William Bernstein Discusses Tilting Hey, rjb.
I get where you're coming from, but Bernstein was attempting to write a popular statistical model of a portfolio that would approach the Efficient Frontier, while claiming that, since you can't know future asset class performance, you can't know where the Efficient Frontier will lie. In order to do that, he looked at historical asset class performance and correlation. For foreign, since he's writing in the late 90s, the only thing he has long term data for is the EAFE. For small he uses the CRSP 9-10, which gets much farther into microcap territory than VTSMX.
When he starts talking about asset allocation in Chapter 5, he admits up front he is "an asset class junkie," and is willing to own "20 or 30" different asset classes. But the rub is that he wants everything to be a separate asset class. We have 15 years of hindsight and recency bias showing an across the board increase in correlations. For instance, Bernstein approaches bonds as a risk control tool, and assumes correlations of .777 between SC and the S&P 500, and .483 between the EAFE and the S&P 500. It's not so much that Bernstein doesn't want to use total market indices, but that doing so doesn't allow him to really make his broader point re: diversification because there is a lack of data. He ends up using the European stocks as a proxy for the EAFE because there wasn't a Vanguard DM fund yet.
The portfolio Ted points to, he calls the "Level-One Asset Palette," and he designs it for those who find "reading this book ... the equivalent of root canal work." Quickly after he presented it as his Lazy Portfolio. In the book he presents second level and third level "palettes," which include EM, Foreign smallcap, REITs, Natural Resource stocks, short term bonds, TIPS, foreign bonds, and valuation factors.
Not sure if that helps or not, but that's what I gather his reasoning is. Personally, if you're going for as much growth and diversification across 4 asset classes as you could easily get, I would think something like CRSP 9-10 (VB or VBR), foreign small (VSS), Real Assets (VNQ, RWO, VDE, or ALPS), and either an intermediate or hedged foreign bond fund (BND or BNDX) would be better. But some of those funds didn't exist 15 years ago.
Dividend Payers Attractive Again As Bond Yields Fall @ron,
@Catch22,
Calling LT treasuries "equity insurance" might have sent this discussion down the wrong path. Maybe a better analogy would be a portfolio shock absorber. LT Treasuries often out perform at times when equities underperform. Personally, an equity investor should expect a certain range of volatility. Bonds can help dampen and absorb some of the bigger equity bumps allowing an investor to stay "fully" invested.
Retirees recently have had to navigate through two market meltdown (catch22's term) over the last 1
5 years. If an investor held a portfolio consisting mainly of equities he/she would have two very large holes to fill.
To drive this point home visually I created a graph using a backtested portfolio tool which shows the impact these two meltdowns had on a 100% equity portfolio (ron's $
500,000) verses two other portfolios that incorporated a mix of LT bonds and equities.
Backtesting Portfolio Tool:"This online portfolio backtesting tool allows you to construct a portfolio based on the selected asset class allocation to analyze and backtest portfolio returns, risk characteristics (Sharpe ratio, Sortino ratio), standard deviation, annual returns and rolling returns."portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults
William Bernstein Discusses Tilting
His No Brainer Portfolio.......
Why has he limited the foreign stocks to Europe only?
And the 25% S&P 500 and 25% small cap index.....that's an unusual "tilt". Almost all the "tilters" tilt to small cap value
If I remember where he discusses this in the
Intelligent Asset Allocater, this is the simplest of his portfolios, and is designed for maximum diversification within 4 widely available asset classes. It was also subject to availability of Vanguard funds at the time, and I don't think they had a "Developed Markets" fund yet, only Europe and Asia/Pac. IIRC, he claims any foreign will capture most of the diversification benefits, so no EM exposure. He also treats SC as a separate class of stocks than LC. Essentially he's trying to prevent a simple way to capture multiple market movements for long term accumulators who don't want to spend time on portfolios, so isn't really worried about "tilting" per se.
I seem to remember he builds in value somewhere in the more complex portfolios, but I could be wrong.
If he wanted maximum diversification within 4 widely available asset classes, I find it odd he did not use the Vanguard Total International Stock Market Index fund. If this is for long term accumulators, what's wrong with adding in emerging markets, Pacific, etc, that you get in the total int'l fund. And a bit odd that he did not use the Vanguard Total Stock Market Index fund too, although that can be explained by his desire to use a separate small cap fund.
William Bernstein Discusses Tilting
His No Brainer Portfolio.......
Why has he limited the foreign stocks to Europe only?
