So I had a unique (I think?) thought about a lazy portfolio of ETFs.One appeal of a lazy portfolio is that it minimizes the number of decisions that the investor needs to make.
There are those who would say to just buy an S&P 500 index fund and be done with it. Like all strategies this idea has pros and cons.
The S&P 500 is made up of ten big sectors. Forgetting the cost for a moment the S&P 500 could be replicated by buying a proportionally correct amount of each of the ten sectors via sector ETFs.
The unique aspect I am spelling out here requires two decisions. One decision made ten times, so one time for each sector, and then one decision about just one sector.
The idea would be to weight each sector consistent with its weight in the S&P 500, so you are not making any sector bets you would be equalweight to the S&P 500, but for each of the sectors you make a decision about foreign or domestic.
So for example;
Financials 18.59% of the S&P foreign sector ETF
Tech 16.09% domestic
Healthcare 12.14% foreign
Energy 11.76% domestic
Industrials 11.62% foreign
Staples 10.07% domestic
Discretionary 8.93% foreign
Telecom 3.65% domestic
Utilities 3.55% foreign
Materials 3.28% domestic
A couple of notes before I go on. If the percentages don't add to 100 you can take it up with iShares which is where the data comes from. These are not my picks I just alternated between the two to make the idea easier to understand.
So for each sector you would decide foreign or domestic and then decide (ok so maybe there is more than one decision) the best ETF to capture what you think is going on in the sector. I believe that value could be added versus the S&P 500 by getting the foreign or domestic issue correct. This would not require anyone to get the country right, or do stock picking, make sector bets, it would just boil down to foreign or domestic.
Obviously making a decision about foreign or domestic for each sector would require some work but I am not so sure it requires a lot of work relative to lazy portfolios but I won't argue with anyone who says otherwise.
If you are correct about, for example, foreign for a given sector getting the best fund becomes less important than the foreign/domestic issue the majority of the time.
I would think this could be done with other benchmarks too.
The other "decision" which may not even be a decision would involve the financial sector, so we are drifting into a sector bet. When the yield curve inverts reduce the financial sector by some portion of your choosing. Maybe reduce by 25-30%, not a big bet, just recognition that financials struggle when the yield curve is inverted.
One thing to keep in mind is that some theme funds could be proxies for a given sector. For example the SPDR/FTSE Macquarie Global Infrastructure Fund (GII) could easily be a proxy for global utilities--not a pick just an example-- or the new Timber ETF (CUT) could be a proxy for global materials, no doubt there are plenty of others.
Like ALL portfolio ideas this one has plenty of drawbacks. It lacks REITs, commodities, small cap (but that could actually be worked in) and obviously ignores fixed income and there are probably some others that escape me at this early hour.
This post is intended to be academic, hence no ticker symbols which should help me avoid compliance issues. If you play around with the concept and compare returns of foreign and domestic sector ETFs you will see some dispersion in performance and if you look at the components you will see where foreign would be the better choice for some sectors and domestic better for others. Taking it that far would, I believe, allow you to see the extent to which very simple decisions can add value to a portfolio that you might actually implement for yourself.
I think an exercise along these lines would be very constructive for learning more about top down portfolio construction.
Are you watching all of this college basketball that has started? WTF? This is an early start, I think they are scheduling 50 games now. Less than a week until the Maui Classic.
33 comments:
it's November, man. Non conference games always start in November.
Mike C,
I can't resist, having been a client of the sell side. You have insulted your clients by calling them "know nothing investor" and "joe sixpack". And, you have misrepresented Vanguard as implying that John Boogle wants folks to just use the s&p index as one stop shop. Every professional discipline has its gospel, rigidity,and paternalistic attitudes which in reality are a form of self protection. And, this benchmark issue brings it out. Bottom line, if you, Roger, and whomever cannot significantly beat (after fees) a simple uncomplicated global lazy portfolio made up of 2-3 etfs/oefs on a year to year basis then you are doing nothing more than selling hope which some may call snake oil. In all respect, it's a tough profession to have this kind of transparency so it's human nature to be self protective. It was not that long ago that asset mgrs did not report any comparative benchmarks nor did they report portfolio performance; it was entirely up to the client to dig out figures and calculate percentage returns. Transparency and accountability for the client has only improved on an incremental basis each time there is a crisis. Go back to 1970, 1980, 1990, 1995, and 2005 for monthly and quarterly statements from a Merrill and equivalent to judge for yourself.
