Author Topic: Portfolio Design: Idiots v. Gurus  (Read 11539 times)

BicycleB

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Re: Portfolio Design: Idiots v. Gurus
« Reply #100 on: October 17, 2019, 08:09:44 PM »
^ Good answer, thanks. Still pondering, but good answer.

Part of me instantly goes "Ah, crypto = baking soda". To me it tastes terrible and, by itself, seems likely to fall flat. But since crypto is highly variable, with possibly a tendency to gain value when ordinary currencies and investments tremble, it's conceivable that crypto could be part of a tasty cookie.

I mean, it scares me too much to actually do it. Just thinking out loud.

chevy1956

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Re: Portfolio Design: Idiots v. Gurus
« Reply #101 on: October 18, 2019, 02:34:17 AM »
Is there a selection bias in being on portfoliocharts.com that makes us miss something important?

That's a fair question.  Without sidetracking this discussion, the short story is that one of my goals is to fight the data availability bias very common in investing analysis by offering a wide variety of modern asset options both at home and abroad.  But it's an ongoing project, and the current list of assets is definitely not all-inclusive of everything I think might be useful.  For example, I think TIPS are nice products and would love to include them on the site if I can find an accurate method to simulate their performance prior to their introduction in 1997. It's a difficult problem to solve, and I'm still researching models behind the scenes. So I encourage people to use the data to expand their thinking rather than artificially limit it.

How do we tell which assets really are flaky and useless, and should be excluded from even a very diverse portfolio?

Since there's no single portfolio suitable for all people, to a large extent I think the answer is personal.  If you really hate a specific asset like gold, then choose a portfolio that doesn't have it!  There are lots of good options.  My one overarching piece of advice, however, is to try to stop tasting each portfolio ingredient in isolation and instead think about its important contribution to the overall recipe.  Nobody thinks baking soda tastes good, but there's a reason it's in the cookies.

These are really good points. I also think @ChpBstrd has pointed out a really interesting point on asset allocation.  A lot of those portfolios that look good may under perform over the next 50+ years. Maybe gold will be reduced to an irrelevancy and cryptos will become the most common means of exchange.

Tyler

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Re: Portfolio Design: Idiots v. Gurus
« Reply #102 on: October 18, 2019, 12:52:10 PM »
A lot of those portfolios that look good may under perform over the next 50+ years. Maybe gold will be reduced to an irrelevancy and cryptos will become the most common means of exchange.

Say what you want about gold, but it's been a valuable means of exchange for thousands of years longer than any other asset on the list.  So I seriously doubt it's going to suddenly vanish in our lifetimes.  ;) 

I hear ya, though.  I appreciate your perspective about the uncertainty of the best performers in the future, and I agree that nobody has a crystal ball.  Personally, that's one reason I value diversification!  Eggs, baskets, and all that.

For the purposes of this discussion, just keep in mind my previous point about how Radagast's SWR analysis accounts for consistency over all timeframes rather than simply high returns over one timeframe (also read his original "no bullshitting" explanation in Note 1). It's an important distinction that implies the order of the list is not as random as you may believe if you're only accustomed to thinking about maximizing returns. 

« Last Edit: October 18, 2019, 01:15:34 PM by Tyler »

BicycleB

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Re: Portfolio Design: Idiots v. Gurus
« Reply #103 on: October 18, 2019, 05:05:48 PM »
Re-reading the OP, I finally notice something that's probably important:

"Note 3: Portfolio Charts has 9:10:4:3 HomeStocks:ForeignStocks:Bonds:"Real"Assets, so all naive portfolios follow that basic ratio, which might be significant."

Oh. Ah. Ding. Light bulb. (Man, how did I miss this?) So...all the naive portfolios are about 70-75% stock. Where they differ from a lot of expert portfolios is having more "real assets" (I guess real estate, gold and commodities) than some of the expert portfolios, and possibly having more diversification with the broad categories listed in the quote. They're kind of a consistent allocation of their own, seemingly.

An allocation that worked well, evidently. But... so does that lead us back to questioning whether a good past allocation is a good future one?

I suppose if we tested a "naive" approach with a significantly different weighting of broad categories, it could help us distinguish between the allocation-of-main-categories element and the diversification-within-main-categories effect.



Tyler

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Re: Portfolio Design: Idiots v. Gurus
« Reply #104 on: October 18, 2019, 09:53:47 PM »
I suppose if we tested a "naive" approach with a significantly different weighting of broad categories, it could help us distinguish between the allocation-of-main-categories element and the diversification-within-main-categories effect.

