Portfolio Optimization Resources?

[james.hendrickson]

Guys,

I've gotten a couple of bigger financial things out of the way, so I wanted to take some time to be sure my retirement portfolio is as optimized as I realistically can make it.

Do any of you have a resource on the basics off portfolio optimization you'd recommend?

Thanks!

[disneysteve]

What do you mean by “portfolio optimization”? Are you focused on asset allocation or tax efficiency or fees or what?

[james.hendrickson]

Disneysteve - basically what I want to do is maximize the return from my investments in my Roth IRA. So, - its likely an asset allocation question. And what I'd ideally like is something that goes beyond "just buy index funds".

[kork13]

What do you mean by “portfolio optimization”? Are you focused on asset allocation or tax efficiency or fees or what?

You asked the exact same question I was having... I've rarely, if ever, heard the term "portfolio optimization".

If you're looking to maximize returns, stocks & sometimes REITs (potentially in the form of mutual/index funds or ETFs) are typically the most straightforward way to do that.

The highest returns you'll find are typically from having interests in a business (either as the owner/part-owner, or as a primary investor/financial backer. However, it's complex to try using IRA funds to do that (though it may be possible with a self-directed IRA).

I dunno ... Really, I'm a bit of a lazy investor, and I'm perfectly happy with my boring index funds, even if I don't get mind-boggling ROI .... Merely getting strong, relatively consistent returns are perfectly fine with me.

[disneysteve]

Disneysteve - basically what I want to do is maximize the return from my investments in my Roth IRA. So, - its likely an asset allocation question. And what I'd ideally like is something that goes beyond "just buy index funds".

James, you always seem to be searching for the "get rich quick" scheme that you are just sure is out there and nobody is telling you about. For someone who runs a site dedicated to responsible money management, you seem to disregard much of the advice we give here every day.

If you want to maximize the return in your Roth, go 100% into stocks with VTI or a comparable total stock market index. Then sit back and ignore it for the next 20 or 30 or 40 years.

Sure, you could go heavy into a couple of single company stocks or speculative stuff like crypto and you might hit a home run but you also might strike out and lose it all. Higher potential reward also comes with higher risk. Maybe put 90% into VTI and play with the other 10% to see if you can pick a winner and goose your returns a bit. At least if you're wrong, which you will be most of the time, you won't lose a big portion of your account.

[myrdale]

James, you always seem to be searching for the "get rich quick" scheme that you are just sure is out there and nobody is telling you about. For someone who runs a site dedicated to responsible money management, you seem to disregard much of the advice we give here every day.

Yes and no.

Are there tools out there? Sure.
Do I need them? No.
Should I at least review my statements on an annual basis? Yes.
Do I? Sometime.

Personally I fall into the "just buy index funds" bucket. My 401K and Roth IRA are nearly identical.

I do not have any taxable brokerage accounts (is that the right term?) in which I am investing in stocks or day trading. Is your question more aimed at that group of people?

Watch an oak tree grow, it's simple, it's boring, but given time (and a lack of tornadoes) it gets BIG!! That's how I consider my investing.

Morningstar.com is supposed to be a good site for reviewing stocks and index funds. You can read up on the people who manage them. Paraphrasing Warren Buffet "While other guys were reading Playboy, I was reading stock reports." I think that is the most you're going to be able to do practically for stock analysis, past just looking at what your returns have been for the past year.

[scfr]

You've already done some "optimizing" by opening & funding a Roth IRA.

[myrdale]

Do any of you have a resource on the basics off portfolio optimization you'd recommend?

95.5 FM is a big time conservative talk radio station out of Atlanta.

Unfortunately they have taken to filling some of their empty slots with a financial group. On the surface, if you listen to them for 10 or 15 minutes it sounds like decent money advise. If you listen to them for two or three weekends in a row, you realize they are pumping the same non-sense over and over.

"Bring your retirement information in for a portfolio x-ray"
"Try our portfolio optimizer"
"We always find a few gold nuggets"
"Make money even when the market is down"

They use the words "portfolio optimization" about once every five minutes, if not more frequently, week after week after week. It really comes across as someone trying to sell gourmet food from the back of a dump truck.

There are means to outperform the market. But that requires some level of risk. Fund managers fail to beat the market 89% of the time. I'm left wondering if that 11% is truly skill or just dumb luck.

[disneysteve]

Fund managers fail to beat the market 89% of the time. I'm left wondering if that 11% is truly skill or just dumb luck.

It’s totally luck. It isn’t the same 11% doing it every year. The managers in that group change from year to year. Nobody consistently beats the market. Market timing is a fool’s errand. You’re going to come out ahead in the long run 100% of the time putting your money in broad market indexes.

[FrostedMoose]

It’s totally luck. It isn’t the same 11% doing it every year. The managers in that group change from year to year. Nobody consistently beats the market. Market timing is a fool’s errand. You’re going to come out ahead in the long run 100% of the time putting your money in broad market indexes.

