Analysis Paralysis

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K72
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Analysis Paralysis

Post by K72 » Mon Mar 11, 2019 9:38 pm

I'm struggling with the most appropriate use of backtesting in the decision making process of choosing the specific components to achieve my desired AA. Some guidance would be greatly appreciated.

For 13 years I put complete faith in my FA to manage my IRA assets and never really bothered to see how things were doing. After finally computing the return vs risk numbers I moved all my IRA assets to Vanguard and am still sorting out the mess of a dozen mutual funds and 200+ individual stocks. My target AA is somewhere in the 50/50 to 70/30 stock/bond range and I'll likely settle on 60/40, which I hope makes reasonable sense for a 64 year old with no more human capital (i.e. I'm retiring).

Through backtesting I find Wellington an ideal candidate but my logical side (after many hours of reading posts in this great forum) says that putting 100% in one (actively managed) fund may not be wise because it may not do as well in the future. Though the following may be a poor analogy, my FA might have done a great job in the future. We just never know. Anyway, whatever mix I pick of VG funds among Total Stock, Total Bond, Total International Stock, etc. to achieve a 60/40 AA I don't like the subsequent backtest results when compared to Wellington. I picture myself choosing a certain portfolio and being disappointed looking back 10 or 15 years from today. I'm thus in a stalemate and keep doing more analysis without making any decisions. I actually don't see how it is practical to ignore the past results. I also guess I'm more than a bit sensitive after being out-to-lunch for the past 13 years.
Last edited by K72 on Tue Mar 12, 2019 2:19 pm, edited 1 time in total.

livesoft
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Re: Analysis Paralysis

Post by livesoft » Mon Mar 11, 2019 9:42 pm

Can you put past results in context? For instance, Wellington may have done well mostly because interest rates have dropped significantly since the early 1980s. Will they drop that significantly going forward? I think you can agree that the answer to that is: No, they cannot.

I don't bother with backtesting of index funds at all. You get what they give you and what they give everybody else. Done. Go out to lunch.

And one more thing: It appears that it doesn't matter what return you get, so stop agonalyzing about it.
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camillus
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Re: Analysis Paralysis

Post by camillus » Mon Mar 11, 2019 9:45 pm

Here’s Vanguard’s 60/40 lifestrategy fund.
https://investor.vanguard.com/mutual-fu ... file/VSMGX

What was the question?

tibbitts
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Re: Analysis Paralysis

Post by tibbitts » Mon Mar 11, 2019 9:52 pm

K72 wrote:
Mon Mar 11, 2019 9:38 pm
I'm struggling with the most appropriate use of backtesting in the decision making process of choosing the specific components to achieve my desired AA. Some guidance would be greatly appreciated.

For 13 years I put complete faith in my FA to manage my IRA assets and never really bothered to see how things were doing. After finally computing the return vs risk numbers I moved all my IRA assets to Vanguard and am still sorting out the mess of a dozen mutual funds and 200+ individual stocks. My target AA is somewhere in the 50/50 to 70/30 stock/bond range and I'll likely settle on 60/40, which I hope makes reasonable sense for a 64 year old with no more human capital (i.e. I'm retiring). The pensions my wife and I receive more than cover our basic expenses and about 85% of total expenses including entertainment, travel, etc. We plan to wait until 70 to start SS.

Through backtesting I find Wellington an ideal candidate but my logical side (after many hours of reading posts in this great forum) says that putting 100% in one (actively managed) fund may not be wise because it may not do as well in the future. Though the following may be a poor analogy, my FA might have done a great job in the future. We just never know. Anyway, whatever mix I pick of VG funds among Total Stock, Total Bond, Total International Stock, etc. to achieve a 60/40 AA I don't like the subsequent backtest results when compared to Wellington. I picture myself choosing a certain portfolio and being disappointed looking back 10 or 15 years from today. I'm thus in a stalemate and keep doing more analysis without making any decisions. I actually don't see how it is practical to ignore the past results. I also guess I'm more than a bit sensitive after being out-to-lunch for the past 13 years.
The odds are 99% that you'll be disappointed when you look back, no matter what you do, if disappointed means discovering you didn't make an optimal choice. How would you have felt about owning Wellington in, oh, the 1960s?