Now you're talking!  That basic idea is one goal of the Portfolio Finder.  Try this:

https://portfoliocharts.com/portfolio/portfolio-finder/

It will help you model hundreds of naive portfolios simultaneously, and you can explore the effects of diversification breadth vs. depth by controlling the assets under consideration.
« Last Edit: October 19, 2019, 09:11:48 AM by Tyler »

chevy1956

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Re: Portfolio Design: Idiots v. Gurus
« Reply #105 on: October 19, 2019, 03:33:48 AM »
A lot of those portfolios that look good may under perform over the next 50+ years. Maybe gold will be reduced to an irrelevancy and cryptos will become the most common means of exchange.

Say what you want about gold, but it's been a valuable means of exchange for thousands of years longer than any other asset on the list.  So I seriously doubt it's going to suddenly vanish in our lifetimes.  ;) 

I hear ya, though.  I appreciate your perspective about the uncertainty of the best performers in the future, and I agree that nobody has a crystal ball.  Personally, that's one reason I value diversification!  Eggs, baskets, and all that.

For the purposes of this discussion, just keep in mind my previous point about how Radagast's SWR analysis accounts for consistency over all timeframes rather than simply high returns over one timeframe (also read his original "no bullshitting" explanation in Note 1). It's an important distinction that implies the order of the list is not as random as you may believe if you're only accustomed to thinking about maximizing returns.

I understand where you are coming from in relation to portfolio design. I like diversification as well but maybe the message should be buy the most diversified low cost index funds across different sectors. So real estate, bonds, stocks and commodities. Then possibly pick your asset allocation among those four sectors. We can all come to different conclusions based on the data. I think recognizing the principles of portfolio design and WR's is really important to understand but there isn't one solution to fit all.

Your data and portfolio analysis is really good. Your site is unreal. Thank you for that.

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #106 on: October 19, 2019, 11:30:59 PM »
How do we tell which assets really are flaky and useless, and should be excluded from even a very diverse portfolio? Crypto seems like a bad "investment" to me, but... well, where is the line?  "The answer is stocks" seems too glib. Even "the ones Tyler wisely chose because of a bunch of data" just seems...well, probably good, but I feel like we're missing something. Even if the categories on portfoliocharts.com are the "right" ones historically, it seems likely to me that they probably include something (stocks?) that are ready for a permanent fall, and exclude something with a shorter history or other exclusion reason that will perform much better. Is diversifying amoung Things That Did Well Up To Now really our best option?

Sorry if I'm rambling. This part seems really confusing to me.
I was recently reading Taleb, who suggests that the time an idea or concept can be expected to endure in the future is proportional to the time it has already existed. Apparently it originated with Broadway shows, a show that played for a week would be expected (on average) to end in a week, one that lasted a year would continue another year. He extended that to ideas: Socrates has been around 2500 years and will probably be around another 2500, Machiavelli has been around six hundred and will probably be around another 600, Arendt has been around 70 and will still be read in another 7 years. Also possibly for species. The fact that something abstract has been around a long time indicates it has enduring value that will be relevant to the future.

Extrapolate those to investments. "Real" assets like land, gold, wheat, pork bellies would be expected to continue to be traded for thousands of years in the future because they have already been traded for that long. Petroleum "rock oil" has been big for maybe 150 years, and will likely mirror that and disappear in another 150 years. Bitcoin is the oldest and safest of cryptos and might be expected to last another decade, while a crypto introduced a year ago will probably fade by next year.

Of course that is a median expectation, not a perfect explanation. Obviously new things appear, while Cats left Broadway and lead plumbing is a terrible idea even though it was used for millennia. But it seems like a good starting point.

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #107 on: October 19, 2019, 11:48:46 PM »
Re-reading the OP, I finally notice something that's probably important:

"Note 3: Portfolio Charts has 9:10:4:3 HomeStocks:ForeignStocks:Bonds:"Real"Assets, so all naive portfolios follow that basic ratio, which might be significant."

Oh. Ah. Ding. Light bulb. (Man, how did I miss this?) So...all the naive portfolios are about 70-75% stock. Where they differ from a lot of expert portfolios is having more "real assets" (I guess real estate, gold and commodities) than some of the expert portfolios, and possibly having more diversification with the broad categories listed in the quote. They're kind of a consistent allocation of their own, seemingly.

An allocation that worked well, evidently. But... so does that lead us back to questioning whether a good past allocation is a good future one?

I suppose if we tested a "naive" approach with a significantly different weighting of broad categories, it could help us distinguish between the allocation-of-main-categories element and the diversification-within-main-categories effect.
Yeah I probably understated that. "Is very significant" might be more appropriate. Although one of the "Naive" portfolios is 90% stock 10% cash and I don't recall it standing out. I do think that the ratio in Portfolio Charts is a pretty good guess about the future though.

