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Required Reading For Many MFO Members: Is Your Portfolio Too Diversified ?

TedTed
edited February 2015 in Fund Discussions
FYI: With all the investment options that advisers are pushing these days, you can easily get the impression that you are a slacker doomed to subpar performance unless your retirement portfolio is brimming with every asset imaginable.

But do you really need to load up with every new product that comes along? Or can a straightforward mix of stocks and bonds get you to—and through—retirement just fine?
Regards,
Ted
(Click On Article Title At Top Of Google Search)
https://www.google.com/search?newwindow=1&site=&source=hp&q=Is+Your+Portfolio+Too+Diversified?+-+WSJ&oq=Is+Your+Portfolio+Too+Diversified?+-+WSJ&gs_l=hp.3...8674.8674.0.10919.1.1.0.0.0.0.230.230.2-1.1.0.msedr...0...1c..62.hp..1.0.0.cTY-0BCNuSI

Comments

  • edited February 2015
    Well ... hi again, Ted,

    Seems the many post about how many funds to own might have given them something to write about. Ever wonder how many from the press vist the MFO board and pick up on ideas? It would be nice if there were away to find out.

    Perhaps, they have not learned of the Old_Skeet's sleeve system. It is cleaver, neat and it works. In addition, a look at their reported results from different time periods might have produced a better picture of the outcomes. After all, 2014 was indeed a strong year for domestic equities and not so good for the international ones. It would have been good to see the periods of five, ten and fifteen years represented. After all, diverification is designed to have some assets in the faster currents of the markets while others might have found a slower moving channel.

    I still plan to keep on keeping-on with my system. Thinking now of adding a little to my private equity fund, LPEFX.

    For those that might be interested, I have linked its Morningstar report below.

    http://quotes.morningstar.com/fund/f?t=lpefx&region=USA

    Have a good one,

    Old_Skeet
  • @Old_Skeet: LPEFX is just what you need to be even more over diversified.
    Regards,
    Ted
  • I have a lot of positions and I have nothing against that. I think my one issue with LPEFX is that with private equity I'd rather choose from among the largest, high-quality names than get the whole sector. The only thing with the route that I take is the K-1 issue.

    Also, interesting to see that Danaher and Brookfield Asset Management qualify as private equity companies. Then wouldn't Berkshire be, as well, if you're going by that view? Oh well, whatever, I'm rambling.
  • Thanks Scott for your comments ...

  • edited February 2015
    Diversification limited to just stocks and bonds might have worked well during a period of decreasing interest rates. We are now at low interest rates and may be in for a period of rising interest rates, at least in the foreseeable future. Was it the summer of 2013 when the 10 year yield went from around 1.6 to 2.6? Both stocks and bonds went down considerably. If we have a sustained rise in interest rates, you might lose money in both stocks and bonds. It is not a bad idea to seek out additional investments outside of stocks and bonds to guard yourself against such a scenario, IMHO.
  • edited February 2015
    Chinfist said:

    Diversification limited to just stocks and bonds might have worked well during a period of decreasing interest rates. We are now at low interest rates and may be in for a period of rising interest rates, at least in the foreseeable future. Was it the summer of 2013 when the 10 year yield went from around 1.6 to 2.6? Both stocks and bonds went down considerably. If we have a sustained rise in interest rates, you might lose money in both stocks and bonds. It is not a bad idea to seek out additional investments outside of stocks and bonds to guard yourself against such a scenario, IMHO.

    I don't think rates are going anywhere for a while and it wouldn't surprise me if the rate hike thought to be this year is moved into early next year. I do think some stocks will do better than others when rates go up, but those that don't - REITs, for example - you'll see a buying opportunity, as it was during the "taper tantrum" when REITs got wrecked.

