I would like to start the discussion on how to manage risk with mutual fund portfolio.
My main concern is how to protect the portfolio from a debacle similar to 2001 or 2008 and of course how to decide that it is a real danger.
I see a few different options and invite different opinions
1. Do nothing and rely on fund managers ability to manage risk.
2. Go partially to cash by selling some funds.
3. Reallocate portfolio to use more defensive funds like bond funds.
4. Take short position by buying bear funds.
Comments
# 1. Yes
#2. No
#3. Yes
#.4 Never !
Regards,
Ted
Linkster Ted often refers to his investments as being part of his "Capital Preservation" account or his "Capital Appreciation" account. I would add one more to his list of accounts and I'll call it a "Capital Spending" account. Thinking in these terms starts to sound like a plan is in place. Here's some thoughts on how I see this plan from my perspective.
Capital you need today, tomorrow, and maybe over the next 1-3 years should reside in this "Capital Spending" account. For retirees this might include a pension, an annuity, a SS payment, or an investment distribution...basically a periodic stream of money that takes care of your periodic needs. If you are working, this is your paycheck and your emergency savings. Keep this money in FDIC insured accounts...keep it flexible...keep it accessible...keep it safe.
Next, if there is extra savings beyond your short term needs (1-3 year time horizon) than I would set an investment goal that at least keeps up with inflation or a 2% return. This adds some risk, but it can be safely managed with strategies like laddering bonds or cds, as well as owning a few conservative allocation mutual funds. I would consider funds like VWINX, VWELX, BUFBX, and others. The investment time horizon for these funds is 3-5 year. Hopefuly a portion of your "fruit" from this "Capital Preservation" account can be picked periodically to replenish your "Capital Needs" account.
Finally, if you are lucky enough to have additional monies to invest...think long term....5-10 years or longer...move further out on the diving board....try to buy when the board is low...think, emerging markets and precious mining funds right now (they are under performing). Rebalance when the board in high... jump some money off when you reach a personal goal...have some fun with these rewards...stimulate the economy.
Over the long term this "Capital Appreciation" account will grow some of your money and provide needed resources to keep you other two accounts funded. Make action goals (rules to follow) for this account. One rule could be, "I will fully fund my other two accounts with a gain of 10% or more regardless of timeframe."
Hope others chime in.
Regards,
Ted
Just passing along what I pick up from you and other here at MFO (David, rono, catch22, scott, ted again, Charles, Old Joe, msf, Bob C, Skeeter, Max, ted again,Kenster, et al)....thanks all
My understanding these two accounts can be inside of one portfolio. If that portfolio has 60/40 asset allocation how would you divide it between "Capital Appreciation" and "Capital Preservation" accounts and what asset allocation each account should have?
1. Keep investments about 50/50 bonds and stocks. Bitter experience has taught me that I can't time the market.
2. Go global. Not only can I not time the market, I can't tell whether Europe's going to outperform America, the dollar's going to underperform the yen, or anything else! Let the fund managers worry about all that.
3. Depend on the fund managers to ultimately control risk, but make sure that they're actually fund managers who concern themselves with risk. David has had some nice comments about this concerning that Beck, Oliver fund he's profiled. I'm pretty sure that the global funds from places like Tweedy, Browne and Perkins and FPA really do concern themselves about risk (one sign is to check the amount of cash they have at the moment), and I'm pretty sure that they'll do a lot better job of it than I would. I'll say the same thing about the Ivy Global Bond Fund (IVSIX) (one sign here is to check the duration). Seems to me that funds that shoot the lights out one year (or during one bull market) can get you killed the next.
I guess its your choice of how you organize your accounts, but personally I like distinct and different locations (accounts) because to me they have different purposes. If they are both in a IRA status just separate them into distinctive accounts.
Owning these two funds (VWELX & VWINX) achieve this. I'm sure other funds would achieve this kind of success as well over long time frames.
Here's how they performed over the last 40 years in ten year increments:
1970 - 1980
1980 - 1990
1990 - 2000
2000 - present
Do you think risk management approach utilized by fund families Tweedy, Browne, Perkins and FPA is more or less the same for different funds in the same family?