Another point is that I first thought of this idea a few years ago and even did a few tests using Portfolio Visualizer, which uses a totally different set of assets over a different time. It also has very different backtesting tools. PV has a lot more and different types of bonds and would have given more bonds and lower stocks and fewer "real" assets. So this was more of a test which supported the hypothesis.

kenmoremmm

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Re: Portfolio Design: Idiots v. Gurus
« Reply #108 on: October 20, 2019, 01:30:33 AM »
How do we tell which assets really are flaky and useless, and should be excluded from even a very diverse portfolio? Crypto seems like a bad "investment" to me, but... well, where is the line?  "The answer is stocks" seems too glib. Even "the ones Tyler wisely chose because of a bunch of data" just seems...well, probably good, but I feel like we're missing something. Even if the categories on portfoliocharts.com are the "right" ones historically, it seems likely to me that they probably include something (stocks?) that are ready for a permanent fall, and exclude something with a shorter history or other exclusion reason that will perform much better. Is diversifying amoung Things That Did Well Up To Now really our best option?

Sorry if I'm rambling. This part seems really confusing to me.
I was recently reading Taleb, who suggests that the time an idea or concept can be expected to endure in the future is proportional to the time it has already existed. Apparently it originated with Broadway shows, a show that played for a week would be expected (on average) to end in a week, one that lasted a year would continue another year. He extended that to ideas: Socrates has been around 2500 years and will probably be around another 2500, Machiavelli has been around six hundred and will probably be around another 600, Arendt has been around 70 and will still be read in another 7 years. Also possibly for species. The fact that something abstract has been around a long time indicates it has enduring value that will be relevant to the future.

Extrapolate those to investments. "Real" assets like land, gold, wheat, pork bellies would be expected to continue to be traded for thousands of years in the future because they have already been traded for that long. Petroleum "rock oil" has been big for maybe 150 years, and will likely mirror that and disappear in another 150 years. Bitcoin is the oldest and safest of cryptos and might be expected to last another decade, while a crypto introduced a year ago will probably fade by next year.

Of course that is a median expectation, not a perfect explanation. Obviously new things appear, while Cats left Broadway and lead plumbing is a terrible idea even though it was used for millennia. But it seems like a good starting point.

hmm. maybe it's late and i'm not comprehending, but this taleb concept makes no sense to me.

why is the expected duration based on the year in which i look at that commodity to estimate how much time it has left? if bitcoin has been around 10 years, and is expected to go kaput in 10 more, how do i logic this out when bitcoin has been around for 15 years? do i say it only has 5 more years to go, or another 15?

it seems like this is an infinity loop.

arebelspy

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Re: Portfolio Design: Idiots v. Gurus
« Reply #109 on: October 20, 2019, 11:33:28 AM »
When it's been around 15 years its self-life is expected to be another 15.

However long it has lasted is a rough rule of thumb for how much longer it will last.
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kenmoremmm

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Re: Portfolio Design: Idiots v. Gurus
« Reply #110 on: October 20, 2019, 11:55:01 AM »
sorry. that's a garbage loop.

if it's been around 1 days, then i expect tomorrow will be its last day???

but then, when it's day 2, now it'll be around 2 more days?

this makes no sense.

dragoncar

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Re: Portfolio Design: Idiots v. Gurus
« Reply #111 on: October 20, 2019, 12:09:11 PM »
sorry. that's a garbage loop.

if it's been around 1 days, then i expect tomorrow will be its last day???

but then, when it's day 2, now it'll be around 2 more days?

this makes no sense.

Yeah Iím struggling to figure out how this rule minimizes prediction error.  Letís say a new play opens in year 1 and ends in year 10.  At the end of year 1, the rule predicts a two year run, error 8.  In year two, prediction is 4, error 6.  So each (year; prediction; error):

1; 2; 8
2; 4; 6
3; 6; 4
4; 8; 2
5; 10; 0
6; 12; 2
7; 14; 4
8; 16; 6
9; 18; 8
10; 20; 10

Average  error 5, so presumably average error is half of the life of the play. 

Even a naive ďthe play will last one more yearĒ rule would have an average error of 3.7.  Im sure there are even better rules
« Last Edit: October 20, 2019, 12:10:54 PM by dragoncar »

arebelspy

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Re: Portfolio Design: Idiots v. Gurus
« Reply #112 on: October 20, 2019, 06:44:01 PM »
I think it's more for older things, saying "Socrates has been around a long time, it's a good bet he'll still be around in 500+ years (2k+ according to his rule of thumb" and "this thing is very new, I shouldn't predict it should last forever."

