I am close to an arrangement with a financial planner to manage half my retirement portfolio. I recently retired, am in my mid-60s and need someone trustworthy to assist my spouse after my death. I have told the planner I want to keep half the portfolio allocated in an existing IRA with three Vanguard index funds -- 50 percent in Total Stock Mkt (VTSAX), 40 percent in Total Bond Mkt (VBTLX) and 10 percent in Total International Stock Mkt (VGTSX). So that leaves the remaining half of the portfolio for the planner to advise. My prerequisites are no-loads, a 5-year track record and minimum three M*s. Considering how the Vanguard half is allocated, what would be a moderate risk allocation of about eight more funds or indexes to round this out? Thank you.

Hi Guys,
Early each year for the past 17 years, Dalbar releases a report that measures the market performance of individual investors against reasonable benchmarks. It includes the relative performance of these private investors in both the equity and fixed income arenas. The name of that annual scorecard is the “Quantitative Analysis of Investor Behavior (QAIB)” report.
Year after year, Dalbar concludes that individual investors are both absolute and relative poor investors, and capture only a small fraction of market rewards. Dalbar believes that investors move in-and-out of the markets using faulty tools, poor timing, and respond to corrosive behavioral factors that all contribute to the sub-par performance.
In many of their annual editions Dalbar remarks that “When the going gets tough, investors panic”. Maybe so historically, but evidence is accumulating that challenges this pessimistic and unkind characterization.
To support their assertion, Dalbar emphasizes average investor equity and bond returns over the most recent 20-year period. Because of its basic construction, this rolling 20-year averaging methodology has much embedded hysteresis (stale data lag effects). This lag-like behavior is a by-product of its rather lengthy data collection period.
For its 2011 edition, which contains data through 2010, Dalbar quotes a 20-year average investor equity fund annual return of 3.83 %. The S&P 500 average return for that same period was 9.14 %. This finding is consistent with Dalbar results tracing backward for over a decade.
Therefore, according to Dalbar, us poorly informed investors suffered an unsatisfactory market returns capture ratio (3.83/9.14) of only 0.409. From Dalbar’s purview, we accept all the risk, and are only partially rewarded. A companion Fixed Income data set examined by Dalbar demonstrates similar harmful abridge returns for investors in that alternate asset allocation investment class.
That’s the bad news; but there is a light at the end of this disturbing tunnel. As an investor cohort, we seem to be “slow learning”.
The evidence for that observation is also contained in the Dalbar 2011 QAIB document.
That 2011 report also demonstrates that there is positive erosion to that poor performance record in the shorter timeframe data sets. Although market experts and financial advisors often only quote the 20-year results, a more careful and detailed examination of the other data groupings presented in the referenced document show that investors are learning. And profiting from their experiences.
The 20-year data sets are no longer the sole relevant measures of investor performance. For example, summary data for the last 10 years suggests that the private investor’s composite performance is improving.
To further illustrate this interpretation, in the freshest 5 one-year periods, the investor group both underperformed and overperformed the Index. It was a mixed bag in terms of benchmark comparisons. For the last 1-year, 3-year, 5-year, and 10-year periods, private equity investors have bounced both above and below the Index Capture Ratio standard. Indeed, we seem to be slow learning.
Unfortunately, our learning has not improved our decision-making in the Fixed Income arena. We still underperform a Barclays Aggregate Bond Index by an unhealthy margin, almost without exception. However, one exception was that we did improve our Fixed Income Capture Ratio for 2010. Let’s keep that momentum going.
My interpretation of this encouraging finding is that easy access to information, more investment options, cost containment products, and a better understanding of market dynamics and our own emotions have contributed to our more informed and better investment decision-making, at least within the equity marketplace.
I also believe that exposure and participation in web forums such as FundAlarm and Mutual Fund Observer are yet other enhancing factors in the investor educational equation.
Here is a Link to the 2011 Dalbar QAIB report:
http://www.preservationcapital.us/Forms/2011QAIB.pdf
Let’s continue this positive march.
Best Regards,

