Raddr's Early Retirement and Financial Strategy Board

[FMO]

it seems to me that most of us here share a set of beliefs and values about how to best invest in equities. It appears to me that those shared beliefs might include the following:

1. A preference for passive (indexing) vs an active (stock picking) approach.
2. A desire for low fees, expenses and trading costs.
3. An understanding and appreciation of MPT.
4. A desire to seek broad diversification.
5. A desire to maximize return while miniminzing risk (volatility)


Now I am the first to admit that equities are not really my thing. I really like directly-held real estate. But I do invest in equities and that being the case, I want to do it well. I have tremendous respect for those on this board who obviously really enjoy discussing the theory of equities investments. I suspect most of you have very definite ideas (which you share) about how to construct your personal portfolios. I am not nearly so confident. From time to time we discuss general approaches and the merits of specific investment products, but for me, where the rubber really meets the road is the process of engineering a personal portfolio.

Does anybody think it would be worthwhile to jointly develop model portfolios based on beliefs and strengths of the board members? I think such an exercise could be very beneficial.

The process of developing one or more such portfolios would probably spin off discussions which go to the heart of the most importnant decisions involved in portfolio construction. The ensuing discussions would help individual board members sharpen their own investment philosophies. The portfolios could become living documents and facilitate continued discussion as we debate the desirability of modifications which may be prudent based on the most recent knowledge/research. It would help people like me in the portfolio construction process and would serve to catalog what (in the board's opinion) represents the best investment vehicles consistent with our beliefs.

Since the most important decision; the fixed income/equity split is very personal, I thought it would be good to develop a separate equity/fixed income portfolios. Perhaps a set that are globally diversified vs a set that are domestic only.

I'm not talking abput trying to develop an "ultimate" portfolio, but instead a portfolio(s) which is the ultimate expression of the board's ideals. It would be acknowleged that that portfolio construction is an intensely personal decision. I just think that the exercise would be useful as a learning exercise.

If you think I am off my rocker and that such an endeavor is an utter waste of time, please tell me. I am very thick-skinned. I just thought it would be fun and educational. I also think it is a good community-building exercise. If I am am wromg, it won't be the first time.

[raddr]

FMO,

That is a great idea. I love this kinda stuff. Do you want us to post some sort of model portfolio or what we have actually done (and why)?
_________________
"I brew therefore I am."
-raddr

[FMO]

[unclemick]

At the risk of appearing bi-polar - I bet both camps index and individual stocks - usually Ben Graham type with a Norwegian widow twist aka divided payers with some div growth.

15% DRIP stocks - alot of utes,oils,banks,REIT,drug,baby bells.
10% Vanguard REIT Index as a counterbalancer(low correlation) and SEC yield bump up.
75% Vanguard Lifestrategy mod - out of the can - lifecyle effort - aka quasi(not pure) balanced index as it contains 25% Asset Allocation - and 10% Total International.
Pretty much unchanged since 1998.

[FMO]

[raddr]

[unclemick]

Heh,heh,heh - ok - here's a sneaky thought - since the whole point of the 15% is to boost the SEC yield of the total portfolio plus provide some, but not necessarily exact growth over time to compensate for inflation - what index class/classes might be on the table - could be ??inflation protected fixed?? not just stocks.

Theory wise - here's the deal - for me - 3-4% minimum SEC yield over time with 'reasonable' growth to combat inflation over time - with a portfolio at the end when I croak - aka 30 year span(?? or ??) since not running to zero planwise.

P.S. - My ballpark SWAG (not precise) is a 73-74 type bear will dip the portfolio 25% based on Lifestrategy being the tall pole. -16.6% in 2000-03 being the worst quarter. Didn't really calc the total port. but REIT helped. The 15% is the unknown in a return to high interest environment(utes are rate sensitive big time).

[FMO]

[raddr]

[unclemick]

Ah er - let's make sure we include some of raddr's commodity work/data in some models.

[raddr]

[unclemick]

???Can you take a classic 60/40 like Vanguards balanced index -TSM/TBM and show what happens to volitilty/return as you morph toward an 'extreme' MPT type: say heh heh

60% stocks
-20% International
-20% US TSM
-20% REITs

40% fixed/commodities
-20% TIPs
-20% Commodities

Wow! We haven't even done PM, emerging/developed, value/growth, sm/mid/large cap. ?????? Help? What was the question again? Max growth with min volitility?

[bpp]

Hi unclemick,

[Alec]

raddr,

I've only got return data on the LBA index going back to 1981. I think it was incepted around 1976. Alternatively, gummy has 5 yr T notes and LT govt bonds going from 1926-2000 [I seem to have found 2001-2003 for 5 yr T notes]. I've only got MSCI EM return data going back to 1988. I think that's when the index was created.

I guess for things like corporate bond data, you'd have to go to SSBI. Should we also take expenses (like the 0.74% for PCRIX) off of the yearly returns to make any simulations more realistic?

- Alec

[peteyperson]

I would want a review of whether it even makes sense to include fixed income at all. Most include it because it is seen as dampening equity-only volatility, but I like to look at them as whether they deliver a reasonable return.

For example:

Current UK Treasury 5-Year yield: 5.15%

Fees: 0.20%

Taxes on the yield at 20%: 1.03%

Inflation: 2.75% + 0.75% adjustment for govt miscalculation
= 3.5%

Net Real Return: 0.40%



Taking out corporate bonds tends to add 0.50% return for the credit risk, but management typically costs at least that much. In the US that is a little different. But then, one must ask, why include bonds? If it is for volatility and capital preservation when equities fall, does investing in corporate bonds make sense? If 1929 strikes, it sure won't and we'll wish we had invested in the safety of treasury bonds instead.

So moving away from the stale argument that we include bonds in the portfolio because it steadies the equity exposure, does it actually make sense on the returns? My numbers seem to indicate that it does not. So I wouldn't want to see a blanket inclusion of FI without any debate on the merits or lack thereof.

Petey