I realize todays exercise is academic but one practical consideration that comes to mind when breaking things down this way is transaction costs for rebalancing, overweighting/underweighting etc. not outweighing the benefits of greater control... especially for smaller account sizes. One possible way around that would be to build a "core" portfolio using 85% (for instance) of the funds available using broad based etfs (S&P 500 & EAFE) and "tweak" the edges by using the other 15% to overweight/underwight a sector or two using sector etfs. Thay way one still hase some control over the top down weighting of the portfolio but can keep costs down.
Golly, the fellas are being rascals...
Roger, stop selling hope with your lame and misleading attempts to explain the academics. Why not educate us with practical, well-researched, winning advice instead?
To keep it simple and useful, why not tell us to just buy "SPY" and be done with all the mindless trading, guessing, and hidden fees behind your random thoughts?
Fact: Any investor who does this will beat 86% of all other S&P investors over 10 years. Moreover, they will win big...not just pennies...we win by an average of almost 4% per year. The reasons are well documented (Arnott et al., Journal of Portfolio Management 26, no. 4 (2000):
1) avoids management fees
2) avoids poor stock picking
3) avoids poor market timing
4) avoids mindless trading(fees and taxes)
Fact: The rest, the 1 in seven investors who beat the SPY pick, can expect to win by 2% per year. Rest assured Roger, these are not "joe sixpacks" like all of us, including you.
?
Why don't you just read another blog that has what you want as this one clearly misses the mark for you.
I prefer to shine the searchlight on snake oil salesmen, that's why.
oh, that seems rational especially since i didn't know I was selling anything.
Just for the record, I truly respect Roger though I disagree with him sometimes. anon 11:13 is not me and dislike the shmuck misusing some of my language. Enough time wasted on this topic....jasper/which i would use to sign in but sometimes this is problematic and beyond me.
Most portfolios are just too complicated for most people. The 9:23 anon touched upon something I can handle. Remember Preto's law of 80:20 principle. When applied to investing, 80% of your portfolio gains are realized by 20% of your portfolio. Regardless of the precise nature of the ratio, it is efficient and effective to have 80% of your portfolio on an autopilot which requires very little of your time. Here you can have your S&P 500 index or a world index. Your real time should be devoted to find the 20% of your portfolio which can make 80% of consequences.
Roger, Is that a picture of you and Bill Clinton?
I tried putting together this portfolio with the proper pecentages and I came out with about a 7.5% Return YTD ...at that point I may as well go with something simple like a Ben Stein portfilio. I'm sure it may deviate a 1% or so depending on your picks but it'll somewhere between 7-8%
I'm not sure why Roger puts up with this crap. Roger baby, why don't you force logins? It'll drive some riff-raff away.
The Preto's law comment resonates with me. I'm in the planning stage to do just that. The emotional stress of a large port has overwhelmed me. My auto pilot will be an asset mgr.
lol, are you saying i look like Lumpy or Eddie?
I would prefer not to have logins so that nayone can have an easier time leaving comments, being anon is fine with me.
My only sentiment about the people who seem to be obsessed (I really don't know how else to describe it) is that I feel bad that other readers waste their time responding or whatever.
I think my colleagues want me to do something to reduce the useless heckles (as opposed to rational discussions) so I may do that. I am not sure.
Anon 11:31 assume you are referring to Pareto's Principal (e.g., http://tinyurl.com/alw5w ). Although there's nothing sacred about 80 (or 20) it's a useful way to think about things -- the bulk of any given effect typically comes from a relatively small number of causes -- it's why taking a core-satellite approach to investing as you suggest makes sense.
Taking the idea a logical step further it's also why it may make sense for some people to just establish a relatively simplified buy-and-hold core investment position while adding the real extra financial oomph in some other way entirely; e.g., not from investing in financial assets but from engaging (or investing) in some other line of work entirely.
