How old are you and your wife?
Do you have any desire to leave money in your estate or is your goal simply to maximize the amount of money you and your wife can spend during your lifetimes?
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Unregistered(d) |
Less' allocation |
Lead | |
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Less,
How old are you and your wife? Do you have any desire to leave money in your estate or is your goal simply to maximize the amount of money you and your wife can spend during your lifetimes? |
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Less Antman |
Re: Less' allocation | ||
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I moved the message to the newsletter section, since it was related to my recent article. I'll be interested in where you're going with your question.
I'm 50 (my wife won't say). We plan to leave a large legacy to charity, and will likely only spend modestly from our investments. |
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Unregistered(d) |
less' allocation | ||
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I'm 63. I wanted to have some sense of your ages since age obviously will have an impact on how aggressive an individual is likely to be in his investment strategy;
I'm guessing that if you were simply interested in having sufficient funds for you and your wife, you might have a different allocation |
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Doug0 |
Re: less' allocation | ||
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Less, five possibly related questions about your allocation:
1. The allocation is 50% stock and 50% "hard" (commodity and REIT). Is this a deliberate balance? 2. Does the fact that the stock indexes contain some companies (like Exxon or Equity Office Products) that should track the hard component suggest that it's not really 50/50, and is this a deliberate decision? 3. Similarly to 2, does the fact that U.S. companies make about 40% of their earnings overseas suggest that the stock component is not really 50/50 U.S./foreign, and is this deliberate? 4. It seems like 75% of the allocation (the 50% hard and the 25% foreign) should directly track against the value of the dollar. Is this deliberate? 5. If someone (e.g. me) would rather invest in brains than stuff, would putting the "hard" component into stocks of commodity-driven companies (like the Energy and Materials section spyders) be substantially similar to investing in commodities? Thanks, I love this forum when you're on it. |
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Less Antman |
Re: less' allocation | ||
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There is no question that my personal portfolio is exactly what I said: my personal portfolio, and not a model. Not one of my clients is invested with the same targets I am using for my personal account (although some come reasonably close, and most include all 6 categories in their portfolio to some extent).
Let me say, however, that I don't consider this to be an unusually aggressive portfolio: in backtesting this portfolio over the past 35 years (which is as far back as we have reasonably good data on all the categories), it has had no more volatility than the traditional balanced approach of 60% S&P 500 Index and 40% Lehman Bond Index, which is often suggested for widows and orphans (though not by me), and my SAP allocation would have declined by a smaller amount than that traditional balanced index during both of the devastating bear markets in that time period, 1973-1974 and 2000-2002 (isn't 20/20 hindsight wonderful?). I don't believe the defining characteristic of the SAP portfolio is aggressiveness. In earlier times, commodities WERE money, and I could argue that I'm leaving a third of my assets in cash equivalents by having a 30% allocation to commodities. Okay, maybe that's a bit of a stretch. It would take 33 1/3% to be a third. [g] What makes the SAP unsuitable for most investors is that my entire portfolio is tax-sheltered. Commodity futures and REITs both have very unfavorable tax treatment compared to stocks, so the appropriate percentages in alternative investments ought to be much reduced for someone whose assets are currently taxable (As a broad estimate, I might cut the allocations to each of those categories in half in such circumstances). I recognize the novelty of my portfolio. I want people to think about the 6 asset classes more than I do the percentages: even putting 5% into a category provides significant diversification benefits, and one reason I have always hesitated to post specific portfolios is that I fear people will just copy them down and use them without considering context. So let me repeat: the SAP allocation is MY personal portfolio and reflects MY personal circumstances. Any intelligent approach to allocation should be based on YOUR personal circumstances. |
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Less Antman |
Re: less' allocation | ||
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Doug,
