FTSE X-US Large
20% FTSE X-US Small
10% IT Treasurey
10% TIPS

Rebalance annually...

Trev H
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Re: Aggressive Bogleheads Portfolio

Post by Trev H »

Hey Guys...

I do still use Vanguards International Value fund (International Large Value including EM Large Value) instead of FTSE X-US Large Cap.

I would trade it in a second for a FTSE X-US International Large Value index fund though. I do wish Vanguard would offer some International Value options (Large/Small in index funds).

Since he was considering ETF's -- I simply suggested an all index mix for the equity.

Back years ago when the backtesting examples were done in the post below - we did look at substuting International Large Market for the International Large Value slice and the differences were small.

For someone that wanted all index on the equity slices, that would be a good way to go. Below is that old post showing the Simplified Ultimate Buy and Hold (4 slices vs 8).

http://www.bogleheads.org/forum/viewtopic.php?t=38374

I have not held REIT in many years now. Not because I don't like them - I do... but there is a point as you increase your small allocation, (US SV and INtl Small) that REIT does not increase returns, actually decreases (but does reduce volatility nicely).

When I shift from accumulating to retirement phase, I may decrease my small some, and add REIT back.

The older I get, the more I like simiplicity --- heck I may just put it all in Wellesley income when I get to that point :-)

Could do a lot worse.

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Re: Aggressive Bogleheads Portfolio

Post by retiredjg »

Trev H wrote:Since he was considering ETF's -- I simply suggested an all index mix for the equity.
That makes sense. Thanks!
The older I get, the more I like simiplicity --- heck I may just put it all in Wellesley income when I get to that point :-)

Could do a lot worse.

Trev H
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Re: Aggressive Bogleheads Portfolio

Post by Charybdis »

I don't think it's a good idea to overweight small-cap value, or value so much. Why isn't 25% small-cap value enough?
Instead of overweighting SCV, you could increase your stock allocation.

What if SCV underperforms TSM in the next 15 years? Don't forget tracking error regret. I only have been investing for a few months, I don't know what it feels like to look at my portfolio, and realize that I could have been doing better with TSM, without the SCV tilt.

But I imagine it would be a very bad feeling! :)

I like Rick Ferri's Total Economy Portfolio, because it doesn't contain a huge tilt - 25% SCV and 10% REIT tilt. This is enough to improve your portfolio return and reduce risk at the same time at a high probability. But if SCV and REIT perform poorly, you still won't have a major tracking error regret.

Also some investors like the 50/50% equity/bond allocation, because you don't know whether equities will outperform bonds or not. But you won't have tracking error regret either way.
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Re: Aggressive Bogleheads Portfolio

Post by Roy »

Charybdis wrote:
What if SCV underperforms TSM in the next 15 years? Don't forget tracking error regret. I only have been investing for a few months, I don't know what it feels like to look at my portfolio, and realize that I could have been doing better with TSM, without the SCV tilt.

But I imagine it would be a very bad feeling!

Also some investors like the 50/50% equity/bond allocation, because you don't know whether equities will outperform bonds or not.
I agree Tracking Error regret is a very real potential psychological threat. Even Larry Swedroe, who tilts massively, has made this point.

A 50/50 portfolio may be equal in percentage/allocation, but over time it is actually dominated in performance by the more volatile equities, especially if the bonds are of Intermediate or shorter maturity.
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Re: Aggressive Bogleheads Portfolio

Post by Jerry_lee »

Just so you know, when you put 25% of a total equity portfolio in small value (assuming the rest in total stock index) and use the S&P 600 Value, you should plan to pick up about 15% exposure to the size factor and 15% to the value factor. Assuming a 2% size premium and 4% value premium (the approximate average from 28-11), that would increase the expected return of the portfolio by 0.9% per year. Not much.

My guess is, as it relates to tracking error, it will cut both ways, and this minor size/value tilt is no panacea. When TSM (or, put a different way, the largest 30-40 mega cap growth stocks in the market) does well, as it did during the Nifty Fifties bubble and Tech bubble, you may wonder why you have any small value at all ("did I really think this small allocation was going to do anything? I'm gonna move everything to TSM to simplify" <read: performance chase>). During the 15+ year periods when TSM has 0% real returns (1965-1981, 2000-now), you will wonder why you have so little small value, and realize you didn't get the full benefits of diversification that small and value provided.

