William Bernstein’s complicated portfolios

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BogleBuddy12
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William Bernstein’s complicated portfolios

Post by BogleBuddy12 »

Hello. I just finished reading William Bernstein’s 4-part series published around 2015, “Investing For Adults.” (I was particularly impressed with “Deep Risk” and “Rational Expectations.”) Excellent reading.

But in the end, I am still unclear if Bernstein would wholeheartedly encourage and endorse a simple portfolio, such as the Three Fund Portfolio, Target Date Fund, or LifeStrategy Fund. He seems to be okay with it, but he would prefer investors slice and dice, tilt their portfolios, and own CDs and individual Treasuries.

There are a couple of spots in Rational Expectations where Bernstein seemingly reluctantly endorses a Two-Fund or Three-Fund Portfolio. That’s my takeaway. He says:

“There are many ways to skin the stock allocation cat. As a first approximation, there’s nothing wrong with using only two stock funds: the Vanguard Total Stock Market Fund for the U.S. portion and the Vanguard Total International Stock Index Fund. These two funds expose you to virtually all of the world’s publicly traded stocks that have even a modest market cap.” then on the following page he discusses: “How Much Tilt? What Kind Of Tilt?” - “The first question, already addressed in chapter 1, is whether tilting towards small and value stocks still carries a premium. The answer, I think, is still yes.“

Later, when discussing why he does not think bond funds are the best tool when using Govt bonds, it seems reluctantly he says:
If you want to keep things really simple and not own CDs and individual Treasuries, feel free to ignore my dislike of bond index funds and deploy a classic “three-fund portfolio”: a total domestic stock fund, a total international stock fund, and a bond index fund.”

So it seems anytime he endorses a simple portfolio, it’s preceded or followed by a statement about ignoring his preferred advice or discussing how to tilt.

Ultimately these books were amazing and he is a brilliant writer. I recommend everyone read this series. But personally, I do not have the ability to stick with or manage a slice and dice portfolio with multiple funds, individual bonds, CDs, etc. I’ve preferred to heed the advice of Taylor Larimore, who so wonderfully describes a simple portfolio that seems to be “good enough.”

Do we think William Bernstein would truly say “fair enough” to a simple portfolio? Or would he deep down believe it’s not nearly good enough?
Last edited by BogleBuddy12 on Sat Jan 22, 2022 7:00 am, edited 2 times in total.
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Re: William Bernstein’s complicated portfolios

Post by SuperTrooper87 »

My takeaway from this and others writings are akin to workout routines or diets. Each has different strategies and ways to reach goals. In the end, it’s typically not the particular diet or workout routine that got someone to their goals, it’s that they stuck to something for a significant period of time and didn’t give up.

So as many say around here, stay the course.

Whatever that course is, you’ll probably be fine.
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Re: William Bernstein’s complicated portfolios

Post by nps »

BogleBuddy12 wrote: Sat Jan 22, 2022 6:53 am Do we think William Bernstein would truly say “fair enough” to a simple portfolio? Or would he deep down believe it’s not nearly good enough?
I think he already has said as much:

http://efficientfrontier.com/ef/0adhoc/ifyoucan.pdf
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Re: William Bernstein’s complicated portfolios

Post by loukycpa »

I remember thinking he was a bit condescending when saying (paraphrasing) "I'll assume you are an adult and already know to tilt your portfolio toward value and small value".

Seems to me the enduring (focus on the word enduring) existence of a value or small cap premium is in the category of subjects two intelligent and rational investors can agree to disagree about.
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Re: William Bernstein’s complicated portfolios

Post by livesoft »

BogleBuddy12 wrote: Sat Jan 22, 2022 6:53 am Do we think William Bernstein would truly say “fair enough” to a simple portfolio? Or would he deep down believe it’s not nearly good enough?
Everybody is human and has a past. I think Bernstein is human and has previously made investments that he holds to this day. Does he then diss himself for what he has done in the past? Most unlikely. I would not diss myself. :)

Since he participates in this forum, maybe he will drop by and comment in this thread for himself. :)
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Re: William Bernstein’s complicated portfolios

Post by JoMoney »

