Rebalance Regularly, Even During Periods Of Volatility I usually rebalance the major areas (cash, bonds, stocks & other assets) of my portfolio when one of them gets to be plus or minus five percent form it's target with the exception being cash.
Example. My current target allocation to equities is 50%. With this, should equities rise to above 52.5% (105% of it's target) during a normal market cycle then I'll trim equities. However, if we are in a seasonal trend then I'll, at times, delay the rebalance towards the end of the seasonal cycle usually following some technicals looking for a breakdown in the trend. With this, I can either rebalance by the calendar or anytime by a break down in the trend. Should equities reach their upper limit within their asset allocation (currently set at 55%) then this requires a rebalance back to at least the 52.5% level and when the seasonal strategy concludes I'll generally rebalance back to the traget allocation of 50% unless equities are selling at a low price to earnings multiple and I'll position towards their mid to high allocation range for me.
Generally, if stocks are selling at a high price to earnings ratio valuation then I'll position towards the low end of my allocation range (45%) and if they are selling at a low price to earnings ratio valuation then I'll position towards my high allocation range (55%).
I am thinking there are many triggers that can warrant a rebalance incuding a need for cash. The above are just a couple of the things that can trigger a rebalance for me with most of them being driven by both stock and bond market valuations. In addition, I'll generally buy major downdrafts in the stock market and sell some equities off as the market recovers keeping within my allowable asset allocation range.
I call this working within one's asset allocation and somewhat follows Biblical beliefs in there is a time to plant and a time to harvest. Through the years this strategy has worked well for me.
Below is a description of my sleeve management system along with my portfolio's configuration. Note, there has been some recent fund movement within the sleeves.
Old_Skeet's Sleeve Management System (02/26/2016)
Here is a brief description of my sleeve system which I organized to help better manage the investments that were held in five accounts along with my current positioning. The accounts consist of a taxable account, a self directed ira account, a 401k account, a profit sharing account and a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves. … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of five sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve, a specialty & theme sleeve along with a ballast & spiff investment sleeve. Each sleeve consists of three to six funds (in most cases) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and amounts held. By using the sleeve system one can get a better picture of their overall investment picture and weightings by sleeve and area. In addition, I have found it beneficial to xray each fund, each sleeve, each investment area, and the portfolio as a whole quarterly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets and wish to weight accordingly. All funds pay their distributions to the cash area of the portfolio with the exception being those in my 401k, profit sharing, and health savings accounts where reinvestment occurs. With the other accounts paying to the cash area builds the cash area of the portfolio to meet the portfolio’s monthly cash disbursement amount with the residual being left for new investment opportunity. In addition, most all buy/sell trades settle from or to the cash area with some nav exchanges between funds taking place.
Here is how I have my asset allocation broken out in percent ranges, by area. My current target allocations are cash 20%, income 30%, growth & income 35%, and growth 15%. I do an Instant Xray analysis on the portfolio quarterly (sometimes monthly) and make asset weighting adjustments as I feel warranted based upon my assessment of the market, my risk tolerance, cash needs, etc. Currently, I am about 20% in the cash area, 30% in the income area, 35% in the growth & income area and 15% in the growth area. When a rebalance is warranted I'll trim first from the ballast & spiff sleeve.
Cash Area (Weighting Range 15% to 25% with target being 20%)
Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual)
Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 25% to 35% with target being 30%)
Fixed Income Sleeve: GIFAX, LALDX, THIFX, LBNDX, NEFZX & TSIAX
Hybrid Income Sleeve: CAPAX, CTFAX, FKINX, ISFAX, JNBAX & PGBAX
Growth & Income Area (Weighting Range 30% to 40% with target being 35%)
Global Equity Sleeve: CWGIX, DEQAX & EADIX
Global Hybrid Sleeve: BAICX, CAIBX & TIBAX
Domestic Equity Sleeve: ANCFX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX
Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 20% with target being 15%)
Global Sleeve: ANWPX, PGROX & THOAX
Large/Mid Cap Sleeve: AGTHX, IACLX & SPECX
Small/Mid Cap Sleeve: AJVAX, PCVAX & PMDAX
Specialty & Theme Sleeve: LPEFX, PGUAX, TOLLX, NEWFX & THDAX
Ballast & Spiff Sleeve: FISCX, VADAX & VNVAX
Total Number of Mutual Fund Positions = 47
How I Blew It With A Smart-Beta Fund
muni reads
GLFOX - Lazard Global Listed Infrastructure Open, @Bee and others 6
5% giant and large-cap, with
55% of assets in top 10 holdings. Certainly not SMID and the concentration may give some pause. It has worked as a global holding for me as for
@puddnhead during a period when JOHAX, IWIRX and Grandeur Peak holdings in my accounts stank up the joint. I'm adding to GLFOX.
