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 Post subject: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Tue Dec 11, 2012 7:15 pm 

Joined: Tue Jun 30, 2009 9:44 pm
Posts: 300
Location: Atlanta, Georgia
Hi folks, what are your thoughts on William Bernstein's "No-Brainer Portfolio"? (Description pasted at the bottom.) For awhile, I have held some VFINX with the idea of eventually expanding my investing into other Vanguard funds to create one of the lazy portfolios. I was thinking of starting with the addition of VBMFX (similar to the "Couch Potato Portfolio") just so that I don't have to buy all those funds at once.

I have Bernstein's "The Four Pillars of Investing" in the line-up for reading, but it's doubtful I'll get through until the new year. In any event, with the "fiscal cliff" stuff in the news lately, I'm wondering whether any of these segments make *obvious* sense either to buy now or buy next year (or whether the "fiscal cliff" risk really wouldn't make a difference either way on my choice). I wish I could get up to speed quickly, but with current work demands, I just can't, and am wondering whether the knowledge is already available from the other folks on here.

Here's some information that I anticipate being useful:
Stats: 31 years, not married, no kids
Risk aversion: I would consider myself fairly average for my age
Retirement plans: for now, probably something standard around 60 or so, but haven't thought too concretely, especially since I hope to get married and have a family, which could impact that decision substantially
Roth 401(k) & Traditional 401(k): Schwab Managed Retirement Trust Fund 2040
Roth IRA: Vanguard Target Retirement 2040 Fund
Taxable: VFINX

For now, assume that I could afford whatever amounts are necessary to get the balance for The No-Brainer Portfolio, though given the amount I have of VFINX now, I couldn't soundly immediately jump to a perfect 25/25/25/25 split.

Edit: Another alternative I've pondered is simply getting the VFINX to admiral share status first and then begin adding other funds. This first part is easily attainable, but I've been getting there more slowly in order to invest evenly over time rather than larger chunks at once.

Thanks so much!

Source: http://www.getrichslowly.org/blog/2009/ ... t-success/
The No-Brainer Portfolio from William Bernstein
•25% — Vanguard 500 Index (VFINX)
•25% — Vanguard Small-Cap Index (NAESX)
•25% — Vanguard Total International Stock Index (VGTSX)
•25% — Vanguard Total Bond Market Index (VBMFX)
William Bernstein is a retired neurologist who has turned his attention to financial matters. He wrote The Four Pillars of Investing, which is one of the best books on investing I’ve ever read (my review). In that book, he offers a variety of possible investment portfolios. This “no-brainer” collection of index funds keeps things simple.


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Tue Dec 11, 2012 8:53 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
1st off, all funds should be considered together. your Schwab 2040 fund should considered with your IRA's and taxable funds. So, maybe you have one of the 4 funds available through your employer plan which can represent part of the a "bucket" or two.

Next, if buying in your taxable account, I would advise you to set the money aside, mix up some egg nog and enjoy the holidays. Then, buy the funds in your taxable account in Jan. If you want to be precise, you can look at the ex-dividend date and buy after that. Especially this year...

Personally, I would upgrade to admiral and then add another fund when you can buy another admiral fund. But, $10k isn't that much to me. I'd say, slowly put the portfolio together, slowly adding the bonds. And don't forget the principals of tax efficient placement.

As far the portfolio itself, its probably hard to predict what it will do in the future, but should be within reason of any other lazy portfolio going forward as any other lazy portfolio. You can see the back testing of various portfolios and funds in Simba's backtesting spreadsheet over at Bogleheads.

http://www.bogleheads.org/forum/viewtopic.php?f=10&t=2520

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Tue Dec 11, 2012 9:20 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1942
I'm rather fond of Dr. Bernstein's writings and because of them, have a portfolio weighted toward small cap and value funds.

As to his No Brainer portfolio, it's simple and effective, as are most Lazy Portfolios. Is it optimal? Probably not. One size doesn't fit all, but lazy portfolios are "good enough" for most people who don't want to think too much about their investments.

If you want to see how 8 lazy portfolios (including Bernstein's No Brainer and his more complex Smart Money portfolio) perform over various periods, check out http://www.marketwatch.com/lazyportfolio. My own portfolio is based on the concept of the lazy portfolios, but take on considerably more risk because I'm fortunate enough to be able to afford that kind of risk. I encourage anyone to be more hands on in their investing than lazy portfolios suggest because I think it's helpful to understand what you're doing and why, but I also recognize that some people are willing to compromise having something optimal in favor of having a life.


