Not to flame another Cman/MJG war, but there is definitely another side to this story. Fama-French factors have come into some pretty compelling criticism lately, and it is no longer clear there is a SCV premium or historical outperformance.
First, a
graphic example. (edit: Sigh, looks like M* won't allow you to link to the period I had originally input. To look at that chart, use 6/25/1979 as the start date. The values I listed are correct.)
Those are the returns of a $10,000.00 investment in each of VFINX ($474,278.66), NAESX ($434,025.38), SCV ($524,319.28), and LCV ($411,828.31) over the past 35
years, approximately the time horizon of a retirement portfolio.
Second, the CAPM model assumes the most efficient portfolio is one that contains all the securities in a market, and that any excess return comes from increased risk. Fama-French expands that by explaining where you find that risk (beta). You aren't increasing your diversification by adding SCV to a portfolio of domestic stocks (if you doubt this, check a correlation table between VFINX and VISVX). You are adding risk in hope of greater returns.
So two questions:
1) Where are the excess returns for the small cap and value premia; and
2) if this investor didn't get greater returns, why did he/she accept greater risk?
As a lot of us probably know this, I'll just link these articles and let people ruminate on their own.
Sam Lee from M* explains Fama-French factors well
here and
here. He also explains his problems with Efficient Market Theory
here. You can find the original paper describing the small-cap premium by Rolf Banz
here.
Turns out, however, that there has been no return premium for small cap stocks since the data was gathered by Banz in 1979. How can that be? Explanations for problems with the Fama-French assumptions, start with their own recent paper explaining how the three factors are actually
five. Ask yourself after, "where does this stop?"
From there you can read:
Sam lee on the Five-Factor model. ("I think this should be a come-to-Jesus moment for those who've taken the F-F model as the gospel truth. Fama and French admit that their original three-factor model was not motivated by theory. They chose value and size because they worked better than other characteristics in back-tests. Grounded in the efficient-market hypothesis, they came up with risk-based stories for these patterns. Small-cap stocks provided excess returns because they're more vulnerable to the business cycle. Value stocks did so because they were distressed.
However, since then, the size factor is no longer considered a significant source of excess returns by many academics and practitioners. Rolf Banz's original 1981 study showing a huge size premium was marred by survivorship bias. After it was corrected in the mid-1990s, back-tests showed a much smaller premium. Moreover, whatever excess returns small-cap stocks provided were driven by the smallest, least liquid securities.")
John Rekenthaler on problems with supposed historical premia. ("To the extent that smaller companies do outperform, those gains likely owe to a liquidity premium. Smaller-company shares have lower trading volume, which increases the chance of moving the stock price by putting in a trade order, and which hampers the investor’s ability to rapidly enter or exit a position. Low liquidity is a real cost that deserves to be compensated with a real return. This is fine--but properly speaking, it’s not a small-company effect.")
Finally these are articles from Advisor Perspectives, a commentary/newsletter service for FAs:
'The Small Cap Falsehood' ("The supposed outperformance of small cap stocks is a foundational precept on which many respected asset managers have staked their expertise over the
years – foremost among them, Dimensional Fund Advisors (DFA), the famed fund company that has gained a near-religious following since they popularized small cap indexing three decades ago. A growing body of research, however, shows no such advantage for the last 30
years and, now, a new study seems to have proven that the supposed small-cap advantage may have never existed in the first place.");
and
'A Test for Small Cap and Value Stocks' ("In a recent talk, Stanford professor and Nobel economist Bill Sharpe challenged advocates of smart-beta strategies, including overweighting small-cap and value stocks, to respond to two questions. Can the strategy be adopted by all market participants, or does it have a practical limit in terms of assets that can be invested? If it has a practical limit, then one should expect the premium to decrease over time.
For small-cap stocks, for example, it is obvious that the answer is "no" – eventually the dollars pursuing those stocks would make them mid- or large-cap stocks. The same is true for value stocks; the money pursuing them will eventually drive prices up and erase their risk premium.
In an email exchange, [Larry] Swedroe essentially agreed.")