It's another way of looking at 'real' diversification, a topic that has been bandied about the blog before, but gives it an interesting spin: As Joseph Juran (very rough paraphrase here) comments, many are useful but only a few are vital, identify the vital and quality is not only assured but efficiently reached.
To RW. The answer is yes. I have been reading a new book "The 4-Hour Workweek" by Timothy Ferriss. Timthy cited Pareto's Principle as a way to cut down unnecessary and nonproductive efforts and focus on the important issues. BTW, this is a good book about thinking outside the box. I certainly enjoy reading it.
Well why you are identifying the proper portfolio I would like to point out the approximate "investment" duration for the following ETFs based on there turnover rate:
DIA 5 days
XLE 3 days
SPY 3 days
QQQQ 3 days
XLF 2.5 days
My point is there are precious few investors these days. It is all about speculation.
Do you think we have peaked yet?
Roger, you call this an "academic discussion".....
You must be attending clown college....
All this to mimic the s&p? Just buy spy and be done with it.
This kind of financial advice is dangerous.
I think the reason that 20% of the portfolio sometimes shows the highest gains is because in a well diversified portfolio the percentage that's in this years hot sector(s) shows the big gains.
That being said, who can guess what next year's hot sectors are going to be? So now we are back to the wisdom of staying diversified.
I am a buy & hold guy and agree in philosophy with the index method over long term. But in a managed portfolio one could overweight the hot sectors and reduce the poor sectors as Roger has said many times, and with some work find some alpha. This years example of under-weighing is of course in financials. But if you stay in a hot sector too long and don't re-balance you could get burnt.
For Roger's detractors; his profession is noble enough in that some people with money do not want to be bothered at all with their investments. I like to manage my own portfolios would not use Roger's services, but perhaps his clients don't either have the time, or they would rather spend the time with their families, etc. They may also sleep better knowing that someone is actively managing their portfolios.
They would rather pay someone in the service industry to complete this task for them, just like in some other service industry. For example some people do their own taxes to save money. But a lot of other folks like me will not be bothered with this since it's so complicated and is a pain in the rear-end. I pay someone to do this for me. You got a problem with that?
So why deride either Roger or those folks that choose to spend their own money through fees for this financial service?
In a nutshell, IT'S NONE OF YOUR BUSINESS KNUCKLEHEADS! (sorry)
JackS
re "Do you think we have peaked yet?".
I do not know if we peaked, but the small caps have led the run domestically for the last 5 years and are now showing signs of being really tired.
IMO the risk/reward favors defensive action at this stage.
I closed out the last of my USO today and initiated a short in IWN in the morning.
looking to initiate a long UNG position if it comes back to $38.
Geez Roger--you are so non-confrontational, non ego-centric but very earnest in what you do. You also save people, forests and give homes to dogs.
That some ding-dong head spends his time (I'm sure it is a he as women wouldn't bother with hurling insults, they would just stalk you) reading and writing sophomoric insults. Sadly the light he shines is merely an ugly light on his own poor behavior.
Sami,
I respect your positions most of the time including today. But my point is if these wonderful long term ETF investment vehicles are "normally" being held for less than a week, you have a market with EXCESS speculation.
But what do I know - I can't find many investments better than cash.
I agree that the market has excess speculation. Which is why i approach it as a speculator.
As i said earlier, i invest in my education, my family, my small business, other privately held small business and real estate in four countries.
In the market I speculate. I divide my portfolio into "strategic" and "tactical".
The strategic i allocate among asset classes (FXA, FXM, DBV, ENY, EDD, DRW, DBA, IEF, RYMFX, DBC, KF, TKF ... you get the idea) and among people smarter than me (CGMFX, HFTFX, HSGFX and a non-listed hedge fund).
For those i try to not time the market... but rather manage allocations... in other words, i add to laggards and "hope" to get my reward through diversification. I also own bonds in that portfolio but those are purchased sparingly when there are really good deals. Like my purchase of LVLT junk bonds in 2002 which turned out to be an awesome home run.
