"The challenge of asset allocation now is no longer having too few ingredients to consider but rather selecting among an ever increasing array of sector-specific mutual funds and exotic ETFs"
A Seven Asset Portfolio out performed all other asset allocations, both prior to and during retirement.
This would consist of:
-large-cap U.S. stock
-small-cap U.S. stock
-non-U.S. developed-market stock
-real estate
-commodities
-U.S. bonds
-cash
-in equal proportions, rebalanced annually.

and,
"The second part of this analysis compares three allocation models when used in a retirement portfolio — which is very sensitive to timing of returns, particularly large losses. This analysis assumed an initial nest egg balance of $250,000 — quite comfortable back in 1970, although fairly modest now — with an initial withdrawal rate of 5% (or $12,500 in year one) and an annual cost of living adjustment of 3%. Thus, the second-year withdrawal was 3% larger (or $12,875), and so on each year. The superior approach, however — with a median ending balance of over $2.1 million — is the model using seven different asset classes."


For retirees facing the future headwinds of rising rates this study found that:
-during the inflationary periods of the 1970s, the seven-asset model had considerably better performance as a retirement portfolio — finishing with a balance of $2,086,863 for the 1970 to 1994 period, while the 60/40 model ended up at $1,090,081. The pattern recurs in the first four 25-year periods.
-an asset allocation model that has a large commitment to U.S. bonds (such as the classic 60/40 portfolio) may be at risk because if interest rates rise, bond returns will likely be far lower than over the past three decades.
-that a more broadly diversified portfolio is prudent — both in the accumulation years and in the retirement years.
Source:
which-asset-allocation-mix-outperforms?

FYI: This week, Vanguard announced it’ll be playing ball, and will add China A-shares to its flagship emerging market fund, the Vanguard FTSE Emerging Markets Index ETF (VWO | C-86). So it’s quite reasonable for investors to ask two important questions.
Regards,
Ted
http://www.etf.com/sections/blog/vanguards-frenzy-china-shares?nopaging=1

FYI: Every year, we are reminded to rebalance our stock portfolios. This year, maybe we shouldn’t.
Regards,
Ted
http://blogs.wsj.com/totalreturn/2015/06/04/portfolio-rebalancing-may-not-pay-off-this-year/tab/print/?mg=blogs-wsj&url=http%3A%2F%2Fblogs.wsj.com%2Ftotalreturn%2F2015%2F06%2F04%2Fportfolio-rebalancing-may-not-pay-off-this-year%2Ftab%2Fprint

FYI: Ron Surz uses a thought experiment to clarify sequence of returns risk and its perilous implications for target-date investors.
Regards,
Ted
http://www.thinkadvisor.com/2015/06/04/what-makes-sequence-of-returns-risk-so-dangerous?t=mutual-funds&page_all=1

This is not a trivial change, but it appears (to me) to be a pretty fundamental re-do:
http://www.fpafunds.com/docs/fund-announcements/2015-06-04-perennial-press-release-final.pdf?sfvrsn=2lease-final.pdf?sfvrsn=2
1. New manager change, plus an alteration from 2 managers to one manager. Eric Ende, as he transitions toward retirement, will move entirely away from this fund and yet remain with Source Capital for awhile, the CEF-equivalent of Perennial which presumably will retain its SC/MC quality mandate. Gregory Herr will pass the baton to Mr. Nathan and focus exclusively on his Paramount charge, which he currently co-manages.
2. Perennial will become US Value and morph, after temporary closure, to an all-cap posture. That this new mandate will result in significant portfolio change is apparent from their press release:
"FPA Perennial Fund will close to new investors on June 15, 2015, as the portfolio manager change will result in significant long-term capital gains. FPA expects to reopen the Fund to new investors in October, following the portfolio transition."
So, congratulations, Perennial holders, the role this MF plays in your portfolio has just been changed for you.