It should be pointed out that Merriman has an agenda here: he sells DFA funds that are uniquely based on the Fama-French factors. To be fair, those funds have done very well since inception. It is worth asking, however, if the small cap premium is based in liquidity and not size, whether an index is the best method of including this asset class in a portfolio.
It should also be said that the one factor that is predictive of future performance is valuation as measured by Shiller CAPE. And right now, US small caps have historically high valuations.
So should someone include SCV? That depends on what their horizon and goals are. But if they do weight to SCV, they should be aware they are accepting increased risk with no guarantee of increased returns.
sweet dividends Copy & Paste 6/21/14: Jack Hough: Barron's
For bond investors, "junk" and "high-yield" used to be synonyms. No longer. Today's bonds from issuers with elevated risk of default simply don't pay all that much. Junk indexes from Barclays and Bank of America Merrill Lynch both hit record low yields of around 4.9% this past week. How low is that? One-year Treasury bills, about the safest investment ordinary investors can buy, have yielded an average of 5.1% since 1953. In other words, the dodgy stuff now pays less than the safe stuff used to.
Of course, junk bonds pay much more than today's Treasuries, whose yields have been suppressed by the Federal Reserve in an effort to stoke the economy. Investors have continued to pile into junk for this relative yield advantage. But then, with the one-year Treasury paying less than 0.1%, scratch-off lottery tickets almost compare favorably. That's no reason to buy them.
From here, junk-bond investors may have more to lose than to gain. In a rosy scenario, the economy gradually improves while the corporate default rate remains exceptionally low, and good junk-bond fund managers earn mid-single-digit returns over the next year. A gloomy scenario looks like 2008, when a popular exchange-traded junk fund, SPDR Barclays High Yield Bond (ticker: JNK), lost 26%. Bank of America Merrill Lynch is predicting total returns for U.S. high-yield of 4% to 5% this year. That's not bad—but the SPDR junk fund has already returned 4.4% year-to-date, implying little upside from here.
Earlier this month, JPMorgan Chase recommended that yield hunters cut junk-bond exposure and switch to stocks. We recently ran a search for stocks that should appeal to junk-bond refugees. It turned up six names, including Amgen (AMGN), Eaton (ETN), and National Oilwell Varco (NOV).
These shares aren't the highest-yielders around. That's for the best, because high yields often come attached to companies with limited growth potential. We began our search by looking only for those with current yields over 2%, roughly the dividend yield for the Standard & Poor's 500 index. But we also looked for estimates of peppy growth in coming years in both profits and dividend payments. For long-term investors, these shares have potential to become high-yielders over time. A 2.5% yield today becomes a 4.9% yield in seven years, assuming a company can increase its payment by 10% a year, and that its share price doesn't change. Of course, rising dividends can attract buyers, sending share prices gradually higher, resulting in handsome total returns.
Stocks are not a direct substitute for bonds. Both are important for investors who wish to keep overall portfolio risk in check. The ideas that follow are alternatives for investors who find that their junk-bond allocation has grown larger than they would like. That could have happened easily: The SPDR junk ETF has now returned an average of 12.6% a year over the past five years, according to Morningstar, versus 4.8% for its high-grade sibling, SPDR Barclays Aggregate Bond (LAG).
AMGEN IS ONE OF the world's largest biotech companies, with sales last year of $18.7 billion, but it has room for growth. Nearly 80% of its revenue comes from the U.S., which leaves plenty of potential to launch medicines overseas. And the company, which specializes in treatments for cancer, kidney disease, and inflammation, has a pipeline of 10 key drugs in late-stage clinical trials with results due through 2016.
Those should more than offset potential revenue declines from legacy drugs facing new competition. Overall revenue for Amgen is expected to increase only modestly, but free cash flow should grow much faster as research spending falls as a percentage of revenue. This year, free cash flow is expected to rise 13% to $6.4 billion. In three years, Wall Street expects it to hit $8.4 billion, or over 9% of the company's current stock market value. Amgen announced a 30% dividend hike in December, but with a yield of just 2%, payments look likely to keep rising at a double-digit pace in coming years.