    Some things will work well when rates rise - I own Starwood Property (STWD), which is heavily floating rate loans and they have discussed how they'll benefit from higher rates.
  • TedTed
    edited February 2015
    @Chinfist:
    "Was it the summer of 2013 when the 10 year yield went from around 1.6 to 2.6? Both stocks and bonds went down considerably." I'm not sure what you mean by this ?
    Regards,
    Ted
    http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
  • edited February 2015
    Ted, I was only referring to the period that yields went up during the 3 or so months of whichever year it was (it was during the last couple of years), not the entire year. During that period, both stocks and bonds went down. I could be mistaken, my memory of what happened a couple years ago during those few months might not be 100% accurate, but after that, yields went back down, and stocks and bonds both went back up.
  • Scott, I agree that rates might not go up this year, but I'm thinking 2016 or 2017. I agree that floating rate funds could be a good place. I think dividend paying stocks could get hurt, just as REITs as you mentioned. It all could wind up being buying opportunities later on.
  • @Chinfist: I'm not trying to beat a dead horse, but here is a example of less is more.
    Regards,
    Ted
    SPY: 5-yr. 16.18%
    QQQ 5-yr. 20.74%
    PRSHX 5-yr. 30.02%
    Average Return Just Three Funds: 22.31%
    SPY: 10Yrs. 7.87%
    QQQ 10Yrs. 11.98%
    PRHSX 10 Yrs. 18.31%
    Average Return Just Three Funds: 12.72%
  • No problem Ted, and just so you know I am not meaning to be confrontational (I know how the tone of Internet discussions can be misinterpreted). The 3 fund portfolio you listed are all stock funds. We have been in a 5 year bull market, so of course they have been performing well. As you know, we will not always have up markets, and it is prudent to guard yourself against bear markets, or significant corrections, although to what extent depends on your time horizon or comfort level. If we had a 20 % down year, which you can't predict, that 3 fund portfolio wouldnt look so good. I am suggesting that there is a possibility that there could be periods when both stocks and bonds will not perform well. A period of rising interest rates, whenever that might come, could possibly provide that scenario. It does not hurt to explore other types of investments.
  • Here's some advice from the U.S. Securities and Exchange Commission about how to choose a mutual fund:

    As with any investment, a fund's past performance is no guarantee of its future success.



  • @MFO Members: I was only giving an example of how you can attain a 12% + return over ten years with only three funds. I don't think you could accomplish this with fifty. I believe less is more
    Regards,
    Ted
  • Old Skeet,

    Obviously, there are many ways to skin the investment cat.
    Mass diversification is one answer… but then, so is simplification.

    I’ll admit that the first time you posted that you owned 50 funds,
    I had to laugh. Sleeves - or pant legs or socks – had me in stitches
    (so to speak).
    That anyone could take diversification this far sounded
    particularly risible on its face.

    And then you listed your funds and I said, “This guy is actually serious.”

    Venturing a wild-ass guess, I imagine that you were bitten
    by the diversification Primacy Effect feline.
    Of course, early on, many of us were bitten – if a little
    diversification is good, than mass diversification must be better.

    Fortunately for many of us, the infection has been cured by
    a dose of Recency Effect, as we’ve witnessed that simplification
    has proven to be as effect as mass diversification.

    That said, I do applaud your fortitude and wish you well.
  • edited February 2015
    Hi Flack,

    I am probably an isolated case in where carrying this many funds works reasonably well. Some folks might buy a fund based upon a whim … I buy a fund for a specific reason and purpose; and, it must fit well within the sleeve where I plan to park it.

    One of the things that has helped me to achieve above average returns, from my perspective, is to be a shrewd buyer and buy when assets have become oversold and then perhaps sell some assets off when I feel they have become overvalued. Booking small profits over the years will add to a portfolio’s overall performance. Especially if a good downdraft comes, those booked profits don’t get vaporized. My brokerage firm does a good job of keeping track of my portfolio’s total return by year. With this, I pretty much know where I am at from both asset investment and portfolio performance perspectives.

    Thanks for stopping by and making comment.

    Old_Skeet
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