BogleBuddy12 wrote: Sat Jan 22, 2022 6:53 am...
Do we think William Bernstein would truly say “fair enough” to a simple portfolio? Or would he deep down believe it’s not nearly good enough?
I don't know why "we" would need to imagine what he "deep down" believes.
From what you said, the literal quote is:
“If you want to keep things really simple and not own CDs and individual Treasuries, feel free to ignore my dislike of bond index funds and deploy a classic “three-fund portfolio”: a total domestic stock fund, a total international stock fund, and a bond index fund.”
I don't think that needs more interpretation, but my attempt to restate it in my words might be along the lines of:
Dr. Bernstein does not like bond index funds, but the difference between what he prefers (or at least to the extent one can predict such differences) and a broad average, isn't likely to make a big difference one way or the other (but he does have an opinion of what he thinks better.)

FWIW, I don't like broad-market bond funds with different maturities/ages. I like the idea of my cash/bonds being something close to matching my expected need of that "safe" money.... but spread out over time, with a large moderately "balanced" portfolio, it very well could average out to looking very close to a broad market bond index fund with bonds of maturities all over the place.
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Re: William Bernstein’s complicated portfolios

Post by dandinsac »

I bought and read William Bernstein’s book, Rational Expectations, several years ago when I started figuring how to invest in 2014, when I turned 50. It really helped me along.

I have followed his recommended approach to bonds by forming a short-term ladder of individual treasuries. Buying them in my Vanguard IRA is a trivial amount of effort. I also have an eleven-year ladder of TIPS with maturities extending until I am 85.

His recommendation resonated with me, especially for TIPS. I understand how individual TIPS work, but when they’re bundled in a fund, it would take too much effort for me to figure it out.

For equities, I didn’t quite get to the simpler approach recommended by Bogleheads until a few years later. I spent several years trying to research and set my stock allocations with some S&P 500, extended market, international, emerging market, REITs, etc. Two years ago, I decided to simply mirror VTWAX - Vanguard Total World Stock Index Fund. That’s not available in my 401K accounts, so I just mirror it with a target of S&P 500 (46%); Extended Market (12%); International (42%). I rebalance those allocations every quarter. Now, I only focus on the ratio of stocks versus safe (cash/treasuries/TIPS/iBonds).
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Re: William Bernstein’s complicated portfolios

Post by Triple digit golfer »

I take it as his preference is X, but if you do Y and do all the other right things (savings rate, low cost, tax efficient, etc.) then you'll get there too.

A weight training analogy as this aligns with my interests:
Some people like barbell training with sets of 5 across. Others do reverse pyramid with a heavy set of 4-6 followed by slightly lighter sets of 6-8. If you add weight regularly, eat right, sleep enough, you'll reach your strength goals either way. Either method is fine, just don't do bench presses with pink dumbbells balancing on a bouncy ball (akin to high cost, actively managed funds or stock picking).
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Re: William Bernstein’s complicated portfolios

Post by galeno »

I like Bernstein BUT...

1. I prefer to use the simple SWR vs his more complicated LMP for retirement.

2. I prefer the simple 2 ETF port vs his complicated slice, dice, and tilt portfolios.
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Re: William Bernstein’s complicated portfolios

Post by whodidntante »

Ask William Bernstein what William Bernstein thinks. :happy
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Re: William Bernstein’s complicated portfolios

Post by martincmartin »

I think Bernstein would say, make your portfolio as complicated as you can practically handle -- including the annual rebalancing -- but no more complicated.

But keep in mind, while definitely a brilliant writer, there are limitations to his methods. For example:

1. Suggests only holding short term treasuries, because he focuses only on inflation risk and nothing else. Intermediate and long term bonds perform better during "flight to safety" when the stock market goes down. And total bond market possibly has even better long term return.

2. He seems to be a Capital Asset Pricing Model guy, so focuses on stock market crashes and doesn't even mention sequence of return risk or other such problems. He doesn't mention economic cycles or super cycles, essentially assuming that future returns are independent of valuation and history, which might be true day to day or even year to year, but historically hasn't been true over longer time periods.

3. His analysis talks about portfolios where you're neither contributing nor withdrawing for decades, which is not what actual people do. As such, he doesn't have much guidance on the stock/bond mix, except "hold as high a percentage as you can stomach, unless you haven't saved enough, then hold more."

