Building the Perfect Portfolio

[slowtraveler]

Hello,

I've been binging on Tyler's portfoliocharts calculators to find a globally diversified portfolio with less drawdown than the standard high equity portfolios. I'm trying the find the perfect portfolio for me-7+% long term real returns, under 33% and 6year max draw downs, globally diversified.

I love the premise of Golden Butterfly but it's too low on return and high on bonds for me. Plus, I don't like being 80% invested in US assets (both stocks and bonds in GB are US-based). I like the portfolios below since they mostly outperform TSM, have far smaller drawdowns and are globally diversified.

I've modified it and get some pretty nice projected returns by bringing up equities to 60-80%.

There are a few portfolios I'm comparing based on this:

1)
20% VTSAX (TSM)
20% VSIAX (SCV)
20% VEMAX (Emerging)
20% VTIAX (International)
10% IAU (Gold)
10% VLBTX (Long-Term Bonds 60%corp,40%govt) OR VUSTX (Long Term Treasury)

I chose long-term bonds because I believe deflation and recession are a real possibility and I believe long-term bonds will hedge better than total bonds in this case.

2)
20% VTSAX (TSM)
20% VSIAX (SCV)
20% VEMAX (Emerging)
20% VTIAX (International)
20% IAU (Gold)
Similar returns but less bonds since I don't love bonds and gold seems a fine hedge. This and the above portfolio perform pretty similarly.

3)
15% VTSAX (TSM)
15% VSIAX (SCV)
15% VEMAX (Emerging)
15% VTIAX (International)
20% IAU (Gold)
20% VLBTX (Long-Term Bonds 60%corp,40%govt) OR VUSTX (Long Term Treasury)
This portfolio has the lowest long term returns by about 1.5% but also a 23% rather than 32-34% draw down, plus the draw down is almost half the time.

I notice REIT instead of bonds produces greater returns and less bad worst case scenarios but Tyler's calculators don't go back to the deflationary great depression, I believe bonds would perform better than real estate in this situation and the safety there is worth more to me than the larger returns.

Also, total bond market doesn't reduce returns much and is more diversified but I believe interest rate rises are less likely during deflationary times so long-term bonds are likely a better hedge for deflation.

I believe I'm okay for US growth, international growth, emerging growth, short-term crashes, deflation. I'm not holding much cash so I'm not prepared for a strong long-term recession.Aside from that, I'll be able to accumulate well and withdraw well. I plan to ERE within 10 years.

What do you think?

[stand@desk]

All are good. I have about 10 years investing experience. I'd say this, it doesn't matter what you do (from these examples), as long as you stick to it. Keep diligently saving money and investing it, not getting caught up in making a bad investment (single stock going bankrupt, divorce etc) and you will be fine. It sounds so easy but it isn't. Tell us which one you have picked and how long you plan to stick with it and how long you end up sticking with it.

"Doing nothing is harder than it looks because of the restraint needed to practice inaction." -This means don't keep changing your allocations or strategies cause you think one is suddenly better or worse. I have done too much of this and it is just spinning your wheels and you underperform the market.

"You don't need brainpower in investing, you need discipline." -Warren Buffet

and one more..

"It's easier to stay out of trouble than to get out of trouble financially." -Warren Buffet

[BRUTE]

brute has also played around with the calculators. for that dataset at least, gold + emerging + something safe (eg LTT) + 40% any equities will look very promising. might be historical accident, but the history does cover a pretty wide range of investment scenarios where individual components shine.

[IlliniDave]

Far more important than modest differences in portfolio composition is the behavioral aspects--coming up with a plan that you are willing/able to stick to over time, as was said above. The perfect portfolio can only be known in hindsight. Constantly changing portfolios/strategies leads to basically chasing what is hot which causes nearly all individual investors who attempt it to accumulate less in the long haul.

Not knowing your age, investing goals, current financial position, and temperament (largely, how well you can stomach occasional losses) it's difficult to say much about the individual options you present. All seem okay as far as portfolios go, though personally I avoid gold. But I have no idea which is best for you. And that's what you should be looking for: what's best for you.

[Tyler9000]

Hey Felipe. I'm glad to see you find the site useful!

It seems like you have a pretty good idea of the types of assets you like. The one technical thing I'll point out is the large overlap between VTIAX and VEMAX. Total international already contains about 15-20% emerging markets, so you're overweighting EM a lot more than it looks like on the surface. You might want to consider cutting back on EM or swapping VTIAX with an international developed fund like VTMGX to properly balance things if that's your goal.

[slowtraveler]

Thank you for the wisdom.