General Electric (GE) raised its dividend payment 16% this year and plans to lift payments in line with earnings from here on. That looks like a good deal for yield-seekers. Shares already pay 3.3%. GE hopes to buy the power division of France's Alstom (ALO.France), which would cut into share repurchases this year and keep earnings-per-share growth modest, but Wall Street predicts 7% growth next year rising to 12% in three years. In September we predicted that GE stock, then $24, would rise more than 30% to $32 in two years (Sept. 23, 2013, "GE: Not Too Big to Grow"). It's close to $27 now. Keys to GE reviving growth include divesting itself of underperforming businesses, using software and analytics to sell new services to industrial clients, and, in the event of an Alstom deal, making good use of new sales inroads.
Just 13% as big as GE by stock market value, Eaton, which makes power, hydraulic, filtration, and other industrial equipment, isn't struggling to grow. Its earnings per share are expected to rise 15% this year and 17% next year. But Eaton faces a near-term risk in the form of a long-running antitrust case with Meritor (MTOR), which says Eaton used its clout unfairly in selling truck transmissions. A jury agreed. A judgment, which triples economic damages in such cases, could run $1.4 billion to $2.4 billion based on Meritor's claims, versus Eaton's projected earnings of $2.2 billion this year. Morgan Stanley views an award that large as unlikely and says investors should look past the litigation to Eaton's attractive growth prospects, because the stock could get a lift once the matter is resolved. Shares yield 2.5% and payments are expected to grow by nearly one-third over the next two years.
INVESTORS WHO HEED JPMorgan's advice to swap junk bonds for stocks might want to consider shares of JPMorgan Chase (JPM) itself. Its first-quarter profit tumbled 19% on declines in bond trading and mortgages. Many banks saw similar results, driven by the Federal Reserve scaling back bond purchases and by mortgage rates rising. JPMorgan has been investing in technology for its bank branches and new products for its asset-management business that should pay off once the climate turns healthier for banks. Wall Street predicts its earnings per share will top $7.40 in three years, versus a forecast of $5.38 this year. Dividend payments are expected to rise even faster. Shares currently yield 2.8%
International Paper (IP) posted a first-quarter loss on poor weather in North America, a mill shutdown, and a fall in the Russian ruble cutting into results for a joint venture in that country. But the results may understate the company's true earnings power. Box shipments are projected to grow modestly in the U.S. and faster overseas, which bodes well for containerboard demand. Mill restructurings should improve profit margins over time. And the Russian joint venture enjoys low materials costs and hence potential for healthy profits as production ramps up later this year. Free cash flow is expected to total $1.6 billion this year, rising to $2.2 billion in two years. The latter figure is more than 10% of International Paper's stock market value. Shares yield 2.9%. Management has recently spent roughly as much on share repurchases as on dividends.
At the end of May, National Oilwell Varco completed the spinoff of its distribution business NOW (DNOW). The remaining company, which makes equipment and components for oil and gas drilling, is valued at $34 billion. It holds $3.7 billion in cash and $3.1 billion in debt, and is expected to generate free cash of $2.2 billion this year, rising to $3.1 billion in 2016. Shares yield 2.3%, and analysts expect the company to spend its free cash on rising dividends—with payments hitting 3% of today's price within two years. In January we recommended shares of National Oilwell Varco for the company's potential to set the industry standard for floating oil production, storage, and offloading platforms, just as it has done for offshore drilling rigs. Shares since then have returned 12%, adjusted for the spinoff. They still look plenty affordable at 13 times this year's earnings forecast.
Integrating Black Swans into Retirement Plans Hi Guys,
Statistical models are a functional tool to help understand the interactions between complex social and physical phenomena.
The most common distribution deployed in this modeling is the Normal (Bell) curve. It’s a good choice for many phenomena, but has shortcomings when applied to investment annual returns, especially at the less likely outcomes that exceed the two standard deviation variation level.
I know, I know you are tired of me riding this hairy horse, but I promise this will be my last post on this matter for an extended time (but not forever). I was just jolted by a lightening bolt this morning, and wanted to share it with you. It could conceivably come to your rescue in your retirement planning.
