Diversification Regret

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Ged
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Re: Diversification Regret

Post by Ged » Sun Nov 04, 2018 6:49 pm

nisiprius wrote:
Fri Nov 02, 2018 11:43 am
I like the idea and the chart (except for the unnecessary decoration represented by the vertical "brush strokes.")
Edward Tufte would agree.

It really is hard to avoid this emotion but as you gain experience and lose your memory with age it becomes less of a problem.

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fortyofforty
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Re: Diversification Regret

Post by fortyofforty » Sun Nov 04, 2018 6:55 pm

nedsaid wrote:
Sun Nov 04, 2018 6:32 pm
No doubt, gold and other precious metals act as portfolio insurance but I think the premium of performance drag isn't worth the diversification benefit. [Emphasis mine.]
Isn't that the essence of the question? Isn't that the crux of this whole discussion?
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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Re: Diversification Regret

Post by abuss368 » Sun Nov 04, 2018 7:59 pm

nedsaid wrote:
Sun Nov 04, 2018 2:28 pm
abuss368 wrote:
Sun Nov 04, 2018 9:45 am
nedsaid wrote:
Fri Nov 02, 2018 11:27 am
Perhaps we will be down to the Zero Fund portfolio at the rate we are going.
Hi nedsaid -

That line catches my attention every time. Well said.
It never ceases to amaze me that Bogleheads of all people fall for short termism. If a favorite asset class stops outperforming, forum members just drop it. We seem to have forgotten about diversification. The urge to "simplify" is often an acknowledgment that Large Cap Growth has been outperforming for about a decade and that everything else has been lagging. If I knew in advance which asset class would outperform over the next 20 years, I too could "simplify".

In my few years here both as a lurker and as a poster, I have seen the standard advice here drop from five funds down to two. This has happened in maybe eight years and it is alarming. The stay the course folks have not been staying the course. I have seen TIPS, REITs, and now International Stocks hit the waste bin. I am even seeing wavering on Bonds.

I am kidding somewhat about the Zero Fund portfolio but not too much. We are forgetting on this forum about diversification. If everything in your portfolio is doing well at the same time, it is a good indication that you are not diversified.
I would agree that TIPS and REITs were the rage of the forum and posters as recently as a few years ago. A lot of bond posts included a recommendation of Total Bond and TIPS! One does not see that anywhere the same degree today. International stocks, and specifically the need for them, have always been debated and probably will continue too.

Jack Bogle has often recommend a simple balance fund or a simple Two Fund Portfolio of Total Stock and Total Bond. Mr. Bogle will often say nothing else is needed and that he does not see a need to have international stocks because U.S. companies half one half of their revenue from overseas. However, he has noted that if an investor is so inclined to include International stocks that approximately a 20% of equity allocation is reasonable.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Diversification Regret

Post by abuss368 » Sun Nov 04, 2018 8:01 pm

Rick Ferri appears to be moving more towards portfolio simplification over the years. While I am uncertain of his current recommendations, I believe he was going to have one or two equity funds and for bonds I am uncertain. I believe Rick's prior portfolio's included even more funds.

I believe Jack often says "Simplicity is the master key to financial success" for good reason.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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nedsaid
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Re: Diversification Regret

Post by nedsaid » Sun Nov 04, 2018 8:11 pm

fortyofforty wrote:
Sun Nov 04, 2018 6:55 pm
nedsaid wrote:
Sun Nov 04, 2018 6:32 pm
No doubt, gold and other precious metals act as portfolio insurance but I think the premium of performance drag isn't worth the diversification benefit. [Emphasis mine.]
Isn't that the essence of the question? Isn't that the crux of this whole discussion?
The other diversifiers discussed here: bonds, International Stocks, Small Value, etc. have positive real returns over time. Gold, over very long periods of time has zero real return over inflation.
A fool and his money are good for business.

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fortyofforty
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Re: Diversification Regret

Post by fortyofforty » Sun Nov 04, 2018 8:49 pm

nedsaid wrote:
Sun Nov 04, 2018 8:11 pm
fortyofforty wrote:
Sun Nov 04, 2018 6:55 pm
nedsaid wrote:
Sun Nov 04, 2018 6:32 pm
No doubt, gold and other precious metals act as portfolio insurance but I think the premium of performance drag isn't worth the diversification benefit. [Emphasis mine.]
Isn't that the essence of the question? Isn't that the crux of this whole discussion?
The other diversifiers discussed here: bonds, International Stocks, Small Value, etc. have positive real returns over time. Gold, over very long periods of time has zero real return over inflation.
So the performance drag of precious metals isn't worth the diversification benefit.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

Snowjob
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Re: Diversification Regret

Post by Snowjob » Mon Nov 05, 2018 12:03 am

staythecourse wrote:
Fri Nov 02, 2018 12:17 pm
Excellent post. Your "diversification regret" is basically the "frame of reference risk" folks talk about. I have NO CLUE why folks follow popular benchmarks like the sp500. I never did when I started investing and I still don't. It makes it seem to the investor they are doing something wrong when their returns are not the same as the sp500 when it shouldn't. Most folks are not 100% stocks. Those that are usually not in 100% U.S. only. Of those that are they are usually not in 100% large cap blend (sp500). So the question that really matters is WHY do folks even pay attention to the sp500?

What would be useful is folks having their own proper benchmark and looking at their return to that when they are evaluating their performances.

As Mr. Gibson says in his book, "Asset Allocation" (paraphrasing), "Being diversified means always being unhappy. You will always hold too many of the losers and not enough of the winners".

Good luck.
I agree, though it did take me a while to internalize this -- and to be fair, I still have regrets some times.

I think a lot of us start trying to pick stocks not knowing what we are doing, then funds and are always comparing back to the index. Once we realize our own failure to beat "the market" we end up throwing in the towel and going the low cost index route. The problem is that pesky S&P-500 index that got us to ditch our bad habits before is still in the back of our mind as the "optimal" return -- especially after the run we've seen. But your right, the crazy thing is, if you go with a good index provider, you shouldn't be paying attention to benchmarks at all since there wont be much tracking error. Set an allocation, occasionally re-balance and forget about it. No bench-marking required.

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Re: Diversification Regret

Post by Snowjob » Mon Nov 05, 2018 12:08 am

randomguy wrote:
Sat Nov 03, 2018 7:27 pm
HEDGEFUNDIE wrote:
Fri Nov 02, 2018 11:33 am
I like the approach vineviz.

In practice, there would be a few “capitulation points” where the 100% S&P 500 investor threw in the towel and sold everything due to severe drawdown, capitulations which would not occur as often with a diversified portfolio.

This behavioral-informed comparison would have cumulative returns looking better for the diversified portfolio.
And what about the capitulation points where people give up on every othwr asset? See the why bonds and why international threads.😁 And I am sure in Jan 2000 there were why small value thread.
I wonder if this could be used as behavioral indicator that could inform re-balancing opportunities

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nedsaid
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Re: Diversification Regret

Post by nedsaid » Mon Nov 05, 2018 12:54 pm

fortyofforty wrote:
Sun Nov 04, 2018 8:49 pm
nedsaid wrote:
Sun Nov 04, 2018 8:11 pm
fortyofforty wrote:
Sun Nov 04, 2018 6:55 pm
nedsaid wrote:
Sun Nov 04, 2018 6:32 pm
No doubt, gold and other precious metals act as portfolio insurance but I think the premium of performance drag isn't worth the diversification benefit. [Emphasis mine.]
Isn't that the essence of the question? Isn't that the crux of this whole discussion?
The other diversifiers discussed here: bonds, International Stocks, Small Value, etc. have positive real returns over time. Gold, over very long periods of time has zero real return over inflation.
So the performance drag of precious metals isn't worth the diversification benefit.
That is the judgement that I have made for my own portfolio. On the other hand the Harry Browne Permanent Portfolio has 25% allocated to Gold and its long term record is pretty good. I have chosen not to own gold.
A fool and his money are good for business.

asif408
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Re: Diversification Regret

Post by asif408 » Mon Nov 05, 2018 1:10 pm

Snowjob wrote:
Mon Nov 05, 2018 12:08 am
randomguy wrote:
Sat Nov 03, 2018 7:27 pm
HEDGEFUNDIE wrote:
Fri Nov 02, 2018 11:33 am
I like the approach vineviz.

In practice, there would be a few “capitulation points” where the 100% S&P 500 investor threw in the towel and sold everything due to severe drawdown, capitulations which would not occur as often with a diversified portfolio.

