This summary of the December 12, 2015 Sacramento Area Bogleheads Meeting is a guest article by Bogleheads® forum member digarei.
TWELVE (12) of us were present to begin our ninth meeting in Sacramento, on the second Saturday of December, the 12th, 2015, in a room on the upper level of an Edwardian mansion in midtown: Ella K. McClatchy Library, 2112 22nd Street, Sacramento, CA 95818
Members were asked to identify guest speakers and propose discussion topics for the coming year. There was interest in having John Bogle and others talk with the chapter via Skype or in person during 2016. Someone suggested that we watch video presentations from speakers at the Bogleheads reunion, then discuss the content.
Before wrapping up the ‘How to Invest’ series with some final thoughts on the 3-fund portfolio and remarks about how to establish a Tilted Portfolio by cmr86, a lively wide-ranging discussion ensued that touched upon many topics: the market, long-term investing, return/risk considerations, investing skill and knowing the right questions to ask. The group agreed that one’s time horizon changes one’s perspective.
The Callan Periodic Table of Investment Returns
This colorful and by now I hope familiar checkerboard—each column containing a list of color-coded asset classes ordered from highest to lowest annual returns for the calendar year—can serve as a reminder to us that no market asset consistently outperforms the others.² Emerging Markets (EM) was very strong, with spectacular returns for several years in the early to mid-2000s but it didn’t stay at the top position forever. In 2008, EM shares purchased at the beginning of the year underperformed all other asset classes, losing more than 50%.
More detail was provided on Emerging Markets in November when the Callan table was introduced. (See ‘How to Construct a Lazy Portfolio’ and ‘How To Lose in the Stock Market’ in the November 14, 2015 – Meeting Summary.) This time we discussed the variability of top performing asset classes more generally.
One of the takeaways was that investors as a group tend to buy when an asset class has been outperforming (“hot”) but usually this approach leads to losses. It’s important that our investments are diversified across market sectors. Asset classes should include both stocks and bonds, REITs and others; market capitalization: both large and small cap; equities balanced between companies characterized by growth and earnings, and value; and from geographically diverse regions (MSCI EAFE, S&P 500 and others).
Allocating 100% of one’s portfolio to a Target Retirement fund or a ‘balanced fund’ that incorporates broad market stocks and bonds satisfies the requirement to diversify.
No one can predict the future. Decide on your allocation to stocks, bonds and other asset classes well in advance and put your plan in writing. Then act according to your plan, not the whims of Wall Street.
Why not 100% stocks?
In light of the poor expected returns for both international and domestic stocks and the all but certain low yield of bonds and fixed income over the next decade, there could be negative or flat portfolio returns for a very long time.
Companies will continue to pay dividends and mutual funds will distribute them, ameliorating some of the anticipated pain—and inflation is expected to be modest. Yet if one holds only stocks (100%) and they end up underperforming for 30 years or more, the impact to one’s portfolio and retirement prospects is quite clear. This is a risk that should be accommodated by most investors, including the young and those with long time horizons.
In the relatively short history of capital markets in the United States (since the first decade of the 1800s), there have been a number of extended periods when bonds outperformed stocks for 10, 20 even 30 years.³
The solution to flat or nonexistent returns is not to take on excessive risk by holding 100% stocks, it is to find creative ways to save and invest more while maintaining a balanced portfolio of stocks and bonds.
If you’re close to retirement from a job that doesn’t give you pleasure and the numbers don’t add up, consider alternative income streams (grow a hobby into a business, for example), find ways to cut your expenses (downsize or move to a LCOL area or no-tax state) or work longer, focusing your attention on living at small expense while maximizing savings into every account you own while ticking off the number of calendar days until retirement.
The Tilted Portfolio
presentation by cmr86 (Clay)
Clay introduced the Tilted Portfolio by emphasizing its bona fides. The research of two University of Chicago business school professors that led to the ‘Fama-French Three Factor Model’ evaluated performance of stock returns over several decades, finding that the returns of small and value stocks regularly beat large cap and growth.4
Characterized as an “active investor strategy”, one overweights small caps and value stocks over the long run in the hope of higher risk-adjusted returns and increased growth. Clay explained that the tilt is not a short-term proposition, has a higher cost associated with its holdings and has underperformed recently. He constrains the portfolio’s equity tilt to no more than 10 – 15%. The expected growth of returns may garner additional taxes so there are implications for the placement of funds in taxable accounts.
A discussion followed on the advisability of tilting and what constitutes a risk-adjusted return. We spent a few minutes discussing the efficient frontier risk/reward curve. The goal is to achieve the best risk-adjusted return for your entire investment portfolio.
Giving people what they want
Members noted that recently there seems to be a multiplicity of factors discussed on the forum and in the financial media, and someone conjectured that this had more to do with marketing than anything else.
Two examples were brought up:
- The introduction of Vanguard’s Total International Bond fund. Why is it now so important that international bonds be a part of every portfolio that Vanguard recommends? What has changed?
- Wealthfront’s Robo-advisor reportedly tilts to small and value. Are these companies just giving people what they want?
Someone recommended the use of Portfolio Visualizer to compare different portfolios—or evaluate one’s own.5
Several members said they would contribute by presenting a topic to the group, and others had topic ideas. The coordinator said that his aim was to assemble the suggestions before the next meeting so they could be discussed, and then propose a schedule. The meeting was adjourned at 12:40 PM. About half of the members met for brunch at Kupros Café (21st street).
¹ The thread topic, ‘Sacramento, CA Area Bogleheads’, was started in July 2010 by lucywatkins1, joined by krmann and others; after a couple of months it lapsed (disappeared from view) as threads of this kind often do. In 2014, the topic was briefly revived when a third member, jay22, posted to it but I missed seeing it at the time. I’m certainly glad that this persistent thread—and the forum members who sustained it—were there to be found when I started looking in earnest for a local group last February! This is the link to the thread:
² Callan Periodic Table of Investment Returns (revised this month to include 2015 data): Callan periodic table of investment returns
³ Why not 100% Stocks? Japan 1990 – Present. (Nikkei 225 Index) An investment in stocks in 1990 would have provided zero returns—a net loss after more than twenty-five years. In the US, stocks don’t always beat bonds, even in extended periods:
“[W]hile it’s true that the longer the period the more likely it is that stocks will outperform bonds because there’s a large equity risk premium, there must be the possibility that they’ll underperform, no matter how long the horizon.”
– Larry Swedroe, 2011 (larryswedroe) CBS Money Watch article comparing the long term performance of stocks, treasuries and corporate bonds.
- Bonds outperformed stocks over the last 30 years: Bogleheads forum post by nisiprius (2012)
- Why bother with bonds? John Maudlin (2009) Published on Barry Ritholtz’s blog site.
Research publications: The Journal of Finance (1992); Journal of Financial Economics (1993). Explanations of the model abound but here are some good places to begin:
5 Portfolio Visualizer is a website owned by Silicon Cloud Technologies, LLC (Austin, Texas). The tools facilitate analysis of portfolios containing multiple asset classes. They seem to be advocates of diversification, as well as factor investing. Much of the functionality is free but certain features, such as printing or downloading result data sets require registration.
”Portfolio Visualizer provides online portfolio analysis tools for backtesting, Monte Carlo simulation, tactical asset allocation and optimization, and investment analysis tools for exploring factor regressions, correlations and efficient frontiers.” Source: https://www.portfoliovisualizer.com