The Optimal Portfolio

Discussion in 'Share Investing Strategies, Theories & Education' started by Redwing, 24th Jul, 2019.

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  1. Redwing

    Redwing Well-Known Member

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    The Optimal Portfolio

    Interesting read and graphics from A wealth of Commonsense

    The problem when searching for the “optimal” portfolio is that it’s always changing. The optimal portfolio today is unlikely to be the optimal portfolio of the future. The only true optimal portfolio is only known with the benefit of hindsight.

    Successful investors know there’s no such thing as a perfect portfolio. So you must understand and be willing to live with whatever drawbacks exist within the portfolio of your choosing.

    And then, come hell or high water, you must be willing to stick with that portfolio. The strategy you either can’t or won’t stick with is indistinguishable from a failed investment plan.

    This year has been kind to stock and bond markets around the globe:


    [​IMG]
    Cont..
     
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  2. Redwing

    Redwing Well-Known Member

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    From Of Dollars and Data

    My personal investment philosophy is: To continually buy a globally-diversified set of income-producing assets through passive investment vehicles while paying low fees.

    My current allocation is:

    • 40% U.S. Large Cap Equities (S&P 500)
    • 30% World Equities (non-U.S.)
      • 15% Emerging Markets
      • 15% Developed Markets
    • 10% U.S. Real Estate Investment Trusts (REITs)
    • 20% U.S. Intermediate Bonds (duration ~5 years)
    All of these are ETFs, but mutual funds could provide similar results.

    Is this allocation optimal? No, and it never will be unless I get lucky. My portfolio has already underpeformed the S&P 500 since I started investing in 2012, but that’s fine with me. As I have written before, even in an optimal portfolio some of your assets will lose money/underperform in almost every year.
     
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  3. Nodrog

    Nodrog Well-Known Member

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    Income producing assets - Now we’re talking:).
     
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  4. Burgs

    Burgs Well-Known Member

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    Great post.
    Powerful message in the summary:
    "Successful investors know there’s no such thing as a perfect portfolio. So you must understand and be willing to live with whatever drawbacks exist within the portfolio of your choosing."
     
  5. Nodrog

    Nodrog Well-Known Member

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    Speaking of simplicity and taking into account all those factors in life other than just investing Taylor Larimore’s (in his 90’s and still going strong) Three Fund Portfolio is considered by many to be about as close as one can get to Optimal:

    The Three-Fund Portfolio - Bogleheads.org
     
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  6. Lacrim

    Lacrim Well-Known Member

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    Thanks..great read.

    My ONLY concern is whether its risky to concentrate all your hard earned in say, less than 5 ETF's/LIC's, whether its run by Vanguard or not. Is that concern justifiable? Could they ever go bust and you lose everything via improper management, company goes under etc etc?
     
  7. oracle

    oracle Well-Known Member

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    Listed Investment Companies (LICs) 2019

    Cheers
    Oracle
     
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  8. Peppas

    Peppas Well-Known Member

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    So what would the optimal 3 fund portfolio be from an Aussie viewpoint?
    VAS, VGS... the vanguard bond one?
     
  9. Redwing

    Redwing Well-Known Member

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    VGB or VAF
     
  10. sharon

    sharon Well-Known Member

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    VAS and VGS. Who needs 3??
    (just my opinion of course). :)
     
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  11. pippen

    pippen Well-Known Member

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    Dont underestimate being conservatively invested especially when you havent gone through a bear market before! Therefore sufficient cash be it bonds, fixed interest and or cash at bank or term deposits will help when jobs are cut, and everyone is selling up around you and it all look like ****!!! (William Bernstein)
     
    Last edited: 26th Jul, 2019
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  12. Hodor

    Hodor Well-Known Member

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    Something I've been thinking about a lot.

    Maybe not when accumulating. When you reach/near your goal I think going a little further to add 10-20% bonds has plenty of merit.
     
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  13. Lacrim

    Lacrim Well-Known Member

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    As Warren B says,
    “The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently.”

    “Keep buying it through thick and thin — and especially through thin”
     
  14. Zenith Chaos

    Zenith Chaos Well-Known Member

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    1. Any portfolio will only be optimal for an instant in time because the market is always changing.
    2. Therefore the optimal portfolio is the one that stays as close as possible to the varying optimal portfolio (minimises the difference over time, like time series regression)
    3. A portfolio needs to be optimal for the future, which we don't know, so chasing optimal may in fact be suboptimal.
    4. 3-fund portfolio is only good for its simplicity reducing mistake, but not better than a 4 fund portfolio managed properly.
    5. Portfolio covering all markets cap weighted is optimal based on modern portfolio theory.
    6. Rebalancing is key as it simulates buying and selling at the best times in the cycle.
    7. Risk free assets like Cash / Bonds are to dampen volatility and manage risk.
    8. REITs also reduce risk through negative correlation with equities.
    9. ETF structure protects the shareholder. Worst comes to worst, you get the current value of your shares back.
     
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  15. Cmelderis

    Cmelderis Well-Known Member

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    @Redwing do you work in this field professionally? I would love to have a chat with someone regarding investing in ETF's etc
     
  16. Nodrog

    Nodrog Well-Known Member

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    Likely better than most professionals truth be told. No money to be made though in fees for simple strategies that outperform most professionals. The crowd has been brainwashed into thinking complex and high fees = better. Nothing could be further from the truth!
     
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  17. Redwing

    Redwing Well-Known Member

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    @Cmelderis

    Not me, there are some professional advisers on the forum though and many enthusiastic and skilled amateurs who have been through the ups and downs of various markets.

    To be honest I would ask any questions here and you will get some great replies from knowledgeable members
     
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  18. Cmelderis

    Cmelderis Well-Known Member

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    Thank you and I shall.
    Its more that I need to get my partner sitting down with someone apart from me that tells him that ETF's are a good place to put his savings....you know how sometimes the advice needs to come from somebody else to back up your claims....
     
  19. Redwing

    Redwing Well-Known Member

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    Accepting an Imperfect Portfolio with Nick Maggiulli

     
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