In general, when the justification for financial advice is just listing the pros without mentioning the cons, like "hold only short term treasuries because of inflation," you should take it with a grain of salt and look for a more complete analysis. Same with Swensen and "no corporate bonds," Swensen was basically saying the market was mispricing corporate bonds but not saying why it's mispricing it.

He does say a lot of stuff that's absolutely spot on. For example, in Intelligent Asset Allocator where he looks at graphs of stocks vs bonds over different time periods. And of course, that you should hold a low cost index of globally diversified equities.
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Re: William Bernstein’s complicated portfolios

Post by martincmartin »

Also note that the tilting to Fama-French factors is more for fun than practically needed. That is, any increase in long term returns will be small. It won't allow you to retire a year earlier for example. I doubt it would even allow you to retire a month earlier.

And there's much debate on these forums on whether the factors are valid any longer: https://bogleheads.org/forum/viewtopic. ... 0&t=367834

Personally, given the outsized performance of the big tech companies, I wonder whether large cap stocks will do worse during any downturn, so that SCV will do better. But anyway, tilting SCV vs holding total stock market is a small change in weighting, as I said above.
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Re: William Bernstein’s complicated portfolios

Post by iceport »

nps wrote: Sat Jan 22, 2022 7:01 am
BogleBuddy12 wrote: Sat Jan 22, 2022 6:53 am Do we think William Bernstein would truly say “fair enough” to a simple portfolio? Or would he deep down believe it’s not nearly good enough?
I think he already has said as much:

http://efficientfrontier.com/ef/0adhoc/ifyoucan.pdf
Exactly. Hard to interpret this document any other way than a hearty endorsement of an ultra-simple portfolio.

He offered some relevant thoughts recently here on the forum:
Bill Bernstein wrote: Tue Jan 18, 2022 3:42 pm The older I get, the more I realize that investing success is more about psychology than anything else, and that a "suboptimal" allocation that lets you sleep at night is better than an "optimal" one that wakes you up at 3 AM in a cold sweat.
He was speaking there primarily about basic levels of risk, I think, but I think that view probably extends to portfolio complexity in general.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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Re: William Bernstein’s complicated portfolios

Post by burritoLover »

The portfolio I keep coming across with Bernstein's name attached is this one (not that radical or complicated):
25% US Large Cap Blend
25% US Small Cap Blend
25% International Stocks
25% Short-Term Bonds
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Re: William Bernstein’s complicated portfolios

Post by loukycpa »

martincmartin wrote: Sat Jan 22, 2022 9:42 am He seems to be a Capital Asset Pricing Model guy, so focuses on stock market crashes and doesn't even mention sequence of return risk or other such problems. He doesn't mention economic cycles or super cycles, essentially assuming that future returns are independent of valuation and history, which might be true day to day or even year to year, but historically hasn't been true over longer time periods.
Seems to me when you advise people to hold 20+ years in safe assets, mainly TIPS, CDs, Treasuries, then SORR is mostly eliminated. Perhaps replaced by other risks, inflation, longevity, etc. I suspect sequence risk is at least one of the main reasons behind this recommendation.

I typically feel like the most conservative person in the room, and having 12 or 13X in safe assets is enough to help even me sleep at night. 20 to 25X as he suggests seems a bit to the extreme side. Perhaps fine if you have way more than enough, have long ago won the game and even your legacy goals have been met.
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Re: William Bernstein’s complicated portfolios

Post by White Coat Investor »

BogleBuddy12 wrote: Sat Jan 22, 2022 6:53 am Hello. I just finished reading William Bernstein’s 4-part series published around 2015, “Investing For Adults.” (I was particularly impressed with “Deep Risk” and “Rational Expectations.”) Excellent reading.

But in the end, I am still unclear if Bernstein would wholeheartedly encourage and endorse a simple portfolio, such as the Three Fund Portfolio, Target Date Fund, or LifeStrategy Fund. He seems to be okay with it, but he would prefer investors slice and dice, tilt their portfolios, and own CDs and individual Treasuries.

