Please Review this Portfolio Proposal

[disneysteve]

bUU, I'm not really sure what it is you're looking for at this point. Are you looking for people to explain why this adviser's proposal is insane or are you looking for people to help you rationalize following his advice? I think several of us have already done the former. I suspect you aren't going to find the latter on this forum.

[BuckyBadger]

That is the craziest portfolio I've ever seen... Do you know how many funds you need for a balanced portfolio? Three index funds. Total US stock, total international stock, and US bonds.

The only issue is what you have available in your 401k. Pick your best option from there and then fill out your portfolio in the accounts where you have more choices. Keep bonds out of taxable.

Having an allocation less than a few percent is completely meaningless anyway, and in that portfolio, do you realize that the LARGEST allocation you have to something is 4%? That's completely bonkers. How, prey tell, does one re-balance that monstrosity?

Your subsequent posts confuse me, as you seem to somehow be starting to think that this is a good idea. Trust us, it's not.

List all the funds available in your 401k and we'd be happy to give you - for free - a portfolio suggestion that makes more sense, costs less, and will actually allow you to manage it.

[bUU]

Well, many have tried. Notice the first point:
1. I think the results make sense, and do not contradict existing literature that active management generally underperforms passive indexing,
And there is your answer.

It is silly to stop reading something after the first point, just because stopping your reading at that point appeals to your own personal opinion about the entirety of the matter.

bUU, I'm not really sure what it is you're looking for at this point. Are you looking for people to explain why this adviser's proposal is insane or are you looking for people to help you rationalize following his advice?

Expecting either would be irrational. Why ask questions if you already know the answer you want? That's silly.

I think part of the problem is that some folks in this thread didn't follow the link I posted through, and then from there followed the link to the research article that is now the focus of the matter. I'll post the link again, here:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1685942

This isn't something that only fund managers are talking about. And it isn't some reckless stock-picker's fantasy. It's a real research paper that many people who support passive indexing have taken seriously.

What we need (and I'm including you in that "we", even though you may resist being included) is a positive or negative (or definitively neutral) determination of the merit of what's outlined in that paper, based on clear and compelling information. Take Petunia's point, above. She stopped reading after "active management generally underperforms passive indexing" and assumed that the matter was settled, but the reality is that "generally" implies that there could be circumstances where active management outperforms passive indexing. That raises a whole host of important questions.

One thing that would put the matter to rest include "it's exclusively random" but it doesn't seem like that is the case. Even Jack Bogle acknowledges that fund managers can consistently outperform the market. He simply assumes that they would always charge more in expenses than their ability to outperform would warrant - in other words, they'd eat all the profit and some. That's what seems to be in question. Showing Petajisto's work to be false would put the matter to rest, in that regard.

Another thing that would put the matter to rest, at least on an individual basis, would be "it's too difficult for [ME] to acquire and analyze the data to capitalize on the exception to 'generally'".

It is nothing but a cop-out to assume that what we think or feel is best is best, when substantive opposition is presented. Saying, "I don't care to find out," is legitimate. Saying that the questions shouldn't be raised isn't.

I've been reading more about this in the last few hours. Even Vanguard isn't denying this as you are. They said, "combined with careful qualitative judgment regarding the health of the investment manager’s firm and the depth of its analytical team, active share can be a useful addition to the investor’s toolkit of portfolio evaluation measures".

An old friend of mine is an economist and asset manager. In researching this today, I actually ran across an article he wrote in January about this. Color me surprised. In that article, he wrote, "I still think that for many people, especially those with portfolios under $250k, passive indexing is simpler, less expensive, and more reliable." Both Vanguard's and Barry's perspectives reflect a nuanced understanding of the issue, helping in forming an informed decision.

That is the craziest portfolio I've ever seen...

It seemed a lot crazier to me yesterday though.

Do you know how many funds you need for a balanced portfolio? Three index funds. Total US stock, total international stock, and US bonds.

Not even the advocates of the Three Fund Portfolio claim it is a balanced portfolio. It is missing entire asset classes, such as REITs - something even Bogleheads.com recognizes in its wiki, under Core Four Portfolios. Furthermore, the Three Fund Portfolio is itself market-cap biased. There are substantive disagreements about whether market-cap biased indexing is superior versus equal-weighting indexing.

Keep bonds out of taxable.

I read an article yesterday that recently moved corporate bonds up the list, but that's for another thread.

Your subsequent posts confuse me, as you seem to somehow be starting to think that this is a good idea. Trust us, it's not.

Given the cavalier manner in which some folks, such as yourself, are dismissing it, without doing the necessary work to research and test its hypotheses, perhaps we shouldn't trust your perspective on this. Remember: I'm a member of this forum, and often give advice not too dissimilar from yours. However, unlike you, I understand the value in testing and retesting assumptions whenever new information comes to light. You should adopt that practice as well, so folks coming to this forum can indeed trust your advice.

