What's the Best Passive Investment Approach? (real estate, job, long-term, ETF)
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Ok, let's say you want to invest long-term, both lump-sum and monthly installments. What do you think is the best approach? Do you have something better not mentioned here in mind? -Thanks for all your input.
a) Buy and hold Berkshire Hathaway or baby-Berkshires like MKL, Leucadia, any other?
b) Tactical asset allocation stocks, bonds, commodities, cash, REITs and annual rebalancing a la Mebane Faber
c) Eternal portfolio 50% bonds, 50% stocks, annual rebalancing
d) Tactical asset allocation as in b) but annual rebalancing by relative strength
e) Buy and hold DWAS small cap momentum ETF (following Fama/French approach)
I understand it is not 100% passive as some approaches require annual rebalancing. I like to challenge my own approach from time to time. Thanks for your input.
Back just before the market correction in late August 2015, I made a decision to try Mebane Faber's tactical asset allocation approach with five assets: an S&P 500 mutual fund (in my 401(k)), an intermediate bond fund (in my 401(k)), a US REIT ETF (SCHH), Foreign stocks mutual fund (in my 401(k)), and a Commodity ETF (USCI). This would be the "IVY 5" portfolio.
My rules are to only consider owning the top three of the five when you rank them by 12 mo + 6 mo + 3 mo performance summed. And only buy them if they are above their own ten month moving averages of dividend adjusted closing prices.
I evaluate on the 1st of each month. My preference is I don't really care to switch between bonds and cash. I ignore the moving average kill switch for bonds. I think that's being overly cautious.
Obviously, I get kicked out of the market into cash & bonds on September 1, but on November 1 I got buy signals for S&P 500 and US REIT, and it looks like this signal will repeat for December 1. The portfolio is 60% cash and bonds, not holding any non-US stocks or Commodities right now.
Just this Thanksgiving I found Antonacci's Dual Momentum paper online, read it, found it was very similar to M. Faber, and the recommendations at this time are similar.
Why am I doing this? Because at age 54.5, I cannot go through another Tech Bubble or Financial Crisis bear market. Using M. Faber or Antonacci, you are pretty much spared the worst of any upcoming bear market, whenever and however bad it will be. You may underperform during bull markets, but at my age, I don't wish to be greedy. Greed could lead to a downfall.
Passive investing is not safe investing for people nearing retirement, unless you just run so cautious that you'll never get to your retirement objective. Above age 50, you have to play effective defense (tactical) and offense (ranking asset classes, picking ones with best momentum). You can't just sit there and think Mother Nature is going to take care of you.
This is not a passive approach, but it also doesn't require me to guess and gamble. It's data-based and backwards looking every month, so you just do some elementary math every month using free data from performance.morningstar.com
The long-term performance of M. Faber and Antonacci are well-documented in SSRN papers which you can get for free online, and in their books. They spell it out for you, completely transparent. Less risk, better long-term performance, but you have to do an hour of work every month. I can taste retirement already...
The whole idea of passive is to be able to put it on autopilot once you've got it set up. Now many will argue why it's not good to do that, but it's not a terrible approach at all.
Vanguard Index Funds are among the most respected out there. They are not the only game in town but they are a very good group of funds. Generally Vanguard suggests a mix between these 4 funds (using all of them in varying percentages, depending on your time horizon, comfort with risk, and a couple other factors):
Vanguard Total Bond Market Index Fund
Vanguard Total International Bond Index Fund
Vanguard Total Stock Market Index Fund
Vanguard Total International Stock Index Fund
Generally they advise a 70/30 % split of stocks to bonds in the growth stage and something like 60/40 in the getting a bit closer to retirement stage (like 10 yrs out). Usually the higher the International %, the more risk is associated, but again, it depends.