There are a couple of spots in Rational Expectations where Bernstein seemingly reluctantly endorses a Two-Fund or Three-Fund Portfolio. That’s my takeaway. He says:

“There are many ways to skin the stock allocation cat. As a first approximation, there’s nothing wrong with using only two stock funds: the Vanguard Total Stock Market Fund for the U.S. portion and the Vanguard Total International Stock Index Fund. These two funds expose you to virtually all of the world’s publicly traded stocks that have even a modest market cap.” then on the following page he discusses: “How Much Tilt? What Kind Of Tilt?” - “The first question, already addressed in chapter 1, is whether tilting towards small and value stocks still carries a premium. The answer, I think, is still yes.“

Later, when discussing why he does not think bond funds are the best tool when using Govt bonds, it seems reluctantly he says:
If you want to keep things really simple and not own CDs and individual Treasuries, feel free to ignore my dislike of bond index funds and deploy a classic “three-fund portfolio”: a total domestic stock fund, a total international stock fund, and a bond index fund.”

So it seems anytime he endorses a simple portfolio, it’s preceded or followed by a statement about ignoring his preferred advice or discussing how to tilt.

Ultimately these books were amazing and he is a brilliant writer. I recommend everyone read this series. But personally, I do not have the ability to stick with or manage a slice and dice portfolio with multiple funds, individual bonds, CDs, etc. I’ve preferred to heed the advice of Taylor Larimore, who so wonderfully describes a simple portfolio that seems to be “good enough.”

Do we think William Bernstein would truly say “fair enough” to a simple portfolio? Or would he deep down believe it’s not nearly good enough?
The message (a correct one) is the same as the one you'll get from anyone who isn't dogmatic about it--it doesn't matter. Pick something reasonable and stick with it. Tilt. No tilt. Simple. Complex. They all work if they are reasonable and you fund them adequately. Some may work better than others, but it's very hard to tell in advance. You makes your bets and you takes your chances.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: William Bernstein’s complicated portfolios

Post by SimpleMan68 »

How many books would Bernstein (or any other author) be able to write and sell if they simply endorsed the 3-fund portfolio? Keep it simple.
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Re: William Bernstein’s complicated portfolios

Post by dbr »

I think writers of books about investing can hardly create a whole book if they don't write pages and pages of stuff about how to do this with a portfolio or that with a portfolio and why it might be helpful. Larry Swedroe and Rick Ferri, both of whom I think are good reading for any investor, have books filled with all kinds of portfolio recommendations. Swedroe has a whole book on nothing but factors, and another on alternatives. If people don't like it they can just reread Mr. Bogle saying somewhere that it is all bosh.

The problem is how do you boil that down to why is it not perfectly ok to hold a three fund portfolio, pay some attention to taxes, and stay the course. I think if asked directly none of those authors are going to tell anyone that they are planning for disaster if they don't do something better. Well, I do think Bernstein's "won the game" thing is one of the most unhelpful statements ever made, but that is easily fixed by actually reading what he does say when he isn't delivering a quip.

I think the whole money for absolutely needed spending and money for discretionary spending is not a helpfuy approach for me, but I think it can help a lot of people better understand what they are trying to do.

We get the some go arounds when Buffett and Bogle say "hold the S&P 500" and everyone runs around wondering what disaster is going to ensue if I put my stocks in VTI. Pensions as bonds is also horribly unhelpful but can be fixed with just a little thinking about what one is doing.

I really love Bernstein's TIPS LMP because it puts it on the line what a person can actually do to ensure inflation risk/term risk/credit risk-free income if a person wants to do that. The present high cost of doing that is also an education. It should stop people from thinking you can invest in stocks and bonds and not have downturns, when you look at what you have to do to get there.
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Re: William Bernstein’s complicated portfolios

Post by galeno »

A 50/50 port, not counting pensions, and using a 4% AWR holds 12.5 years of safe assets.

A 30/70 port, not counting pensiones, and using 4% AWR holds 17.5 years of safe assets.