This behavioral-informed comparison would have cumulative returns looking better for the diversified portfolio.
And what about the capitulation points where people give up on every othwr asset? See the why bonds and why international threads.😁 And I am sure in Jan 2000 there were why small value thread.
I wonder if this could be used as behavioral indicator that could inform re-balancing opportunities
Probably not for short-term benefit, but several Boglehead authors have suggested this as a good reason to re-balance or even over rebalance to possibly give a benefit over the long term.

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Taylor Larimore
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Re: Diversification Regret

Post by Taylor Larimore » Mon Nov 05, 2018 5:29 pm

nedsaid wrote:Even Taylor Larimore has dropped International Stocks and TIPS from his portfolio.
A word of explanation may be in order:

International stocks: Up until a few years ago I had both the S&P 500 Index Fund and Total International in my taxable account. I had been withdrawing from my international fund because withdrawals resulted in less capital-gains. Now, all I have left in my taxable account is the S&P fund. I figured that any benefit from International diversification was less important than saving immediate taxes.

TIPS: I dropped our TIPS fund several years ago for simplicity when I realized that Total Bond Market Index Fund was all we needed for safety (It's worst annual return was -2.66% in 1994).

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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fortyofforty
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Re: Diversification Regret

Post by fortyofforty » Mon Nov 05, 2018 6:57 pm

nedsaid wrote:
Mon Nov 05, 2018 12:54 pm
fortyofforty wrote:
Sun Nov 04, 2018 8:49 pm
nedsaid wrote:
Sun Nov 04, 2018 8:11 pm
fortyofforty wrote:
Sun Nov 04, 2018 6:55 pm
nedsaid wrote:
Sun Nov 04, 2018 6:32 pm
No doubt, gold and other precious metals act as portfolio insurance but I think the premium of performance drag isn't worth the diversification benefit. [Emphasis mine.]
Isn't that the essence of the question? Isn't that the crux of this whole discussion?
The other diversifiers discussed here: bonds, International Stocks, Small Value, etc. have positive real returns over time. Gold, over very long periods of time has zero real return over inflation.
So the performance drag of precious metals isn't worth the diversification benefit.
That is the judgement that I have made for my own portfolio. On the other hand the Harry Browne Permanent Portfolio has 25% allocated to Gold and its long term record is pretty good. I have chosen not to own gold.
Sure. Diversification has limits in everyone's portfolio. I think that reveals the personal decisions made as to the risk-reward calculations we all make, including those regarding international equities. It's all part of the same "diversification" spectrum, from a single stock or bond or other asset all the way to trying to own a piece of every investable asset.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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nedsaid
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Re: Diversification Regret

Post by nedsaid » Mon Nov 05, 2018 8:20 pm

Taylor Larimore wrote:
Mon Nov 05, 2018 5:29 pm
nedsaid wrote:Even Taylor Larimore has dropped International Stocks and TIPS from his portfolio.
A word of explanation may be in order:

International stocks: Up until a few years ago I had both the S&P 500 Index Fund and Total International in my taxable account. I had been withdrawing from my international fund because withdrawals resulted in less capital-gains. Now, all I have left in my taxable account is the S&P fund. I figured that any benefit from International diversification was less important than saving immediate taxes.

TIPS: I dropped our TIPS fund several years ago for simplicity when I realized that Total Bond Market Index Fund was all we needed for safety (It's worst annual return was -2.66% in 1994).

Best wishes.
Taylor
Thanks, Taylor. As I remember, you started a thread and explained your exit from International. As you mentioned above, it wasn't because you gave up on the asset class. It was a logical decision. This is what I mean that everyone's situation is different and thus the general advice we give here has to be adapted accordingly.

As far as TIPS, you have also explained your reasoning in previous threads.
A fool and his money are good for business.

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nedsaid
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Re: Diversification Regret

Post by nedsaid » Mon Nov 05, 2018 8:23 pm

fortyofforty wrote:
Mon Nov 05, 2018 6:57 pm
nedsaid wrote:
Mon Nov 05, 2018 12:54 pm
fortyofforty wrote:
Sun Nov 04, 2018 8:49 pm
nedsaid wrote:
Sun Nov 04, 2018 8:11 pm
fortyofforty wrote:
Sun Nov 04, 2018 6:55 pm


Isn't that the essence of the question? Isn't that the crux of this whole discussion?
The other diversifiers discussed here: bonds, International Stocks, Small Value, etc. have positive real returns over time. Gold, over very long periods of time has zero real return over inflation.
So the performance drag of precious metals isn't worth the diversification benefit.
That is the judgement that I have made for my own portfolio. On the other hand the Harry Browne Permanent Portfolio has 25% allocated to Gold and its long term record is pretty good. I have chosen not to own gold.
Sure. Diversification has limits in everyone's portfolio. I think that reveals the personal decisions made as to the risk-reward calculations we all make, including those regarding international equities. It's all part of the same "diversification" spectrum, from a single stock or bond or other asset all the way to trying to own a piece of every investable asset.
I have often joked that if all I cared about was non-correlation with the US Stock Market that I would stuff money into my mattress. I even offered to run a "money in the mattress" mutual fund, minus management expenses. After all, I would need to buy mattresses to stuff investors' money into. There gets to be a point of diminishing returns on diversification. You should have a rationale behind whatever new asset classes you add to your portfolio.
A fool and his money are good for business.

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Re: Diversification Regret

Post by abuss368 » Mon Nov 05, 2018 9:32 pm

Taylor Larimore wrote:
Mon Nov 05, 2018 5:29 pm

A word of explanation may be in order:

International stocks: Up until a few years ago I had both the S&P 500 Index Fund and Total International in my taxable account. I had been withdrawing from my international fund because withdrawals resulted in less capital-gains. Now, all I have left in my taxable account is the S&P fund. I figured that any benefit from International diversification was less important than saving immediate taxes.

TIPS: I dropped our TIPS fund several years ago for simplicity when I realized that Total Bond Market Index Fund was all we needed for safety (It's worst annual return was -2.66% in 1994).

Best wishes.
Taylor
Thanks Taylor. We dropped the Vanguard Intermediate TIPS fund about 10 years ago and consolidated with Total Bond Index. Your right, this excellent fund is all that is needed for safety.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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fortyofforty
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Re: Diversification Regret

Post by fortyofforty » Mon Nov 05, 2018 9:32 pm

nedsaid wrote:
Mon Nov 05, 2018 8:23 pm
fortyofforty wrote:
Mon Nov 05, 2018 6:57 pm
nedsaid wrote:
Mon Nov 05, 2018 12:54 pm
fortyofforty wrote:
Sun Nov 04, 2018 8:49 pm
nedsaid wrote:
Sun Nov 04, 2018 8:11 pm


The other diversifiers discussed here: bonds, International Stocks, Small Value, etc. have positive real returns over time. Gold, over very long periods of time has zero real return over inflation.
So the performance drag of precious metals isn't worth the diversification benefit.
That is the judgement that I have made for my own portfolio. On the other hand the Harry Browne Permanent Portfolio has 25% allocated to Gold and its long term record is pretty good. I have chosen not to own gold.
Sure. Diversification has limits in everyone's portfolio. I think that reveals the personal decisions made as to the risk-reward calculations we all make, including those regarding international equities. It's all part of the same "diversification" spectrum, from a single stock or bond or other asset all the way to trying to own a piece of every investable asset.
I have often joked that if all I cared about was non-correlation with the US Stock Market that I would stuff money into my mattress. I even offered to run a "money in the mattress" mutual fund, minus management expenses. After all, I would need to buy mattresses to stuff investors' money into. There gets to be a point of diminishing returns on diversification. You should have a rationale behind whatever new asset classes you add to your portfolio.
And any you leave out.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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JoMoney
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Re: Diversification Regret

Post by JoMoney » Mon Nov 05, 2018 9:59 pm

nedsaid wrote:
Mon Nov 05, 2018 8:23 pm
...
I have often joked that if all I cared about was non-correlation with the US Stock Market that I would stuff money into my mattress. I even offered to run a "money in the mattress" mutual fund, minus management expenses. After all, I would need to buy mattresses to stuff investors' money into. There gets to be a point of diminishing returns on diversification. You should have a rationale behind whatever new asset classes you add to your portfolio.
It would probably work out better than a commodities fund :oops:
If you want non-correlation, lots of volatility, zero productive return, and willing to take a slight loss for expenses... then you can justify taking a portion of your portfolio to the craps table for "diversification" :mrgreen:
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Diversification Regret

Post by chuckb84 » Mon Nov 05, 2018 10:57 pm

Ged wrote:
Sun Nov 04, 2018 6:49 pm
nisiprius wrote:
Fri Nov 02, 2018 11:43 am
I like the idea and the chart (except for the unnecessary decoration represented by the vertical "brush strokes.")
Edward Tufte would agree.