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whodidntante
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Re: Analysis Paralysis

Post by whodidntante » Mon Mar 11, 2019 10:02 pm

Wellington holds USA/DM large value stocks, and intermediate term, moderate credit risk bonds. It has low expenses for an actively managed fund and is highly regarded on this forum. I happen to think that manager risk and style drift are real things, so that would be my main concern about the fund. That is enough for me to avoid it, and I have, although I do agree it looks nice in a back test.

I would buy a passive portfolio of index funds that support your desired asset allocation, and implement that portfolio as tax efficiently as possible.

jbranx
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Re: Analysis Paralysis

Post by jbranx » Mon Mar 11, 2019 10:17 pm

I own Wellington (and Wellesley) and Global Wellington and appreciate very much the returns John Neff and the Wellington team have provided me over the decades. However, I would never put more than 10-20% of my assets in one fund. Expense is much higher than index funds. There is always manager risk and risk that large value and corporate bonds will not be the best returning assets in the future. To get off the stalemate, just put some percentage in Wellington and the remainder in the Three Fund index funds or Four Funds, counting reits (VNQ and VNQI). Given that you already have your expenses covered, this combination should provide a decent dividend flow and cap gains over your retirement horizon, at least keeping up with or maybe exceeding inflation. I'm currently at about 50/50 in a portfolio like above, and twelve years into retirement I have more total assets than I did on my retirement date. And we've done plenty of travel and otherwise enjoying ourselves.

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Cyclesafe
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Re: Analysis Paralysis

Post by Cyclesafe » Tue Mar 12, 2019 7:50 am

What to say? You ditched your skimming financial advisor and are choosing between a proper-for-you allocation among index funds or lower-cost-highly regarded managed funds. There is no right answer because you don't have a time machine.

What is certain is that with the latter, your costs will be higher every year. Game it out ten years and the effect - at equal after-tax performance - is substantial. It doesn't matter what back testing shows. Don't set yourself up for disappointment. Managed funds will NOT beat the market every year. There's plenty of data that shows this.

Besides, differing returns in the past generally are due to differing asset allocations yielding differing risk/return tradeoffs.

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ruralavalon
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Re: Analysis Paralysis

Post by ruralavalon » Tue Mar 12, 2019 11:23 am

K72 wrote:
Mon Mar 11, 2019 9:38 pm
I'm struggling with the most appropriate use of backtesting in the decision making process of choosing the specific components to achieve my desired AA. Some guidance would be greatly appreciated.
. . . . .
. . . I'm thus in a stalemate and keep doing more analysis without making any decisions. I actually don't see how it is practical to ignore the past results. I also guess I'm more than a bit sensitive after being out-to-lunch for the past 13 years.
I don't use backtesting as a significant part of fund selection, it's about the last thing I look at. When using backtesting I look at how a fund acted in the last few market crises, 2000 and 2008, look at the whole at time the fund has existed, and look at whether it performed well only when young and nimble.

For me more important factors include:
1) broad diversification;
2) low expense ratios;
3) tax-efficiency if a taxable account is involved;
4) simplicity;
5) a general preference for good index funds over good actively managed funds; and
6) how long the fund has existed, and the quality of the firm operating the fund.


K72 wrote:
Mon Mar 11, 2019 9:38 pm
For 13 years I put complete faith in my FA to manage my IRA assets and never really bothered to see how things were doing. After finally computing the return vs risk numbers I moved all my IRA assets to Vanguard and am still sorting out the mess of a dozen mutual funds and 200+ individual stocks. My target AA is somewhere in the 50/50 to 70/30 stock/bond range and I'll likely settle on 60/40, which I hope makes reasonable sense for a 64 year old with no more human capital (i.e. I'm retiring). The pensions my wife and I receive more than cover our basic expenses and about 85% of total expenses including entertainment, travel, etc. We plan to wait until 70 to start SS.