I still have substantial questions, starting with but not limited to why there is any duplication within asset classes, but they're questions, and perhaps even substantial skepticism - not cavalier assumptions.

[BuckyBadger]

It's funny that you mention Mr Bogle, as I am a "Boglehead" and post frequently on their forum, and read it regularly. In fact, the boglehead forum tab is open behind this one.

Since that forum is much more dedicated to more in-depth investing than this one, I recommend you post this proposal there. I love the Saving Advice forums, but here people are definitely more saving-focused rather than investing.

Unless you're scared of what they would say, I would 100% recommend that you post this thread over there, too.

But I'm guessing that you probably don't want to hear what they have to say...

[bUU]

We're already discussing this article on bogleheads.org. It was from that thread that I received the link to the Vanguard article I alluded to above, which included the comment "combined with careful qualitative judgment regarding the health of the investment manager’s firm and the depth of its analytical team, active share can be a useful addition to the investor’s toolkit of portfolio evaluation measures".

[BuckyBadger]

What's the title of that thread? I don't remember seeing it.

Did you post this portfolio over there?

[bUU]

The thread is entitled, "Active Share and Mutual Fund Performance - Antti Petajisto".

The portfolio is a reflection of the approach outlined in the article. If you buy into the article, then you buy into the portfolio (as far as we know). That's why all I'm concerned about now is the validity of the article.

[Petunia 100]

It is silly to stop reading something after the first point, just because stopping your reading at that point appeals to your own personal opinion about the entirety of the matter.

Take Petunia's point, above. She stopped reading after "active management generally underperforms passive indexing" and assumed that the matter was settled, but the reality is that "generally" implies that there could be circumstances where active management outperforms passive indexing. That raises a whole host of important questions.

No, I did not stop reading after the first point. I'm not certain why you would assume I had.

Yes, "generally" implies that there are circumstances where active management outperforms passive indexing. In point of fact, 20% of all actively managed funds do. You may prefer to attempt to identify them; you may get it right. I prefer to "settle" for the sure thing of beating 80% of all actively managed funds.

Looking at the suggested portfolio, I see multiple actively managed small cap funds. An investor will never beat the index by choosing multiple actively managed funds in the same category. If one fund has a 1 out of 5 chance of beating its index, then two funds in the same category have a 1 out of 25 chance of both beating the index, three funds have a 1 out of 125 chance, and the odds get worse from there. They won't all beat the index; one may, perhaps two. The others which underperform will drag down total return. In the end, the portfolio will end up underperforming the index by a wide margin, because of all the fees. This strategy is not new; it is also known as "buying an expensive closet index fund".

[BuckyBadger]

Is one person saying that they skimmed the article really count as "discussing" it?

One (or even a couple of) new article(s) is(are) not enough to get me to ignore a history of sound investing advice from people like Mr. Bogle. That portfolio asks you to ignore nearly all of his Twelve Pillars of Investing. It also guarantees that you will be unable to manage it yourself, rebalance it, or really understand what's going on inside it. There is absolutely nothing in that paper that makes me inclined to change from simple low cost portfolios held for a long time frame.

There are active funds that beat the index, but they don't beat the index forever, and if half beat the index, than half of all managed funds (by arithmetic necessity) will lag the index. And the thought that you can find 30 (THIRTY!) actively managed funds that are going to beat the index all at the same time is just crazy talk. Some will beat the index, some will lag, and you'll end up with an overall return similar to the index but with fees that are 200% higher.

You're not talking about one or two carefully chosen actively managed funds that, for some reason or another, you really trust will be managed in a spectacular fashion, we're talking about literally dozens of actively managed funds. Do you really think that ANYONE can choose 30 over-performing actively manged funds?

ETA: I was typing while Petunia was posting, and we make similar points I think.

[bUU]

I prefer to "settle" for the sure thing of beating 80% of all actively managed funds.

As is your prerogative. I'm actually pretty sure that, in the end, if there is indeed a reliable means of identifying those funds that will outperform, that it will require more effort than I'm able to devote (but of course I don't know that yet). Regardless, when such questions come up in the future (Active Share has actually been brewing, under the surface, since at least 2008, as far as I can tell), I'll be happy to have gotten to the point where I can say with assurance that that's the case, with assurance.

Looking at the suggested portfolio, I see multiple actively managed small cap funds.

I still haven't gotten an explanation for that yet. All he's said is, "I was hoping to show you ideal investment portfolios given your 401k plan constraints and growth needs." Though he hasn't indicated how such duplication make the portfolios ideal, what he said makes it sound like it was a reflection of the fact that we have a couple of really crappy 401k plans that we have to live within, and so where you and I see duplication, what it really is is that one fund is going to be from one 401k, one is going to be from another 401k, and one is going to be from an IRA. Of course, if he has four of anything, then that excuse won't hold water, but perhaps his explanation is more nuanced than I've guessed, here.

[bUU]

Is one person saying that they skimmed the article really count as "discussing" it?