For my tactical portfolio i actively manage the holdings based on the charts. I only use price and volume indicators and try to catch the middle part of trends. I look at long term trends and thus some of my positions last for many months and even years. infrequently i take the day trade or a short term trade just for the heck of it.
Thank you for the domestic versus foreign sector comments.
I dare anyone here to tell me that Ken Heebner is not the smartest man on Wall Street.
I am dumping everything on CGMFX...he has surely made a deal with the devil and his CGMFX will return 80% per year for the next 10years
Speaking of Ken Keebner(CGMFX), CGMFX seems to behave very similar to my Fidelity Southeast Asia(FSEAX). Can somebody venture a guess why they are so similar? Does this mean good funds tend to behave similarly because the way they manage the alpha, beta, etc
I think this is a useful academic exercise. This is how ideas often start and clearly there is some fundamental support for buying the S&P components and re-balancing.
Another idea would be to simply split the sector 50/50 or 72/25 etc.
Practically, getting the foreign sector ETFs into this jumble would have to looked at first. Siemens, Philips, Samsung might be big parts of your tech sector etc. Also what about REITs?
FYI I know of a big broker - rhymes with Pith Blarney - that can rebalance your ETFs in their internal system, no cost, and in a tax free account, no taxes in a tax-free account(up to you to negotiate your management fee.)
As for the unwarranted negative tone of a few comments, they don't effect my enjoyment of this excellent blog one bit.
It is incredibly challenging to have fresh ideas about investing that are looking for out-performance within the ETF universe. That's what the lazymans do, they outperform.
And what's wrong with coming up with a better mousetrap, that's down right American if you ask me. Which makes the negative types... well, you get the picture.
"My only sentiment about the people who seem to be obsessed (I really don't know how else to describe it) is that I feel bad that other readers waste their time responding or whatever."
I take it he thinks you have a bad blog or something. He should know, he reads and comments on every one of your posts. (and, would probably do the same at TheStreet if possible.....
Btw, which "advice" was he referring to? lol (got to be a yankee fan)
"As for the unwarranted negative tone of a few comments, they don't effect my enjoyment of this excellent blog one bit."
Please learn the difference of affect and effect. We will listen to your thoughts if we think you learned to spell.
In my case, I can't type, because I can't see from diabetes. I did learn to spell, and type, but it's not easy from this corner of the Matrix.
What's your excuse?
Resident smart arse.
Don't feel bad. Anon 7:06 misspelled Ken Heebner's name.
Dave B.,
In this context, "difference" takes "between" as its preposition, rather than "of."
So: "a difference of ten dollars," perhaps; but diabetes or no, your criticism of venndata's comment should read, "please learn the difference between..."
anon 11:13, while rather rude, suggests an interesting question. roger, instead of trying to essentially capture the s+p with some well-placed biases (for example, underweight the financial etf), why not buy spy (or, my preference vti since i want the whole market and not just s+p's arbitrary favorites) and then specifically target the under/overweight with either options on sector etfs or sector etfs? for example, i agree with your financial underweight but could counter my ownership of financials in spy or vti thru put options on xlf (plenty of open interest in the options and relatively small spreads between bid/ask suggest a reasonably liquid market). by owning ten or so etfs you seemingly will induce tracking error (i know you aren't trying to track exactly, but i don't see why you want ANY tracking error except for the negative bet on financials or perhaps one or two others) and that tracking error increases the "cost" of your strategy. i think i understand your intent, but i think you should use a rifle to target the intended part of your strategy rather than accidentally incur other impacts by using a shotgun approach.
by the way, i would not generally extend this approach to international, commodities, real estate, or bonds as of yet. for example, i understand and do own international etfs, fxa, fxe, gld, slv and will consider reits (major asset classes apparently vastly underrepresented in the s+p).
your blog stimulates good discussions, so keep it up if you please.
buying SPX only, or the like, in the manner you suggest is valid. I don't think it is ideal and others would fair enough.
This post was merely the exploring of a concept that I think helps study the impact of foreign added in some parts but not others.
As far as tracking error, I am not an index investor so this is not on my radar. At times it makes sense to look a lot like the index and at other times not.
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