I think it's mostly to remind you that the old stuff isn't going away, and the new stuff that looks great may not be around for as long as you think. Sort of a mental model to help ward against recency bias.
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Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #113 on: October 20, 2019, 10:48:42 PM »
Think of it as mean time to failure, not a definite time it will end. If it is relevant after ten years you estimate there is a 50/50 chance it will still be relevant relevant in another 10. Not it will end then, but that on average you would expect something that has endured that long to double itís longevity. Half would fail sooner and half later.

Or you could invert it and estimate the odds it will become worthless next year. If something started ten years ago you estimate there is a 1/10 chance it will be gone next year. If it has been around 5,000 years and is still widely used, you estimate there is just a 1/5000 chance it will suddenly become irrelevant next year.

mrmoonymartian

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Re: Portfolio Design: Idiots v. Gurus
« Reply #114 on: October 21, 2019, 02:09:38 AM »
Yeah Iím struggling to figure out how this rule minimizes prediction error.
Probably talking about different errors. I see that if you don't take the absolute value of the error and keep the vector, then the errors cancel out. Meaning for a particular event predicted regularly, the mean of all of predictions was in fact accurate. They just weren't particularly precise, as you demonstrated.

talltexan

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Re: Portfolio Design: Idiots v. Gurus
« Reply #115 on: October 21, 2019, 09:54:37 AM »
sorry. that's a garbage loop.

if it's been around 1 days, then i expect tomorrow will be its last day???

but then, when it's day 2, now it'll be around 2 more days?

this makes no sense.

Yesterday, I thought it was going to be dead at the end of today with 50% probability. Since it's clear that hasn't happened, I need to update my beliefs with the fact that it didn't die and recalculate.

ChpBstrd

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Re: Portfolio Design: Idiots v. Gurus
« Reply #116 on: October 21, 2019, 12:00:56 PM »
The durability of cars and Thanksgiving turkeys and virtually anything physical doesnít work this way. IDK about ideas/memes though, such as the idea that gold/cryptocurrency has value or that one is supposed to eat turkey on Thanksgiving. Technology, culture, and industries are changing at a faster pace now than at any point in history. I would be wary of claims that people in 20-30 years will behave the same way people do now, or even want the same things (e.g. car ownership is starting to decline, people now spend more money and time on cell phones than TVs, veganism is taking off, stock trade commissions are free, and all this was not even sci-fi a few years ago.).

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Re: Portfolio Design: Idiots v. Gurus
« Reply #117 on: October 21, 2019, 09:38:51 PM »
sorry. that's a garbage loop.

if it's been around 1 days, then i expect tomorrow will be its last day???

but then, when it's day 2, now it'll be around 2 more days?

this makes no sense.

Yesterday, I thought it was going to be dead at the end of today with 50% probability. Since it's clear that hasn't happened, I need to update my beliefs with the fact that it didn't die and recalculate.
Right, you continually update your expectations of the unknown. In 2010 I expect bitcoin to be forgotten in a year, if anybody even knew of it. In 2011 I guess there is a 50/50 chance bitcoin will disappear by 2013. In 2013 I think there is a 50/50 chance it will be relevant in 2017. In 2017 it is still around so I estimate there is a 50% chance it will exist in 2025. Right now in 2019 we guess it has 50/50 of making it to 2029.

The durability of cars and Thanksgiving turkeys and virtually anything physical doesnít work this way. IDK about ideas/memes though, such as the idea that gold/cryptocurrency has value or that one is supposed to eat turkey on Thanksgiving. Technology, culture, and industries are changing at a faster pace now than at any point in history. I would be wary of claims that people in 20-30 years will behave the same way people do now, or even want the same things (e.g. car ownership is starting to decline, people now spend more money and time on cell phones than TVs, veganism is taking off, stock trade commissions are free, and all this was not even sci-fi a few years ago.).
Easy come, easy go.

It is supposed to apply to things without a defined expiration date. A mosquito, rat, or human would individually die on a fairly predictable schedule. Mosquitoes, rats, and humans can be expected to last another 200 million, 50 million, and 100,000 years.

Anyhow getting off topic.
« Last Edit: October 21, 2019, 09:44:14 PM by Radagast »

FIreDrill

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Re: Portfolio Design: Idiots v. Gurus
« Reply #118 on: August 01, 2020, 05:06:05 PM »
What I'm getting at, ChpBstrd, is that holding diversified assets (even "nonproductive" ones, for the purposes of non-correlated rebalancing for lower volatility and thus higher SWR and sometimes even higher CAGR) isn't "market timing," it's more the similar idea to most investing: that the future won't look substantially different than the past.