If you read further, you'll see that Vanguard and Ritholtz from The Big Picture have also addressed Active Share, as have many others.

One (or even a couple of) new article(s) is(are) not enough to get me to ignore a history of sound investing advice from people like Mr. Bogle.

If you want to blindly kowtow to Bogle that's your prerogative, but even the Buddha said, "Believe nothing, no matter who said it, not even if I said it, if it doesn't fit in with your own reason and common sense." If you don't have enough bandwidth to learn something new, even if it is simply why Active Share doesn't work, then you cannot call yourself a fully informed investor.

That portfolio asks you to ignore nearly all of his Twelve Pillars of Investing.

But not all 12. Regardless, see the Buddha's one pillar of wisdom, above.

It also guarantees that you will be unable to manage it yourself, rebalance it, or really understand what's going on inside it.

I've made clear that that is unacceptable. I suspect he'll show how Active Share is determined, and then I'll let you know whether it is something that is or isn't within a typical investor's capability. Before I got more strongly into investing, a friend at church asked me why that was the case. I told him because I already have a full-time job. He said, "Oh. I'm retired." It made sense. In retirement, spending a few hours a week, even, doing this kind of work will be a good thing: "Short Mental Workouts May Slow Decline of Aging Minds, Study Finds". And while I am still a few years away, my friend from church is several year into retirement - he may find this approach useful, and can therefore be my vanguard.

Do you really think that ANYONE can choose 30 over-performing actively manged funds?

That's really the point: I'm not willing to blindly assume the worst of this guy - you are. Again, that's your prerogative.

[Petunia 100]

I still haven't gotten an explanation for that yet. All he's said is, "I was hoping to show you ideal investment portfolios given your 401k plan constraints and growth needs." Though he hasn't indicated how such duplication make the portfolios ideal, what he said makes it sound like it was a reflection of the fact that we have a couple of really crappy 401k plans that we have to live within, and so where you and I see duplication, what it really is is that one fund is going to be from one 401k, one is going to be from another 401k, and one is going to be from an IRA. Of course, if he has four of anything, then that excuse won't hold water, but perhaps his explanation is more nuanced than I've guessed, here.

I understand limited choices inside an employer plan. In the non-retirement section, where you are free to pick any fund/s at all, I see 3 small cap funds, plus the 3 Royce and 2 Wasatch funds. I have not looked up any of the funds, but Royce and Wasatch are both small cap shops. Are any of those 5 funds also small caps? This is in addition to the small cap funds inside retirement accounts.

Is this particular advisor claiming to use the principals of Active Share?

[bUU]

Are any of those 5 funds also small caps?

I only looked deeply into the non-retirement funds. There he had:

- 1 large-cap value
- 1 large-cap core
- 1 mid-cap growth
- 1 mid-cap value
- 3 small-cap growth (which is utterly bewildering)
- 1 small-cap core
- 1 global equity income
- 1 global multi-cap
- 1 global real estate
- 1 multi-sector bond
- 1 high-yield bond
- 1 high-yield municipal bond
- 1 short-duration bond
- 1 long-short equity (which is also pretty bewildering)

He provided breakdowns for both non-retirement and retirement. His non-retirement breakdown roughly matched mine. His retirement breakdown had:

- 2 large-cap value + 1 in a 401k
- 1 large-cap core
- 2 large-cap growth + 1 in a 401k
- 1 mid-cap value
- 2 mid-cap growth + 2 in 401ks
- 1 small-cap value + 1 in a 401k
- 1 small-cap growth + 1 in a 401k
- 5 "specialty or foreign" + 2 in 401ks
- two kinds of bond funds

FWIW.

Is this particular advisor claiming to use the principals of Active Share?

I told him that, "The proposal is such a complex and voluminous approach..." His answer to that charge included that article.

He also provided this link:

http://www.investopedia.com/university/behavioral_finance/

[snafu]

I agree this is not the time to buy Bond Funds or their ETFs. You asked readers to assess the Investment Portfolio submitted and are free to do whatever you like. I wonder if you worked out the MERs and fees for your Rep.

Like the others, I find the lists excessive. I know you can just choose the best of what employer offers you and wife and support those holdings with no more than 6 ETF or MFs split with Index, Global and REIT. If you have 'special' knowledge of a particular sector use that...it's likely better than your Investment Rep. I know I couldn't possibly track that many holdings and figure out if I were making the expected returns. How will you know whether the top 10 holdings in each MF overlap? My suggestion is to ask the Rep for six holdings for each account with Index Funds or ETFs as the base.

[bUU]

are free to do whatever you like

Including asking for explanations vis a vis specific concerns expressed.

My suggestion is to ask the Rep for six holdings for each account with Index Funds or ETFs as the base.

At the very least, we're stuck with the bulk of our retirement in current employer 401ks, which have no ETFs, only one S&P 500 index fund each, and no in-service rollover provisions.