Through backtesting I find Wellington an ideal candidate but my logical side (after many hours of reading posts in this great forum) says that putting 100% in one (actively managed) fund may not be wise because it may not do as well in the future. Though the following may be a poor analogy, my FA might have done a great job in the future. We just never know. Anyway, whatever mix I pick of VG funds among Total Stock, Total Bond, Total International Stock, etc. to achieve a 60/40 AA I don't like the subsequent backtest results when compared to Wellington. I picture myself choosing a certain portfolio and being disappointed looking back 10 or 15 years from today. . . . . . .
At age 64 and retiring with pensions adequate to cover expenses, your desired asset allocation ("somewhere in the 50/50 to 70/30 stock/bond range and I'll likely settle on 60/40") is reasonable in my opinion.

What sort of account(s) do you have? Is this only tax-advantaged accounts, or is a taxable brokerage account involved?

Vanguard Wellington Fund Admiral Shares (VWENX) ER 0.17% is an excellent, actively managed, well diversified (96 stocks, 933 bonds), balanced fund (65/35 equity/fixed income), with a very long history (90 years), very reputable management, and a low expense ratio.

As mentioned I have a general preference for good index funds over even a good actively managed fund, so my suggestion would be a three-fund portfolio using the three Vanguard total market index funds. (This is my own personal way out of "analysis paralysis", total market index funds as the default position.) At age 64 and retiring with pensions adequate to cover expenses you could just stop agonizing about it, make a decsion, and move on to enjoy your retirement.

I don't see anything wrong with using Vanguard Wellington Fund as your only fund if only tax-advantaged accounts are involved.

If a significant taxable brokerage account is involved then in my opinion it's likely better to use the three-fund portfolio, with very tax-efficient stock index funds in the taxable account. Wiki article, "Tax-efficient Fund Placement".
Last edited by ruralavalon on Tue Mar 12, 2019 12:22 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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FelixTheCat
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Re: Analysis Paralysis

Post by FelixTheCat » Tue Mar 12, 2019 12:14 pm

I understand analysis paralysis. You are trying to picture the perfect portfolio for your situation.

Start with Vanguard's Asset Allocation tool https://personal.vanguard.com/us/FundsInvQuestionnaire

Next look at Boglehead tax efficiency https://www.bogleheads.org/wiki/Tax-eff ... _placement

Then try back testing with Portfolio Visualizer https://www.portfoliovisualizer.com/backtest-portfolio

Is your brain hurting yet? I understand because I was there at one time. Eventually, you will need to enact your plan and be able to sleep at night. If you have the right AA, you don't even think about your portfolio when the market moves.

I suggest you talk to a Vanguard Financial Advisor to hash out a plan that is good for you.
Felix is a wonderful, wonderful cat.

Dandy
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Re: Analysis Paralysis

Post by Dandy » Tue Mar 12, 2019 3:47 pm

Balanced Index is a nice 60/40 fund that I use. It lacks International. So you could add some Total International Stock Fund and enough Total Bond Fund to keep the allocation at 60/40. That would give you a nice, low cost 3 fund portfolio that is mostly self balancing. Send all distributions to cash and use that to tweak any re balancing needed.

The Balanced Index Fund performance over the last 10 years compares favorably to Wellington and at a low expense ratio.

megabad
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Re: Analysis Paralysis

Post by megabad » Tue Mar 12, 2019 4:04 pm

If the only reason you are investing in Wellington over Balanced is because of past performance than I think that is probably not a good reason. You might choose such a fund because you will believe it will outperform in the future though.

That said, I think Wellington is a fine fund. It is very low fee for an active fund. I would have no problem putting a huge swath of a tax advantaged portfolio in it if that was my desired asset allocation. I would not consider it for taxable account though.

pward
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Re: Analysis Paralysis

Post by pward » Tue Mar 12, 2019 4:56 pm

Wellington is fine if you just want to pick one fund and be done with it.