Q&A With Doug Ramsey, Co-Manager, Leuthold Core & Leuthold Global Fund A few highlights:
Expect the S&P 500 to bottom somewhere between 1600-1700. It's about 1950 now.
Given the length of this bear (going on 11 months) and the length of a normal bear, the bottom might occur this summer.
The worst of overvaluation has been squeezed out. We've gone from the second highest valuation to perfectly average in a bit over a year.
"On a smoothed-over basis, the S&P 500 is 19.5 times normalized earnings. The developed world ex-U.S. is 14.5, and emerging markets are 9.5. Europe has depressed valuations on depressed normalized earnings." Much of the risk from small caps is gone. Indeed, GMO projects small caps to return noticeably more than large caps in the next 5-7.
For what interest that holds,
David
Larry Swedroe: Does GMO Add Value For Investors? @expatsp: $10,000,000
is the low minimum retail class for GMO, buddy. The share class minimums are $10M, $
50M, $12
5M and $300M.
Larry Swedroe: Does GMO Add Value For Investors? Hi David,
I just glanced at M*, and for the last ten years, GBMFX has returned 4.82% annually, beating its category by a highly respectable 1.03%.
http://www.morningstar.com/funds/XNAS/GBMFX/quote.htmlBut that's the institutional share class, with a $10 million minimum. I presume that the higher fees for non-institutional investors will eat up some of that alpha, and then it's very inefficient taxwise (1.78% tax cost) so unless you're in a tax-sheltered account, there goes the rest of that alpha and then some.
Vanguard's balanced index fund, VBINX, turned in a
5.99% annual return over that ten year period, with a 0.80% tax cost. In a taxable account, the annual return would be nearly double GBMFX, and even in a tax-sheltered account it would be superior. And of course there's no manager-transition risk, concern about luck, etc.
I don't know about the since-inception results, maybe in the 90s GBMFX had glory years, but MJG's thoughts -- that even funds run by brilliant, ethical, humble, and careful managers like Mr. Grantham have a hard time outperforming -- are becoming ever more convincing.
John Oliver: Hollywood Whitewashing Enjoy ! (Click On Watch This Video On YouTube)
Regards,
Ted
Rebalance Regularly, Even During Periods Of Volatility
FPA Crescent Fund Annual Report - December 31, 2015 "At first glance, it appears that we’ve declined as much as the market — down 11.71% since May 2015’s market peak against the S&P 500’s 11.30% decline — but that’s looking at the market only through the lens of the S&P 500. However, roughly half of our equity holdings (totaling almost a third of the Fund’s equity exposure) are not included in the S&P 500 index. Our quest for value has increasingly taken us overseas and our portfolio is more global than it has been in the past. We therefore consider the MSCI ACWI a pertinent alternative benchmark."
What?
"We look pretty good compared to a global all-equity benchmark"?
Uhhh ... the fund is 37% cash and 8.5% international stocks. That's way less global than either its Morningstar benchmark or Morningstar peer group.
Underperformance doesn't bother me. Obfuscation does.
David
Larry Swedroe: Does GMO Add Value For Investors? 'Let the jury consider their verdict,' the King said, for about the twentieth time that day.
'No, no!' said the Queen. 'Sentence first - verdict afterwards.'
'Stuff and nonsense!' said Alice loudly. 'The idea of having the sentence first!'
'Hold your tongue!' said the Queen, turning purple.