Hi Guys,
Your responses to my earlier posting on a portfolio composed of a small number of Balanced mutual fund holdings were awesome. Your excitement is infectious.
That submittal was organized to illustrate the potential benefits from such a simple approach; it was not intended to suggest that the products selected for illustrative purposes were anywhere near optimum. They are not.
Your enthusiastic replies nudged me to explore the balanced holdings strategy a little bit more deeply. So I expanded the matrix of candidate actively managed balanced mutual funds from 3 to 12, a dirty dozen. As a benchmark for comparative purposes, I retained the 50/50 equity/bond Index mix to represent a passively managed portfolio.
The funds I selected for this expanded study came from Board member suggestions, from the Morningstar preferred lists, from investment newsletters, and from the three major fund families, Fidelity, T. Rowe Price, and Vanguard.
Since the study is limited to only a dozen actively managed funds, any claims to optimization would be arrogant and misleading. But it surely is a move in that direction.
The Permanent portfolio (PRPFX), used as a third diversification ingredient, was retained in the current statistical analyses, but it really is not a balanced mutual fund with its precious metals and foreign money exchange components.
The actively managed balanced mutual funds included were: DODBX, VWINX, FBALX, FPURX, ACGIX, VWELX, NAINX, JABAX, RPBAX, BUFBX, and LOMMX. The PRPFX offering completes the dirty dozen group. The MFO website word limit does not permit a description of each fund symbol. Sorry.
The sometimes popular focused LOMMX fund managed by the eclectic and short-fused Ken Heebner was added since that fund was expected to have a low correlation with the other products. It did not fail in that regard.
Once again, annual returns from the most recent 15-year period was chosen for analysis because it recorded both upward and downward directed markets. The data were collected from the Morningstar and Yahoo Financial websites. All analyses were performed on the StatView computer code.
A summary of that analysis was prepared. It included average annual returns, fund volatility as measured by standard deviation, and correlation coefficients inputs.
A few observations are pertinent after scanning that tabular summary.
Ten of the actively managed Balanced mutual funds outperformed the passively managed 50/50 equity/bond mix benchmark. The exceptions were the PRPFX and NAINX funds.
In general, the higher performing Balanced funds had the higher volatility and thus a higher likelihood of a negative return in any given year assuming a Bell curve returns distribution. Among those funds examined, Heebner’s LOMMX offering recorded the highest volatility of 19.3 % on an annual basis.
The Permanent portfolio entry displayed a very low correlation with candidate companion Balanced funds. That’s expected because of its holdings (gold, silver, REITs, Swiss Francs) that are an integral part of that portfolio’s design. Hence, PRPFX is an excellent diversifier choice to lower your composite portfolio volatility.
The original 3-fund grouping, the team of DODBX, VWINX, and PRPFX, was not too shabby a cohort from both a returns and a risk perspective. It yielded a 7.94 % annual average return with a 8.76 % standard deviation. Its compound annual return for the 15-year period was 7.58 %.
For the expanded candidate Balanced fund field, the Janus product (JABAX) seems to be a horse of a different color, especially with respect to its lower correlations with other Balanced fund entries, and, its near best-of-field annual returns. It is an excellent suggestion for candidate inclusion from one of our talented Board members.
A number of the funds have a disappointingly high correlation coefficient with one another. If diversification is the goal, buyer beware.
If both diversification and above-average returns are equally weighted goals, a 2-holding portfolio pair of JABAX and DODBX is attractive. The 15-year average annual returns for this pair was 9.73 % with a standard deviation of 12.36 %.
If lower volatility (fewer negative years) is a primary objective, and some sacrifice of returns is acceptable, the Balanced fund pairing of JABAX with VWINX appears to be a respectable compromise. That pairing delivered a 8.87 % annual average return over the study period with a standard deviation of only 11.93 %.
The lowest correlation calculated was between the LOMMX and the VWINX products. They had a correlation coefficient of 0.23. An equally weighed portfolio of these two offerings generated an average annual return of 8.45 % with a with a still high standard deviation of 11.17 % for the study timeframe because of the LOMMX volatility. The low correlation coefficient between these two entities reduces volatility a little below the JABAX/VWINX option, but also sacrifices a little return based on the historical performance record. You get to choose your own poison.
End wealth is ultimately determined by compound annual return, and not average annual return. Portfolio volatility subtracts from average annual return when converting annual results to a compound final figure. For the three cases considered, the JABAX/DODBX mix produced a compound yield of 9.03 %, whereas the JABAX/VWINX 2-holding portfolio generated a 8.22 % compound annual return. The LOMMX/VWINX array delivered a 7.87 % compound return.
The Modern Portfolio Theory (MPT) tradeoff between risk and reward is evident when contrasting the JABAX/DODBX against the JABAX/VWINX options. These results also demonstrate that the LOMMX/VWINX candidate portfolio is not on the Efficient Frontier line; it falls below that line. Therefore, MPT suggests that the LOMMX/VWINX combination is not an effective portfolio.
If you want to do your own analysis, I append the equations that allow converting individual mutual fund performance data sets into a 2-holding composite portfolio. Note the coupling effects of correlation coefficient on a portfolio’s overall volatility, and the impact that volatility has in reducing average annual returns into a compound annual return framework.
Portfolio Return = W1 X R1 + W2 X R2
Portfolio Volatility (std dev) = Square root of {(W1 X V1)(W1 X V1) + (W2 X V2)(W2 X V2) + 2 X CC X W1 X W2 X V1 X V2}
Compound Return = R – 0.5 X V X V/ (1 – R)
With W being the portfolio weight fraction, R being the annual average return, V being the volatility or standard deviation, and CC being the correlation coefficient. For the 2-holding portfolio, the added numbers (1 or 2) to the symbols equate to the two separate holdings.
I hope you find these formulas helpful. Sorry about the mathematics, but it is necessary once correlation coefficients are introduced into the discussion.
One further point is deserving of some attention. The data collection frequency and period should be selected to be compatible with your expected trading frequency. A day trader needs minute-by-minute inputs.
These data reflect annual returns. That frequency of data collection is consistent with a portfolio that has an annual turnover rate of perhaps 10% or less. If you trade more often, monthly or quarterly data collection would be more appropriate and more time demanding.
I hope you find this submittal useful. I advocate no special portfolio strategy or specific holdings. Those decisions are yours, and yours alone. Good luck and good hunting.

Scott,
Thanks for the feedback. I agree that the records of the Hatteras mutual funds have been less than compelling. The private vehicle returns have trailed the S&P over 1, 3 and 5 year periods (albeit with half the maximum drawdown).
On the subject of the listed vehicles, I've done some research on Altin AG, Absolute Invest, Absolute Private Equity and Third Point Offshore. I don't think that these vehicles are intended for US investors, but their public listing would enable purchase of them. Am I correct that if US investors decide to purchase these or similar securities that they should do so in tax-advantaged rather than taxable accounts? By the way, talk about an esoteric niche in the case of Burford Capital! It's a shame that the SEC bars these vehicles from having US listings (especially given the plethora of truly hazardous financial products that are available domestically). Thanks.