That being said, doing your own index 60/40 would be fine as well. Nobody knows which will perform better in the future.

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Stinky
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Re: Analysis Paralysis

Post by Stinky » Tue Mar 12, 2019 5:05 pm

Congratulations to you in getting away from the financial advisor who put you into a dozen mutual funds and 200+ individual stocks. You’ve already taken the first, biggest step toward taking control of your future and improving your results, by getting rid of the fee drag and trading costs.

There’s no single right answer for the future. Three fund approach, a single balanced fund, or Wellington are all plausible choices.
It's a GREAT day to be alive - Travis Tritt

Thesaints
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Re: Analysis Paralysis

Post by Thesaints » Tue Mar 12, 2019 5:16 pm

K72 wrote:
Mon Mar 11, 2019 9:38 pm
I actually don't see how it is practical to ignore the past results. I also guess I'm more than a bit sensitive after being out-to-lunch for the past 13 years.
Don't ignore them, but be sure to use them correctly. Backtesting is only useful in giving you an idea of possible future outcomes. It often gives you little information in figuring out which of the possible outcomes is more likely to eventually take place.
In short, a fund's history gives you a much more precise (but I should say "less fuzzy") information on its future volatility, than on its future return.

KlangFool
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Re: Analysis Paralysis

Post by KlangFool » Tue Mar 12, 2019 5:22 pm

OP,

I do all 3:

A) 40% of my portfolio is in the Wellington Fund

B) 40% of my portfolio is in the 3 funds

C) 20% of my portfolio is in the Larry portfolio.

No, I do not use back testing at all.

KlangFool

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K72
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Re: Analysis Paralysis

Post by K72 » Thu Mar 14, 2019 10:30 pm

Many thanks to those who replied! I've read every one and will likely do so many times more to absorb everything. My current thought just to get started is to keep things super simple and initially allocate my tax-advantaged assets as follows:

40% in Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
60% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

while I continue to get educated by reading several books I've purchased based on this forum and of course reading much more in this forum. Is this approach reasonable?

jbranx
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Re: Analysis Paralysis

Post by jbranx » Thu Mar 14, 2019 10:40 pm

K72 wrote:
Thu Mar 14, 2019 10:30 pm
Many thanks to those who replied! I've read every one and will likely do so many times more to absorb everything. My current thought just to get started is to keep things super simple and initially allocate my tax-advantaged assets as follows:

40% in Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
60% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

while I continue to get educated by reading several books I've purchased based on this forum and of course reading much more in this forum. Is this approach reasonable?
Very reasonable in my view. As you do further research, you may want to determine what allocation--if any--to non-US stocks. That topic is well vetted on this site and on Vanguard.com. Congratulations and best wishes.

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ruralavalon
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Re: Analysis Paralysis

Post by ruralavalon » Fri Mar 15, 2019 7:27 am

K72 wrote:
Thu Mar 14, 2019 10:30 pm
Many thanks to those who replied! I've read every one and will likely do so many times more to absorb everything. My current thought just to get started is to keep things super simple and initially allocate my tax-advantaged assets as follows:

40% in Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
60% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

while I continue to get educated by reading several books I've purchased based on this forum and of course reading much more in this forum. Is this approach reasonable?
Yes, that is a very reasonable approach at age 64 and retiring.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Stinky
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Re: Analysis Paralysis

Post by Stinky » Fri Mar 15, 2019 8:46 am

K72 wrote:
Thu Mar 14, 2019 10:30 pm
Many thanks to those who replied! I've read every one and will likely do so many times more to absorb everything. My current thought just to get started is to keep things super simple and initially allocate my tax-advantaged assets as follows:

40% in Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
60% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

while I continue to get educated by reading several books I've purchased based on this forum and of course reading much more in this forum. Is this approach reasonable?
Excellent plan.

Keep reading the Forum. I learn something from the smart people who post here every day, and I expect you will too.
It's a GREAT day to be alive - Travis Tritt

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