What I'm getting is:

1) Build a portfolio I can stick to:
I'll admit this is a challenge of mine. Constantly trying to perfect things and improve them. For a while I've been 70%VTSAX, 30%VTIAX as it's simple but I see the 20/20/20/20/10/10 does better and doesn't have the deep drawdown.

2) Watch the overlap in these funds as I'm overweighting Emerging. Which I agree with. I believe emerging has more room for growth than developed but also comes with accounting risk and the higher chance that the growth in profits won't return back to shareholders since the laws protecting shareholders are less ingrained/practiced in many emerging countries. The returns between the portfolios don't change much with this change but you are wiser than me here by a few light years so I'll dig deeper into this, thank you.

Investing Goals: Long term real growth in the 5-10% range with smaller drawdowns and volatility than total stock market.
I plan to save hard for the next 5-10 years then enter a semi-retirement of part-time work on things I enjoy or seasonal work on something I feel good about helping with. Both my portfolio and part time work would ideally cover my expenses.
Current financial Position: Pretty decent savings but a fraction of Jacob's and many others in this forum.
Temperament:
I'm constantly looking forward to a crash so I can buy stock. I have yet to invest through a deep crash though.

I'm currently leaning the most towards:
20% VTSAX (TSM)
20% VSIAX (SCV)
20% VEMAX (Emerging)
20% VTIAX (International)
10% IAU (Gold)
10% VBTLX || VLBTX (Total Bond vs LT Bond)
due to the higher returns and my long investing horizon.

[Josué]

Hi,

If I may ask, why did you sell so soon after Brexit? Shouldn't you have held on to those bargains for the long-term?

[slowtraveler]

I should have but I went overweight into VTIAX when I saw that sale, sold off when prices looked reasonable. Couldn't help myself.

As an update:
I've moved towards adding a bit of ST bonds and cash as a safety net to help me have some dry powder and some breathing room.
The current portfolio isn't quite as optimal when backtested but I think it's more reasonable.
80 Equities-20 I Bonds/Cash
40%VTSAX
20%VTIAX
20%VEMAX
10% Health Care Index
10% Consumer Staples Index

The 2 indexes have behaved with lower standard deviation than SCV while beating the market. A good percentage of the stocks are among the best performing over the last century from the S&P-pharmaceuticals, tobacco, consumer staples.
https://www.thebalance.com/best-industr ... cks-357211

The only thing I'm debating on now is whether to get some Gold as a hedge to the high equities or opt for a higher cash flow.

[classical_Liberal]

...

[slowtraveler]

Now the real challenge, pulling the trigger and staying course.

[BRUTE]

3 years cash, wow. brute is thinking about this right now, how much cash or others holding? brute was thinking more like 3 months.

[Seppia]

I hold the equivalent of 18 months.
Thing is, for low spenders it's a relatively small amount of money in absolute value.
When some "expected unexpected" expenses happen they are usually fairly large, and I would not like to go access credit, even if it's easy, cheap, and I could pay it back fairly fast.
Just not worth the hassle in my opinion.

Oh, and merry Christmas to you all, it's 9 am here in sunny Italy.

[FBeyer]

3 years cash, wow. brute is thinking about this right now, how much cash or others holding? brute was thinking more like 3 months.

I'm being an ass, sorry.
You're planning on holding 3 months in cash, and you're also planning on lazy-indexing something with a backtested 9 year drawdown?

I'm looking to save something like 3 years expenses in cash. That way even a small amount of dividends during large corrections will postpone the time before I need-need to sell from my depreciated assets to pay my bills. Hence, I'm looking specifically to expand my indexing with dividend investing.

A cow for her milk, a hen for her eggs,
And a stock, by heck, for her dividends.

[BRUTE]

brute is here to learn. tak.

[enigmaT120]

I have something like a full year's worth of expenses in cash, but it's because I'm saving up for a new roof and to restore my old Chevy Napco pickup. I need to get that money spent.

[fiby41]

What I learnt from the demonetization of Rs 500 and Rs 1000 currency notes: viewtopic.php?f=3&t=8303

The amount of cash you have should be:

Equal to the amount of income that is not taxed
Why: So you don't raise any red flags when you have to deposit all the amount in the bank in one go.
eg. In India income below Rs 2,50,000 /year is not taxed
Also, the govt had said no inquiry/notice would be taken if this much amount was deposited per person.
So that is the amount- A year's worth of untaxed income, that could be had in cash.


Don't have all this currency in notes of the same denominations.

Possible ways to divide:

1 Dived the above number in the number of denominations available
Eg. Rs 10, 20, 50, 100, 500, 1000
So 6
And have that much amount in each denomination.

OR

2 Have equal number of all 6 notes until they add up to the total.