Nassim Nicholas Taleb documented and named the impact of highly improbable investment events in his hugely successful 2007 book “The Black Swan”. That title alone captured the attention of a hungry public; it was sheer marketing brilliance.
He gave an electrifying name to events that were well known by scientists for many decades as the less exciting “Fat Tails”. Benoit Mandelbrot recognized these outliers in cotton market pricing, studied it for
years, and published a superb book, “The (Mis)Behavior of Markets”, on the topic in 2004.
I attempted to incorporate Fat Tail elements when I generated a Monte Carlo code to explore portfolio survival prospects in the mid-1990s. I have long championed the advantages of using Monte Carlo-based analyses as an aid to the retirement decision task.
The scientific and engineering communities have been forever aware that not all physical events surrender to a Normal or Log-Normal statistical distribution. For example, I worked at GE for a short time, and within a week after my arrival, my section chief gave me a copy of a book titled “Statistical Models in Engineering”. I still have it. Various chapters are devoted to Normal, Log-Normal, Gamma, Beta, Rayleigh, Cauchy, Weibull, and other special statistical distributions.
Honestly, today I don’t know the merits, shortcomings, or applications of these numerous modeling options. These tools require specialized knowledge and considerable experience. That’s the bad news. The good news is that investors don’t need that mathematical level of sophistication. I even doubt if these distributions adequately capture real Black Swan events in a satisfactory manner.
My eureka moment was that I finally realized we can integrate Black Swan events into our retirement decision by experimentally using real world historical data in a random fashion. The really good news is that we can easily complete this task using a couple of options available on the Portfolio Visualizer Monte Carlo website that I recently recommended. Here again is the direct Link to that Monte Carlo simulator:
http://www.portfoliovisualizer.com/monte-carlo-simulationHere’s how to use the Portfolio Visualizer tool to estimate the impact of Black Swan events on your portfolio survival likelihoods.
Complete the short list of required inputs that reflect your holdings, goals, and time scale. In the Simulation Model box, Portfolio Visualizer offers three options: Historical Returns, Statistical Returns, and Parameterized Returns. For our current purposes, only the Historical Returns and Statistical Returns options need to be exercised.
The Statistical Returns do not specifically select Black Swan outliers, but only incorporate the smoothed interpretation of these data. The Historical Returns data set randomly selects from all historical data, so it includes the wild outliers specifically. The experiment is to run both distributions, and simply compare the outcomes. The impact of historical Monte Carlo events on your portfolio survival likelihood is the difference in the calculated probabilities.
I conducted a few experiments, certainly not comprehensive in scope.
Black Swans will lower the likelihood of portfolio survival by zero to only a few percent. Results will depend upon the specifics of your portfolio holdings, etc. I’ve run several test cases for a 50/50 equity/bond mix that generated these sample outcomes. Retirement planning should include a sufficient safety margin to accommodate these surprises.
As a general observation, it appears that Black Swans are minor league players when the timeframe is long(I did most of my check cases with a 30 year time horizon). Sensitivity to Black Swans becomes more acute as timeframe is shortened.
Of course, this analysis only measures the impact of past Black Swans. No logical method can confidently project the frequency or magnitude of future Black Swans. That’s the nature of the uncertain investment beast.
I hope you visit the Portfolio Visualizer site to test the robustness of your portfolio and timeframe to Black Swan events. You just might learn something; I did.
By now, I’m sure you have tolerated enough of Monte Carlo and especially of me. So I’ll jump off the Monte Carlo bandwagon, at least for the moment. Thanks for your patience.
Best Regards.
Unconstrained Bond Funds Are Constraining Investors Howdy
@davidmoran , et-al
Not knock against OSTIX, nor other multi-sector bond funds; but my largest concern with any such fund is the ability of the management team to have the proper expertise in a given bond type sector. The presumption being that a multi-sector bond fund team should be pretty darn good at determinations about the direction of bond sectors.
Not an easy game to play, eh?
This is the luck part for any investor. I "gamble" upon which bond fund I feel has their act together. To a point they (the fund) are doing the same; but also get whipped around by policy changes of central bankers who are the pilots of the investment game.