I had to take a long break from the board because I was juggling too many balls, and this is always going to take a back seat to my family and my clients. I've simplified my life in several ways over the past couple of years (finally following my own advice to clients), so I should be able to participate with reasonable frequency, and the board does help me think and improve my own skills, because people feel comfortable challenging me here to defend my views. This makes me a better advisor for my clients, which is my selfish reason for participating (obviously, I also hope to be able to provide some useful guidance to the enormous legion of do-it-yourselfers). 1. No, there was no conscious decision to make it 50-50, although there is some research suggesting that equal allocations generally work out best when future correlations are uncertain (and when are they NOT uncertain?). With neutral tax consequences (only relevant to a 100% sheltered portfolio), I typically allocate 50% to CF+RE, simply because it appears to have been the allocation that dampened volatility the most in my backtesting. I haven't done the calculation for my average client (because I have no average clients), but very few have portfolios as completely tax-sheltered as mine, and I would guess that 30% to CF+RE is more typical, and 20% common for all-taxable accounts. I also have some clients whose taxable portfolios remain 100% in global stocks, especially if they started with me several years ago (since they often have unrealized gains on all of their investments at this point, and I don't want to create large taxable events if they can tolerate the higher volatility of an all-stock portfolio). Once again, every person is unique. 2. Stocks of operating companies that are engaged in the sale or use of a particular asset are weak substitutes for commodity futures (which are not the same as commodities, but more on that in item 5). Commodity-based operating companies played a part in my client portfolios not dropping nearly as much as the market during 2000-2002 (the tech-light implications of my equal allocation strategy also made a big difference), but my clients would have been spared even more if there had been a decent commodity futures fund at the time (a high-expense fund using my least favorite GSCI Commodity index was the only option available then). For people who are older and need more secure diversification, I think it is important to use commodity futures themselves (and PCRIX still remains my favorite choice for people who can satisfy the extremely high minimum investment). 3. Large foreign companies earn major parts of their income selling to US customers as well (Nokia? Sony?). In the long run, imports equal exports, or somebody is just eating currency. BTW, for a while, I've been tempted to reduce my US allocation to less than 50%, as the rest of the world's stock market capitalization now exceeds that of the US (for the wonderful reason that the rest of the world is moving more and more away from government control and for the unhappy reason that this country is moving more and more toward it). 4. Actually, I would say almost 100% of the portfolio tracks against the US dollar, as the assets of a domestic business do not consist principally of cash. Paper currency is not wealth: wealth lies in tangible assets and intangible knowledge (and health and love and friendship and purpose and ... ). All of the investments I hold are intended to represent real assets. 5. Confusing commodity futures with commodities is like confusing universal health insurance with universal health care. Commodity futures are not "stuff": they are insurance policies taken out by producers against price drops, who pay a premium for that service in the form of a discount from the expected price of the commodity at the settlement date of the contract. Commodity futures have provided a rate of return comparable to other businesses (such as insurance companies), while having a negative correlation to stocks. I don't own commodities (well, I've got some gold in a few teeth) nor do I want to purchase trusts holding actual commodities. A newsletter on commodity futures is definitely overdue, as this is the single most valuable diversifier to become available to the average person in the last few years. |
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Doug0 |
Re: less' allocation | ||
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"A newsletter on commodity futures is definitely overdue, as this is the single most valuable diversifier to become available to the average person in the last few years."
Thanks, I'll look forward to that. As a simplification alternative, what do you think of the DBC that uses just six commodities to hopefully proxy the entire market? |
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Less Antman |
Re: less' allocation | ||
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It's a reasonable simplification, and I came very close to using it in my SAP allocation. I decided against it because the allocation to energy is higher than I prefer (55%). Not nearly as bad as GSG (71%), but this is a narrow enough sector to make me uncomfortable having so much in one category of futures.