Scott, I could not agree with you more on just about everything you've said. I am a long-time holder of FAIRX (long "before" AUM hit1b) and it "was" a significant % of my portfolio, ~20%. This month I have reduced my portfolio percent in FAIRX to a mere 3%.
I haven't lost faith in BB, he is human and does make mistakes, and has admitted so with regards accumulating AIG and the "financial" too agressively. He is allowed to err once in a while!
Furthermore, because of FAIRX concentrated portfolio (20 Stocks) and its AUM, it is very hard to move out of positions without negatively affecting the share price of that particular stock. If he owned 25-30 stocks, maybe this affect could be mitigated. But anyway, as you stated, BB is more than willing to wait the "financials" out; I cannot, thus I have moved the lion's share into another fund.
If and when BB is right (or he alters the holdings) and FAIRX begins to perform again, I probably will allocated more dollars to it, but NOT until then. I don't have the luxury of waiting 9,12,15 months for BB to be right, so I have to move on, for now. Things like this happen to the best investors throughout history. Hopefully, this is just a blip, on an otherwise pristine BB resume'.

Hi Guys,
I have noticed a very risk averse thread running through several Mutual Fund Observers (MFO) postings. Wealth preservation is a paramount objective.
In the spirit of that observation, I recall century old adages for wealth preservation from the Bible and from the house of Rothschild. Dividing the portfolio into three equal pockets that enhance diversification seemed to be the strategy of the day, over multiple centuries. Never place all your resources into the keel of a single ship was good advice yesteryear, and is still solid advice today.
I also remember that Richard Young, publisher of the Intelligence Report financial newsletter, has advocated a wealth preservation strategy for decades that has embodied a 50/50 mix of balanced mutual funds.
Along that line of reasoning, I have constructed a simple 3-unit, equally funded portfolio of two balanced mutual funds and the diverse Permanent Portfolio mutual fund (PRPFX). The two mutual funds that I selected for the portfolio are the Dodge and Cox (DODBX) and the Vanguard Wellesley (VWINX) mutual funds. These funds were chosen as candidate actively managed funds with cost containment considerations. The expense ratios for PRPFX, DODBX, and VWINF are 0.77, 0.57, and 0.28, respectively. That’s an average annual cost of 0.527; not bad for actively managed portfolios.
Of course, Index funds and ETFs also offer similar cost containment elements and are attractive alternate candidates to serve the same wealth conservation goal.
A 15-year timeframe was selected for the purposes of this brief study to manage time and to include the turmoil associated with two market downturns. Data was collected from the Yahoo business and the Paul Merriman websites for the 1996 to 2010 timeframe.
The data were entered into the StatView statistical computer code. Analyses were completed for the original data sets and for both a 50/50 split of equity/bond passively managed proxies and for a 30/30/30 mix of the identified actively managed mutual funds.
The results of the study are summarized at the end of this posting and are extracted from the StatView analyses.
Note how the conservative funds have delivered returns that are similar, and for this limited timeframe, sometimes superior to the S&P equity standard. Because correlation coefficients are usually well below the perfect correlation level, diversified portfolios can be assembled that reduces volatility without compromising returns performance.
For those investors who can not tolerate negative annual returns for whatever reason, the lower volatility levels (that’s a lower standard deviation) translates into fewer negative years over an extended holding period.
For the 15-year timeframe examined, the S&P 500 produced negative results 4 times. That’s a about 27 % of the time and is relatively consistent with the historical record of roughly 30 % downward annual performance.
In contrast, the individual component portfolios and their 30/30/30 mix delivered far fewer disappointing returns. In particular, the actively managed 30/30/30 mix generated below zero rewards only 1 time. The passively directed 50/50 Index portfolio only reduced negative results to 3 times.
Here are some of the statistical findings:
Correlation Coefficients
Portfolio Mean Return Std. Dev. DODBX VWINX PRPFX S&P 500 Bonds 50/50 30/30/30
DODBX 9.73 14.40 1.00 Index Mix
VWINX 8.01 7.65 0.77 1.00
PRPFX 6.13 7.65 0.57 0.48 1.00
S&P 500 8.55 20.36 0.81 0.58 0.47 1.00
Bonds 6.88 8.23 - 0.13 0.05 -0.17 -0.25 1.00
50/50 Index 6.89 9.36 0.79 0.66 0.44 0.98 -0.20 1.00
30/30/30 Mix 7.94 8.76 0.95 0.86 0.75 0.76 -0.11 0.76 1.00
As Albert Einstein famously observed "Anyone who has never made a mistake has never tried anything new.", and "Learn from yesterday, live for today, hope for tomorrow. The important thing is to not stop questioning."
Good luck to all you dedicated investors, especially to those who face the daunting challenge of avoiding all negative returns.
Best Regards,
MJG