The best one may hope for is to be tied closely to the rear of the central bank boat, so as to not be caught drifting too far off the course being set and changed by the pilot(s).
As to OSTIX and other multi-sector bond funds and internal management, one finds; needless to say, a variety of courses being laid by the managers.
Part of our personal household plan is to have a mix of these type of bond funds. Yes, such a plan has been poo-pooped over the
years both here and at FundAlarm, but of course; we don't really care whether another has their own plan or doesn't like ours. Monitoring the behavior of several funds is not a big chore in our technological world today.
We get the mix we are comfortable with today with: PIMIX, FAGIX and LSBDX in particular; with a mix of other dedicated high yield funds, too.
PIMIX has been more of a mortgage area fund over the recent
years, but has changed style a bit in the last 6 months. FAGIX is a dedicated HY fund, but has always held a mix of "other" accounting for 10-20% of the total. LSBDX remains an everything bond fund with 10% more or less of equity thrown in for good measure.
Multi-sector, flexible, unconstrained bond funds or whatever name one may discover for such funds should flex and evolve as necessary to survive and prosper in our, perverted monetary policy investment world of today.
The evolving of OSTIX into a high yield bond fund indicates the range of choices managers of such funds may have by prospectus. Holders of these funds may only "hope" that management has a full understanding of a particular bond sector to provide positive results. NOTE: We do not hold OSTIX.
Now, if one is damned good at presuming the directions of pricing of any bond sectors; pile into a narrow focused fund, and make some decent money. At the end of the day, it really doesn't matter from where the profits arrive, eh? Both bond and equity investors all around the globe are making money every business day. Find your comfort zone and invest accordingly.
My 2 cents worth.
Catch
Top Large-Cap Funds Mix It Up With Blend, Growth Styles
RSIVX - Yield? @AndyJ Exemplary rigor (I am not worthy). I've been rather lax in not subjecting my recent "starter fund" to stricter scrutiny. As a new fund with uncommon methodology, due diligence would
strongly encourage a closer monitoring, at least for a couple of
years. Thanks for nudging the bar back up for me!
Open Question(s) for the Board on Small Caps How many years from retirement are you, and what proportion of your total portfolio do you allocate to small caps?
Further, what proportion of your international sleeve do you allocate to small caps?
Cheers.
D.S.
I'm retired, early. Wife still works, age 41. At present, we are down to 3.21% of total in small caps, but I could go as high as 8% and feel ok about it. Last year, I let my small-cap fund MSCFX fly, and took goodly profits to transfer into one of my core holdings. When they're hot, they're hot. This year, NAESX has been added: Low expenses, good record. It was the best of the not-wonderful 403b menu selections--- at least to my mind--- and given the make-up of everything else we're holding.
Open Question(s) for the Board on Small Caps In the early years of retirement, I use funds that can go all over the capitalization spectrum, so I leave the percentages to the managers. FWIW, I'm now around 15% in smallcap and about 30% in midcap by M*'s definitions.
Open Question(s) for the Board on Small Caps Hey, D.S.
Years from retirement? What a thought. I'm not sure how one decides when to retire or quite what retirement would look like (if I publish MFO but don't teach full-time, am I retired?). Maybe 10 - 20 years, health, sanity and family permitting.
My asset allocation is 70/30. Within the 70, stocks are about 2:1 domestic over foreign. In both domestic and international, about 40% is small to midcap. On principle I'd have more "pure" small cap exposure but it's tough when your retirement providers are TIAA-CREF, Fidelity and Price.
David
RSIVX - Yield? Heard back from Mr. Schaja this morning. Here's what he says:
The 30-day SEC yield as of May 31 was 4.47% Retail and 4.72% for Institutional class. We estimate the yield-to-worst at 5.2% and the yield-to-maturity at 6.6% (both gross of expenses) and an average of the two, or 5.9% would be a good approximation. The portfolio is on the short side of our maturity range, with an effective average maturity of only a little over 2 years. We expect to generate returns in excess of the yield as we have historically.