http://www.sec.gov/Archives/edgar/data/732041/000110465915043479/a15-13532_1497.htm
497 1 a15-13532_1497.htm 497
FPA Perennial Fund, Inc. (FPPFX)
Supplement dated June 4, 2015 to the
Prospectus dated April 30, 2015
This Supplement updates certain information contained in the Prospectus for FPA Perennial Fund, Inc. (the “Fund”) dated April 30, 2015. You should retain this Supplement and the Prospectus for future reference. Additional copies of the Prospectus may be obtained free of charge by visiting our web site at www.fpafunds.com or calling us at (800) 638-3060.
CHANGE IN NAME
Effective September 1, 2015, the Fund’s name will be changed to “FPA U.S. Value Fund, Inc.”.
CHANGE IN PORTFOLIO MANAGERS
Effective September 1, 2015, the paragraphs under the heading “Summary Section — Portfolio Managers” on page 7 of the Prospectus are deleted and replaced in their entirety with the following:
“Portfolio Manager. Gregory Nathan, Managing Director of the Adviser, has served as a portfolio manager since September 1, 2015.”
Effective September 1, 2015, the paragraphs under the heading “Management and Organization — Portfolio Managers” on page 13 of the Prospectus are deleted and replaced in their entirety with the following:
“Portfolio Manager
Gregory Nathan is primarily responsible for the day-to-day management of the Fund’s portfolio.
Mr. Gregory Nathan has been an analyst for FPA’s Contrarian Value strategy, including FPA Crescent Fund, since January 2007. Prior to joining FPA in 2007, Mr. Nathan was a managing member of Coldwater Asset Management LLC.
The SAI provides additional information about the Portfolio Manager’s compensation, other accounts managed by the Portfolio Manager and the Portfolio Manager’s ownership of shares of the Fund.”
Effective September 1, 2015, Eric Ende and Gregory Herr will no longer be Portfolio Managers of the Fund.
DISCONTINUANCE OF SALES TO NEW INVESTORS
Effective on or about June 15, 2015, the Fund has discontinued indefinitely the sale of its shares to new investors, except existing shareholders, directors, officers and employees of the Fund, the Adviser and affiliated companies, and their immediate relatives.
In addition, the Fund will allow new investors to purchase shares if they fall into one of the following categories:
1. Clients of an institutional consultant, a financial advisor, a financial planner, or an affiliate of a financial advisor or financial planner, who has client assets invested with the Fund at the time of your application;
2. Investors purchasing Fund shares through a sponsored fee-based program and shares of the Fund are made available to that program pursuant to an agreement with FPA Funds or UMB Distribution Services, LLC, and FPA Funds or UMB Distribution Services, LLC has notified the sponsor of that program, in writing, that shares may be offered through such program and has not withdrawn that notification;
3. Investors transferring or “rolling over” into a Fund IRA account from an employee benefit plan through which you held shares of the Fund (if your plan doesn’t qualify for rollovers you may still open a new account with all or part of the proceeds of a distribution from the plan);
4. You are an employee benefit plan or other type of corporate or charitable account sponsored by or affiliated with an organization that also sponsors or is affiliated with (or is related to an organization that sponsors or is affiliated with) another employee benefit plan or corporate or charitable account that is a shareholder of the Fund, and;
5. You are a participant of an employee benefit plan that is already a Fund shareholder.
The Fund may ask you to verify that you meet one of the categories above prior to permitting you to open a new account in the Fund. The Fund may permit you to open a new account if the Fund reasonably believes that you are eligible. The Fund also may decline to permit you to open a new account if the Fund believes that doing so would be in the best interests of the Fund and its shareholders, even if you would be eligible to open a new account under these guidelines.
The Fund’s ability to impose the guidelines above with respect to accounts held by financial intermediaries may vary depending on the systems capabilities of those intermediaries, applicable contractual and legal restrictions and cooperation of those intermediaries.
The Fund continues to reinvest dividends and capital gain distributions with respect to the accounts of existing shareholders who elect such options.
FPA Perennial Fund, Inc. (as of September 1, 2015, FPA U.S. Value Fund, Inc.) expects to re-open to new investors during October 2015.

http://www.sec.gov/Archives/edgar/data/313212/000031321215000150/485a.htm
Launches at the end of August. The manager hasn't really run a fund before, but has been managing some sort of TRP portfolio for the past five years.
Not a terribly informative prospectus, though perhaps an interesting idea. There are four or five open-end funds that bear the "emerging market value" label, mostly so-so or weaker. Andrew Foster made the interesting argument a while ago that value investing mostly didn't work in the emerging markets because there was, in a world of interlocking directorships and chaebols, such a limited prospect for value ever to be unlocked. Andrew suspected that the EM were maturing enough that corporations might feel more inclined to be responsive to shareholders, which might usher in an era of successful EM value investing.
For what interest that holds,
David

