Depending on timeframe, could not agree more, and am debating in retirement whether to return to SC bigtime, specifically WEMMX.

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-simulation
Here’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.

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.

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.

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

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 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.

"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.

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.

slick,
Spoken like a true Financial Advisor. However, diversified asset allocation offered little or no protection against the types of extra ordinary losses my portfolio suffered via the tech bubble, 911 or the real estate financial crisis. Market meltdowns were correlated across all asset classes and global regions. But here is my point: If your retirement portfolio is going to be used as an income generation machine to support your retirement, at our age you don't have as much time to recover from events outside that of normal market cycles. The last thing you want to do is to eat your seed corn to support retirement. Thus, in my opinion, as you approach retirement portfolio risk must take on additional consideration (especially when markets are at all time highs). That is why the topic of this discussion ("New highs doesn't mean you should sell" is of interest to me. Just my two cents, which I'm hoping won't be degraded by half if and when we are confronted with the next potential Black Swan event.

>> I think you are suggesting that you want something future looking, kind of like the M* metal system? Ha!
Of course not. I am interested chiefly in downside protection.
>> One big reason we gravitated toward the MFO ratings methodology was because of the emphasis on drawdown. A parameter that I think gets kind of swept under the rug.
Uh, well, see end query.
>> And Martin is typically not published.
Is there a reason to look at it and not Ulcer? Can you expand on them?
>> M* has PRBLX risk at 1 or "Low", while MFO has it as 4 or "Aggressive." The difference here is MFO's system is hypersensitive to risk and all funds are rated against market,
If you say so. Hypersensitive to risk, huh. See below.
Let me try to turn this dialog around and get you to understand the concern perhaps more starkly.
Your savvy and market-watching mother is planning for retirement and has been reading up on other famous unnamed websites about, say, PRBLX and FPACX. Great funds, everyone agrees, Ahlsten and Romick.
She also knows you are a true database expert in exactly this area.
So she goes to check out your Owls but does not find PRBLX. Fine, she says, I didn't really want some all-equity mfund anyway, I want a nice smartly run balanced fund. So she looks for FPACX. It ain't there either. She does see BUFBX, though.
So she thinks, okay, I will put my 300k all in that one. But first I want to check how the two of them did from *summer '07 to spring '11*, cuz I sure do remember how awful and gutwrenching that time period was, and in my dotage I have to feel that my mfunds are probably going to do well and recover with some alacrity, getting back to level.
Guess what she finds when she compares FPACX and BUFBX since 2007? Not that long ago. She calls you and asks, in her maternal way, wtf?
What do you say? 'It's all numerically driven, mom?' 'You don't understand what an Owl stands for?' 'We emphasize drawdown smarter than others?'
Wait, what?
So ... what's your answer to her?
I think GO needs serious tweaking. I have spent a career mostly working with engineers and similar getting their data to reveal patterns and scrutinizing patterns to uncover the underlying data. As the departed AJ put it, 'I just strongly think the MFO GO numerical system doesn't capture what the two funds are doing and how they perform ... '
Your intellectual work is immensely worthy. Immensely. I trust you can take these pointed queries usefully as appropriate.

Slick,
I have achieved my retirement goals (retired)...and won't really need to draw upon any of the funds for at least another 5-7 years (when my wife retires). However, along the way with asset allocations similar too or greater than yours, we endured portfolio fluctuations of 3-500K several times. From 1987 going forward, I've experienced them all and as I age, in an effort to avoid losses of that magnitude again, I have become perhaps overly concerned about limiting downside risk (not the 10% kind...the 50% kind). I agree that my portfolio at 42% equities is conservative...perhaps overly so, but for the present, I sleep much better at night. There are worse things than just reinvesting the bond income stream. Have you seen what the YTD total return of PIMIX is?

@dgoodrow,
I am the same age as you and I am 70% equities, 30% bonds and cash. Depending on your needs and individual situation, as many here will tell you, you might be a bit too conservative. If however you have determined what you need in retirement and 50/50 can get you there and you sleep better at night, its fine. I am currently adding to three funds at market tops from the sale of a stock , not too much at a time, but have learned that whether you dollar cost average in or do it in a lump sum, if they are retirement accounts, it won't matter too much in the long run, assuming they are not huge amounts. If we do have a blow out second half, I will reallocate at year end, as I do not want to be over 75% equities.
Welcome to the board and please keep posting, and let us know what you decide.