It's not that Berkowitz is done or that he isn't a great investor. I don't think it's a flaw in the overall management style (nor did I ever think the fund was low-risk), but simply a sector bet that he overstayed and while he can admit he was wrong about AIG (although after his friends in the industry apparently told him he was an idiot to invest in it - quite honestly, if a manger said he talked to people in the industry who told him he was an idiot and he didn't take that into account and that "mere mortals" would have difficulty getting AIG, I'd be displeased, but that's just me), I'm doubtful that he will give up on the financial bet any time soon.
It's also a matter of whether or not one wanted to rely on a portfolio chock full of an "all-star team of 'Too Big To Fail'" not long after one of the worst financial crises in the nation's history. You can think these companies are some sort of magnificent value, or you can think that their problems are far from over and would rather not have to sit with these companies that didn't learn a thing from 2008 while they work their problems out potentially over months and years. As for Bank of America, Berkowitz apparently started buying at $15 (http://blogs.wsj.com/marketbeat/2011/05/09/berkowitz-on-aig-i-was-wrong/?mod=google_news_blog)
It remains interesting to me that Berkowitz can discuss walking away from financials that he doesn't understand to becoming one of the biggest shareholders in the universe, and a main reason that continues to come to mind was that he believed that to some degree he was "shaking hands with government" (hence the ridiculous thank you note to government). Either way, much like Heebner's timing of the energy/materials exit, Berkowitz overstayed in financials, and how nimble he can be is questionable, and whether he even wants to move on from the bet.
The whole thing kind of reminds me a little of Kinetics Paradigm (WWNPX), which weathered the 2001 crisis beautifully and did terrific until they decided to stay in financials throughout all of 2008 and surprised those who were expecting a repeat performance of the 2001 downturn (although acting like shareholders should be thrilled in the shareholder letters was a bit much.) That fund didn't go away, and it's actually worked its way back in the last couple of years, although a lot of the financials appear gone. However, I don't believe I've heard one word about it on this board in a couple of years.
No one talks about CGM Focus much, either, although poor Heebner looks to be having another not so great year. Will Danoff and David Decker (who I hope will show up somewhere else after leaving Janus) have had off years, as has Romick and Yacktman. However, when a fund becomes reliant on something, that's another issue and timing is another. How well does a manager move on when it becomes apparent that something that's such a large element of the fund has clearly gone against them? Heebner's issue over the last few years would appear to mainly be mistiming (too early/too late) his continual moves from sector-to-sector.
Things change (quickly these days.) If you are comfortable, with Berkowitz (or Heebner, or whatever the names of the Paradigm managers are), then great. However, at what point does underperformance (see Heebner this year again) start to keep one from other opportunities that may appear. If it's a sensible part of your portfolio, fine. However, I tend to believe many who hold Fairholme (or held CGM Focus during its prime) are holding it as a fairly substantial portion of their portfolio.
At some point, people are going to catch a turn for Heebner, and investing in a fund manager is in a way another element of the investment. If you think Heebner has not taken stupid pills and due for a period of being back on track, you'd look at CGM Focus.
Part of me is a little tired of managers as financial media stars. I don't want a manager who's always on CNBC or in every article on Morningstar. I just want someone who quietly goes about finding quality companies. Yacktman, Ralph Shive and Todd Ahlsten of Parnassus are examples, among others.
As for Sears (which I got yelled at last year when I wondered why anyone would want to own it over $100), it would appear they are looking to other avenues for business: http://www.heraldsun.com.au/news/breaking-news/us-department-store-sears-pulls-dvd-porn-from-website/story-e6frf7jx-1226054866171
Apparently, Berkowitz compared Sears to Apple before its turnaround, and I'll say this: Eddie Lampert is no Steve Jobs. He can, however, buy back shares really well. How that will lead to a magical turnaround for Sears at the retail level is beyond me.
I do like St Joe for the longer-term, although that situation was handled poorly. I do love Brookfield Asset Management (although particularly the spin-offs). I do also think that Berkowitz is an excellent investor. However, he can do wrong like anyone else, and then it becomes whether or not one wants to stay and how quickly the fund can make changes. If it becomes apparent that the fund isn't going to move, then it's up to the shareholder whether or not they want to wait for what may become an extended period.
I don't see all the reason for upset towards those who do not, as some people don't want to rely and wait around for the value to be realized in the financials. Berkowitz clearly does, it would seem. He may be right, they very well may be right to leave. To those who want to wait, I wish them luck.
And I didn't even get into the fact that Allocation may as well be called "Fairholme II: The Sequel", and a different fund ("Fairholme International", perhaps?) would have attracted new money from current FAIRX holders, whereas as of right now I have no idea why anyone who owns FAIRX would also want to own the Allocation fund. Hmmm... anything else? I guess I'll throw in the commonly noted complaint that he should have closed the fund already.
And I'm sure I'll probably get yelled at for this post, but it's been a while since the board has been debate-y.

I'm rather negative to begin with so the idea of shorting is something I'm open to, but I have a hard time imagining a world where we've spent trillions of dollars to prop up the financial system, only to have the stimulus stop and then let the cards fall where they may (and the result doesn't end well.)
If we were to actually have a significant downturn in the market again and then QE3 appears, at that point I'd be surprised if it doesn't become quite clear that QE3 has become a required structural feature to keep things moving. If the cards fall where they may and things start really rolling to the short side, then how does the government explain flushing trillions of dollars and ending up in more or less the same place where we started?

I've been a long-time investor in FAIRX, but sold my entire position this week. My decision had nothing to do with M*, since I don't use them. I have always advised that if people are uncomfortable with a fund, they should sell it. I was becoming uncomfortable with huge bets on the financial sector and Bruce's hands on involvement in St Joe which I viewed as a distraction for him. I've used part of the proceeds to add to my position in ag commodities (DBA) and reestablish a position in ag companies (MOO), pursuing a global food and water theme (I also own PIO) that I had gotten away from until now.