There is tracking error with everything: bonds vs. stocks, foreign vs. us, etc. Best to realize that when you diversify, you shouldn't expect your portfolio to closely track one small component of it (TSM), and that is a good thing!

Realize, just because some investors don't believe in size/value dimensions, or some advisors aren't set up to or even want to coach clients through the noise of short term returns/dispersion inherent in a plan that is well balanced across market, small, and price factors, doesn't mean you should avoid it. From an historical perspective (and there is no reason to believe the future will be different), portfolios that diversify more broadly across small/large and value/growth have increased the probability of achieving long term objectives relative to LG concentrated allocations (assuming those objectives were long term real appreciation and sustainable real withdrawal rates, NOT the avoidance of short term market deviations or price volatility).
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Re: Aggressive Bogleheads Portfolio

Post by Jerry_lee »

Also, because it has come up in this thread, I would strongly urge against developing an allocation based on trying to more closely track the "real economy". Why? It completely ignores the purpose of investing. It is not, in an of itself, a beauty contest where the most "market-like" allocation wins or is superior in anyway. It is, instead, an effort to create the highest probability of achieving your goals with the least amount of long term risk (shortfall) and the most flexibility to handle expected/unexpected short term demands. A market portfolio or an economic portfolio may have very little correlation with the risk and expected returns you need to be successful.

Lets call small and value tilts what they are: not some effort to mimic economic activity in your portfolio, but instead unique sources of risk and return that can improve portfolio results relative to a TSM only portfolio or allow one to lower fixed income risk (and improve portfolio liquidity) for a given stock/bond mix. Its Fama/French (and many before them) research efforts that drive our diversification across size and value factors.
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Re: Aggressive Bogleheads Portfolio

Post by mptfan »

Jerry_lee wrote:Also, because it has come up in this thread, I would strongly urge against developing an allocation based on trying to more closely track the "real economy". Why? It completely ignores the purpose of investing. It is not, in an of itself, a beauty contest where the most "market-like" allocation wins or is superior in anyway. It is, instead, an effort to create the highest probability of achieving your goals with the least amount of long term risk (shortfall) and the most flexibility to handle expected/unexpected short term demands. A market portfolio or an economic portfolio may have very little correlation with the risk and expected returns you need to be successful.
Jerry, I was the one who brought up the "real economy" argument, and yet, I agree with you. My main point was to illustrate the hypocrisy of some Bogleheads who espouse the maxim that you should "own the market" when it comes to stocks, while simultaneously rejecting this position when it comes to bonds...

"Rather than trying to pick the specific securities or sectors of the market (US stocks, international stocks, and US bonds) that will outperform in the future, Bogleheads buy funds that are widely diversified, or even approximate the whole market. This guarantees they will receive the average return of all investors."

http://www.bogleheads.org/wiki/Boglehea ... philosophy
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Re: Aggressive Bogleheads Portfolio

Post by Roy »

Regarding tracking error (regret), I think the ever-present media reflects what the S&P 500 (essentially, TSM too) does when it says, "the stock market is doing well/bad". As most investor portfolios are driven by equity volatility (particularly of the Large Cap and Domestic sort), I see such regret as the most powerful psychological player, certainly for those not well-informed about alternatives to a CAPM-based model, which illumination had better include a thorough understanding of those risks.

I'm certainly not saying one should not diversify across factors, just that a good reason for not doing so, (the best, in my view), is this potential particular regret. Even Larry has mentioned this often in books, papers, and posts. Then again, I think at least some advisors here believe this effect can be modified (or obviated) by a good advisor. And I'm unsure whether the clients of Larry, Jerry, or Rick ever complain about this, once taken under their wings. I suspect its effects would be felt more powerfully among the DIY crowd, though even money managers/brokers can chase hot asset classes and flee sinking ones.

I agree that a "real economy" portfolio is no more ideal for a given individual than any other titled construct, even if I accepted the premise behind its design. The only real portfolio is the one that is right for the individual.

Mptfan is correct in that there seems to be far greater latitude among the "total market" Bogleheads regarding their bond allocations than their equity positions (for example, a 50/50 split between TIPS and Total Bond, to cite just one common approach among otherwise total market adherents). Of course, among the community as a whole, opinions seem divided on at least several mutually exclusive approaches to investing.
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