I am super late to this party but this is exactly why I incorporated GLDM into my portfolio.  Gold has been one of the few assets that has had an inverse correlation with stocks when going through recessionary periods making it a great asset to rebalance and take advantage of market dips.  Back in February I took about 70% of our portfolio and allocated it according to the following.

QQQ - 45% - Nasdaq 100
VDC - 15% - Consumer Staples
VO   - 10% - Mid Cap
VB   - 10% - Small Cap
VPU  - 10% - Utilities
GLDM - 10% - Gold

The portfolio is tech-heavy and uses consumer staples, utilities, and gold as recessionary hedges.  It also has a decent amount of mid and small-cap exposure.  It backtests well but that doesnt mean much.  So far I have been extremely happy with it through the 2020 crash in which Gold and Tech have done very well and has given some great rebalance opportunities.

Buffaloski Boris

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Re: Portfolio Design: Idiots v. Gurus
« Reply #119 on: August 22, 2020, 07:23:20 PM »
This is a great thread. Has anyone just gone a head and done a naive portfolio for real?

Buffaloski Boris

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Re: Portfolio Design: Idiots v. Gurus
« Reply #120 on: September 27, 2020, 11:24:46 AM »
This is a great thread that needs to go back to the top.

The way I read this is that if you had simply picked allocations to asset classes more or less at random you would likely do better, from a historical perspective, than following the advice of various investment gurus.

Steeze

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Re: Portfolio Design: Idiots v. Gurus
« Reply #121 on: September 27, 2020, 01:37:28 PM »
Probably someone has already done this, but why not loop through every possible portfolio combination on portfoliocharts and identify the top combinations?

I was messing around one day trying to find portfolios that beat all the portfolios listed In the matrix chart by incremental charges in holdings until I found optimum results. I am sure I found a sort of local maximum, but there may be others that are wildly different combinations but perform the same.

For example:

3% LCV, 3% LCG, 3%MCV, 3%MCG, 36%SCV, 20%LT Bonds, 5%ST Bonds, 22% gold, 5% REIT

Not a portfolio I would necessarily hold, but it backtests great. My goal was to find a portfolio that would have lowest total score when summing all categories in the matrix. SWR and Perpetual WR had to be #1, and total return had to be competitive with 100% TSM.

Maybe there are others. The Portfolio Finder attempts this, but is too limited in scope by only allowing 10 options and equally weighting everything. I want to run through the portfolio matrix over and over trying every combination of possibilities in, say, increments no smaller than 1%. I would want at least 20 options to be considered. Maybe it would take a while to run but would be interesting to see if any really random portfolios showed up that handily beat the others.
« Last Edit: September 28, 2020, 04:21:35 AM by Steeze »

BicycleB

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Re: Portfolio Design: Idiots v. Gurus
« Reply #122 on: September 27, 2020, 06:27:20 PM »
Wouldn't it be likely that such an approach would find an accidental winner - something where its performance is unlikely to be repeated?

Steeze

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Re: Portfolio Design: Idiots v. Gurus
« Reply #123 on: September 27, 2020, 06:54:57 PM »
Wouldn't it be likely that such an approach would find an accidental winner - something where its performance is unlikely to be repeated?

My understanding was the matrix was using historical data so in that sense I would think that it couldnít be a one-off because in order to score highly in every category it would have to back test successfully through years of data with different start and end points.

As far as repeating in the future who knows - 50%gold/50% Brazilian TSM might be the winner!

There were some nuances in this process that were interesting to me though. Like having a collection of small/mid/large/value/growth would out perform vs. TSM even in the same approximate ratios as TSM, Iím assuming because of the rebalancing benefits.

Likewise holding long term and short term Bonds separately was better than having a total bond market fund.

Probably the same goes for emerging or developed markets - if you had a fund for every country and rebalance each year or so you would beat an all in one fund through rebalancing. Gets away from the simplicity of the classic 3 fund, but probably helps smooth things out of you could execute it mechanically

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #124 on: September 27, 2020, 10:43:06 PM »
This is a great thread that needs to go back to the top.