Cisco stock has been dropping (about 33%) for the past 1 year.
Fairholme bought Cisco throughout Q1 --- it's about 4% of their portfolio now.
Cisco stock has been trending down for the past year and even the past few months so that obviously isn't helping to provide a performance uptick for the fund lately but helpful from a buying perspective so far this year. We'll see how this turns out longer term.
Gurufocus...."Many gurus view this as cheap for a company with great financial strength, a few lackluster quarters and some acknowledged challenges. For fiscal year 2010, it had free cash flow of $9.2 billion, its second strongest year in 10 years. In the third quarter of fiscal 2011, cash flows from operations were $3.0 billion, increased from $2.6 billion in the second quarter of fiscal 2011, and flat from the third quarter of fiscal 2010. Cisco also has cash, cash equivalents and investments of $43.4 billion as of the end of the third quarter 2011, up from $39.9 billion at the end of fiscal 2010."
Recent Cisco Quarterly transcript with John Chambers:
http://seekingalpha.com/article/269451-cisco-systems-ceo-discusses-q3-2011-results-earnings-call-transcript
- There'll be some job cuts
- Re-focus on core products and improve higher-end products (switches/routers)
- Focus on streamlining the organization
http://www.pcworld.com/businesscenter/article/227711/cisco_plans_job_cuts_drops_growth_target.html

Hi msf,,,agreed. Fee(profit) based advisers receive a higher dollar amount in good times but still are profitable in market down turns...just a little less profitable. No loss, just a little less profit.
My point is that normal market risks for advisers has been minimized. We, as individual investors, make a decision to pay for these services or choose other options. Unfortunately, many retiree plans don't have choices. 403b plans, as one example, are chock full of fees and charges that chip away at an employee's investment and, in my opinion, are one more set of risks to overcome to be profitable. I believe I was one of the last to take advantage of the 9024 transfer before it was abolished by the insurance industry lobby. I'm afraid the 1035 transfer provision isn't far behind.
We have way too many situations today where financial transactions are picked away at by small costs (fees, taxes, tolls, loads, etc.). It is called "dispersed costs and concentrated benefits"; a method of collecting small amounts of money from a very large base of individuals and pooling these profits into the hands of a very few.

I think my "best worst" case scenario is a longer-term decline in living standards/quality of life over the coming decades if we proceed down the road we're proceeding on. I don't believe the current path is sustainable at all and I absolutely do not believe that that path will be changed until it is forced to, but it can go on for longer than expected. The next crisis comes if/when it becomes apparent that the current path can't continue, and what form that crisis will take - I think - will be different in nature than 2008.
I suppose my worst case scenario would be a currency crisis (and I think a tipping point for a larger crisis such as that would be external in nature), although I don't believe there's a strong possibility of that happening. Still, I did pick up "When Money Dies" (a detailed and highly regarded account of the hyperinflation in Weimar Germany) at a book sale the other day. - see: http://www.telegraph.co.uk/finance/recession/7883931/Obscure-book-by-British-adviser-becomes-cult-hit-after-Warren-Buffett-tip.html It was discussed last year that one of the military's war games in their "Unified Quest 2011" was a scenario of dollar/financial system collapse. If that's the case, it may still not be likely, but it was apparently on someone's mind to prepare for the possibility that it may occur down he road. (and discussed a bit in this part of a speech on Economics and National Security: ) You can see a CNBC segment on it at about 6:30 into this clip. The 90 minute speech by Jim Rickards is - I think - well worth a viewing, and it's not "we're doomed!" as much of a thoughtful and thought-provoking discussion of the current state of the world (which isn't good, but at least is - I think - insightful about where we are and where we could be going.) The above is only part 1.
Again, I don't see a collapse or crisis as highly likely, but it is good to think about those scenarios and how they might play out and play "What if" games, as was noted above (and I think Greg's discussion above is really quite excellent and I agree that there is more noise now than ever.
I don't see a "Mad Max" scenario, either, although I do believe that people should put down their IPads and teach themselves basic outdoor skills, like gardening, skills that are really not being passed down to new generations. People need to reconnect with the planet a bit, and that's not only for the good of the planet, but for the good of the people on it for if there's a situation where your tablet computer isn't there to guide you. That's not even for a financial disaster - what if there's a natural disaster?
I mean, you see it in the average age of farmers, which is something like the upper 50's. Kids don't want to be farmers, but farmers will become increasingly important over the coming years. (The average age of the American farmer is 57, and there has been a 20 percent drop in farmers under 25. - http://www.npr.org/2011/02/27/134103432/Americas-Future-Farmers-Already-Dropping-Away)