It really is hard to avoid this emotion but as you gain experience and lose your memory with age it becomes less of a problem.
You beat me to it! Tufte would CERTAINLY agree, and I still remember his seminar I attended (and got all the books!).

On thing I love about this site is that people post DATA, in good visual form and then critique a la Tufte!

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Taylor Larimore
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Re: Diversification Regret

Post by Taylor Larimore » Mon Nov 05, 2018 11:09 pm

Bogleheads:

The Three Fund Portfolio contains over 15,000, non-overlapping, worldwide securities at extremely low cost. This amount of diversification was unthinkable until the introduction by Jack Bogle of total market index funds.

"More diversification" is a term often used by brokers and advisors to help sell another fund--always with higher costs and usually with overlapping securities.
Diversification is the last refuge of the scoundrel. -- Jack Bogle
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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nedsaid
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Re: Diversification Regret

Post by nedsaid » Mon Nov 05, 2018 11:54 pm

Taylor Larimore wrote:
Mon Nov 05, 2018 11:09 pm
Bogleheads:

The Three Fund Portfolio contains over 15,000, non-overlapping, worldwide securities at extremely low cost. This amount of diversification was unthinkable until the introduction by Jack Bogle of total market index funds.

"More diversification" is a term often used by brokers and advisors to help sell another fund--always with higher costs and usually with overlapping securities.
Diversification is the last refuge of the scoundrel. -- Jack Bogle
Best wishes.
Taylor
So who are the scoundrels? My guess is that these are the advisors who sell questionable and expensive investments to investors in the name of diversification.

If you include those investors who factor tilt, then I suppose I am a scoundrel. I don't think that is what you mean as you have said yourself that there are many roads to Dublin.

But yes, a three fund portfolio is a fine portfolio.
A fool and his money are good for business.

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nedsaid
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Re: Diversification Regret

Post by nedsaid » Mon Nov 05, 2018 11:58 pm

JoMoney wrote:
Mon Nov 05, 2018 9:59 pm
nedsaid wrote:
Mon Nov 05, 2018 8:23 pm
...
I have often joked that if all I cared about was non-correlation with the US Stock Market that I would stuff money into my mattress. I even offered to run a "money in the mattress" mutual fund, minus management expenses. After all, I would need to buy mattresses to stuff investors' money into. There gets to be a point of diminishing returns on diversification. You should have a rationale behind whatever new asset classes you add to your portfolio.
It would probably work out better than a commodities fund :oops:
If you want non-correlation, lots of volatility, zero productive return, and willing to take a slight loss for expenses... then you can justify taking a portion of your portfolio to the craps table for "diversification" :mrgreen:
One reason that I don't have precious metals in my portfolio. But yet, the Harry Browne Permanent Portfolio is 25% Gold and it has a good record. Probably part of the trick is continual rebalancing to maintain the 25% Gold. Why this seems to work when Gold has zero real return over very long time periods is beyond me. But Gold, unlike cash stuffed in a mattress, does have intrinsic value and is used as a hedge against the currency. Probably what happens is that Gold probably tends to strengthen during times the dollar is weak versus other strong currencies. Just my guess.

I don't invest in commodity funds either, for much the same reason. Commodities have a real return of minus one percent a year over time. Commodity Futures often produced stock like returns with low correlation to stocks but so much institutional money flooded into these markets that these might have been ruined forever as an asset class.
A fool and his money are good for business.

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Re: Diversification Regret

Post by 2015 » Tue Nov 06, 2018 12:23 am

nedsaid wrote:
Mon Nov 05, 2018 11:54 pm
Taylor Larimore wrote:
Mon Nov 05, 2018 11:09 pm
Bogleheads:

The Three Fund Portfolio contains over 15,000, non-overlapping, worldwide securities at extremely low cost. This amount of diversification was unthinkable until the introduction by Jack Bogle of total market index funds.

"More diversification" is a term often used by brokers and advisors to help sell another fund--always with higher costs and usually with overlapping securities.
Diversification is the last refuge of the scoundrel. -- Jack Bogle
Best wishes.
Taylor

So who are the scoundrels? My guess is that these are the advisors who sell questionable and expensive investments to investors in the name of diversification.

If you include those investors who factor tilt, then I suppose I am a scoundrel. I don't think that is what you mean as you have said yourself that there are many roads to Dublin.

But yes, a three fund portfolio is a fine portfolio.
In my mind, the scoundrels are those that attempt to make the simple complex. By doing so, the overconfident get to stroke their egos, the bloggers, the "good guys", the "well-respecteds", the authors, those that spew link upon link of marketing disguised as financial information, get to pay their bills. I enjoy nothing more than pulling the curtain back on these "Wizards" thereby exposing them for what they are: charlatans. The emperor really doesn't have any clothes on. Really.

Investing is hard. As hard as you make it. Or it's simple. As simple as you make it. Munger has spoken on how he thinks it's insane to try to know everything all the time (which isn't possible), instead of doing nothing most of the time and "loading up" on things that are a "cinch". I would place the 3 fund PF along with rebalancing in markets good and bad in the "cinch" category. I also believe those that focus on process versus outcome will minimize diversification regret.

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Re: Diversification Regret

Post by fortyofforty » Tue Nov 06, 2018 7:27 am

nedsaid wrote:
Mon Nov 05, 2018 11:58 pm
JoMoney wrote:
Mon Nov 05, 2018 9:59 pm
nedsaid wrote:
Mon Nov 05, 2018 8:23 pm
...
I have often joked that if all I cared about was non-correlation with the US Stock Market that I would stuff money into my mattress. I even offered to run a "money in the mattress" mutual fund, minus management expenses. After all, I would need to buy mattresses to stuff investors' money into. There gets to be a point of diminishing returns on diversification. You should have a rationale behind whatever new asset classes you add to your portfolio.
It would probably work out better than a commodities fund :oops:
If you want non-correlation, lots of volatility, zero productive return, and willing to take a slight loss for expenses... then you can justify taking a portion of your portfolio to the craps table for "diversification" :mrgreen:
One reason that I don't have precious metals in my portfolio. But yet, the Harry Browne Permanent Portfolio is 25% Gold and it has a good record. Probably part of the trick is continual rebalancing to maintain the 25% Gold. Why this seems to work when Gold has zero real return over very long time periods is beyond me. But Gold, unlike cash stuffed in a mattress, does have intrinsic value and is used as a hedge against the currency. Probably what happens is that Gold probably tends to strengthen during times the dollar is weak versus other strong currencies. Just my guess.

I don't invest in commodity funds either, for much the same reason. Commodities have a real return of minus one percent a year over time. Commodity Futures often produced stock like returns with low correlation to stocks but so much institutional money flooded into these markets that these might have been ruined forever as an asset class.
Although I agree with your sentiment (I also leave out precious metals and commodities in my portfolio), I disagree that gold has some mystical "intrinsic value".
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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Re: Diversification Regret

Post by TM90 » Tue Nov 06, 2018 3:13 pm

A lot of bogleheads struggle with the returns of international because it has underperformed the US in recent years but international did outperform US from 1986 to 1994, that's 8 years of underperformance for the total stock market, how would you cope? I know the dates are cherry picked but it has happened and it could happen again, I suppose an investor in that time frame would be unhappy about not having enough diversification.

And traditionally (I'm surprised nobody brought this up already) let's not forget about Japan.

It's a global market, although US companies do half of their business overseas the next big thing could come from Europe or the far east.

I'm from Europe and I invest in:
Msci World index
Msci World Small Cap index
Msci Emerging markets IMI index
Barclays Global Aggregate Bond index EUR hedged

I know I won't win and I know I won't lose, it's the essence of indexing and a more modern take on buying the haystack.

But great thread, I had some diversification regret but now I remember why diversification is important, thanks bogleheads! :sharebeer

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Re: Diversification Regret

Post by nedsaid » Wed Nov 07, 2018 7:50 am

2015 wrote:
Tue Nov 06, 2018 12:23 am
nedsaid wrote:
Mon Nov 05, 2018 11:54 pm
Taylor Larimore wrote:
Mon Nov 05, 2018 11:09 pm
Bogleheads:

The Three Fund Portfolio contains over 15,000, non-overlapping, worldwide securities at extremely low cost. This amount of diversification was unthinkable until the introduction by Jack Bogle of total market index funds.