The way I read this is that if you had simply picked allocations to asset classes more or less at random you would likely do better, from a historical perspective, than following the advice of various investment gurus.
Yes, that is essentially what I am seeing, with the note that "Portfolio Charts has 9:10:4:3 HomeStocks:ForeignStocks:Bonds:RealAssets, so all naive portfolios follow that basic ratio." However, one of the portfolios was 90% stocks 10% cash, and I'm sure there were a few other almost as odd balls as well. Further, I first noticed the phenomenon using Portfolio Visualizer, which uses often different assets in different ratios over a different time period, so I think there is quite a bit of flexibility to near-randomly select different assets, in the general vicinity of 35% US stocks, 35% ex-US stocks, 20% bonds, 10% "real assets". You will get a similar effect with anything similar. Another thing I think might be bringing down gurus is heavier bond allocations, which in most cases have done little to improve inflation-adjusted results.

To your earlier question
Has anyone just gone a head and done a naive portfolio for real?
I guess I am sorta doing this for real. It probably became official two years ago when my wife started her 401k. There weren't many good options, and she had to choose between S&P500, Vanguard PrimeCAP active large growth, and Vanguard actively managed International Growth or International Value, or some other crap. So I split it 50/50 between actively managed US and international large growth funds VPMAX and VPWILX. That was officially my start of acknowledging my naivety. I think VWILX, an actively managed international large growth fund - go figure - , has been the best performing stock fund we have.

Buffaloski Boris

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Re: Portfolio Design: Idiots v. Gurus
« Reply #125 on: September 28, 2020, 01:36:37 PM »
@Radagast thanks for the note and explanation. One thing I did notice in looking at the charts was that the Total Stock Market market portfolio was near last or dead last in each country. Correct me if Iím wrong, but isnít that a cap weighted all domestic stock portfolio essentially the same as VTSAX (or the domestic equivalents outside the US?)

Full disclosure: I am NOT a fan of cap weighted US funds for a myriad of reasons and have been railing against them for as long as Iíve been here. Iím curious as to what the numbers are showing as compared to ďdiversification via dartboard.Ē I want to make sure Iím drawing a valid conclusion.

Oh and thanks again @Tyler for portfoliocharts!

ChpBstrd

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Re: Portfolio Design: Idiots v. Gurus
« Reply #126 on: September 28, 2020, 03:09:11 PM »
We have to be careful when we answer the question of "what worked best in the past" and not convince ourselves we are answering the question "what will work best for the next 20 years."

Japanese equities were amazing from the 1960s through the 1980s, but became a long-term dud over the following 30 years. Had one invested based on past performance or upon a mantra like "stocks always go up faster than bonds in the long run" then one might have held the Japanese stock market through it all.

Similarly, to look at a sector or investment type and to say it is a superior idea because it worked well in the past is not that different than saying one should buy Netflix now because look how well they did in the past. Yes, one is a sector and one is a stock, but the thinking process is the same, isn't it? Went up = must be "good".

That said, a reasoned approach doesn't always work any better than following old investing mantras. Value stocks have been underperforming the broader market for years and the valuations of international stocks were low and stayed low. Imagine all the very good reasons NOT to buy Tesla or Zoom a year ago, or even to short them. Imagine being an investor in 1945 at the end of WW2. The sudden decline in war spending would be deflationary, right? Wrong. The Fed kept rates low and people holding cash lost a quarter of their purchasing power in 3 short years. It's easy to think oneself into a bad idea.

There's an element of chance with all this and that's the point. When the next 30 years are done, there will be another answer to the historically-best AA but our investing lives will be mostly done.

Buffaloski Boris

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Re: Portfolio Design: Idiots v. Gurus
« Reply #127 on: September 28, 2020, 04:37:57 PM »
We have to be careful when we answer the question of "what worked best in the past" and not convince ourselves we are answering the question "what will work best for the next 20 years."

Japanese equities were amazing from the 1960s through the 1980s, but became a long-term dud over the following 30 years. Had one invested based on past performance or upon a mantra like "stocks always go up faster than bonds in the long run" then one might have held the Japanese stock market through it all.

Similarly, to look at a sector or investment type and to say it is a superior idea because it worked well in the past is not that different than saying one should buy Netflix now because look how well they did in the past. Yes, one is a sector and one is a stock, but the thinking process is the same, isn't it? Went up = must be "good".

That said, a reasoned approach doesn't always work any better than following old investing mantras. Value stocks have been underperforming the broader market for years and the valuations of international stocks were low and stayed low. Imagine all the very good reasons NOT to buy Tesla or Zoom a year ago, or even to short them. Imagine being an investor in 1945 at the end of WW2. The sudden decline in war spending would be deflationary, right? Wrong. The Fed kept rates low and people holding cash lost a quarter of their purchasing power in 3 short years. It's easy to think oneself into a bad idea.