And the 25% S&P 500 and 25% small cap index.....that's an unusual "tilt". Almost all the "tilters" tilt to small cap value
If I remember where he discusses this in the
Intelligent Asset Allocater, this is the simplest of his portfolios, and is designed for maximum diversification within 4 widely available asset classes. It was also subject to availability of Vanguard funds at the time, and I don't think they had a "Developed Markets" fund yet, only Europe and Asia/Pac. IIRC, he claims any foreign will capture most of the diversification benefits, so no EM exposure. He also treats SC as a separate class of stocks than LC. Essentially he's trying to prevent a simple way to capture multiple market movements for long term accumulators who don't want to spend time on portfolios, so isn't really worried about "tilting" per se.
I seem to remember he builds in value somewhere in the more complex portfolios, but I could be wrong.
Dividend Payers Attractive Again As Bond Yields Fall @bee @ronYou noted to bee: "Bee, I don't see it as equity insurance because how much are you going to buy if for example you have a $
500,000 or more equity holdings? Insurance is a premium you pay for protection. You might consider trying to cover some of a loss by buying, in your case EDV but that's not insurance. It's like a lot of these alternative funds. I could never invest enough to take a risk of betting and loosing."
Is there any reason to hold any bonds?
If one holds any bond funds, is this not a form of insurance against an equity melt?
Is not the answer to hold all equity and sell when one's downward pain point is reached; and place the monies into cash and wait for the next upward move?
Regards,
Catch
Dividend Payers Attractive Again As Bond Yields Fall I am one of the more aggressive yet most conservative on this board. As for SPLV from its closing high to its recent intraday low it declined 5.1%. I realize we are all different here and whatever suits our personality etc. and there is no right or wrong way. But at my age (or any age for that matter) I would be devastated to see a 5.1% decline in any of my positions. (actually would never allow that to happen via a trailing mental stop) And since I normally invest all or nothing, that would entail a 5.1% in my liquid net worth. We read all about the current rout in junk bonds, but the open end haven't come close to 5.1%. And then you have the junk munis that are up double digit this year and some of those (EIHYX) haven't had so much of a 1% decline along the way. Trend persistency and low volatility with little to no drawdown along the way is my preference for .........
Dividend Payers Attractive Again As Bond Yields Fall Bee, I don't see it as equity insurance because how much are you going to buy if for example you have a $500,000 or more equity holdings? Insurance is a premium you pay for protection. You might consider trying to cover some of a loss by buying, in your case EDV but that's not insurance. It's like a lot of these alternative funds. I could never invest enough to take a risk of betting and loosing.
William Bernstein Discusses Tilting
His No Brainer Portfolio.......
Why has he limited the foreign stocks to Europe only?
And the 2
5% S&P
500 and 2
5% small cap index.....that's an unusual "tilt". Almost all the "tilters" tilt to small cap value
William Bernstein Discusses Tilting "My point is that a 100% or even a 75% stocks portfolio isn't for everyone and Dr Bernstein's 60% stocks portfolio shouldn't be judged against a 100% stocks (S&P 500) portfolio."
Exactly. The so called "financial experts" at Marketwatch do not comprehend this. One should also know that this is the same outlet that was reporting the price of gold in barrels. We had a good laugh on that one.
Comparing is more of a ego trip than anything else.
William Bernstein Discusses Tilting @Ted I'm not sure I catch your drift, Ted
Yes, stocks have outperformed bonds in the past, but it's anyone's guess as to whether that will continue to be the case.
My point is that a 100% or even a 7
5% stocks portfolio isn't for everyone and Dr Bernstein's 60% stocks portfolio shouldn't be judged against a 100% stocks (S&P
500) portfolio.
Dividend Payers Attractive Again As Bond Yields Fall Hi Slick,
I remember you noting this about your portfolio from past post sometime ago. Not too long ago I held about fifteen percent in utilities and I have now reduced this down to about eight percent within equities. In addition, I have linked an article from Seeking Alpha about how some believe that utilities are now considered a good portfolio diversifier.
http://seekingalpha.com/article/2400835-a-surprising-new-portfolio-diversifierThanks for making a comment.
Old_Skeet
William Bernstein Discusses Tilting
William Bernstein Discusses Tilting @Ted Is the S&P
500 a fair comparison for the Bernstein haystack portfolio? Bernstein was 40% in bonds
William Bernstein Discusses Tilting
new frontier for MLPs @Scott: Speaking of Harry Domash and Dividenddetective.com.
Finally, FundAlarm's Discussion Board is another area worth checking out. The boards are moderated, meaning that rude, off topic, or otherwise offensive messages don't get posted. With more than 2
5 posts on an average day, the board is amazingly active for a relatively unknown site. However, most of the posts come from "Ted," described on the site as a night owl residing in Olympia Fields, Illinois.