"More diversification" is a term often used by brokers and advisors to help sell another fund--always with higher costs and usually with overlapping securities.
Diversification is the last refuge of the scoundrel. -- Jack Bogle
Best wishes.
Taylor

So who are the scoundrels? My guess is that these are the advisors who sell questionable and expensive investments to investors in the name of diversification.

If you include those investors who factor tilt, then I suppose I am a scoundrel. I don't think that is what you mean as you have said yourself that there are many roads to Dublin.

But yes, a three fund portfolio is a fine portfolio.
In my mind, the scoundrels are those that attempt to make the simple complex. By doing so, the overconfident get to stroke their egos, the bloggers, the "good guys", the "well-respecteds", the authors, those that spew link upon link of marketing disguised as financial information, get to pay their bills. I enjoy nothing more than pulling the curtain back on these "Wizards" thereby exposing them for what they are: charlatans. The emperor really doesn't have any clothes on. Really.

Investing is hard. As hard as you make it. Or it's simple. As simple as you make it. Munger has spoken on how he thinks it's insane to try to know everything all the time (which isn't possible), instead of doing nothing most of the time and "loading up" on things that are a "cinch". I would place the 3 fund PF along with rebalancing in markets good and bad in the "cinch" category. I also believe those that focus on process versus outcome will minimize diversification regret.
This is really a sad post. I guess my question was answered and I got the double down. We drove Larry Swedroe from the forum (again!) and I am losing interest here pretty fast. Also really sad that one of the forum leaders keeps double downing on this comment after an apology only to issue it again. I guess I am one of the scoundrels and knowing how people honestly feel, I have lost interest in discussions here.
A fool and his money are good for business.

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vineviz
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Re: Diversification Regret

Post by vineviz » Wed Nov 07, 2018 8:22 am

It's only a snapshot in time, but I'll leave this here.

Image
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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fortyofforty
Posts: 1150
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Re: Diversification Regret

Post by fortyofforty » Wed Nov 07, 2018 6:12 pm

nedsaid wrote:
Wed Nov 07, 2018 7:50 am
2015 wrote:
Tue Nov 06, 2018 12:23 am
nedsaid wrote:
Mon Nov 05, 2018 11:54 pm
Taylor Larimore wrote:
Mon Nov 05, 2018 11:09 pm
Bogleheads:

The Three Fund Portfolio contains over 15,000, non-overlapping, worldwide securities at extremely low cost. This amount of diversification was unthinkable until the introduction by Jack Bogle of total market index funds.

"More diversification" is a term often used by brokers and advisors to help sell another fund--always with higher costs and usually with overlapping securities.
Diversification is the last refuge of the scoundrel. -- Jack Bogle
Best wishes.
Taylor

So who are the scoundrels? My guess is that these are the advisors who sell questionable and expensive investments to investors in the name of diversification.

If you include those investors who factor tilt, then I suppose I am a scoundrel. I don't think that is what you mean as you have said yourself that there are many roads to Dublin.

But yes, a three fund portfolio is a fine portfolio.
In my mind, the scoundrels are those that attempt to make the simple complex. By doing so, the overconfident get to stroke their egos, the bloggers, the "good guys", the "well-respecteds", the authors, those that spew link upon link of marketing disguised as financial information, get to pay their bills. I enjoy nothing more than pulling the curtain back on these "Wizards" thereby exposing them for what they are: charlatans. The emperor really doesn't have any clothes on. Really.

Investing is hard. As hard as you make it. Or it's simple. As simple as you make it. Munger has spoken on how he thinks it's insane to try to know everything all the time (which isn't possible), instead of doing nothing most of the time and "loading up" on things that are a "cinch". I would place the 3 fund PF along with rebalancing in markets good and bad in the "cinch" category. I also believe those that focus on process versus outcome will minimize diversification regret.
This is really a sad post. I guess my question was answered and I got the double down. We drove Larry Swedroe from the forum (again!) and I am losing interest here pretty fast. Also really sad that one of the forum leaders keeps double downing on this comment after an apology only to issue it again. I guess I am one of the scoundrels and knowing how people honestly feel, I have lost interest in discussions here.
Nah, I doubt you are one of the "scoundrels" (although it's not my term, so I can't speak for the author). You've never tried to sell us something, so I reserve that label for those on the outside who try to charge high fees for poor service, like many traditional brokers. Part of the nature of a forum is the back-and-forth discussion format, often spirited, so it'd be a loss if you left.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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nedsaid
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Re: Diversification Regret

Post by nedsaid » Wed Nov 07, 2018 7:36 pm

fortyofforty wrote:
Wed Nov 07, 2018 6:12 pm
nedsaid wrote:
Wed Nov 07, 2018 7:50 am
2015 wrote:
Tue Nov 06, 2018 12:23 am
nedsaid wrote:
Mon Nov 05, 2018 11:54 pm
Taylor Larimore wrote:
Mon Nov 05, 2018 11:09 pm
Bogleheads:

The Three Fund Portfolio contains over 15,000, non-overlapping, worldwide securities at extremely low cost. This amount of diversification was unthinkable until the introduction by Jack Bogle of total market index funds.

"More diversification" is a term often used by brokers and advisors to help sell another fund--always with higher costs and usually with overlapping securities.



Best wishes.
Taylor

So who are the scoundrels? My guess is that these are the advisors who sell questionable and expensive investments to investors in the name of diversification.

If you include those investors who factor tilt, then I suppose I am a scoundrel. I don't think that is what you mean as you have said yourself that there are many roads to Dublin.

But yes, a three fund portfolio is a fine portfolio.
In my mind, the scoundrels are those that attempt to make the simple complex. By doing so, the overconfident get to stroke their egos, the bloggers, the "good guys", the "well-respecteds", the authors, those that spew link upon link of marketing disguised as financial information, get to pay their bills. I enjoy nothing more than pulling the curtain back on these "Wizards" thereby exposing them for what they are: charlatans. The emperor really doesn't have any clothes on. Really.

Investing is hard. As hard as you make it. Or it's simple. As simple as you make it. Munger has spoken on how he thinks it's insane to try to know everything all the time (which isn't possible), instead of doing nothing most of the time and "loading up" on things that are a "cinch". I would place the 3 fund PF along with rebalancing in markets good and bad in the "cinch" category. I also believe those that focus on process versus outcome will minimize diversification regret.
This is really a sad post. I guess my question was answered and I got the double down. We drove Larry Swedroe from the forum (again!) and I am losing interest here pretty fast. Also really sad that one of the forum leaders keeps double downing on this comment after an apology only to issue it again. I guess I am one of the scoundrels and knowing how people honestly feel, I have lost interest in discussions here.
Nah, I doubt you are one of the "scoundrels" (although it's not my term, so I can't speak for the author). You've never tried to sell us something, so I reserve that label for those on the outside who try to charge high fees for poor service, like many traditional brokers. Part of the nature of a forum is the back-and-forth discussion format, often spirited, so it'd be a loss if you left.
I am not in the investment biz, just share my experiences in hopes that others will learn. So I have no financial interest in pushing certain financial products. As far as Larry Swedroe, I think maybe three forum members are Buckingham clients and his postings here probably generated book sales for him but whatever financial benefit he got here was minimal and certainly way out of proportion to the time he spent here. He has a passion for financial and investment education. The other advisor who posts here a lot is Rick Ferri and I doubt he got any more than a token financial benefit either, perhaps he sold a few books. The others like Bill Bernstein, Paul Merriman, Bill Schultheis, and others post here very infrequently.

Clearly, the line for me got crossed here. Fine to disagree with people here but to call them charlatans was just too much. Don't know why Larry would ever post here again. Sad, just sad. This forum is not a fan club and no one here is a deity or above disagreement. But it does seem silly to chase off distinguished authors who want to make a contribution.

As for me, my portfolio differs in many ways from what Larry would recommend. For example, I still own individual stocks.

Also, we should be able to police ourselves a bit and not let the party get too rowdy. The moderators can't do everything. The forum is actually pretty well moderated. The other thing is that well known advisors have used their real names and not hid behind anonymous avatars. It says something when someone puts their views out publicly under their own name.
A fool and his money are good for business.