"I typically feel like the most conservative person in the room, and having 12 or 13X in safe assets is enough to help even me sleep at night. 20 to 25X as he suggests seems a bit to the extreme side. Perhaps fine if you have way more than enough, have long ago won the game and even your legacy goals have been met."
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Re: William Bernstein’s complicated portfolios

Post by Hofburg43 »

BogleBuddy12 wrote: Sat Jan 22, 2022 6:53 am Ultimately these books were amazing and he is a brilliant writer. I recommend everyone read this series. But personally, I do not have the ability to stick with or manage a slice and dice portfolio with multiple funds, individual bonds, CDs, etc. I’ve preferred to heed the advice of Taylor Larimore, who so wonderfully describes a simple portfolio that seems to be “good enough.”

Do we think William Bernstein would truly say “fair enough” to a simple portfolio? Or would he deep down believe it’s not nearly good enough?
No one can sell books or receive the public attention they seem to desperately crave by advising people to invest their money in an S&P Index Fund. So they dream up nonsense and people with a bad case of "fear of missing out" buy it.

Well, expect for one person, Jack Bogle, who wrote a dozen books on it and sold a million copies overall.

Of course, the difference is, he had invented the idea and didn't want any of your money in return for having done so.
My lifetime requirement for investment advice was satisfied upon reading Jack Bogle write that most people need only a low cost S&P 500 Index fund.
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Re: William Bernstein’s complicated portfolios

Post by staustin »

dandinsac wrote: Sat Jan 22, 2022 9:14 am I bought and read William Bernstein’s book, Rational Expectations, several years ago when I started figuring how to invest in 2014, when I turned 50. It really helped me along.

I have followed his recommended approach to bonds by forming a short-term ladder of individual treasuries. Buying them in my Vanguard IRA is a trivial amount of effort. I also have an eleven-year ladder of TIPS with maturities extending until I am 85.

His recommendation resonated with me, especially for TIPS. I understand how individual TIPS work, but when they’re bundled in a fund, it would take too much effort for me to figure it out.

For equities, I didn’t quite get to the simpler approach recommended by Bogleheads until a few years later. I spent several years trying to research and set my stock allocations with some S&P 500, extended market, international, emerging market, REITs, etc. Two years ago, I decided to simply mirror VTWAX - Vanguard Total World Stock Index Fund. That’s not available in my 401K accounts, so I just mirror it with a target of S&P 500 (46%); Extended Market (12%); International (42%). I rebalance those allocations every quarter. Now, I only focus on the ratio of stocks versus safe (cash/treasuries/TIPS/iBonds).
outstanding post... thank you for contributing your thoughts.
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Re: William Bernstein’s complicated portfolios

Post by dbr »

I also find the 20x or whatever it is to be an odd comment, but keep in mind that applies only when x is what one absolutely needs to spend. I think that path takes you into deep woods in a hurry.

I do agree a lot of the thinking you get with Mr. Bernstein takes a while to parse out.

I don't think much of what he talks about is much different in the end from any of the other generally Boglehead ideas about things, as long as you think about it and don't take anything too literally right off the top.
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Re: William Bernstein’s complicated portfolios

Post by loukycpa »

galeno wrote: Sat Jan 22, 2022 10:59 am A 50/50 port, not counting pensions, and using a 4% AWR holds 12.5 years of safe assets.

A 30/70 port, not counting pensiones, and using 4% AWR holds 17.5 years of safe assets.

"I typically feel like the most conservative person in the room, and having 12 or 13X in safe assets is enough to help even me sleep at night. 20 to 25X as he suggests seems a bit to the extreme side. Perhaps fine if you have way more than enough, have long ago won the game and even your legacy goals have been met."
He even goes as far as to say if 20 to 25X is all you have then it should all be safe assets in a liability matching portfolio. If you want a risk portfolio, have to keep working/saving. I'd have to find the quote but I know I've read this from him.

In that situation most Bogleheads are going to tell you to keep at least 20% to 30% in equities. Never any reason to go below 20%.
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Re: William Bernstein’s complicated portfolios

Post by willthrill81 »

dbr wrote: Sat Jan 22, 2022 11:27 amI do agree a lot of the thinking you get with Mr. Bernstein takes a while to parse out.
I said the same thing earlier this week as there have been many threads here over the years where posters have asked what Bernstein actually meant by some of his statements. He made the below statement earlier this week, which clarifies matters.
Bill Bernstein wrote: Tue Jan 18, 2022 3:04 pm I'm unclear only if you don't actually read what I wrote, which is that young investors should be heavily into stocks, and retirees, and near-retirees, should aim for an LMP, and beyond that, an RP.
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Re: William Bernstein’s complicated portfolios

Post by willthrill81 »

loukycpa wrote: Sat Jan 22, 2022 11:48 am
galeno wrote: Sat Jan 22, 2022 10:59 am A 50/50 port, not counting pensions, and using a 4% AWR holds 12.5 years of safe assets.