Keep in mind, though, that I still prefer PCRIX (and even PCRDX) for those with a mutual fund supermarket available who can meet the minimum, as I think the use of TIPS as collateral adds value, and the limitation on energy of 33 1/3% results in a portfolio as balanced as my cocktail but with no need to rebalance within the commodity futures category because PIMCO is doing it for you. PCRIX is a no-brainer favorite, and I think the TIPS and rebalancing make PCRDX worth it, but at a 1.24% expense ratio, the latter is going to make some readers go ballistic: the ones who are prone to obsess over .01% expense ratio differences. I'm not naming any names, Doug. [g] |
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Doug0 |
Re: less' allocation | ||
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After thinking a couple of days about this, I realize I don't have nearly the reading background in commodity futures that I have in stocks and bonds, so could you recommend any books that discuss commodity futures' role in MPT (other than Gibson's)?
The point about commodity fund market baskets being energy-heavy has come up a couple of times. Like many Americans, the price of energy is one of the most important variables in my personal finances. Hedging my gasoline and utility purchases with commodity futures seems like it could be a reasonable investment, in theory. Do you view your commodity future holdings solely as a diversifier of your other portfolio holdings; or partly as a hedge against your daily living expenses? Might it be reasonable to do so? |
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Less Antman |
Re: less' allocation | ||
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Offhand, no single book comes to mind, as my own understanding has developed from a series of articles in technical publications and not from any single book (except the Gibson book you told me not to recommend). A great list of online articles suitable for non-professionals is the reading list of one of my colleagues in the industry, Altruist Financial Advisors, at:
www.altruistfa.com/readin...ommodities My entire philosophy of equity investing is based on the idea that individuals need to be able to pay for goods and services in the future at prevailing prices, so that the only true returns are inflation-adjusted returns. Food and energy prices have always been the most volatile, so agricultural and energy futures offer a hedge against the costs that most cause upset to a person's personal finances (how many people would have liked a boost in their portfolio from energy futures to pay for the surge in gas prices recently?). I don't want to overstate that benefit, but it IS in the back of my mind in guiding my philosophy. The one scenario that my approach to markets doesn't cover well is a deflationary depression, but in the unlikely event of such a scenario, the deflation is, to some extent, its own reward, since the prices for things we buy will drop So, yes, you are quite right: it IS reasonable to look upon the investment in commodity futures as, in part, a hedge against increases in the cost of living for those very commodities. And the environment in which food and energy prices are rising out of control will often be a very bad environment for stocks and other traditional investments, so commodity futures may be the only investment to mitigate the harm in such an environment. |
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Unregistered(d) |
PowerShares vs. PIMCO Commodity Real Return | ||
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Less,
In your SAP, you rely on four PowerShares indexes (DBA, DBE,DBB, DBP) but in your own portfolio you use PIMCOs Commodity Real Return fund. Could you explain why you dont use the PowerShares indexes? The PIMCO fund tries to track the Dow Jones AIG Index. Would a fund or ETF that tracked that index be better than either the PowerShares or the PIMCO fund? The prospectus for the PowerShares indexes refers to the fact that they are each based on only a few commodities and that there are indexes with more commodities. Should this be a concern for investors. |
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Less Antman |
Re: PowerShares vs. PIMCO Commodity Real Return | ||
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The SAP IS my personal portfolio: I no longer use the PIMCO fund personally. As I indicated in my SAP wiki discussion, I made a decision to switch to ETFs so that my personal portfolio could be duplicated at any broker. In order to turn my portfolio into an all-ETF version, I had to switch from PIMCO to the PowerShares ETFs. I apologize if my article was confusing, but I said PIMCO's fund represented my favorite open-end mutual fund: I didn't say I'm using it, and I'm not, as it isn't an ETF.