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fortyofforty
Posts: 1150
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Re: Diversification Regret

Post by fortyofforty » Wed Nov 07, 2018 8:38 pm

nedsaid wrote:
Wed Nov 07, 2018 7:36 pm
fortyofforty wrote:
Wed Nov 07, 2018 6:12 pm
nedsaid wrote:
Wed Nov 07, 2018 7:50 am
2015 wrote:
Tue Nov 06, 2018 12:23 am
nedsaid wrote:
Mon Nov 05, 2018 11:54 pm



So who are the scoundrels? My guess is that these are the advisors who sell questionable and expensive investments to investors in the name of diversification.

If you include those investors who factor tilt, then I suppose I am a scoundrel. I don't think that is what you mean as you have said yourself that there are many roads to Dublin.

But yes, a three fund portfolio is a fine portfolio.
In my mind, the scoundrels are those that attempt to make the simple complex. By doing so, the overconfident get to stroke their egos, the bloggers, the "good guys", the "well-respecteds", the authors, those that spew link upon link of marketing disguised as financial information, get to pay their bills. I enjoy nothing more than pulling the curtain back on these "Wizards" thereby exposing them for what they are: charlatans. The emperor really doesn't have any clothes on. Really.

Investing is hard. As hard as you make it. Or it's simple. As simple as you make it. Munger has spoken on how he thinks it's insane to try to know everything all the time (which isn't possible), instead of doing nothing most of the time and "loading up" on things that are a "cinch". I would place the 3 fund PF along with rebalancing in markets good and bad in the "cinch" category. I also believe those that focus on process versus outcome will minimize diversification regret.
This is really a sad post. I guess my question was answered and I got the double down. We drove Larry Swedroe from the forum (again!) and I am losing interest here pretty fast. Also really sad that one of the forum leaders keeps double downing on this comment after an apology only to issue it again. I guess I am one of the scoundrels and knowing how people honestly feel, I have lost interest in discussions here.
Nah, I doubt you are one of the "scoundrels" (although it's not my term, so I can't speak for the author). You've never tried to sell us something, so I reserve that label for those on the outside who try to charge high fees for poor service, like many traditional brokers. Part of the nature of a forum is the back-and-forth discussion format, often spirited, so it'd be a loss if you left.
I am not in the investment biz, just share my experiences in hopes that others will learn. So I have no financial interest in pushing certain financial products. As far as Larry Swedroe, I think maybe three forum members are Buckingham clients and his postings here probably generated book sales for him but whatever financial benefit he got here was minimal and certainly way out of proportion to the time he spent here. He has a passion for financial and investment education. The other advisor who posts here a lot is Rick Ferri and I doubt he got any more than a token financial benefit either, perhaps he sold a few books. The others like Bill Bernstein, Paul Merriman, Bill Schultheis, and others post here very infrequently.

Clearly, the line for me got crossed here. Fine to disagree with people here but to call them charlatans was just too much. Don't know why Larry would ever post here again. Sad, just sad. This forum is not a fan club and no one here is a deity or above disagreement. But it does seem silly to chase off distinguished authors who want to make a contribution.

As for me, my portfolio differs in many ways from what Larry would recommend. For example, I still own individual stocks.

Also, we should be able to police ourselves a bit and not let the party get too rowdy. The moderators can't do everything. The forum is actually pretty well moderated. The other thing is that well known advisors have used their real names and not hid behind anonymous avatars. It says something when someone puts their views out publicly under their own name.
It's also great that people like Rick Ferri are willing to come on the forum, present viewpoints, and get challenged on them. It's a great proving ground for ideas, theories, and hypotheses.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

2015
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Re: Diversification Regret

Post by 2015 » Wed Nov 07, 2018 11:50 pm

nedsaid wrote:
Wed Nov 07, 2018 7:50 am
2015 wrote:
Tue Nov 06, 2018 12:23 am
nedsaid wrote:
Mon Nov 05, 2018 11:54 pm
Taylor Larimore wrote:
Mon Nov 05, 2018 11:09 pm
...
Diversification is the last refuge of the scoundrel. -- Jack Bogle
Best wishes.
Taylor

So who are the scoundrels? My guess is that these are the advisors who sell questionable and expensive investments to investors in the name of diversification.

If you include those investors who factor tilt, then I suppose I am a scoundrel. I don't think that is what you mean as you have said yourself that there are many roads to Dublin.

But yes, a three fund portfolio is a fine portfolio.
In my mind, the scoundrels are those that attempt to make the simple complex. By doing so, the overconfident get to stroke their egos, the bloggers, the "good guys", the "well-respecteds", the authors, those that spew link upon link of marketing disguised as financial information, get to pay their bills. I enjoy nothing more than pulling the curtain back on these "Wizards" thereby exposing them for what they are: charlatans. The emperor really doesn't have any clothes on. Really.

Investing is hard. As hard as you make it. Or it's simple. As simple as you make it. Munger has spoken on how he thinks it's insane to try to know everything all the time (which isn't possible), instead of doing nothing most of the time and "loading up" on things that are a "cinch". I would place the 3 fund PF along with rebalancing in markets good and bad in the "cinch" category. I also believe those that focus on process versus outcome will minimize diversification regret.
This is really a sad post. I guess my question was answered and I got the double down. We drove Larry Swedroe from the forum (again!) and I am losing interest here pretty fast. Also really sad that one of the forum leaders keeps double downing on this comment after an apology only to issue it again. I guess I am one of the scoundrels and knowing how people honestly feel, I have lost interest in discussions here.
My post was not directed at you (or anyone) personally, so don't be sad. I'll bet you're really cool :D .

OTOH, not a day goes by I don't read something outside the fields of investing, macroeconomics, and personal finance that doesn't reinforce the idea of the danger inherent in complexity. As history has repeatedly shown, with extremely rare exception, you simply cannot win with complexity in an opaque, ever-changing, and adaptive system such as investing. The single most important concept in relation to any complex adaptive system is that it is an open system, with unknown and unknowable actors, inputs, and outcomes that operate outside one's own system and over which one can never have control. With extremely rare exception, complexity exacerbates any damage one can do to oneself in such a system. I've come to realize those who peddle otherwise, regardless of who they are, have interests diametrically opposed to my own.

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nedsaid
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Re: Diversification Regret

Post by nedsaid » Thu Nov 08, 2018 6:10 am

2015 wrote:
Wed Nov 07, 2018 11:50 pm
nedsaid wrote:
Wed Nov 07, 2018 7:50 am
2015 wrote:
Tue Nov 06, 2018 12:23 am
nedsaid wrote:
Mon Nov 05, 2018 11:54 pm
Taylor Larimore wrote:
Mon Nov 05, 2018 11:09 pm
...



Best wishes.
Taylor

So who are the scoundrels? My guess is that these are the advisors who sell questionable and expensive investments to investors in the name of diversification.

If you include those investors who factor tilt, then I suppose I am a scoundrel. I don't think that is what you mean as you have said yourself that there are many roads to Dublin.

But yes, a three fund portfolio is a fine portfolio.
In my mind, the scoundrels are those that attempt to make the simple complex. By doing so, the overconfident get to stroke their egos, the bloggers, the "good guys", the "well-respecteds", the authors, those that spew link upon link of marketing disguised as financial information, get to pay their bills. I enjoy nothing more than pulling the curtain back on these "Wizards" thereby exposing them for what they are: charlatans. The emperor really doesn't have any clothes on. Really.

Investing is hard. As hard as you make it. Or it's simple. As simple as you make it. Munger has spoken on how he thinks it's insane to try to know everything all the time (which isn't possible), instead of doing nothing most of the time and "loading up" on things that are a "cinch". I would place the 3 fund PF along with rebalancing in markets good and bad in the "cinch" category. I also believe those that focus on process versus outcome will minimize diversification regret.
This is really a sad post. I guess my question was answered and I got the double down. We drove Larry Swedroe from the forum (again!) and I am losing interest here pretty fast. Also really sad that one of the forum leaders keeps double downing on this comment after an apology only to issue it again. I guess I am one of the scoundrels and knowing how people honestly feel, I have lost interest in discussions here.
My post was not directed at you (or anyone) personally, so don't be sad. I'll bet you're really cool :D .

OTOH, not a day goes by I don't read something outside the fields of investing, macroeconomics, and personal finance that doesn't reinforce the idea of the danger inherent in complexity. As history has repeatedly shown, with extremely rare exception, you simply cannot win with complexity in an opaque, ever-changing, and adaptive system such as investing. The single most important concept in relation to any complex adaptive system is that it is an open system, with unknown and unknowable actors, inputs, and outcomes that operate outside one's own system and over which one can never have control. With extremely rare exception, complexity exacerbates any damage one can do to oneself in such a system. I've come to realize those who peddle otherwise, regardless of who they are, have interests diametrically opposed to my own.
I agree that certain financial advisors, like the Edward Jones and the Ameriprise folks, tend to put clients in needlessly complex and expensive portfolios. I have seen a bunch of them here.