On the second, it depends on the family. Tweedy, Browne has the same team manage each fund and they use the same discipline with each. F P A has six different strategies, two of which (absolute return income, SMid-quality growth) are quite distinct from the others.
In general, "absolute value" managers buy only when they find compelling values. Many of them have found nothing attractive in months, and have let huge cash warchests accumulate. These folks offer fair downside protection, though at the cost of some upside. Such managers include Mr. Romick at F P A Crescent (FPACX), Messrs Cook and Bynum of Cook & Bynum (COBYX), Mr. Pye of F P A International Value, Mr. Dodson of Bretton (BRTNX), Mr. Cinnamond of Aston River Road Independent Value (ARIVX) and Mr. Wydra of Beck, Mack. They often have very fine five (ten, fifteen and twenty) year years, but often look like slack witted losers in the one-to-three year range.
On the general topic of risk management, you might look at a long/short fund. I have a minuscule position in Aston River Road Long/Short (ARLSX), which I opened as a way of motivating much closer examination of the fund. We've already profiled it and I wouldn't be surprised to find myself move more money in before too long.
For what it's worth,
David
I am new to MF investments.
As a practical question for those of you who outsourced risk management functions to fund managers:
Did you have the guts not to sell your funds in 2008-2009 and follow a passive approach?
What level of conviction to fund manager competency we should have to do that?
Plan to put most of it into RSIVX and try to control my impatience.
My pending buys require a 10% correction.
Haven't reduced my stocks, probably a mistake, but I'm not paying 1-1.5% a year for them, and most pay a dividend.
Didn't sell in 2008-9, but was younger then. Won't sell if it happens within 3 years. Plan to be more balanced after that.
Fund managers generally did no better than the indexes in 2008-9. Those with significant cash now are preparing for the next correction, so they might be worth buying.
Depending on your age and risk acceptance, using index funds with 50-70% US stocks and the remainder of your stocks in international indexes, and 20% (high risk acceptance) in bonds (most writers suggest all US, but I like some international thru Vanguard), or 40% bonds (usual ratio)) has been good in the past. If near retirement, Social Security represents a bond equivalent, as per John Bogle, who has a lot more experience and is older than I, so you should shade your investments more toward stocks.
True, certainly a solid way to go. Not much foreign, either stocks or bonds, in there, though. You could argue that they're mostly global companies, of course.
Elaborating a bit on what David said, TWEBX has the widest latitude with the same investment team, so I'd prefer that one from Tweedy. The only thing wrong with the family seems to be the expense ratios, but the extremely low turnover somewhat makes up for that.
Thinking of JPPIX from Perkins: Perkins is associated with Janus, and the manager of JPPIX moved over from Janus. I should think that the Perkins connection would only strengthen the domestic side of the fund. JPPIX lost less than the category in 2008 (a high -37.83, though. I don't expect miracles from long only funds, but I do expect outperformance during bear markets). It has a 'low' risk rating from Morningstar, high 5 year Sortino, and is 16% cash now. Can't say that the Janus connection thrills me, but I've never found anything wrong to say against Perkins.
FPRAX is no doubt the most speculative since the managers are new and the strategy is new, but Py, the international manager, is from Oakmark (good), got by the screen of being hired by FPA (good), and clearly runs the international fund conservatively (currently 38% cash, and with decent returns anyway). Herr I can't say I know much about other than he got hired by FPA and earned a promotion by working on Perennial and Paramount for the last 5 years or so. So I think it's a good bet to assume that he's no gunslinger, either.
I think you can get a good idea of how these people think from reading their fund reports, special papers, anything they have on their sites. Practically all funds say that their cash positions are residues of their fund processes, but so long into a bull market I'd kinda like their fund processes to be producing significant cash positions now. A lot of funds say that they'll go anywhere for bargains, but they have to be small enough to seriously go into small stocks if that's where the bargains are. Oh, I think I'm rambling now! Hope what I've said is helpful.