The PIMCO Commodity Real Return Institutional Fund is, in my view, usually the best choice for investors who can meet its very high minimum. Most of my clients can, and that is what I use for those clients. Most of the readers on this board cannot, but can purchase the 4 commodity ETFs in my personal portfolio (with trivial commissions if they choose a deep discount broker). Someone who uses the 4 PowerShares ETFs in my portfolio will be diversified over 14 different commodities, without excessive weighting in any one category. PIMCO's fund consists of 19, which is certainly a little better (although PIMCO includes two animal futures, and those who are uncomfortable with that may prefer PowerShares, which do not). In my view, the best index is one that is not overweighted in any one category. Using the 4 PowerShares ETFs in the proportions I use or using PIMCO Commodity Real Return Fund are both reasonable. I don't consider the Goldman Sachs Commodity Index to be acceptable, nor do I like the PowerShares DB Commodity Index ETF (ticker symbol DBC), because they overweight energy enormously (and because DBC only includes 6 commodities): my 4-ETF cocktail remedies that overweighting, and the Dow Jones AIG Index used by PIMCO already limits energy exposure to 33%. I don't think it will be very long before either a Dow Jones AIG Index ETF or an even more balanced ETF becomes available, and there is a very good possibility that I will switch to it when it does. My wiki portfolio will reflect any such change. For those who haven't taken a look at my personal portfolio (which is, as I just said, my personal portfolio, and not a recommendation to anyone), including the running results, which will be updated monthly, go to simplyrich.editme.com/Sim...sPortfolio and see what I do for myself. |
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joelesposito |
International | ||
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Is there a reason you prefer the vanguard Ex-Us over the Vanguard total international fund? Or do you use this just to get the ETFs.
BTW, I can't reall y seem to fugure out the difference between those two funds, as far as what they invest in. |
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Less Antman |
Re: International | ||
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It was just to get an ETF: Vanguard Total International is a perfect mutual fund to cover both developed and emerging markets. One difference is that VEU includes Canada: I'm not sure if there is any other significant difference.
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Henry |
"Idle cash" | ||
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Less-
Whatever the markets might do from this point forward, I think one must conclude that your portfolio's inattention to the possibility of deflationary recessions is a serious omission. A retiree withdrawing from a portfolio such as yours could be in serious jeopardy at such a time (as now). It seems to me that cash (and/or nominal treasuries) cannot be considered 'idle' given the diversification benefit. Any second thoughts on your part? Thanks.
Last Edited By: Henry
04/16/09 18:06:30.
Edited 1 times.
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Less Antman |
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Well, I'm not a retiree, and have repeated until blue in the face that my allocation is my allocation, not advice for others.
As for deflation, the first rule is to repay all debts. After that, deflation itself is not a problem, as it means a reduction in the cost of living. Recessions lasting a year or two at a time have been a part of history forever, and I believe more investment wealth has been lost trying to avoid bear markets than in the bear markets themselves. As for a long-term collapse of the economy and society, I readily concede that I don't incorporate end-of-the-world scenarios in my portfolio allocation, and never will. You can't hedge the world. You are absolutely correct that cash can diversify a portfolio. For most people, I believe the cost exceeds the benefit, but I've mentioned on more than one occasion that clients of mine who are retired are allowed to keep up to 20% in cash equivalents before I fire them. |
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Henry |
Rambo retirees! | ||
Less Antman wrote: For the Rambo-retiree, the "How to lose 40+% of your life savings in one year" portfolio. Booya! |
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Less Antman |
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Most of my clients plan to spend more than 1 year in retirement.
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Henry |
Rambo retirees (cont.) | ||
Less Antman wrote: Certainly. Almost as certain is that some would-be Rambo-retirees would, under not very unusual circumstances, learn that they are indeed not super-heroes. They would (and have perhaps already done so) lock in a large loss by selling in response to intolerable stress. I suppose you would fire them at that point. You might, however, consider doing so from an undisclosed location. Booya? |
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Less Antman |
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I vet clients carefully and warn them about major declines in the market explicitly. Not one client of mine bailed out of the market in 2002 or 2008. Not
one. Some thought about it, but keeping them from doing such stupid things is the most important way I earn my fee.
I agree, however, that people investing on their own often fail to understand the emotional difficulty of sticking to a long-term plan, and end up buying high and selling low. Perhaps that's why the advice I endorsed in Andy's book was for a one-third US, one-third international, one-third cash equivalent portfolio. Your objection, then, is not to the logic of my allocation, but to the emotional obstacles to following it. On that, we agree. |
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