A 30/70 port, not counting pensiones, and using 4% AWR holds 17.5 years of safe assets.

"I typically feel like the most conservative person in the room, and having 12 or 13X in safe assets is enough to help even me sleep at night. 20 to 25X as he suggests seems a bit to the extreme side. Perhaps fine if you have way more than enough, have long ago won the game and even your legacy goals have been met."
He even goes as far as to say if 20 to 25X is all you have then it should all be safe assets in a liability matching portfolio. If you want a risk portfolio, have to keep working/saving. I'd have to find the quote but I know I've read this from him.

In that situation most Bogleheads are going to tell you to keep at least 20% to 30% in equities. Never any reason to go below 20%.
Yes, he firmly endorses the LMP approach. That's a perfectly viable approach for risk averse retirees who aren't expecting a longer retirement than around 30 years. And yes, I agree that retirees' stock allocations should virtually never be lower than 20% of their total portfolio, including the LMP.

Among the potential problems with the LMP strategy are (1) the cost of creating a 30 year ladder of TIPS/I bonds may be prohibitively high, (2) the necessity of accurate estimates of one's expenses many years into the future, (3) the inability to set up a TIPS/I bonds ladder beyond 30 years, (4) the potentially very low resulting withdrawal rate of the strategy, perhaps lower than the historic perpetual withdrawal rate, (5) the potential for outliving your LMP, and (6) the loss of virtually all upside potential for a large proportion of one's portfolio.

None of the above invalidate the LMP strategy, but it's certainly not the be-all-that-ends-all strategy for everyone. It has its warts just like every other approach.
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Re: William Bernstein’s complicated portfolios

Post by Volando »

BogleBuddy12 wrote: Sat Jan 22, 2022 6:53 am
Later, when discussing why he does not think bond funds are the best tool when using Govt bonds, it seems reluctantly he says:
If you want to keep things really simple and not own CDs and individual Treasuries, feel free to ignore my dislike of bond index funds and deploy a classic “three-fund portfolio”: a total domestic stock fund, a total international stock fund, and a bond index fund.”
I’ve only read The Four Pillars of Investing but I can’t recall him talking about this. Mind sharing why he doesn’t like bond funds?
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Re: William Bernstein’s complicated portfolios

Post by dbr »

willthrill81 wrote: Sat Jan 22, 2022 12:05 pm
loukycpa wrote: Sat Jan 22, 2022 11:48 am
galeno wrote: Sat Jan 22, 2022 10:59 am A 50/50 port, not counting pensions, and using a 4% AWR holds 12.5 years of safe assets.

A 30/70 port, not counting pensiones, and using 4% AWR holds 17.5 years of safe assets.

"I typically feel like the most conservative person in the room, and having 12 or 13X in safe assets is enough to help even me sleep at night. 20 to 25X as he suggests seems a bit to the extreme side. Perhaps fine if you have way more than enough, have long ago won the game and even your legacy goals have been met."
He even goes as far as to say if 20 to 25X is all you have then it should all be safe assets in a liability matching portfolio. If you want a risk portfolio, have to keep working/saving. I'd have to find the quote but I know I've read this from him.

In that situation most Bogleheads are going to tell you to keep at least 20% to 30% in equities. Never any reason to go below 20%.
Yes, he firmly endorses the LMP approach. That's a perfectly viable approach for risk averse retirees who aren't expecting a longer retirement than around 30 years. And yes, I agree that retirees' stock allocations should virtually never be lower than 20% of their total portfolio, including the LMP.