Want to point out that Small/Value tilting does not need to be complex and/or expensive. The Coffeehouse portfolio uses relatively few funds and Paul Merriman has a two fund portfolio that does this as well. As I recall, Trevor H has a 4 fund portfolio that does this. I have wondered if the Paul Merriman Ultimate Buy and Hold portfolio is too complex saying the pizza tastes the same no matter how many slices are cut. There is a diminishing diversification benefit to adding more and more asset classes. Problem is, no one knows how little diversification is too little and how much is too much. That is a legitimate area for debate and disagreement.

As far as Larry, it is fair to debate the wisdom of adding alternatives to the portfolio and the wisdom of using semi-liquid interval funds. It is also fair to debate how much value an advisory service adds to the process of portfolio management and what the appropriate price for those services are. Many here feel that advisory services, including Vanguard's, just don't add enough value even at reduced fees. It does boil down to the fact that even the more Boglehead oriented advisors have to make a living and charge for their services.

The complexity vs. simplicity argument is a good one and simplicity tends to win because the markets are pretty darned efficient. The factors are a real thing, they have been known about or suspected by professional investors for decades. Even indexing benefits from factors as the better indexes screen out the stocks with the worst characteristics, screening out the "anti-factors" and the stocks in the "WIld West" where almost anything goes. Market Cap weighting also ensures a tilt towards the largest and most successful companies so I argue that there is a bit of a Quality tilt as well. So if indexing already screens out many of the worst stocks, a good argument can be made that indexing already has done most of the heavy lifting.

So I have been saying that indexing for most investors is plenty good enough and that the expectations from factor tilting should be beating the indexes by 0.50% a year to 1.00% at most. I will take 0.50% a year.

The problem I have had with the discussion is that the words "scoundrel" and "charlatan" are emotionally charged words. They don't apply to the more Boglehead oriented advisors who sincerely believe in their recommendations and have put substantial personal monies into those recommendations. Larry eats his own cooking. Doesn't mean Larry is right but he certainly is not misleading investors. We can also agree to disagree about the academic research. Even though I agree with the research, even I will say that the research isn't perfect.
A fool and his money are good for business.

2015
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Re: Diversification Regret

Post by 2015 » Fri Nov 09, 2018 1:18 am

Taking all emotion out of the equation, what remains is the simple fact that complexity can and does in fact work. Until it doesn't. History has shown this without fail. In any complex adaptive system there is no way to know when the spiked punch bowl, whatever the flavor, will run dry. Why? To quote Brian Tracy, because "six months later the answers have changed."

We live in an age of complex connected systems. Simple logic and rules can no longer explain how to survive in this age. Complex systems exhibit catastrophic behavior when one part affects many others in a domino effect (i.e., the economic meltdown). The world is filled with “systematic irrationalities” and popular, linear explanations do not fit. Complex large systems evolve into a critical, out of balance, state where minor disturbances lead to events, or avalanches of all sizes. As one tries to make predictions further and further into the future, info one needs to gather about the initial conditions increases exponentially. The economy is at best organic, and under these conditions, it is impossible to forecast long term. The clever, complex portfolio or investing strategy becomes its own worst enemy.

To combat the fear of missing out, those that would mix complication with their investing liquor are forever doomed to chasing after the latest discharge from those that peddle complexity. The hamster never gets off the wheel because the wheel never stops. Worse, by hanging on to every word of the complexity pushers those that seek it miss out on the Big Picture everywhere. They remain confined within the shallow limits of investing, personal finance, and economics and miss those forces outside these fields impacting the very complex adaptive system otherwise known as their own life.

pascalwager
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Re: Diversification Regret

Post by pascalwager » Sat Nov 10, 2018 11:03 pm

galeno wrote:
Fri Nov 02, 2018 1:20 pm
When you invest in ONE all world all cap equity fund/ETF (e.g. VT) this worry is null and void.

Bogleheads tend to view equities as USA, non-USA developed, and EM. Each one of those categories can be divided by size (large, mid, and small) and type (growth or value).

When you buy and hold "the entire global equity haystack" one thing is certain. You will NEVER win the equity horse race on a year over year basis.
When I want to know how the "world market" (or market of markets) is doing, I just click on my book-marked Vanguard Total World Stock fund fact sheet to see the daily % change. And sure, I also look at the S&P 500 index and M* style-chart changes since I also have two DFA tilted accounts.
Preferred AA: Total US and foreign stock markets and short-term Treasury fixed income

pascalwager
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Re: Diversification Regret

Post by pascalwager » Sat Nov 10, 2018 11:59 pm

fortyofforty wrote:
Sat Nov 03, 2018 9:02 pm
I regret being "diversified" in international. It's roughly correlated with domestic equities, but just doesn't rise as fast on the way up. It seems to drop just as fast, though. I read learned Bogleheads, led by the namesake himself, declaring that there is no justifiable reason to own international equities. Yet, I continue to pour money into that asset sub class. It might be a mistake and a drag on my portfolio, but I continue on. At what point do you dump an underperformer, and when do you give up on the "experiment" or the "theory" or the "hypothesis", especially when it might be unnecessary overdiversification?
Bill Sharpe might say you hold it for "better or worse". But why not consider Eugene Fama who says international investing is a matter of taste. Or Rex Sinquefield of DFA who said it was unnecessary unless you specifically wanted to have the geographical lower correlation between foreign small companies and US companies.
Preferred AA: Total US and foreign stock markets and short-term Treasury fixed income

Mainlandjones
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Re: Diversification Regret

Post by Mainlandjones » Sun Nov 11, 2018 8:15 am

if you diversify your portfolio away from the S&P index, you should expect your portfolio to underperform when the S&P is doing well, and overperform when the S&P is not doing well. That is the definition and goal of diversification. Understanding this simple concept should mitigate regret.

columbia
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Re: Diversification Regret

Post by columbia » Sun Nov 11, 2018 9:05 am

pascalwager wrote:
Sat Nov 10, 2018 11:59 pm
fortyofforty wrote:
Sat Nov 03, 2018 9:02 pm
I regret being "diversified" in international. It's roughly correlated with domestic equities, but just doesn't rise as fast on the way up. It seems to drop just as fast, though. I read learned Bogleheads, led by the namesake himself, declaring that there is no justifiable reason to own international equities. Yet, I continue to pour money into that asset sub class. It might be a mistake and a drag on my portfolio, but I continue on. At what point do you dump an underperformer, and when do you give up on the "experiment" or the "theory" or the "hypothesis", especially when it might be unnecessary overdiversification?
Bill Sharpe might say you hold it for "better or worse". But why not consider Eugene Fama who says international investing is a matter of taste. Or Rex Sinquefield of DFA who said it was unnecessary unless you specifically wanted to have the geographical lower correlation between foreign small companies and US companies.
2007:
Fama: Anybody who has studied that issue doesn’t come to the conclusion that there are huge opportunities in other markets that don’t exist in the United States. That’s kind of a standard line of international money managers, that the opportunities are better in international markets. That’s certainly not true in developed markets.
In emerging markets, well, I think maybe insiders have more information than they do in domestic markets, but maybe not. In any case, there’s not enough data to know about emerging markets. And the variances are so big it would be impossible to know anyway. When people study money managers in developed markets, they don’t find any evidence that those markets are inefficient … and there’s very little evidence that they’re inefficient in the United States. But I’ve never taken the extreme position that markets are entirely efficient.
https://www.minneapolisfed.org/publicat ... ugene-fama

Aside: He doesn’t sound emotional, irrational or xenophobic. ;)

HEDGEFUNDIE
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Re: Diversification Regret

Post by HEDGEFUNDIE » Sun Nov 11, 2018 9:16 am

columbia wrote:
Sun Nov 11, 2018 9:05 am

2007:
Fama: Anybody who has studied that issue doesn’t come to the conclusion that there are huge opportunities in other markets that don’t exist in the United States. That’s kind of a standard line of international money managers, that the opportunities are better in international markets. That’s certainly not true in developed markets.
In emerging markets, well, I think maybe insiders have more information than they do in domestic markets, but maybe not. In any case, there’s not enough data to know about emerging markets. And the variances are so big it would be impossible to know anyway. When people study money managers in developed markets, they don’t find any evidence that those markets are inefficient … and there’s very little evidence that they’re inefficient in the United States. But I’ve never taken the extreme position that markets are entirely efficient.
https://www.minneapolisfed.org/publicat ... ugene-fama

Aside: He doesn’t sound emotional, irrational or xenophobic. ;)
Way to quote Fama out of context. The question he’s answering is whether international markets are less efficient than domestic markets, and if so whether that would present investors with special opportunities that don’t exist in the US. He wasn’t talking about whether investors should hold international or not.

stan1
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Re: Diversification Regret

Post by stan1 » Sun Nov 11, 2018 9:24 am

We're back to the basics but there are a lot of people who I respect chiming in on this thread.