The risk of passive investing are underappreciated. The facts bear me out. You can do your own testing at portfoliovisualizer.com
From 2000-2008, the two back-to-back bear market periods, this happened in terms of computing annual growth rate (CAGR):
Bonds +7.99%
S&P 500 timing model +6.89%
60/40 balanced fund +2.08%
S&P 500 buy & hold -3.22%
A person with a 2008 retirement target date or who was in early retirement during 2000-2008 was screwed by the 60/40 balanced fund or if they held even more stocks, as some did.
You did fine using S&P 500 timing with simple methods like the 200 day moving average, and if you had bonds. If you had a 60/40 timed S&P 500 and bonds portfolio, that was pretty safe and it grew, too.
Don't just go by what THEY say... THEY want your money.
The risk of passive investing are underappreciated. The facts bear me out. You can do your own testing at portfoliovisualizer.com
From 2000-2008, the two back-to-back bear market periods, this happened in terms of computing annual growth rate (CAGR):
Bonds +7.99%
S&P 500 timing model +6.89%
60/40 balanced fund +2.08%
S&P 500 buy & hold -3.22%
A person with a 2008 retirement target date or who was in early retirement during 2000-2008 was screwed by the 60/40 balanced fund or if they held even more stocks, as some did.
You did fine using S&P 500 timing with simple methods like the 200 day moving average, and if you had bonds. If you had a 60/40 timed S&P 500 and bonds portfolio, that was pretty safe and it grew, too.
Don't just go by what THEY say... THEY want your money.
The reality is that the luck factor in investment outcomes is quite big. If you look at rolling 30 year returns of a 50-50 stock bond portfolio you get very different returns depending on when you started. If your investing ended in the mid-70s or 2009 you were screwed, for example. So choosing the right birth year is most important in investing I am joking of course. But that's the reality of it and it's better if companies or other big institutions should bear the burden as they have much better resources to manage the volatility than individuals... as we are seeing for the last 35 or so years. Anyways the uncertainty is huge and much bigger than we care to admit.
The reality is that the luck factor in investment outcomes is quite big. If you look at rolling 30 year returns of a 50-50 stock bond portfolio you get very different returns depending on when you started. If your investing ended in the mid-70s or 2009 you were screwed, for example. So choosing the right birth year is most important in investing I am joking of course.
Start and end dates of the portfolio are very, very critical, agreed.
The risk of passive investing are underappreciated. The facts bear me out. You can do your own testing at portfoliovisualizer.com
From 2000-2008, the two back-to-back bear market periods, this happened in terms of computing annual growth rate (CAGR):
Bonds +7.99%
S&P 500 timing model +6.89%
60/40 balanced fund +2.08%
S&P 500 buy & hold -3.22%
A person with a 2008 retirement target date or who was in early retirement during 2000-2008 was screwed by the 60/40 balanced fund or if they held even more stocks, as some did.
You did fine using S&P 500 timing with simple methods like the 200 day moving average, and if you had bonds. If you had a 60/40 timed S&P 500 and bonds portfolio, that was pretty safe and it grew, too. that is also only an issue if i happens before you had experienced an up cycle in retirement .
i is the first 5 years that influence the retirement while the first 5 years decide the entire outcome regardless of how good years 16-30 go .
Don't just go by what THEY say... THEY want your money.
first some actual facts
the 2008 retiree stands no different today then any other retiree group in history with average retirement conditions .
the 2000 retiree is a little worse off . the 2000 retiree is about on par with the 1929 retiree . their 4% inflation adjusted income stream is not on track to fail , but they will have little left in the bucket at the end .
with a 60/40 mix typically over every rolling 30 year period you hit 30 years with more then you started with 90% of the time .
you had more than 2x what you started with 67% of the time frames .
so to end with little left over is a pretty poor scenario for the y2k retiree.
the 2008 retiree is just fine .
when it comes to withdrawals it is not the steepness of the drop that matters . it is only about recovery time . even a modest drop for an extended period of time can be far more hurtful then an event like 2008 .
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Faber and Antonacci
