Random Walk portfolio for 50-something?

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Topic Author
IslandTime
Posts: 134
Joined: Fri Jan 25, 2019 6:25 pm
Location: New Hampshire

Random Walk portfolio for 50-something?

Post by IslandTime »

I was reading Burt Malkiels 13th edition of a Random Walk. He recommends for a portfolio mid 50's aged investor:

stocks
-27% US stocks
-14% developed international markets
-14% emerging international markets

bond and bond substitutes
-7.5% long term corp bonds
-7.5% emerging market bonds
-12.5% Dividend growth fund

reits
-12.5% reit index

cash
-5%

It's interesting he puts a dividend stock growth fund under bond and bond substitutes. I would put that in the stock category in terms of risk. The problem with substituting a dividend growth index fund for bonds is that that in a market crash the price of the fund could crash too. So makes portfolio a lot more volatile. People agree? Anyone agree with adding a dividend growth fund as a bond subsititue?

And furthermore, I read so much that you should never search just for dividend stocks. Instead you want the best stocks for "total return". Earnings are what is important, not if they pay a big dividend. So I'm a bit perplexed by Burt Malkiels thinking here with the dividend growth fund.

Odd he doesn't have any short term treasury bonds for the bond portion (which I prefer). Interesting he has 7.5% towards emerging market bonds too.

Thoughts on his portfolio?
livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Random Walk portfolio for 50-something?

Post by livesoft »

His suggested portfolio is just one of many such portfolio. I wouldn't waste any more time with it.

What other portfolios are you looking at? What did you think about them?

(OK, I see your prefer some ST treasury bonds.)
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dbr
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Re: Random Walk portfolio for 50-something?

Post by dbr »

With all due respect to Dr. Malkiel whenever I see an example like that the response is that's interesting but no one is actually going to do that.

There are hundreds of variations that can be generated out of all the elements available for investing and no good reasons to pick exactly any single one.

Classifying dividend stocks as bonds is not likely to get a lot of traction with opinion here.

But, more directly, what actually is that AA and does it work. You basically have 80% in stocks and 20% in bonds because REITS and dividend funds are stocks so far as risk is concerned and cash and bonds are bonds. There is a reasonable allocation of international stocks relative to the whole.

Emerging market stocks and bonds are represented to a degree that might be called a fringe portfolio. The same is true of using long bonds though the financial theory to do that with lots of stocks and at that age is possibly completely justified. Most people don't do that.

Tilting to extra REITs is controversial and goes in and out of style. These days that idea might seem a little quaint. That does not mean it does not make sense.

To invest in a portfolio like this you need to dig back into the rationale for it and be sure you are clear on what to expect and why. It is also a very tough job to show that a portfolio this specifically spread out away from a total market portfolio actually is a better choice than simple total market index funds. First check what Malkiel is saying about why one would choose this portfolio.
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JoMoney
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Re: Random Walk portfolio for 50-something?

Post by JoMoney »

IslandTime wrote: Tue Jan 24, 2023 8:38 am...
And furthermore, I read so much that you should never search just for dividend stocks. Instead you want the best stocks for "total return". Earnings are what is important, not if they pay a big dividend. So I'm a bit perplexed by Burt Malkiels thinking here with the dividend growth fund.
...
You may want the best stocks for "total return", but there is no agreement on which stocks will offer that. There are lots of people on this board that believe "small value" stocks will do that. There are lots of theories out there. You might believe that "earnings are what is important", but not that long ago some of the highest returns could be found in stocks with no earnings at all.
A dividend growth fund is not the same as one that pays "a big dividend", a dividend growth fund is one focused on stocks that have a history of or expected to grow their dividend. Sometimes that results in a portfolio with a lower dividend than the broad market.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Topic Author
IslandTime
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Joined: Fri Jan 25, 2019 6:25 pm
Location: New Hampshire

Re: Random Walk portfolio for 50-something?

Post by IslandTime »

JoMoney wrote: Tue Jan 24, 2023 9:10 am
IslandTime wrote: Tue Jan 24, 2023 8:38 am...
And furthermore, I read so much that you should never search just for dividend stocks. Instead you want the best stocks for "total return". Earnings are what is important, not if they pay a big dividend. So I'm a bit perplexed by Burt Malkiels thinking here with the dividend growth fund.
...
You may want the best stocks for "total return", but there is no agreement on which stocks will offer that. There are lots of people on this board that believe "small value" stocks will do that. There are lots of theories out there. You might believe that "earnings are what is important", but not that long ago some of the highest returns could be found in stocks with no earnings at all.
A dividend growth fund is not the same as one that pays "a big dividend", a dividend growth fund is one focused on stocks that have a history of or expected to grow their dividend. Sometimes that results in a portfolio with a lower dividend than the broad market.
If a "total return" approach is superior why would anyone want to even have a dividend etf in a portfolio? Dividends don't have any explanatory power in total returns.
livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Random Walk portfolio for 50-something?

Post by livesoft »

IslandTime wrote: Tue Jan 24, 2023 9:35 amIf a "total return" approach is superior why would anyone want to even have a dividend etf in a portfolio? Dividends don't have any explanatory power in total returns.
I wouldn't want a dividend ETF in my portfolio, but many people have emotional and expressive needs that are not rational to me so they seek out dividend funds. Take a look at Meir Statman's book "Finance for Normal People" for more on this.
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Raspberry-503
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Re: Random Walk portfolio for 50-something?

Post by Raspberry-503 »

Lookup "Yield Shield" and how some people view dividends as an alternate way to generate fixed income. The author of "Quit like a Millionaire" argues that companies continue paying dividends even in down markets so as long as you don't sell the stock during said down-market, you don't care about share value and continue getting a cash stream.

Whether you buy the arguments and counterarguments is something you'll have to figure out by yourself.
secondopinion
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Re: Random Walk portfolio for 50-something?

Post by secondopinion »

IslandTime wrote: Tue Jan 24, 2023 9:35 am
JoMoney wrote: Tue Jan 24, 2023 9:10 am
IslandTime wrote: Tue Jan 24, 2023 8:38 am...
And furthermore, I read so much that you should never search just for dividend stocks. Instead you want the best stocks for "total return". Earnings are what is important, not if they pay a big dividend. So I'm a bit perplexed by Burt Malkiels thinking here with the dividend growth fund.
...
You may want the best stocks for "total return", but there is no agreement on which stocks will offer that. There are lots of people on this board that believe "small value" stocks will do that. There are lots of theories out there. You might believe that "earnings are what is important", but not that long ago some of the highest returns could be found in stocks with no earnings at all.
A dividend growth fund is not the same as one that pays "a big dividend", a dividend growth fund is one focused on stocks that have a history of or expected to grow their dividend. Sometimes that results in a portfolio with a lower dividend than the broad market.
If a "total return" approach is superior why would anyone want to even have a dividend etf in a portfolio? Dividends don't have any explanatory power in total returns.
Right, but remember that dividends are efficiently returned to the investor (no bid-ask spread, no commissions, not subject to what the market is doing for the day, no risk of wash sales). For some investors, this is harmless and even helps their process of reallocating/withdrawing money. The only time it is not efficient is if the investor is tax-sensitive, they want to accumulate capital gains, or is just going to reinvest in the company anyway. Much of this is minor in practice, but not always is it so.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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