For Total Stock Market ETF as of 9/30/2018 the Top 10 holdings make up 18.7% of total assets.

Those companies are:
Apple, Microsoft, Amazon, Alphabet, Berkshire Hathaway, Facebook, JP Morgan Chase, Johnson & Johnson, Exxon Mobil, and Bank of America

I can't look at that list and say to myself "that looks diversified" or take the simplistic approach and just say "the market has spoken". Instead I look at it and say to myself "I have 18.7% of my equity holdings in those 10 companies? Wow, that seems concentrated."

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fortyofforty
Posts: 1150
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Re: Diversification Regret

Post by fortyofforty » Mon Nov 12, 2018 7:30 am

pascalwager wrote:
Sat Nov 10, 2018 11:59 pm
fortyofforty wrote:
Sat Nov 03, 2018 9:02 pm
I regret being "diversified" in international. It's roughly correlated with domestic equities, but just doesn't rise as fast on the way up. It seems to drop just as fast, though. I read learned Bogleheads, led by the namesake himself, declaring that there is no justifiable reason to own international equities. Yet, I continue to pour money into that asset sub class. It might be a mistake and a drag on my portfolio, but I continue on. At what point do you dump an underperformer, and when do you give up on the "experiment" or the "theory" or the "hypothesis", especially when it might be unnecessary overdiversification?
Bill Sharpe might say you hold it for "better or worse". But why not consider Eugene Fama who says international investing is a matter of taste. Or Rex Sinquefield of DFA who said it was unnecessary unless you specifically wanted to have the geographical lower correlation between foreign small companies and US companies.
I'm in the Sharpe camp, I guess. I will continue to buy international when it's low(er) and hope the worm turns, eventually. I am not nearly 50/50 like Mr. Market would demand, but at least I'm in.
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Re: Diversification Regret

Post by ReformedSpender » Mon Nov 12, 2018 8:32 am

stan1 wrote:
Sun Nov 11, 2018 9:24 am
We're back to the basics but there are a lot of people who I respect chiming in on this thread.

For Total Stock Market ETF as of 9/30/2018 the Top 10 holdings make up 18.7% of total assets.

Those companies are:
Apple, Microsoft, Amazon, Alphabet, Berkshire Hathaway, Facebook, JP Morgan Chase, Johnson & Johnson, Exxon Mobil, and Bank of America

I can't look at that list and say to myself "that looks diversified" or take the simplistic approach and just say "the market has spoken". Instead I look at it and say to myself "I have 18.7% of my equity holdings in those 10 companies? Wow, that seems concentrated."
Well stated

:beer
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Re: Diversification Regret

Post by Elysium » Mon Nov 12, 2018 8:51 am

I have to agree with Taylor on this one, even though I am personally invested in more than just large cap US stocks, and into disproportionate amount of US Small Value, Mid-Caps, etc. The difference is I do know that I am not diversifying, and instead concentrating by having my own personal weighting into each investment, an active strategy if you may call it, but I am fine with it since this is my strategy.

Just dont' call it diverification like the title of this thread. You are not more diversified when you make Small Value allocation an equal proportion to US Market. SV is just a tiny portion of the US Market, and what you are doing (me too), is overweight it with the expectation of higher returns than market. That's about it, if it weren't for the high expected returns, then there is no need to overweight it. There is another reason actually, that is we suspect what if the market is wrong and not totally efficient, so let's have our own custom slices and call it diversification.

Otherwise there is no backing to these custom slices of 25% this and 15% that, where is the tool that everyone agrees showing the most efficient slicing and dicing allocation. Most people have picked it up from the back of a book by an author or investment FA cooked up, or just figured it in their own mimd.

Do it if you like, as your own personal strategy, just don't pretend it is somehow more diversified and backed by theory.

All of this has been discussed here ad nausem over the years, with academic studies arguing on both sides, with no consensus that overweighting is more diversification.

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Re: Diversification Regret

Post by HEDGEFUNDIE » Mon Nov 12, 2018 9:08 am

Elysium wrote:
Mon Nov 12, 2018 8:51 am
I have to agree with Taylor on this one, even though I am personally invested in more than just large cap US stocks, and into disproportionate amount of US Small Value, Mid-Caps, etc. The difference is I do know that I am not diversifying, and instead concentrating by having my own personal weighting into each investment, an active strategy if you may call it, but I am fine with it since this is my strategy.

Just dont' call it diverification like the title of this thread. You are not more diversified when you make Small Value allocation an equal proportion to US Market. SV is just a tiny portion of the US Market, and what you are doing (me too), is overweight it with the expectation of higher returns than market. That's about it, if it weren't for the high expected returns, then there is no need to overweight it. There is another reason actually, that is we suspect what if the market is wrong and not totally efficient, so let's have our own custom slices and call it diversification.

Otherwise there is no backing to these custom slices of 25% this and 15% that, where is the tool that everyone agrees showing the most efficient slicing and dicing allocation. Most people have picked it up from the back of a book by an author or investment FA cooked up, or just figured it in their own mimd.

Do it if you like, as your own personal strategy, just don't pretend it is somehow more diversified and backed by theory.

All of this has been discussed here ad nausem over the years, with academic studies arguing on both sides, with no consensus that overweighting is more diversification.
Give yourself more credit, you are definitely more diversified than someone who holds TSM alone.

Here is a good analogy. Which is the more diversified diet? The one that includes everything in the grocery store or the one that satisfies each essential food group?

Just because there is more out there to buy does not mean they add any value, to your portfolio or your diet.

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Re: Diversification Regret

Post by fortyofforty » Mon Nov 12, 2018 9:21 am

HEDGEFUNDIE wrote:
Mon Nov 12, 2018 9:08 am
Elysium wrote:
Mon Nov 12, 2018 8:51 am
I have to agree with Taylor on this one, even though I am personally invested in more than just large cap US stocks, and into disproportionate amount of US Small Value, Mid-Caps, etc. The difference is I do know that I am not diversifying, and instead concentrating by having my own personal weighting into each investment, an active strategy if you may call it, but I am fine with it since this is my strategy.

Just dont' call it diverification like the title of this thread. You are not more diversified when you make Small Value allocation an equal proportion to US Market. SV is just a tiny portion of the US Market, and what you are doing (me too), is overweight it with the expectation of higher returns than market. That's about it, if it weren't for the high expected returns, then there is no need to overweight it. There is another reason actually, that is we suspect what if the market is wrong and not totally efficient, so let's have our own custom slices and call it diversification.

Otherwise there is no backing to these custom slices of 25% this and 15% that, where is the tool that everyone agrees showing the most efficient slicing and dicing allocation. Most people have picked it up from the back of a book by an author or investment FA cooked up, or just figured it in their own mimd.

Do it if you like, as your own personal strategy, just don't pretend it is somehow more diversified and backed by theory.

All of this has been discussed here ad nausem over the years, with academic studies arguing on both sides, with no consensus that overweighting is more diversification.
Give yourself more credit, you are definitely more diversified than someone who holds TSM alone.

Here is a good analogy. Which is the more diversified diet? The one that includes everything in the grocery store or the one that satisfies each essential food group?

Just because there is more out there to buy does not mean they add any value, to your portfolio or your diet.
If you expected SCV to provide a return lower than that provided by a capitalization-weighted TSM, would you still add it to your portfolio, to increase "diversification"?

Would you eat equal amounts of pickled pigs feet and hamburger, even though hamburger is far more popular, or would you be better off eating things in a general proportion of how each item sells, including everything (for diversification) but not trying to outguess shoppers' preferences?
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Re: Diversification Regret

Post by HEDGEFUNDIE » Mon Nov 12, 2018 9:26 am

fortyofforty wrote:
Mon Nov 12, 2018 9:21 am

If you expected SCV to provide a return lower than that provided by a capitalization-weighted TSM, would you still add it to your portfolio, to increase "diversification"?