Mr. Swedroe is a marketer. His title, Director of Research, strikes me as modestly misleading since we often associate that title with someone leading the stock-by-stock, market-by-market analytics effort. BAM's official description of his role is this: "Larry regularly reviews the findings published in dozens of peer-reviewed financial journals, evaluates the outcomes and uses the result to inform the firm’s formal investment strategy recommendations." What does that mean? The most recent research I read concluded that frequent portfolio disclosure depresses performance by facilitating front-running of the fund. Okay, and therefore ... ? Several recent studies found that most active funds don't outperform their benchmark's raw returns. Uh-huh. "Finding successful funds ex-ante is extremely difficult." Someone got published for that nugget. At base, Larry's conclusion was reached a long time ago, BAM is deeply invested in it, and I'm not sure what he's actually contributing. The nature of peer-reviewed articles is that they aren't timely, so it's unlikely that the answer to the question "what on earth are the Chinese doing?" will be found there.
On the risk-adjustment stuff, I looked at GMO's five largest funds.
Benchmark-Free Allocation (GMBFX) is largest and it's beaten its peers since inception with dramatically higher returns (about 300 bps/year) and lower risk (a downside deviation of 4.4 versus 7.2 for its peers). It's Sharpe ratio is 0.99 versus 0.43 for the peers.
International Equity (GMOIX) is second largest and it's beaten its peers since inception with modestly higher returns (about 120 bps) and lower risk (DSDEV 11.2 vs 12.5), resulting in a higher Sharpe (0.24 versus 0.16).
Quality (GQEFX) is third, a Great Owl (i.e., a consistent winner), with higher returns (40 bps), lower DSDEv (7.8 versus 10.3) and higher Sharpe (0.44 versus 0.32).
Emerging Markets (GMOEX) is fourth. It has better performance (180 bps), very slightly higher volatility (16.9 versus 16.8) and a higher Sharpe (0.14 versus 0.06).
US Equity Allocation (GMUEX) is fifth. Better performance (90 bps), lower vol (9.8 versus 10.6) and higher Sharpe (0.51 versus 0.42).
If you play with the comparison groups or the time frames, you can substantially change the results. That said, most of these funds lead most of their peers, mostly with lower volatility, over most full market cycles.
David
Larry Swedroe: Does GMO Add Value For Investors? @MJG: your points on n-factor models are well taken. It would be interesting to compare fit statistics and information criteria for each of the models for each of the funds to better determine if funds' all have the same underlying factor structure. Which model is correct? Is the correct model the "correct" all the time? Leave that as it is for another time. There's also a methodological issue in terms of getting the random variable distributions of the observed indicators correct. Without that, the factor analysis results are apt to be biased, and statistical inferences on parameters from the factor solution are apt to be incorrect. Same, of course, goes for a t-test, etc. Would the biases be consistent across funds/comparisons? Hard to say. But, leave that as it is. There is also the question of how appropriate linear or fully parametric models (such as factor analysis) are for something as opaque as financial markets and asset performances. Perhaps a parametric model should explicitly account for trending (is "momentum" sufficient) in a different manner. Again, leave that as it is.
Because, what I really want to know is -- in terms of actual, realized, dollar value returns -- what is GMO's performance when we factor in their contribution to risk reduction. I would think that is what GMO with their "2-sigma" logic, etc., is trying to do: not just pick attractive and/or undervalued assets per se, but avoid market bubbles. This is how I often hear Grantham speaking of GMO's mission. Here I think a different accounting for volatility is important before dismissing what GMO does or doesn't do. And it doesn't have to be all that complicated, but simply comparing means to means doesn't account for this aspect of what GMO attempts to do (perhaps adding "momentum" to a factor analysis does capture this in some tangential way; I don't think so, but its possible). I would think an analyst such as Larry savvy enough to wax poetic about factor analysis would know this. For example, it is quite possible for Fund A to have a lower mean annualized return than Fund B, but outperform Fund B, if it has lower volatility. As Buffett says: "Rule #1 is to not lose money; Rule #2 is to not forget Rule #1". Who cares if the market index has a higher average return but takes costly bites out of your principle along the way? That's really the point of my critique. If GMO lagged the market average by 0.
5% but reduced investors' exposure to the 2001 or 2008 downturns, they would have added significant value that would likely not be captured in simple mean comparisons or (as I understand it) an n-factor model.
