A few years ago cost structures for managing one's investment portfolios were also significantly higher than today!
There's an even better alternative for someone willing to put in the leg work:
(1) Figure out your investment horizon. For many people, this is way shorter than suggested by generic advice, which makes some diversification beyond "stonks go up" meaningful.
(2) Figure out what costs you'll incur by rebalancing etc.
(3) Write a short script that optimises the amount of activity in portfolio management that improves performance over your investment horizon, given your costs.
Unsurprisingly, the result can vary a lot between people. The result is most likely going to involve a very low level of activity, but the process of finding it out is very informative.
What I've found out (and this is replicated also by more authoritative people like Carver) is that for almost everyone, mixing in some 10--20 % of a safer asset like 10 year bonds and rebalancing yearly outperforms a pure equity portfolio over most realistic investment horizons.
Agree with you 100%, I did the same simulations and found the same result.
I would suggest a step beyond though, because rebalancing your portfolio is fun year 1-5, but not so fun year 5-20: have a look at e.g. Vanguard retirement target funds.
Essentially, it's an ETF with a rebalancing rule included for a specific target date. For instance if you buy the target 2050 (your hypothetical retirement age), the ETF rebalances itself between bonds/monetary fund/stocks until it reaches that date, u til it's pretty much all cash in 2050.
Lowest hassle diversified retirement scheme I found.
Nope not all cash, it goes down to around 50% stocks at the target date (and actually continues to get slightly more conservative after). Just look at the current portfolio of the Vanguard 2025 fund: https://investor.vanguard.com/investment-products/mutual-fun...
That fund is currently at 50% stocks. It does get more conservative as you get past the target date, but I was mainly referring to the stock percentage at target date, which the parent poster implied was almost zero.
You mean VFIFX? What a disaster. My retirement plan put me in that until I realized investment advice for young people is a tax on the inexperienced and vulnerable. VFFSX (S&P 500) does 2x better returns every time. I feel guilty saying it on Hacker News. Like pension funds I bet Vanguard is one of these so-called LPs who give money to VCs like Y Combinator to help ivy league kids follow their dreams. Without these heroes I'm not sure there'd be a startup economy. I just don't want to be the one who pays for it. I think the future Wall-E predicted with Buy N' Large is probably closer to the truth.
> VFFSX (S&P 500) does 2x better returns every time
US large cap has certainly recently outperformed the other parts of the target date fund (international stocks, bonds). But there is certainly no guarantee that it will happen "every time". In the last 10 years, US equity has been the best overall performing asset class for the past decade but 7 out of those 10 years at least one other category outperformed it: https://www.blackrock.com/corporate/insights/blackrock-inves...
> Like pension funds I bet Vanguard is one of these so-called LPs who give money to VCs like Y Combinator to help ivy league kids follow their dreams.
You can look up the holdings of VFIFX or any other Vanguard fund. There is no private equity or private credit.
And now GLD with its 1 year return at 40% is outperforming them both, which is a really scary thought. How bad do things have to be, that all our blood sweat and tears scurrying off to work each mourning earns less than a piece of metal dug out of the ground that sits around doing nothing? I thought inflation was supposed to be a tax on poors, but even rich private equity which gets ahead by sucking the blood out of Americans digging themselves out the grave can't save itself.
This is one of those things where again, one will have to weigh the costs of both alternatives. A rebalancing ETF usually has higher costs (management fees, but possibly also internal trading costs that show up as performance beneath benchmark index), but of course, manually rebalancing also has a cost – the cost of one's time and effort!
There are scenarios where these target date funds are not good.
Rebalancing into bonds and mmmfs is a form of insurance against catastrophic losses equities. But if you have a sufficiently large account then catastrophic losses that affect your life are extremely rare, if they do occur they will likely affect your bond portfolio as well, and the expected loss vs 100% equities over 15-20 years is significant, something like 10x the value of the insurance you are buying.
If you want insurance for a large account then long-dated put options 20% of the money are much cheaper.
I want to learn more about how to rebalance my portfolio. I started with ETFs and MFs and then bought some good stocks when they were low. But I have never rebalanced it. Would you be able to share some resources about it? Also, if possible, some pointers about your script.
Rebalancing is just selling the high performers and buying the low performers. In his example, you'd keep your "safe asset" allocation at say 15% - if your other stocks did well one year, you'd sell some and buy more "safe assets" so they again constitute 15% of your total value. If stocks tanked, you'd instead sell some "safe assets" and buy more stocks, again until your "safe assets" are back at 15% of total value.
Mediocre performance is better than your top performers dropping 30% or 60%.
I can point couple companies that suddenly dropped from $90 a share to below $10 and then they never got up “Just eat takeaway.com” between 2018 and 2022 it was looking like they would go to the moon. In 2022 you can see hell of a drop and it is not going back.
If you would sell parts of it before 2022 you would lock at least some of the gains.
But I think you know better when to switch companies ;)
I have only read half of Carver's Smart Portfolios yet but I find myself agreeing with much of it. I have started writing up a review of it sometime soon, although I might not publish it for free in a while!
There's an even better alternative for someone willing to put in the leg work:
(1) Figure out your investment horizon. For many people, this is way shorter than suggested by generic advice, which makes some diversification beyond "stonks go up" meaningful.
(2) Figure out what costs you'll incur by rebalancing etc.
(3) Write a short script that optimises the amount of activity in portfolio management that improves performance over your investment horizon, given your costs.
Unsurprisingly, the result can vary a lot between people. The result is most likely going to involve a very low level of activity, but the process of finding it out is very informative.
What I've found out (and this is replicated also by more authoritative people like Carver) is that for almost everyone, mixing in some 10--20 % of a safer asset like 10 year bonds and rebalancing yearly outperforms a pure equity portfolio over most realistic investment horizons.