Ted's postings consist mostly of links to interesting news and commentary about mutual funds, and investing in general. According to the site, although officially retired, Ted doesn't fill his posts with links to stories you see everywhere. I spend all day long on the Web, but all of Ted's links that I clicked took me to stories and commentary that I wouldn't have found on my own.
Dividend Payers Attractive Again As Bond Yields Fall How much are you willing to take for this scenario in retirement?
People love insurance...especially in retirement. LT treasuries are insurance against equity risk and maybe a number of other kinds of risks. If you buy a 20 yr treasury individually at age 6
5 it will mature just in time for longevity risk to come due at 8
5. With no loss of face value and a coupon paid along the way to offset inflation. If you prefer a fund, buy a Zero Coupon Treasury fund. The fund actually liquidates in this same manner. BTTRX is one that "matures" in 202
5.
To me its just insurance. EDV is "equity insurance". I'm bringing this up just after a small fire (market hiccup). Look at what the value of "equity insurance" really looks like. Here's EDV in 2009 when VTI got really burned:
How much "equity insurance" does someone need? Hmm...now that's a good question to ask someone a lot smarter than me. Please don't ask an insurance saleman.
You Really Want To Pick Stocks ? Think About Following These Guys
Dividend Payers Attractive Again As Bond Yields Fall A re-do from August 7, here.
Many sectors/funds slip past our view, in our ever changing world of investing. Most of us are too busy with family and making a monetary living to watch everything, all of the time.
Since late February of this year, we returned some of our monies back into direct investments in TIPs funds.
Yes, there are those who poo-poo such areas of investments.
The argument against, generally being that such investments have such low yields; why in the world would anyone want to invest.
Not unlike equity investing, we look at these from a price point. Yield from bonds, not unlike a dividend from an equity is not usually our focus with a fund holding. If both price and yield work together to some extent; well, all the better, eh?
As to TIPs in general; several areas may affect their value or lack of; being a safe haven, cash equivalent holdings for some funds, pension funds and the persception of inflation.
Generally, if conditions are favorable; TIPs holdings are our "cash" for parking monies.
Lastly, with active managed TIPs funds; one will find a variety of holdings. As seen in the below list; duration of holdings plays an important role, and that many TIPs funds will not be 100% in this bond area; but will also hold other investment grade bond types.
Well, anyway; just a few blips about this area.
A sampling..... YTD numbers, as of Aug 5
---LTPZ, + 17%
---STPZ, + 1.6%
---TIPZ, + 6.7%
---TIP, + 6.1%
---FINPX, + 5.9%
---ACITX, + 5.6%
---BPRIX, + 6%
Note: TIP 5 year annualized = 5.6%
Take care,
Catch
Dividend Payers Attractive Again As Bond Yields Fall What is often not mentioned in articles like this is another important fact. When bond yields fall bond funds realize capital appreciation since the bonds they bought yesterday have a higher "value" (price+coupon) than the one's they could buy today.
Capital appreciation of older issue bonds in a falling yield environment is a bond holders "alpha". If bonds are held to maturity they sell at face value...the bond holder collected their original investment plus the coupon...no harm no foul.
Many have worried themselves out of bond positions. Bonds are less important for income these days and more important to help an overall portfolio cushion against equity markets periodically faltering. When this happens investors look for a "flight to safety", they buy bonds forcing yields to fall and as a result yesterday's bonds appreciate... the bond's value goes up.
This bond appreciation provides a cushioning effect on their equity allocation and might even serve as the "dry powder" to reallocate back into equities when stocks reverse significantly.
A stock dividend will only protect a stock's value equal to it's dividend. In a stock correction, a bond's value will often times appreciate.
Dollar Cost Averaging into bonds when the stock market is moving higher by using proceeds from periodic stock profits is one way of buying bonds when they are out of favor.
How did your bond do during this last "hiccup"? Over the past month as treasury yields have lowered; the etf, EDV (long duration treasuries), has appreciated in value over 4%, while VTI (total stock market) sold off by a little over 2%.
YTD, EDV is up 22% verses VTI gain of 4%. The 22% gain in EDV is the cushion for the overall portfolio or possible the "dry powder" that an investor could reallocate if they thought stocks were a "buy" right now.
It's my feeeling LT treasury funds like EDV have a portfolio cushioning effect on stock market risk. Because of their longer duration they possess an amplification effect verses shorter duration bonds. If you are trying to protect against interest rates rising for your cash position, buy shorter duration bonds. If you are trying to cushion periodic stock market downturns (equity risk) hold longer duration bonds.
I see a place for both in a well diversified (risk adjusted) portfolio.