Hi Ted,
It appears that you have decided to continue the march, at least for now. That's good. Thank you.
Indeed you have been doing this form of research for years, and I have benefited from it since the early FundAlarm days. Compared to your time on the job, Barry Ritholtz is a rookie. He was likely in the 4th grade when you posted your first listing.
I’m happy that you have elected to basically ignore the MFO naysayers except for your very perceptive summary sentence. This too reflects your overarching experience level.
I suspect some segment of these naysayers adhere to the following advice which was published about 7 months ago by Ritholtz titled “Reduce the Noise Levels in Your Investment Process”:
" (1) Constantly consume mainstream media. Financial television is an excellent source of actionable investing ideas.
(2) Play down data. It’s overrated. Stick with anecdotes from people you know personally and your gut instincts.
(3) Pay attention to pundits. They exist for the sole purpose of helping you reach a comfortable retirement.
(4) Get the inside dope. All of the important information about the stock market — especially when it is going to crash or rally — is known only to handful of secret insiders. If you can’t get their magic knowledge, blame them for any losses you incur.
(5) Stress about this. Exert lots of energy, spend lots of time and create lots of tension about all of the following: Federal Reserve and the Taper, the Dollar versus the Euro, the Tea Party and Congress, Hyper-Inflation, European Sovereign Bank Debt, Gold, China, Deflation, Austerity and the Hindenburg Omen.
(6) Don’t do the math. Numbers are vastly overrated, and probability analysis is for geeks anyway.
(7) Stay in your comfort zone. Focus only on those news sources that are in sync with your politics. Seek out sources that confirm your preexisting opinions and investment postures. Never read anything that challenges your beliefs.
(8) Think fast. Trading is where the big money is made! Don’t worry about the long term — it’s way off in the future. Measure your success in hours and days, not years and decades.
(9) Have a Super Happy Fun Time. There is no reason that you cannot also have a good time with your retirement account: It’s tax -deferred, so you have no capital gains consequences. Have fun with it — that’s what it’s there for anyway!
(10) Ask: What Have You Done For Me Lately? Never listen to people with good long-term track records who may have had a losing period. When Warren Buffett underperformed in 1999, you should have written him off. Investing is about recent performance!"
Of course, Ritholtz was just showing off his sarcastic side. He meant and believes just the opposite. He called this subsection of his article “How to Get More Noise and Less Signal”. I love it! In this arena you and Ritholtz share some common characteristics.
Thanks once again for doing this arduous task. It has saved me and many other MFO members countless hours of searching time while wisely directing our attention to meaningful candidate articles that will positively inform us in most instances.
Continue to continue the march.
Best Wishes.

Hi guys!
Long time since last post….I have a couple of questions for you.
I have two (2) health funds (FPHAX and FSPHX). They seem to track differently on days when the health sector is soft. I am looking to add LOGSX and get rid of FSPHX … looking for lower beta or less volatility… what do you think?
What do you think about Berix? I have a Fidio Brokerage Account, so I would have to pay $50 to get it (which I don’t like). But it looks so good and I would take it into retirement with me.
I have bought MLP’s with Fidelity in a 401 brokerage account. Has anybody had any of these over the years and how bad are they when interest rates go up a few points? I have GASFX, so I see what it does over time in the marketplace, but I have no experience with MLP’s.
Looking for an upgrade from WPFRX for a similar reason: lower beta. Have been looking at WPVLX for some time…..any ideas?
Thanx in advance

I'm not seeing much compelling about LOGSX at first glance, but I could certainly be missing something. FSPHX has been a solid performer.
I own HQL, which has a very nice yield, although it may vary in the future. The thing I like about HQL (and sister HQH) is that they can invest a pretty significant amount in private equity.
MLPs and other interest rate sensitive equities are going to be hit when interest rates start moving - there was certainly a hit on many of them when there was a move in rates in 2013. That turned out to be a buying opportunity for many of these names. There continues to be a lot of questions as to whether or not rates will stay low for much longer than expected, but either way, I own MLPs (and REITs) with a long-term perspective and will just continue to reinvest divs.

Hi guys!
Long time since last post….I have a couple of questions for you.
I have two (2) health funds (FPHAX and FSPHX). They seem to track differently on days when the health sector is soft. I am looking to add LOGSX and get rid of FSPHX … looking for lower beta or less volatility… what do you think?
What do you think about Berix? I have a Fidio Brokerage Account, so I would have to pay $50 to get it (which I don’t like). But it looks so good and I would take it into retirement with me.
I have bought MLP’s with Fidelity in a 401 brokerage account. Has anybody had any of these over the years and how bad are they when interest rates go up a few points? I have GASFX, so I see what it does over time in the marketplace, but I have no experience with MLP’s.
Looking for an upgrade from WPFRX for a similar reason: lower beta. Have been looking at WPVLX for some time…..any ideas?
Thanx in advance

Depends on age and anticipated retirement age. 20 to 50 y.o. with retirement at 70 (probably the new normal for the younger generation): 10% short term bond and 10% high yield bond and remainder in stock funds. Would include mid-cap blend or value and/or small cap blend or value for this period of one's investing life (and might even extend it to retirement age)
Age 50 and above: this distribution is logical, but I prefer ETFs that meet the criteria.

I have this in wife's retirement portfolio. I was buying on the dips down in the $4-8 range and racked up quite a few shares. I would think around 5 or so plus years it will start moving upwards as a lot of US companies are investing heavily on infrastructure in that part of the world waiting on this frontier to take off.

Don't know if Ted posted it, but he always pushed index funds, which makes MFO superfluous. (I still hope that new small funds can beat their index for a while.)
Considering MFS's location on the graph of the first link, they probably want part of their ad budget returned, unless they get their banner posted somewhere else for free.
I do feel nervous putting money into any stock fund currently, although I'm sure some sophisticated readers are into the shorts. I hope I have the conviction to move whole-heartedly into the index funds after the next "correction."
Introspectively, it's interesting how difficult I find it to keep cash in my retirement funds, while I put my contribution to my children's Roth IRAs into cash and told them to wait.

Title should be How America Saves - 2014 edition. It's all great information on retirement data, but I was hoping for biting commentary from Vanguard on exactly how "America saves 2014".