Would you eat equal amounts of pickled pigs feet and hamburger, even though hamburger is far more popular, or would you be better off eating things in a general proportion of how each item sells, including everything (for diversification) but not trying to outguess shoppers' preferences?
There are absolutely assets that I hold that have lower expected returns in order to increase portfolio diversification. Long treasuries, for example, and lately emerging markets bonds.

I don’t buy anything in equal amounts or by popularity, whether it’s investments or food. In both cases I buy what I need to buy to ensure a well-balanced outcome to meet my needs. In the case of groceries that means foods with essential nutrients, and none of the junk food. In the case of investments that means holding a basket of assets that represent uncorrelated risk factors.

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Re: Diversification Regret

Post by Elysium » Mon Nov 12, 2018 10:31 am

HEDGEFUNDIE wrote:
Mon Nov 12, 2018 9:08 am
Elysium wrote:
Mon Nov 12, 2018 8:51 am
I have to agree with Taylor on this one, even though I am personally invested in more than just large cap US stocks, and into disproportionate amount of US Small Value, Mid-Caps, etc. The difference is I do know that I am not diversifying, and instead concentrating by having my own personal weighting into each investment, an active strategy if you may call it, but I am fine with it since this is my strategy.

Just dont' call it diverification like the title of this thread. You are not more diversified when you make Small Value allocation an equal proportion to US Market. SV is just a tiny portion of the US Market, and what you are doing (me too), is overweight it with the expectation of higher returns than market. That's about it, if it weren't for the high expected returns, then there is no need to overweight it. There is another reason actually, that is we suspect what if the market is wrong and not totally efficient, so let's have our own custom slices and call it diversification.

Otherwise there is no backing to these custom slices of 25% this and 15% that, where is the tool that everyone agrees showing the most efficient slicing and dicing allocation. Most people have picked it up from the back of a book by an author or investment FA cooked up, or just figured it in their own mimd.

Do it if you like, as your own personal strategy, just don't pretend it is somehow more diversified and backed by theory.

All of this has been discussed here ad nausem over the years, with academic studies arguing on both sides, with no consensus that overweighting is more diversification.
Give yourself more credit, you are definitely more diversified than someone who holds TSM alone.

Here is a good analogy. Which is the more diversified diet? The one that includes everything in the grocery store or the one that satisfies each essential food group?

Just because there is more out there to buy does not mean they add any value, to your portfolio or your diet.
My point is that theoretically there is no basis to state I am more diversified than the Market with my active decision to overweight assets that are in fact represented in the Market portfolio. There are no academic studies that proves this is in fact more efficient, and in fact there are studies that exists that shows the Market is the most efficient portfolio. Obviously, not everyone agrees, and I know the monte carlo simulation tools exist to arrive at efficient frontier portfolios, however, those are dependent on back testing and very much period dependent. The efficient frontier keeps changing is my understanding, and that means the static portfolios we can come up with that allocates 25% to TSM and 25% to SCV are not based on any theory, just a personal preference. How could we then call it more diversified, when there exists some theory behind the Market being the most efficient portfolio.

My second point is that, it is irrelevant whether I am investing in the most efficient and most theory backed portfolio. All I need is a strategy that works for me reasonably well, it doesn't have to be perfect, most efficient, and most diversified, something that doesn't exist. As Bogle would call it, the enemy of the good plan is the pursuit of the perfect plan. To meet our needs, the Market portfolio would do, and a slice & dice portfolio would also do, so long as we stick to the basic principles of low cost, save enough, invest often, and stay the course.

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Re: Diversification Regret

Post by fortyofforty » Mon Nov 12, 2018 11:08 am

HEDGEFUNDIE wrote:
Mon Nov 12, 2018 9:26 am
fortyofforty wrote:
Mon Nov 12, 2018 9:21 am

If you expected SCV to provide a return lower than that provided by a capitalization-weighted TSM, would you still add it to your portfolio, to increase "diversification"?

Would you eat equal amounts of pickled pigs feet and hamburger, even though hamburger is far more popular, or would you be better off eating things in a general proportion of how each item sells, including everything (for diversification) but not trying to outguess shoppers' preferences?
There are absolutely assets that I hold that have lower expected returns in order to increase portfolio diversification. Long treasuries, for example, and lately emerging markets bonds.

I don’t buy anything in equal amounts or by popularity, whether it’s investments or food. In both cases I buy what I need to buy to ensure a well-balanced outcome to meet my needs. In the case of groceries that means foods with essential nutrients, and none of the junk food. In the case of investments that means holding a basket of assets that represent uncorrelated risk factors.
You are not responding to my specific question. SCV is already represented in a TSM portfolio. Would you add more of it, beyond market weight, if you expected it to perform worse than a capitalization-weighted portfolio? If so, why not recommend SCG?
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Re: Diversification Regret

Post by vineviz » Mon Nov 12, 2018 11:15 am

Elysium wrote:
Mon Nov 12, 2018 10:31 am
My point is that theoretically there is no basis to state I am more diversified than the Market with my active decision to overweight assets that are in fact represented in the Market portfolio. There are no academic studies that proves this is in fact more efficient, and in fact there are studies that exists that shows the Market is the most efficient portfolio.
I urge you to be cautious about confusing "efficient" with "diversification". These terms have very different meanings, and there is a wealth of academic research available that discusses the differences if you're interested.

In early modern portfolio theory, under a certain set of assumptions, the market portfolio was presumed to be a particular kind of efficient: mean-variance efficient or mean-variance optimized. This is the portfolio in which expected return is maximized for a given level of variance (or volatility). In effect, mean-variance optimization is a process of finding a balance between risk and return.

Diversification, on the other hand, is a process of reducing the concentration of risk in a portfolio. It is related but distinct from mean-variance optimization in that it uses different inputs (i.e. expected return is not an input) and a singular goal (spreading out risk).

Mean-variance efficient portfolios have many great qualities, but they are not necessarily maximally diversified. In fact, there is a good amount of academic research which shows that they are often highly concentrated portfolios. This is dramatically true in a multi-factor world in which market return is not the only source of investment risk.

There's also an interesting string of research that extends investor concern about the first two moments of portfolio performance (mean and variance) to higher moments (i.e. skewness and kurtosis). Jondeau and Rockinger (2003) find that for highly risk-averse investors, portfolios optimized for four moments contain significantly different allocations than portfolios optimized for just two moments.
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Re: Diversification Regret

Post by nedsaid » Mon Nov 12, 2018 11:42 am

I did look at the Bogleheads Guide to Investing. There was the discussion of whether it was necessary to invest Internationally or not but there was a table showing the performance of US and International stocks year by year that made a strong case for International diversification. There was discussion about TIPS and REITs and both were included in some of the suggested portfolios. Interesting. It wasn't just my imagination. So my joke about going from 5 funds, to 3 funds, to 2 funds, to 1 fund and ultimately Zero funds was not far off the mark. I have been razzing my fellow Bogleheads a lot about this, we might find that we need diversification after all. It isn't just for scoundrels.
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Re: Diversification Regret

Post by siamond » Mon Nov 12, 2018 12:31 pm

I never bought in the argument that TSM is not diversified enough because it doesn't account for factor diversification. Factors are really artificial academic constructs, which is cool research, but it's just research, where new refined theories emerge every now and then, leading to an increasing zoo of factors, etc... Personally, I tilt (towards Small/Mid Value, EM and Int'l Small) because I expect higher returns and the increased volatility doesn't faze me too much, not for dubious reasons of factor diversification.

This being said, I am starting to better appreciate the point that market cap weighing might not be such an ideal way to diversify. It certainly leads to very concentrated bets on just a few companies nowadays (at least in the US). Plus there is a certain 'success bias' at work in the market cap weighing which rattles me a bit.

My tilts are basically bets on under-represented market segments and companies (e.g. small/troubled/emerging ones) with higher risk/return profiles. I have no intention to change my AA, mind you, but I am starting to appreciate that there is a form of diversification at work that I had not fully perceived when I established my (fixed) AA. I like that.

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Re: Diversification Regret

Post by SGM » Mon Nov 12, 2018 1:16 pm

I think I am fairly well diversified. My portfolio isn't perfect, but it has done well over the long term. Like a lot of long time investors I still have a few individual stocks. Large capital gains make it difficult to sell all of them. At some point when you get older you consider that an heir will get the stock at a higher basis. I am comforted to know that even Jack Bogle has some individual stocks that he bought as a young man.

It seems that a factor can outperform for sometime and then not at another. For me I pick a reasonable strategy and pretty much stick with it. However, I enjoy reading the give and take on the forum.

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