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Tue Dec 11, 2012 9:30 pm 

Joined: Tue Jun 30, 2009 9:44 pm
Posts: 300
Location: Atlanta, Georgia
Thanks so much for your advice, BF. Your comments are very helpful to me. I know I should consider my portfolio in total, but mentally I've been tied to compartmentalizing them -- I'll have to work on that. My non-401k/IRA investing has been rather limited so far because (1) I had substantial student loans for my professional degree to pay off first (done!) and (2) I still have a bunch of money tied up in loans to family members (the bulk of which is to people who make consistent, on-time payments per formal promissory notes; the last of which is to City Brother, if you remember my trail from a couple months ago). On the other hand, my dad taught me well to faithfully max the retirement contributions, so at least I feel I'm on track there. Now, I'm excited about learning more about investing and growing my accounts!

Edit: Thank you, VinTek, too. I'm eager to carve out some time to read Bernstein's The Four Pillars of Investing. Until I know more about what I'm doing, I feel like a lazy portfolio will be the "safe" route :) I'm also interested to check out that link you provided. Thanks!


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Wed Dec 12, 2012 5:11 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1341
One thing that has come up, at least here in Canada, is that you might also want to compare bond funds against CDs, or a ladder of CDs. The most popular investment-grade bond ETF up here in Canada has a current expected yield to maturity of around 2.2%, and when you consider that the MER on this funds is around 0.3% you're looking at less than 2% over the next 5-7 years. You can find 5-year CDs that pay 2.25% or more, plus your principal is guaranteed (which is not the case with bond funds).


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Wed Dec 12, 2012 8:37 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
In the US, I'm hard pressed to find any CD over 2%. But, let's say there are CD's with a yield over what VG's total bond fund is doing. I think the main point to understand is the overall role bonds play in one's portfolio. It has been shown, that through rebalancing a portfolio can reduce risk (however you would like to measure it) and improve returns. Rebalancing with a bond fund is rather straight forward, but what I don't have a firm understanding of is the ability to rebalance (and the associated penalties) with CD's.

Perhaps, someone in the accumulation phase can add funds (from cash) into other areas to find balance. And, it is more likely that going forward, stocks will do much better than bonds (and CD's) and the rebalancing will be adding to the "bond" portion. But, if a "double -dip" recession or perhaps a bad couple of months presents itself, one may not be able to capitalize on the situation.

Furthermore, say interest rates rise. Those in Bond funds will take a bath on their NAV, but those with Cash will now have a buying opportunity. Although, I believe bond fund mgrs know this, and are stocking up bonds less sensitive to the interest rate.

In all this babbling, CD's aren't a bad idea, but I wouldn't go all into CD's either (which I don't know if the was the suggestion or not). Personally, only my emergency fund is in CD's, but with a change of Ally's policy, I wouldn't advocate that either.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Wed Dec 12, 2012 9:05 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1341
Bichon Frise wrote:
In all this babbling, CD's aren't a bad idea, but I wouldn't go all into CD's either (which I don't know if the was the suggestion or not).


Right, I wasn't suggesting that -- I've got a hefty share of my portfolio in bond funds myself. It's just that I am right now, today, faced with a choice of rebalancing and it's hard for me to figure out whether I'd be better off buying shares in a bond fund or putting it into CDs (or GICs as we call 'em up here). I've decided to evade the issue by propping up a couple of other areas of my portfolio that have gotten out of balance instead ;-)


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Wed Dec 12, 2012 10:20 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1942
If you're into market timing at all (and I'm not; I prefer my purchases to be dictated by my target asset allocation), this is not the time to go into bond funds. http://www.businessweek.com/articles/2012-10-18/bond-fund-investors-beware#r=lr-fs last October calls out the risks in bond fund purchases right now.


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Wed Dec 12, 2012 10:38 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1341
Yep, and that's the issue for me. My asset allocation is out of whack, due more to inattention on my part than a better reason like huge growth in my equities. I'm way, way below my target allocation for bonds. I may just defer building that up for a while. I'm actually quite comfortable with volatility and risk, but recognize that I'm probably more comfortable than I should be, especially given that I'm in my early 50s now.


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Wed Dec 12, 2012 11:24 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
VinTek wrote:
If you're into market timing at all (and I'm not; I prefer my purchases to be dictated by my target asset allocation), this is not the time to go into bond funds. http://www.businessweek.com/articles/2012-10-18/bond-fund-investors-beware#r=lr-fs last October calls out the risks in bond fund purchases right now.


Been reading articles like that about bond funds for about 4 years now. Those who rode the pine, missed out.

Isn't AA rebalancing a form of "market timing?" That's all I do is rebalance my AA. Well, I'm sitting a small pile of cash ($30k-$40k) watching for a buying opportunity. Certainly will wait until the new year to purchase any funds to avoid tax (with no or little real gain) this year.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Wed Dec 12, 2012 11:46 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1341
Bichon Frise wrote:
Isn't AA rebalancing a form of "market timing?"