There's an element of chance with all this and that's the point. When the next 30 years are done, there will be another answer to the historically-best AA but our investing lives will be mostly done.

Or as they say in investment brochures: Past performance is no guarantee of future results. Unfortunately outside of conjecture, the past is what we have as a tool to grok the future.

joe189man

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Re: Portfolio Design: Idiots v. Gurus
« Reply #128 on: September 30, 2020, 08:42:51 AM »
Thanks for all of this work, its a great resource and very interesting

one question, what's the best way to go about creating one of these portfolios? Manually buy them through a brokerage (which one?) and rebalance at your preferred time interval? Any company create these for you?

i only have my 401k at the moment and don't have access to investment classes mentioned; gold, some bonds, some emerging markets, etc.

Thanks

mntnmn117

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Re: Portfolio Design: Idiots v. Gurus
« Reply #129 on: September 30, 2020, 09:23:13 AM »
@Radagast One thing I did notice in looking at the charts was that the Total Stock Market market portfolio was near last or dead last in each country. Correct me if Iím wrong, but isnít that a cap weighted all domestic stock portfolio essentially the same as VTSAX (or the domestic equivalents outside the US?)

This poor performance on withdrawal rate seems counterintuitive when TSM (VTSAX/VTI) seems to have nearly the highest real average return(2nd chart further down on page 1). Would a correct interpretation recommend TSM during accumulation, Naive during drawdown?

BicycleB

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Re: Portfolio Design: Idiots v. Gurus
« Reply #130 on: September 30, 2020, 05:06:12 PM »
@Radagast One thing I did notice in looking at the charts was that the Total Stock Market market portfolio was near last or dead last in each country. Correct me if Iím wrong, but isnít that a cap weighted all domestic stock portfolio essentially the same as VTSAX (or the domestic equivalents outside the US?)

This poor performance on withdrawal rate seems counterintuitive when TSM (VTSAX/VTI) seems to have nearly the highest real average return(2nd chart further down on page 1). Would a correct interpretation recommend TSM during accumulation, Naive during drawdown?

It might be hard to determine "correct" when the future is hard to predict, different investors have different tolerances for volatility, and other individual differences mean that the most optimal solution for one person might be suboptimal for another.

I think you make a good point that an accumulating investor might find a slightly faster average time to FI by choosing TSM, while the greater apparent safety of Naive might make it a good choice for someone who is drawing down. Some people find volatility unsettling though, so a near equal performance from Naive plus lower volatility might make Naive a happy choice for some investors during their accumulation phase too.

Steeze

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Re: Portfolio Design: Idiots v. Gurus
« Reply #131 on: September 30, 2020, 07:32:55 PM »
@Radagast One thing I did notice in looking at the charts was that the Total Stock Market market portfolio was near last or dead last in each country. Correct me if I’m wrong, but isn’t that a cap weighted all domestic stock portfolio essentially the same as VTSAX (or the domestic equivalents outside the US?)

This poor performance on withdrawal rate seems counterintuitive when TSM (VTSAX/VTI) seems to have nearly the highest real average return(2nd chart further down on page 1). Would a correct interpretation recommend TSM during accumulation, Naive during drawdown?

It might be hard to determine "correct" when the future is hard to predict, different investors have different tolerances for volatility, and other individual differences mean that the most optimal solution for one person might be suboptimal for another.

I think you make a good point that an accumulating investor might find a slightly faster average time to FI by choosing TSM, while the greater apparent safety of Naive might make it a good choice for someone who is drawing down. Some people find volatility unsettling though, so a near equal performance from Naive plus lower volatility might make Naive a happy choice for some investors during their accumulation phase too.

Couldn't there be an all around portfolio that is good in both situations?


« Last Edit: September 30, 2020, 07:50:33 PM by Steeze »

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #132 on: September 30, 2020, 10:10:30 PM »
Thanks for all of this work, its a great resource and very interesting

one question, what's the best way to go about creating one of these portfolios? Manually buy them through a brokerage (which one?) and rebalance at your preferred time interval? Any company create these for you?

i only have my 401k at the moment and don't have access to investment classes mentioned; gold, some bonds, some emerging markets, etc.

Thanks
I would not get too into the details, the whole point here is that you don't know what will be best. Start like normal by figuring which are the low cost stock funds in your 401k, and split them up as well as you can. If the only good fund is an S&P500 fund with an 0.2% expense ratio, then put it all in the S&P500. If you have a good S&P500 fund, a good small cap fund, and a good international fund then split it equally between the three. Choose a fund to put into an IRA that is different than those three, and yet another different fund in a taxable brokerage account. If there are two of you you may have another 401k, HSAs, and others which might have certain funds that are better than others available in those accounts (better = inexpensive, yet different than your others), so use those. You can buy a house, or savings bonds, or others. Pretty soon you have 5-10 diverse assets, which is all you need really, especially getting started.