To read GMO's 1Q 2015 Letter, which contains Ben Inker's "Breaking Out of Bondage," and Jeremy Grantham's "Are We the Stranded Asset?
A brief update on the U.S. market: still not bubbling yet, but I think it will
■
The key point here is that in our strange, manipulated world, as long as the Fed is on
the side of a strong market there is considerable hope for the bulls. In the Greenspan/
Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully-
fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing
in 2006. Both of these were in fact stunning three-sigma events, by far the biggest equity
bubble and housing bubble in U.S. history. Yellen, like both of her predecessors, has
bragged about the Fed’s role in pushing up asset prices in order to get a wealth effect.
Thus far, she seems to also share their view on feeling no responsibility to interfere with
any asset bubble that may form. For me, recognizing the power of the Fed to move assets
(although desperately limited power to boost the economy), it seems logical to assume that
absent a major international economic accident, the current Fed is bound and determined
to continue stimulating asset prices until we once again have a fully-fledged bubble. And
we are not there yet.
■
To remind you, we at GMO still believe that bubble territory for the S&P 500 is about 2250
on our traditional assumption that a two-sigma event,
based on historical price data only
We could easily, of course, have a normal, modest bear market, down 10-20%, given all of
the global troubles we have. If we do, then the odds of this super-cycle bull market lasting
until the election would go from pretty good to even better. So, “2250, here we come” is
still my view of the most likely track, but foreign markets are of course to be preferred if
you believe our numbers. Stay tuned.
https://www.gmo.com/docs/default-source/public-commentary/gmo-quarterly-letter.pdf?sfvrsn=8

FYI: It's Shiller vs. Siegel in the battle over equity market valuations.
Regards,
Ted
http://www.bloomberg.com/news/articles/2015-06-01/goldman-sachs-asked-two-of-the-world-s-best-known-economists-if-u-s-stocks-are-in-a-bubble

Hi BobC,
Thank you so much for responding to MFOer Davidrmoran’s questions with regard to the whys of your near-term cash portfolio asset allocation policy. Your explanations are clearly and understandably presented.
But you did not address the question of why you decided that a 3 to 5-year war-kiddy reserve is the favored approach for most of your customers. How was that reserve time-span determined?
Is it close to the historical average time length of a Bear market? Is it tied to the psychological behavior or biases of your clientele? I appreciate that it is a conservative approach that over the stated 30-year period of your business has been attractive to your customers. Congratulations on preserving their loyalty. It demonstrates that you are doing something right for them.
But that conservative approach is leaving much end wealth on the table. How happy would your clients be if they recognized that their end wealth could have been substantially higher without compromising their portfolio survival odds?
Let’s do a simple illustration over the lifetime of your advisory organization. I’ll use the Portfolio Vizualizer website option titled “Backtest Portfolio”. Since your firm has counseled investors for 30 years, I’ll imagine two starting portfolios in 1984 with one thousand dollars each and not touched through 2014. Portfolio Visualizer will effortlessly calculate the end wealth of each portfolio.
Like in the earlier Monte Carlo simulations, let’s assume a 40/10/30/20 mix of US Equities, International Equities, Bonds, and Cash, respectively as a baseline. That could be representative of a portfolio that your clients might find acceptable based on a 4-year cash reserve recommendation from you.
By way of comparison, let’s switch some of that cash into a Bond holding to reflect a 2-year reserve allocation. In that instance, the mix is 40/10/40/10. Both portfolios are a 50/50 equity/fixed income asset allocation.
What is the end value after 30 years of these two portfolio options?
The end value for the 4-year protective cash option is $12,793. The end value for the 2-year protective cash option is $14,120. That’s for every one thousand dollars invested in 1984. That’s roughly a 14 percent penalty.
The 2-year reserve cash portfolio does marginally increase portfolio volatility from 9.51% to 9.68%. However, during that period, the Worst year was a negative 17.39% and it was registered by the 4-year cash reserve portfolio. Go figure!
That’s a lot of money that you are asking your clients to sacrifice for “perceived” safety. I say “perceived” because the Monte Carlo analyses hint that the 4-year reserves portfolio is slightly more likely for bankruptcy. From an end wealth perspective, the 4-year option is an opportunity cost.
I like Short Term Corporate Bonds as a near-term alternative to cash. Using those to substitute for the 10% cash case generates an end wealth of $15,016 for every one thousands dollars invested in 1984. It does introduce a little more risk.
Let’s test the results for timeframes shorter than 30 years. The number magnitudes and percentages change, but the relative rankings of the three options examined do not change if the investment period is shortened to the recent 20 years nor for the current 10 year period. The 4-year reserve cash option comes at an opportunity cost.
There is a reduced end wealth price to be paid for keeping excess reserves in cash. That’s one reason why active mutual funds maintain a low cash allocation unless some downturn is projected.
I’m sure you access a back-testing tool similar to the one I used at Portfolio Visualizer. I’m equally sure that you generate these type of tradeoff studies for your customers to allow them to make an allocation decision. One size does not fit all clients well, especially given the many factors that influence a final asset allocation decision.
By the way, it took me ten times the effort to report these results than to actually do the calculations.
Best Wishes.