I suspect that the nature of the fund's strategy
might cause the guys to be a bit chary about publishing a single number but the complexity of the compliant explanation required for yield/worst versus yield/maturity versus SEC yield
and the probability that effective yield lies somewhere in between might explain the lack of a single number on-site. Morty did not say that. I'm guessing.
So they wouldn't be surprised to generate 5.9% yield plus some capital appreciation.
For what that's worth,
David
Open Question(s) for the Board on Small Caps How many years from retirement are you, and what proportion of your total portfolio do you allocate to small caps?
Further, what proportion of your international sleeve do you allocate to small caps?
Cheers.
D.S.
M*, Day 2: David Herro and Rob Lovelace on EMs and international indexes I want to add to my existing retirement position but am tempted to pay Fido $50 and put it into SGOIX instead (I also have an existing position), which is steadier, although its mgrs have been there only 7 years. Thoughts welcome.
? for Junkster >>>>Did you have ice water injected into your veins as a newborn, or did you have that done later?
p.s. I live in Carson City, less than 15min drive from the eastern crest overlooking Lake Tahoe, 30min from Desolation Wilderness, and 60min from backside of Yosemite (but a lot lower). I could get in a couple of day hikes for you next week if it would make you feel better.:)<<<<<
heezsafe, lived 16 years in Reno and my favorite hiking and backpacking spot in your neck of the woods was the Sawtooth Range outside of Bridgeport.
As an aside, going to try the Cman route and abstain from posting. Yes, I know, tried this once before unsuccessfully but this time will try harder. Good luck to all.
Edit: All the time I posted here, I never once mentioned my book. And the ones that knew I wrote one, I asked them kindly not to mention it. The last thing I wanted was to come across as someone pandering a book, especially one written almost 15 years. Last year my royalty income came to a grand $102. I believe you can get this free online, otherwise just pick up a used one. Thanks Mark. You are a swell guy. I e-mailed you yesterday politely asking if you could delete the reference to me writing a book.
Quant Funds Are Hot Again FYI: Funds that use quantitative stock-picking models are on a roll. A list of 52 U.S.-sold quant funds compiled by Morningstar beat more than 80% of their respective peers over the trailing three
years through June 13, and the group outperformed its respective peers in 2011, 2012, 2013, and thus far in 2014.
Regards,
Ted
http://news.morningstar.com/articlenet/article.aspx?id=651588
New highs doesn't mean you should sell DGoodrow said...
GLRBX is a 50/50 balanced fund...much more to my liking,..
If you're comfy with that fund co. and management,you've got to like JAZZX . The James Long-Short Fund has out performed GLRBX since its May 2011 start.
http://www.jamesfunds.com/fund-overview.php?fund=JAZZX A L/S strategy would be a good diversifier as would the previously mentioned Precious Metals.Also you could use E M debt and the M L P /infrastructure space.Also look @ David Glancy's PYSAX or PVSAX. He has a good record and often holds 15-20% cash,mostly for an unforeseen opportunity.Use RSIVX for your 1-3 year expenses .
Scott has often mentioned the need for infrastructure investment across the world and many of the funds specializing in that space are up nicely this year.$$ cost ave. into your chosen alternatives and re-balance @ your comfort level.
From $4 Tril to $9 Tril in next 10
years.
http://news.yahoo.com/global-infrastructure-capital-spending-hit-9-trillion-2025-040519158--sector.htmlE M debt for the brave.A number of companies have plans to sell dollar-denominated bonds, including the US$1.5 billion unsecured notes proposed by state-owned oil and gas giant PT Pertamina; $450 million bonds by coal miner PT Berau Coal Energy and $175 million bonds by property developer PT Pakuwon Jati, among others.
Pertamina’s notes, which are offered with 6.45 percent coupon rate and will be due in 2044, obtained a Baa3 rate from Moody’s Investor Service. Under the rating, the obligation is seen to have a moderate credit risk.
“The outlook of the rating is stable,” Moody’s wrote in a statement published on Friday.