No, it's not luck. A whole bunch of people consistently beat the market all the time. Fund managers don't, because they can't. They are working with way too much money from millions of people. They have to invest all of that money, which means they can't just buy a few good companies. They have to water down their portfolios with hundreds of companies that are just so-so. So the old saying that fund managers can't beat the market is circular reasoning. Of course they can't.

I have averaged 39.6% annual return since 2020. I bought several energy companies when oil was near zero, made about 280% in 18 months, then switched to homebuilders. DFH, KBH, and TOL. We are short 10 million homes in the U.S. That problem won't go away for a decade or more. You could do nothing but buy a few homebuilder stocks and average 30-40 percent growth per year for quite a long time. They are going to sell homes whether the 30 year is 3% or 13%.

James, there's your tip. Now go and buy some. By the way, DFH is down below $40, about 10% off from this time last week.

[disneysteve]

No, it's not luck. A whole bunch of people consistently beat the market all the time. Fund managers don't, because they can't. They are working with way too much money from millions of people. They have to invest all of that money, which means they can't just buy a few good companies. They have to water down their portfolios with hundreds of companies that are just so-so. So the old saying that fund managers can't beat the market is circular reasoning. Of course they can't.

That's exactly what I was saying. myrdale was talking about fund managers not beating the market. I was saying that the 11% that might in any given year isn't a consistent group. It's always changing. No fund manager consistently beats the market. It's luck when they do.

Sure, there are people - not fund managers - who do well. Warren Buffet is the poster child for that. But it's quite rare and not something the average investor is ever going to achieve. It's great that you've beaten the market the past 3 years. Lots of people do in the short term. What's your average annual return for the past 10 or 20 years?

VTI has a 1-year return of 29.37% , a 5-year of 14.25%, and a 10-year of 12.27%. I don't know about anyone else but I would be quite happy with that.

[FrostedMoose]

That's exactly what I was saying. myrdale was talking about fund managers not beating the market. I was saying that the 11% that might in any given year isn't a consistent group. It's always changing. No fund manager consistently beats the market. It's luck when they do.

Sure, there are people - not fund managers - who do well. Warren Buffet is the poster child for that. But it's quite rare and not something the average investor is ever going to achieve. It's great that you've beaten the market the past 3 years. Lots of people do in the short term. What's your average annual return for the past 10 or 20 years?

VTI has a 1-year return of 29.37% , a 5-year of 14.25%, and a 10-year of 12.27%. I don't know about anyone else but I would be quite happy with that.

Warren Buffet doesn't play the stock market. He mostly owns companies outright, or plans to do so when he starts investing. When you buy a stock, you're buying a business. There are businesses aplenty that are thriving, making good money, even in unlikely sectors. I bought $50,000 of Dillard's (DDS) five years ago when everyone was knocking retail. But Dillard's makes money. Look at the returns. It's worth about $270,000 now.

If you want to get rich, pick three or four good companies that make money and stick it out. It's really not that hard to find good companies. Someone coherently tell me how you miss on homebuilders over the next decade. But if you want to make a decent return and protect your loot, buy the averages.

The problem is, the average investor doesn't have the conviction to buy 3 or 4 companies, and if they do, they get spooked at the first downdraft and do something stupid. If you want to get rich, you have to first take risk. That's true whether you are buying into a business that is publicly traded or starting/buying your own. All the same hamburger.

[james.hendrickson]

Guys - circling back around here.

Here is where I came down on the decision.

I decided to do two things.

First - get educated on the topic of asset allocation. I got two books -

1) All About Asset Allocation, Second Edition, by Richard A. A. Ferri

2) The Elements of Investing: Easy Lessons for Every Investor 10th Anniversary Edition, by Burton G. Malkiel (Author), Charles D. Ellis (Author)

Both of these were recommended by a professional investor friend of mine.

Second, I had about $9,000 to put into my IRA, so I decided on a mix of stock and bond mutual funds/ETFs. So far I've taken a $3,000 position in the Dodge and Cox Stock fund, and I'll likely get some Vanguard bond funds with the remaining capital. The bond allocation is a bit heavy given my age - but my total net worth is stock heavy, so weighting it more towards bonds should reduce the risk to my overall wealth.

[james.hendrickson]

Warren Buffet doesn't play the stock market. He mostly owns companies outright, or plans to do so when he starts investing. When you buy a stock, you're buying a business. There are businesses aplenty that are thriving, making good money, even in unlikely sectors. I bought $50,000 of Dillard's (DDS) five years ago when everyone was knocking retail. But Dillard's makes money. Look at the returns. It's worth about $270,000 now.

Great pick FrostedMoose - I would not have considered Dillard's myself.

[disneysteve]

I decided on a mix of stock and bond mutual funds/ETFs.

I have previously been a fan of bond funds but in recent years they've really done poorly. I've become much more a proponent of individual bonds so that I control the interest rates and maturities. There is no principal risk as long as you hold a bond until maturity (when dealing with government issues I mean, not corporates). We still hold bond funds but I stopped adding to them a couple of years ago in favor of individual issues.