Cathy:
You have already elicited a lot of high-quality, quite specific feedback upon which I am unlikely to improve.
I will humbly suggest a return to a "forest view" for a moment. If I understand your comments here correctly, you are mostly talking about positioning of a quite defensive portfolio of investments for your mother. It sounds like you have done quite a thorough job of identifying a somewhat conservative target (5%+) and then creating a mix that you are comfortable with, given the target.
In your last posting you make clear that beyond a numerical target, one of your goals is not losing a lot "under even dire conditions".
I have a perhaps similar management-for-Mom situation I am working with. I find that purely numerical modelling falls short for some of the planning tasks. The reasons lie partly in the fluctuations in the correlation coefficients of the different asset classes, the secular trend toward convergence among global equities and the uncertainties about what the coming years hold -- all discussed eloquently above by you, MJG, Investor, Scott and others. There is just a lot of variability baked in.
In order to get beyond the limitations of that kind of modelling as a tool for decision-making, I find I need to do scenario-based planning based very much on the specifics of our family situation and what the money is needed for.
So I have a rough, uncertain numerical target I hope to hit which is based on trying to generate sufficient returns to pay expenses, given the continuation of other sources. And I am taking various approaches to allocation to try to achieve those returns. (My approach to this includes trying to defend against risk of my own misjudgments and execution risk by setting up different "investment sleeves" each embodying a point of view I consider plausible, most of which require limited intervention on my part. For example: one of those "sleeves" is an AssetBuilder portfolio at Schwab.)
Beyond that, though, I also play "what if" games, to try to determine which scenarios I really want to plan for. This can include what rono has sometimes referred to as EOTWAWKI (end of the world as we know it) scenarios, if your assessments call for that, but what I am talking about is personal scenario planning, based on the immediate facts of greatest importance to you.
Since in my particular planning situation, the current most probable scenario is dependent upon continuing payments from a Long Term Care policy, I find that one of the scenarios I feel I must look at (especially post-AIG bail-out), is what happens if the insurance company making those payments fails. Although a low-probability event (I hope), if such a failure occurred, it would have an immense effect on the burn rate of the maternal resources. Consequently, it has affected my decision-making about how those resources are invested. Under some assumptions, it would make the most sense to stay all in FDIC insured accounts and treasuries, and let inflation and the current expenses eat away at the portfolio. This, I think, is what a lot of people would do. However, I have decided to take on somewhat more investment risk in order to try to preserve more resources in case low-probability but very unpleasant scenarios occur.
I feel that post-meltdown there is even more noise in the financial media than there was in 2007 and before. So I am trying to be somewhat more disciplined than I used to be in my informal assessments of how I am doing, am trying to stay focused on the immediate goals I have to deal with, and am trying to allow for a degree of self-forgiveness if I get some things wrong, even pretty badly wrong. We make our judgments, do the best we can given our limitations, and then see how we do.
I wish you well.
gfb

I think it's just really tough to know where things are headed. All that I can do really is have larger themes (commodities and emerging markets), as well as smaller themes and have a belief in those themes over the long term (although position sizes and the manner of expressing those themes in terms of choosing different investments may happen over time.) The remainder of the investments are more broad-based and flexible. I currently have little in the way of fixed income, but I will likely look into fixed income again some point down the road and believe it's a very important element for those at/nearing retirement (although I continue to believe that the best course is a broadly diversified fixed income portfolio.)
A lot of the global issues that I've discussed in the past still concern me. There was an interview with Caterpillar's CEO the other day where he discussed the demand in developing markets and the infrastructure build-out that continues to go on. Meanwhile, in this country we've thrown tons of money at the financial system and not really given much thought to developing the remainder of the country to be competitive in an evolving global market. There's an incredibly critical article (http://www.koreatimes.co.kr/www/news/opinon/2011/05/137_87020.html) about the state of high speed rail in California in the Korean Times (!) this morning, and another article in Reuters regarding rail in Florida.
Despite setbacks, there was this quote: "Transportation Secretary Ray LaHood says he's thrilled to be moving forward the long-term goal of connecting 80 percent of Americans to high-speed rail within 25 years." Um, 25 years? Are we serious? By that time, other countries might look like the Jetsons. Obviously an exaggeration, but we're getting a late start and you're telling me the goal is to have it done in 25 years? It'll take at least five for various aspects of it to be debated at the state/local/federal level (You've already seen a lot of that, with Wisconsin getting mad at their governor for not accepting rail funds.) Beyond that, the country needs upgrades to the power grid, other utilities, airports and roads, among other things (which I'm guessing wil be accomplished in 25-40 years from now.) I'd love to invest in alternative energy, but between volatile energy prices and debates over funding, I continue to question whether it will ever really take off until we reach a point where we have to urgently start looking at alternatives to traditional energy sources.
Other countries absolutely have their flaws, as well, but ambitious plans for development on infrastructure will offer them an advantage, if successful. It's a matter of giving people the option to use tools (whether improved transportation or improved utilities, etc) to improve their daily lives, not to mention business benefits of improved infrastructure. I guess what my question is is what is the vision for moving the country forward. I'm not getting a sense of it, and while the squabbles over budget (and how we can quickly move up the debt ceiling) are currently taking center stage, what about all the current political bickering over other issues would make me think that these people could unite with a vision for moving the country forward? (shrugs)
In terms of emerging markets, you're seeing corporations trying to venture deeper into markets and buying up local companies, with Yum Brands buying an Asian chain (Little Sheep) the other day, and Wal-Mart buying a stake in an Asian e-commerce company the other day. Some US companies have not succeeded - you saw Best Buy close their China stores earlier this year, but the local chain they bought (Five Star) continues to do well.
Riskier bonds may have time periods where they do not correlate to the stock market, but in a 2008 situation, emerging market bonds are definitely not going to hold up. Templeton Global Bond did, although that was because manager Michael Hasenstab did an excellent job with currency hedging.
There's a very good discussion with Jim Rickards on King World News regarding Bill Gross being short treasuries and the thinking/theory behind it; Rickards believes that Gross is not short treasuries because he believes that there's going to be bond market trouble if QE ends this year, but he does believe that there will be trouble over the medium term and there's no way for a Bill Gross to position the fund in that manner right away if a turning point really does happen, it has to occur over time, ahead of time. The short treasuries trade has been so greatly discussed over the last year or so, but - despite a fundamental theory that seems sound - it has not worked. It will, but it won't play out in a way that everyone expects.
I think one has to prepare (even if it's not what they would prefer to see) for what they see in the future to some degree, and what I see may not be what someone else sees, and that's fine. I'm flexible in my longer-term themes, but will continue to stick with them until I'm convinced otherwise; I'm not going to try and trade in-and-out of them. The rest of the portfolio can be deployed in a more broad/opportunistic fashion.