It depends on how you do it. For some people, asset allocation is triggered by percentages and they dutifully go in and rebalance once an asset's percentage crosses a particular threshold without a regard to how the market is behaving. Others do it by date (at the end of the year or the beginning of the year, for example) also without regard to how the market is behaving. I wouldn't say that's really market timing because your motivation to rebalance isn't determined by events in the market. In fact it can lead to buying high and selling low if you blindly rebalance without any knowledge of what's going on. In theory, if you do this long enough, your instances of bad timing should be offset by instances of good timing. I don't trust that assumption, though.


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Wed Dec 12, 2012 12:09 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1942
brad wrote:
I wouldn't say that's really market timing because your motivation to rebalance isn't determined by events in the market. In fact it can lead to buying high and selling low if you blindly rebalance without any knowledge of what's going on. In theory, if you do this long enough, your instances of bad timing should be offset by instances of good timing. I don't trust that assumption, though.

I'm not sure I agree with that. From my understanding, rebalancing automatically leads you to buy low (because your allocation in that asset has dropped and you need to replenish) and sell high (for the inverse reason). Granted, purchases and sales are rarely (if ever) optimal because you don't know when the tops and bottoms of the market are (nor should you care), but disciplined rebalancing should lead to long term gains for precisely the reasons outlined above.


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Wed Dec 12, 2012 1:05 pm 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1341
VinTek wrote:
From my understanding, rebalancing automatically leads you to buy low (because your allocation in that asset has dropped and you need to replenish) and sell high (for the inverse reason).


Sell high, yes, but not necessarily buy low unless your various asset classes are nicely uncorrelated. If the stock market's doing great and your domestic equities allocation is now higher than your target, you'd sell some off and use the proceeds to build up whatever is now below target in your portfolio. If that something else is, say, government bonds, then yes you're probably buying low because government bonds and stocks tend to move in different directions. But what if your international equities were also under target and you decided to boost your allocation there with the money from the sale of your domestic equities? I'm not so sure you'd automatically be buying low there.

The Canadian Couch Potato blog has some interesting text on rebalancing; he does acknowledge that it encourages you to buy low and sell high, but goes on to clarify that it doesn't necessarily improve returns:

"One of the benefits of rebalancing is that it encourages you to buy low and sell high, so many people assume that the strategy is designed to boost returns. But that’s not actually the case. Think about it like this: if stocks outperform bonds over the long term—and we wouldn’t invest in stocks if we didn’t expect this—then a portfolio that is never rebalanced will naturally become more and more heavily weighted to equities. So more often than not, rebalancing will mean trimming back stocks and moving that money to the fixed income side. Over the long term, that’s likely to lower returns, not increase them.

If we assume an annualized return of 10% for stocks and 5% for bonds, then a portfolio that starts out with 60% in equities will naturally drift to 80% stocks after 20 years. Most investors do not want their portfolios to get more risky as they age. Rebalancing, then, is primarily about managing risk by keeping your asset allocation more or less consistent. If it does boost returns, that’s simply a bonus."


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Wed Dec 12, 2012 1:13 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1942
brad wrote:
"One of the benefits of rebalancing is that it encourages you to buy low and sell high, so many people assume that the strategy is designed to boost returns. But that’s not actually the case. Think about it like this: if stocks outperform bonds over the long term—and we wouldn’t invest in stocks if we didn’t expect this—then a portfolio that is never rebalanced will naturally become more and more heavily weighted to equities. So more often than not, rebalancing will mean trimming back stocks and moving that money to the fixed income side. Over the long term, that’s likely to lower returns, not increase them."

Agreed. If we stayed with equities come hell or high water, we'd benefit from the higher returns from stocks over the long term. However, we also know that the cost of this rate of return is volatility, or risk. Given that, the whole reason for having an asset allocation at all (as opposed to a portfolio composed entirely of stocks) is to mitigate risk. So I'll amend my statement: rebalancing on a periodic basis will increase returns over the long term for a given risk tolerance.


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 Post subject: Re: William Bernstein's "The No-Brainer Portfolio"
PostPosted: Wed Dec 12, 2012 1:39 pm 

Joined: Fri May 04, 2012 2:23 pm
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as far as AA being a form "market timing," by definition anyone who times the markets does so based on indicators. People in the past (and probably still today) have used such things as P/E ratios, "insider" information, the length of skirts in NYC, the superbowl, worst performers the year prior, etc etc.

If all these things are "market timing," why can't rebalancing your portfolio somehow fit within the definition?

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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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