The 3-5 years of expected PORTFOLIO withdrawals protected. The 3-5 year number does not include SS benefits, any pension, annuity income, etc. - just what you would need to take from your investment portfolio. This might include required IRA distributions, cash from taxable accounts, or a combination of these two...whatever you expect to need from your investments to meet your total cash flow needs. So, if you have a $500,000 portfolio, and you expect to need $20,000 per year from this to meet your total needed annual cash flow, we would recommend having at least $60,000 to $100,000 of the portfolio in cash, CDs, or short-term bonds. The strategy helps to reduce the possibility that you would need to sell equities in a down market to generate cash flow. And it still leaves 80% of the portfolio to be diversified. Some clients choose to make the 20% held aside a part of the total (replenish the cash flow bucket as withdrawals are made - maybe semi-annually, but at least annually in up markets. Others prefer to keep the 3-5 year bucket as a separate entity. It has worked for our clients for 30 years. Hope this explains the strategy.

Perhaps it might be useful to consider the details of the suggestion "to have 3-5 years of portfolio cash flow needs in cash, CDs, or short-term bonds."
I would think that the "3-5 years" figure does not mean that you would need a reserve capable of funding your entire living requirements for that period of time, but merely the "marginal" extra amount over and above predictable income sources such as SS, pension or annuity necessary to fund that period.
1) First, this scenario assumes that there is some annual portfolio drawdown required to maintain the living standard required.
2) That drawdown would be in addition to any income from predictable sources such as SS, pension or annuity.
3) That drawdown may also be reducible if it exceeds the minimum living standard required.
4) So only the amount of cash reserve required to supplement other income sources to maintain the minimum required income level, for "x" number of years without portfolio drawdown, needs be considered, not the entire annual income amount.

That is certainly a much smaller number than the total amount required to maintain the entire required income level, for "x" number of years.
Thanks very much to all who've responded to my request for comments on this particular thread. Quite a nice array of thoughts to consider.
OJ

Hi Davidrmoran,
You raise important questions with regard to a retirement cash cushion requirement. How much is needed? How was that level determined? What fraction of a retirement portfolio should be protection money in the form of near-term cash equivalents?
I retired twenty years ago, and at that time I was exposed to several professional retirement expert estimates. Yesteryears typical number hovered around two years worth of the planned withdrawal rate. Does four years near-term cash provide additional protection benefits?
This is another example of the benefits of Monte Carlo simulations to scope the issues. There is little need to rely on rules-of-thumb or instincts or opinion.
Since the retirement decision is so far in my rearview mirror, I really don’t want to spend too much time doing real work. Therefore, I only did 4 simulations to illustrate the tradeoffs. These took about 5 minutes to complete using the Portfolio Vizualizer Monte Carlo tool. If the subject is of paramount significance for you, a more comprehensive set of calculations is likely warranted.
I assumed a 30 year retirement time horizon with drawdowns at the 4.5% and 5.5% portfolio levels. I used the programs Historical Returns and Historical Inflation options. I postulated a simple portfolio mix with an asset allocation of 40% US equities, 10% International Equities, 30% or 40% Bond, and either 20% or 10% cash. That’s a 4 calculation matrix with a 50/50 split between equities and fixed income sources.
Obviously, end wealth was always higher (like a factor of 2) for the lower 4.5% withdrawal schedule. End wealth was higher for the 2 year cash reserve portfolio. Portfolio survival was marginally higher for the 2 year cash reserve portfolio. At the 2 year cash asset allocation, portfolio survival was 88% for the 4.5% drawdown rate, and dropped to 70% at the higher 5.5% withdrawal rate.
The 2 year cash cushion wins by both end wealth and survival measures.
These sample simulations suggest that you need not concern yourself with a 4 year cash reserve. Although it certainly would increase the comfort zone for any retiree, it is likely an unnecessary luxury. It seems like an arbitrary number. Portfolio asset allocation is always a top-tier investment decision, especially so during retirement.
I suggest you try a few Monte Carlo cases yourself to confirm and expand my brief findings.
Best Wishes.
EDIT: For completeness, here is the Link to the Monte Carlo code that I used in the reported calculations:
https://www.portfoliovisualizer.com/monte-carlo-simulation