Hi CathyG,
I suspect that your doubts about the benefits of market product diversification is clouded by viewing its impact through a somewhat imprecisely focused lens.
Investment diversity will always reduce portfolio volatility if the component mix that constitutes the portfolio are not perfectly correlated.
Although investment risk is a multi-dimensional concept, volatility is one important contributor to that risk. For example, your compound rate of return ( the compound rate determines your end wealth) is reduced below simple average annual returns by the square of the volatility measurement.
The correlation scale between to investment alternatives mathematically ranges from a plus One value to a minus One value. A plus One level means perfect returns correlation; the products are in absolute synchronism. A zero level translates into no meaningful co-movement, complete chaos exits between the two options in terms of returns. A minus One means that the returns are perfectly asynchonistic, as one goes up, the other goes down.
By design, a solid S&P 500 Index fund has a nearly perfect plus One correlation with the S&P benchmark. Gold investment products typically have a near zero correlation with the S&P 500 benchmark. No investment product has ever had a minus One correlation with that same benchmark. There is no complete simple hedge. International equities have a 0.5 to 0.8 correlation with US equities. The US bond products have a 0.2 to 0.5 correlation with US equities.
The correlation coefficients are dynamic and change with time. As the global marketplace has become more interconnected, the complexity and tight coupling of the financial environment has prompted the product correlation coefficients to drift together. However, they are never at the perfect One value.
Therefore, diversification always benefits a portfolio. Perhaps those benefits are more subdued and more difficult to recognize when contrasted against earlier timeframes, but some benefits remain. And the coupling will likely relax with the passage of time as global conditions morph from one problem area to yet another.
When dissecting the benefits of diversification you need a more refined tool then simple ad hoc observations of daily NAV price movements. Resources are available that characterize the wealth advantage offered by diversification.
For example, visit the Paul Merriman website that illustrates how returns can be maintained while reducing portfolio volatility as a function of adding bond components to an all equity portfolio. By diversifying with bonds, return levels can be maintained at the all equity level yet volatility can be reduced by one-half with a 50/50 equity/fixed income portfolio mix.
For example, visit the Risk Grades website and enter any portfolio you wish. Risk Grades will calculate and list the advantage that whatever diversity your entered portfolio offers. Act quickly here because this website will be going out of business at the end of June.
I provide the addresses of the referenced websites immediately below;
http://www.merriman.com/PDFs/FineTuning.pdf
http://riskgrades.com/
I hope this has helped to clarify your understanding of financial diversification and the need to include an array of loosely correlated investment alternatives in your portfolio.
Best Regards,
MJG

MERFX is an interesting example of an alternative strategy (merger arbitrage) that does not correlate heavily to the market. Some people do not care for alternative strategies, but I think merger arbitrage has a consistent track record as an overall strategy (whether or not the manager carries out the strategy is the issue, but the managers at both funds have a rather good record.) Otherwise, for long-short funds I don't think there's really much in the way of active long-short managers that have really carried out the strategy well year/after/year, including some notable disappointments that looked as if they had potential (Nakoma Absolute Return/NARFX.)
I definitely don't recommend jumping into foreign markets. For me, I view it as a learning experience and the opportunity to add asset classes/strategies that aren't accessible in this market, but it opens one up to additional risks (currency swings, for example.)
AQRNX is not going to be particularly conservative, but I do like its ability to vary allocation to different asset classes and, despite bumps in the road over time, do have respect for the financial minds at AQR. GTAA is a better option in terms of having something that has the ability/potential to go from 0 to 60 and 60 to 0 and in-between based upon the current environment. Still, none of these will perform well if the market tanks, although GTAA has the ability to go full stop to cash if market action calls for it (and it can minimally hedge.) You can hedge to some degree with a short or short fund, but that's a pain in this market and understandably not something that a lot of people are going to want to do.
I think it's difficult to know in terms of what will perform best in the next crisis, but I think I'm concerned regarding govt. bonds and I think - over the longer term unless things get disorderly (and I hope things don't get disorderly, but if there's some sort of tipping point, I think if you're not positioned for it, forget about it) I continue to be concerned about the dollar.
Glad you did well with SCPZF! I sold most of it, but kept a few shares around for the longer-term.

I'm not going to say that this person isn't a good financial planner, I don't know. I will say:
1. The advisor may have access to load-waived or no-load versions. I know there is a no load version of the popular Templeton Global Bond (TEGBX) fund. What he/she sees in Templeton World I have no idea.
2. I had family with a financial planner at a large financial firm and it really became quite apparent that the funds used - while not the world's worst - were clearly the funds that the firm was trying to push - funds that were in many cases not terrible but didn't seem exceptional in any way either. When better funds were suggested (something like First Eagle), they would get the run-around.

Considering hiring a financial planner affiliated with UBS.... his model portfolio for my retirement (which I am) includes about six funds with front-end loads, including Templeton World. I mentioned I generally have a strong distaste for paying loads and he said there would be no loads or front-end fees charge for these funds. He mentioned something about an arrangement with UBS but I was unclear about that. Am I missing something? Thanks.