Only 40% overall of the naive portfolios contained allocations to gold or emerging markets. Most did not. Neither is mandatory to a naive investor.
« Last Edit: September 30, 2020, 10:15:18 PM by Radagast »

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #133 on: September 30, 2020, 10:14:00 PM »
@Radagast thanks for the note and explanation. One thing I did notice in looking at the charts was that the Total Stock Market market portfolio was near last or dead last in each country. Correct me if Iím wrong, but isnít that a cap weighted all domestic stock portfolio essentially the same as VTSAX (or the domestic equivalents outside the US?)
Yes. However some of the countries have much smaller markets, often with heavy sector tilts. Effectively most other countries have markets that are closer to "small capitalization value" than the US is. Only Japan was for a while larger and growthier than the US in this dataset I believe.

Radagast

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Re: Portfolio Design: Idiots v. Gurus
« Reply #134 on: September 30, 2020, 10:26:50 PM »
@Radagast One thing I did notice in looking at the charts was that the Total Stock Market market portfolio was near last or dead last in each country. Correct me if Iím wrong, but isnít that a cap weighted all domestic stock portfolio essentially the same as VTSAX (or the domestic equivalents outside the US?)

This poor performance on withdrawal rate seems counterintuitive when TSM (VTSAX/VTI) seems to have nearly the highest real average return(2nd chart further down on page 1). Would a correct interpretation recommend TSM during accumulation, Naive during drawdown?
It is not counterintuitive, the extra volatility of an all-stock portfolio is a well known risk to a high safe withdrawal rate. You cannot get higher return without higher risk, and sometimes you roll the dice get low returns. That's why it's risk.

I do think in general your first investments should be all stock funds, and then you should fill out the rest gradually as you get enough money to bother.

However, I also think you are too narrowly focused on VTSAX / US total market. People didn't know in 1970 which countries or markets would have the best return or withdrawal rates. Look at both domestic TSM and world TSM returns for every country to get a better sense of the range of likely possible outcomes for any "total market fund". They were not notably different or even better than the naive portfolios.

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Re: Portfolio Design: Idiots v. Gurus
« Reply #135 on: September 30, 2020, 10:31:02 PM »
@Radagast One thing I did notice in looking at the charts was that the Total Stock Market market portfolio was near last or dead last in each country. Correct me if Iím wrong, but isnít that a cap weighted all domestic stock portfolio essentially the same as VTSAX (or the domestic equivalents outside the US?)

This poor performance on withdrawal rate seems counterintuitive when TSM (VTSAX/VTI) seems to have nearly the highest real average return(2nd chart further down on page 1). Would a correct interpretation recommend TSM during accumulation, Naive during drawdown?

It might be hard to determine "correct" when the future is hard to predict, different investors have different tolerances for volatility, and other individual differences mean that the most optimal solution for one person might be suboptimal for another.

I think you make a good point that an accumulating investor might find a slightly faster average time to FI by choosing TSM, while the greater apparent safety of Naive might make it a good choice for someone who is drawing down. Some people find volatility unsettling though, so a near equal performance from Naive plus lower volatility might make Naive a happy choice for some investors during their accumulation phase too.

Couldn't there be an all around portfolio that is good in both situations?


Of course there could. But it could also be over-designed to the past, causing it to be doomed to failure in the future. What if your 36% SV and 22% gold both go through a bad period at the same time? And how did that portfolio fare for the other countries available?

Steeze

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Re: Portfolio Design: Idiots v. Gurus
« Reply #136 on: October 01, 2020, 04:07:46 AM »
Of course there could. But it could also be over-designed to the past, causing it to be doomed to failure in the future. What if your 36% SV and 22% gold both go through a bad period at the same time? And how did that portfolio fare for the other countries available?

I am sure that one is not great in all situations, just was ok from 1970 until now which is what that data uses. Just in principle it seems like it should be possible. Maybe it takes something more creative like options strategies, or leveraging, etc.

I donít know - just seems like it should be possible to have similar returns and lower volatility at the same time

BicycleB

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Re: Portfolio Design: Idiots v. Gurus
« Reply #137 on: October 02, 2020, 05:51:30 PM »
...seems like it should be possible to have similar returns and lower volatility at the same time

I think the point of the thread is that the naive portfolios with lots and lots of diversification produced lower volatility and roughly similar returns at the same time.