And The Braver!Troubled coal miner PT Berau Coal Energy released late on Thursday a prospectus highlighting its plan to sell up to $450 million in debt papers
Proceeds from the bond issuance would be used to refinance its $450 million bonds, which were issued in 2010 and are due to mature next year
The new bonds will mature in five
years and will be offered with a maximum coupon rate of 12 percent, the prospectus reads. That compares with Berau’s 2010 bond coupon rate of 12.5 percent.
Berau, one of the major coal miners in the country, is struggling to manage its liquidity as the global coal outlook remains uncertain.
The coal miner reported $10.18 million in net loss during the first three months of the year, leading to worries over the company’s ability to pay its debts.
Amid concerns of rising private sector debts, Indonesian companies are continuing to seek external funding in foreign currencies to support expansion or the refinancing of previous debts.Raras Cahyafitri, The Jakarta Post, Jakarta | Business | Sat, June 21 2014, 2:47 PM
http://www.thejakartapost.com/news/2014/06/21/firms-sell-dollar-bonds-despite-rising-concerns-over-private-debt.html
Horseshoes and Hand Grenades "Lies, damned lies, and statistics." If one wants a quote.
While I agree that close is probably good enough for hand grenades (that's the whole point with them, after all), one gets 3 points for a ringer in horseshoes and one point for being close, so it's just another flawed analogy (at least on the professional horseshoe circuit).
But really, a 60/40 mix for someone under 40 (I'd say under 50)?
I'd be more impressed if someone proved rebalancing starting more than 20 years before retirement enhanced returns. The never rebalanced portfolio slightly outperformed with higher volatility in the cited example, even after starting with the drag of 40% bonds.
I agree with John Bogle who seems to support using Social Security as part of one's bond allotment and including more equities.
A bit surprised that rebalancing every 3 months, which seems a bit hyperactive, provided second best return.
New highs doesn't mean you should sell Professor Jeremy Siegel [author, Stocks For the Long Run] made an important point with respect to the bear market from October 2007-March 9, 2009, when the US stock market went down 57%. He said something to the effect of, iirc, 'there are only two asset classes, stocks and US Treasuries.'
In that bear market/financial crisis, it didn't matter if you had large cap, small cap, mid cap, REITs, US stocks, foreign stocks, value, growth......they all got clobbered. But one asset class did great: US Treasuries. There is a 'flight to safety' in US Treasuries. So that does provide important diversification. Check out the total return of US Treasury bond funds in 2008 and you will see they did great, and provided great diversification.
However, DGoodrow mentioned "In light of pending problems for bonds going forward".
That is a duration issue, which only comes up if rates rise. If rates rise say 1% in one year, and if you are in a total US bond market index fund, which has a duration of 5.6 years, then your bond fund will likely lose approx. 5.6% in net asset value, which does not include the yield which is currently 2.1%, so the one year total return would be roughly -3.5%. Of course, there are many who believe that rates will rise significantly over an extended period, hurting bond holders a lot more, which may be what DGoodrow is alluding to.
So one solution for someone who is concerned about bonds going forward is to put some fixed income money into online FDIC insured banks. You can get .95% in a demand type savings account [with no minimum deposit], or more in certificates of deposit.
Another option for diversification is a gold fund, like GLD or IAU.
Personally I don't feel comfortable doing that, as I would rather wait for a much more attractive gold price.
Just some thoughts.
New highs doesn't mean you should sell davidrmoran,
I'm not sure you completely understand the context upon which I made the statement. The discussion was pertaining to a total 70/30 asset mix portfolio (with the equity position increasing throughout the balance of the year) close to retirement, as opposed to my portfolio that was closer to 40/50 mix (which Slick said might be on the conservation side). And I assumed that Slick intended diversification to mean LC/MC/SC domestic, international and emerging markets. FCNTX lost upwards of 38% in 2008. Diversified? Large Cap domestic is not diversified. FPACX? Hardly diversified enough by itself or in conjunction with the others you mentioned...and wasn't it it's large position in cash that limited the slide in 2008. GLRBX is a 50/50 balanced fund...much more to my liking, but hardly the thing that an entire million and a half $ portfolio is made of. As far as not being able to afford waiting 3-4 years for the market to recover, and eating your portfolio seed corn while you wait...good luck with that. I would rather "afford" to be conservative.