Hi Guys,
The 2011 edition of the Las Vegas Money Show was held at Caesars Place from May 9 to May 12. This annual event featured Steve Forbes as the keynote speaker in its opening ceremony. Forbes is optimistic, mainly because of an informed and energetic US population.
The 3 day sessions are mostly free after registration. Thousands attended a daily matrix of presentations that offered as many as 15 lectures per period across 8 hourly periods. It’s usually a great opportunity and learning experience.
The Show also features an extensive exhibition hall that provided an option to meet exhibitors who are trying to introduce and sell their relatively new products. Mutual fund outfits, market computer tool developers, and newsletter publishers were fairly represented. So too were oil and gas wildcat entities and gold explorers. To each his own poison.
James Stack, Mark Skousen, Ron Muhlenkamp, Janet Brown, John Buckingham, Jim Lowell, Mark Hulbert, and Louis Naveillier were a few of the investment luminaries who delivered formal presentations. Jack Ablin effectively substituted for the recently deceased Joe Battipaglia. These folks always offer a carefully structured and documented market perspective with several investment ideas often embedded.
You might be interested in visiting the Money Show website. I have appended a Link to it. Also, after registering on that site, you gain access to many of the fine video presentations that are archived on the website as well as some generated at the Vegas sessions. I suggest you visit moneyshow.com at your convenience. The Link follows immediately:
http://moneyshow.com/
Las Vegas is a terrific place to merge a profitable learning experience with a little adult fun My wife and I enjoyed the entire four days. We attended about 20 of the hundreds of meetings scheduled.
The overall attendance for the conference seemed somewhat down from previous conferences. Although the attendance was a bit muted, the enthusiasm from the participating guests and from the lecturers themselves was infectious. Some popping good questions were asked and spirited debate ruled the day.
Here are a few of my takeaways from the numerous sessions visited. These remarks constitute my composite interpretations from the sometimes disparate opinions expressed from several experts delivered from differing perspectives with separate and distinctive objectives. from the professional investment community. With that essential warning, here are some summary comments and observations; here is the message from Vegas.
1. The financial crisis had many causes and contributors including government policy and regulations, Wall Street prevailing and faulty wisdom, housing boom speculators, excessive leveraging by most everyone, and our own greed. The complexity and tight coupling of our global markets exacerbated the event and generated uneven winners and losers. The winning groups were Singapore, emerging Asia, and emerging Latin America. The loser cohort included Iceland, Ireland, Greece, and the United States.
2. With inflation rates and interest rates expected to rise with high likelihood, stay totally away from government bonds. That opinion directly corresponds to the current PIMCO’s Bill Gross bond positioning. That assessment was almost universally proclaimed among the MoneyShow market participants.
3. Perhaps for the first time ever, Municipal bonds face potential defaults in some communities. So the advice is to examine the solvency issue of any tax-exempt bond product offering that you are considering based on a careful assessment of default probability.
4. By most standard definitions, the economic recovery is on its way. The problem is that it is the most muted recovery ever recorded in almost all recovery measurement categories. The pace is sluggish at best. The economic improvements are almost imperceptible from many conventional measurement standards.
5. Since Franklin D. Roosevelt’s presidency during the depression years, the third year in office of the presidential 4-year cycle has generated positive equity market returns in the mid-teen range on average. Most of that impressive return is generated in the first 3 quarters of the third year. Additionally the third year period has always delivered positive equity returns. That’s an exceptional record to motivate full equity commitment for this year.
6. The equity market is about half way through the average bull market after a nadir point has been identified. Based on historical averages it could last for another two years. Multiple Bull market indicators and signals are still in place. However, things could go South in a hurry, so stay alert. Famed conservative financial guru Jeremy Grantham of GMO believes the market will advance just a little more, but has cautioned his clients to be prepared to jump ship by the end of the third quarter. There’s a sense of uneasiness among the current forecasters. This time the recovery is indeed distinctive, and, politics and trust are significant uncertainties that enter into the investment environment equation big time.
7. The current favored strategy approach to mitigate risk is through broad international markets diversification and through strategic sector rotation. China and the emerging markets are the Chosen Ones of the moment. In a mature Bull market, sector rotation into HealthCare, Utilities and Consumer Stables are currently recommended.
8. An overarching approach that many market experts endorsed during the presentations was one advocated by Jack Albin in his book “Reading Minds and Markets”. The basic concept is to use a global macro construct whereby decisions are made sequentially from the top downward. In essence, the decisions flow downward from the broadest stock/bond asset allocation to large/small, growth/value and domestic/foreign calls to sector allotments to individual stock/mutual fund/ETF specific buys. I suspect most of us subscribe to this top-down decision tree matrix approach as a matter of daily living.
And the song and the dance goes on.
Perhaps, with just a little luck, from Bruce Springsteen’s haunting 2000 song, we can meet “Further On (Up the Road)” with some solid market returns.
Good luck to all you guys. I missed you at the recent Vegas MoneyShow. Perhaps we’ll meet the next time around. I hope so.
Best Regards,
MJG

Hi Scott. I agree the performance is similar and they both are heavy financial stocks. Interesting though that FAAFX doesn't hold any St. Joe's and it's largest holding, MBIA, doesn't show up in FAIRX holdings. FAAFX is also holding 2x the cash. Time will tell how or if they differ.