Frank, at least for me I was never fond of hedging because you have two decisions instead of one, i.e. when to lift the hedge. The junk funds have been flat but on a total return basis made all time highs as recently as Friday. After the close today I will be anywhere from 40% to 50% in cash (15% now) Will be watching how OSTIX handles the selloff because would like to go there. Since 12/08, there has always been a place to hide in bondland. My fear has been what happens when there is no place to hide. Bank loans may shine someday but haven't seen much from them yet. Friday's employment report should prove interesting, especially for Treasuries. I need a little under a 1.50% annual return to not have to touch my principal so may just kick back and watch for awhile. This in and out get tiring for this old trader. Then again, doubt I could ever just sit back and watch if something is moving in Bondville.
Edit: While the junk ETFs ala JNK and HYG are seeing higher than normal % declines today, noticed the SJNK is unchanged and on extremely heavy volume. SJNK is the short term junk ETF. Looks like many on moving to the shorter dated junk.

I would agree that Treasuries could be in a bear market. TLT, as a proxy for long-term Treasuries, is down about 15% from its high about February 1. Meanwhile, the high-yield market seems to have hit a high about March 1 and since then has gone nowhere to down, depending on which fund or ETF I'm looking at.
As a bond investor, I don't see anything that looks very good right now. Lately I've considered shorting Treasuries via RRPIX, although a correction in the stock market would likely cause treasuries to reverse upward. I own high-yield funds, which I'll hesitate to sell if junk starts to tank and instead could hedge these with RYIHX.
Junkster: What do you think of hedging as a strategy for high-yield? My thinking is that if the NAVs of my junk funds fall, hedging with RYIHX should mitigate those NAV losses while I continue to collect the dividends from the long funds.

Here is a link to a story dated May 1, 2010. From the Denver Post. Al Lewis is the author so this is probably a reprint off the WSJ
http://www.denverpost.com/ci_14994090
My opinion of Janus remains the same. Mr. Rollins is unlucky that his name was involved in the scheme. He doubled his lack of luck by being involved with Lance Armstrong of the Livestrong Foundation.
Hopefully he will do well on his own. I won't invest with him.

Sven & John Chisum: Let's get our facts straight !
Mr. Mueller used one of Denver's most elite organizations to find potential investors. He wooed members of the tony Cherry Hills Country Club, an opulent golf club in a Denver suburb that is dotted with mansions, according to investors. He also wooed neighbors from Cherry Hills Village where he lived and relied on the names of his most prominent clients to promote his own fund, investors said.
One such prominent investor was former Janus Capital money manager Blaine Rollins who once oversaw $11 billion in the Janus Fund. Mr. Rollins not only invested in Mr. Mueller's fund, but he also worked for the business, becoming the director of research last year, according to his attorney, Dan Shea of Hogan & Hartson LLP.
Mr. Shea said that Mr. Rollins had no knowledge of the alleged fraud, adding that his client also lost money. "Blaine invested a substantial amount of money and never made a withdrawal," Mr. Shea said. "He still to this day does not know what Mueller did."
Regards,
Ted
Source:
Al Lewis, WSJ 4/29/10

Former manager from Janus. Short piece from Denver Post in 2014.

In perhaps his biggest misstep, he invested with a neighbor from Cherry Hills Village named Sean Mueller, who promoted a day-trading system offering returns of 12 percent to 20 percent a year.
In 2009, Rollins signed on as Mueller's director of research. But Mueller, like Armstrong, hid a much darker side than the charismatic persona projected in public.
In 2010, Mueller received a 40-year prison sentence for running a $71 million Ponzi scheme that defrauded 65 investors, including former Denver Broncos quarterback John Elway.

denverpost.com/business/ci_26176640/former-janus-star-blaine-rollins-attempts-mutual-fund

FYI: (This is a follow-up article)
Is active or passive better? It depends whom you ask.
Regards,
Ted
http://www.marketwatch.com/story/this-study-shows-stock-fund-managers-can-beat-an-index-2015-06-03/print

One thing I do agree with Bernanke on:
http://www.cnbc.com/id/102728250
US Congress pushed China towards AIIB: Bernanke