Among the potential problems with the LMP strategy are (1) the cost of creating a 30 year ladder of TIPS/I bonds may be prohibitively high, (2) the necessity of accurate estimates of one's expenses many years into the future, (3) the inability to set up a TIPS/I bonds ladder beyond 30 years, (4) the potentially very low resulting withdrawal rate of the strategy, perhaps lower than the historic perpetual withdrawal rate, (5) the potential for outliving your LMP, and (6) the loss of virtually all upside potential for a large proportion of one's portfolio.

None of the above invalidate the LMP strategy, but it's certainly not the be-all-that-ends-all strategy for everyone. It has its warts just like every other approach.
You wrote about what I would also write. For some perspective I once tried to calculate payout rates for a TIPS 30 year portfolio and starting with the observation that if the real rate is 0% then the payout by definition is 3.3%. The problem comes when you buy the TIPS at -2% real and then the payout drops to 2.4%. That is the same as 40x expenses. The idea becomes attractive at +2% real with a payout of 4.4%. Then you are at 22x expenses.

The really genuine implementation of the LMP would be an inflation indexed life annuity. To an extent SS and some Federal pensions might fit that concept. It certainly underlines the idea of maximizing SS benefits, if the wealth and spending of the retiree makes that a fit. I had the impression that when an inflation indexed life annuity could be purchased they were expensive as in not exceeding a 4% payout.
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BogleBuddy12
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Re: William Bernstein’s complicated portfolios

Post by BogleBuddy12 »

Volando wrote: Sat Jan 22, 2022 12:31 pm
BogleBuddy12 wrote: Sat Jan 22, 2022 6:53 am
Later, when discussing why he does not think bond funds are the best tool when using Govt bonds, it seems reluctantly he says:
If you want to keep things really simple and not own CDs and individual Treasuries, feel free to ignore my dislike of bond index funds and deploy a classic “three-fund portfolio”: a total domestic stock fund, a total international stock fund, and a bond index fund.”
I’ve only read The Four Pillars of Investing but I can’t recall him talking about this. Mind sharing why he doesn’t like bond funds?
He says:

“For the lion’s share of your fixed-income assets, the entire mutual fund structure is, in fact, unnecessary. To repeat this book’s opening mantra: there are risky assets, and there are riskless ones, and the two play very different roles. Keep the two as separate as possible and make the risky assets as risky as you like. Critically, your riskless assets should retain their value in a crisis. Corporate bonds, in particular, have a modest amount of stock-like behavior and can see price falls independent of the rise or fall in overall interest rates. Municipal bonds can also behave this way, and if you’re depending on either corporates or munis for liquidity during a crisis—precisely when you’re likely to want or need it the most—you may have to take a substantial haircut to realize it. Tax-sheltered investors should keep almost all of their fixed-income assets in government-guaranteed securities: Treasury bills and notes and CDs. And while taxable investors should own at least some municipal bonds, they should still hold a fair dollop of Treasuries and CDs, as well. The main point here is that you don’t need or want to own a mutual fund for Treasuries, and it’s neither desirable nor available for CDs.”

“The only bond funds you should own are open-end municipal and corporate bond funds (to the extent that you do own these two asset classes). The reason for this is simple. Without a great deal of effort and expense, the individual cannot put together a well-diversified low-expense mix of municipal or corporate securities. With munis, the choice is clear: Vanguard offers a wide variety of national and state-specific mutual funds.”
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Re: William Bernstein’s complicated portfolios

Post by Northern Flicker »

Treasuries and insured CDs have virtually no credit risk, so an individual can hold them directly without concern about adequately diversifying credit risk. When bond fund expense ratios were higher (which may have been the case when these books were written), the savings may have been worth managing a bond/CD ladder.

Today, intermediate treasury index funds like VGIT or FUAMX have ERs in the 3.5-4 bp/yr range. The efficiency of reinvestment of coupon payments by the fund manager is likely in and of itself worth at least that much. You also get better liquidity (withdrawals won't change duration). For shorter duration, the same applies to FUMBX and VGSH.

If you prefer to hold a total bond market index fund, that is also fine. The Swensen bond portfolio of 50% intermediate treasuries and 50% intermediate TIPS likely mitigates more risks than any of the above.
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Re: William Bernstein’s complicated portfolios

Post by Volando »

Thanks for sharing! I wonder, has that approach (favoring t bills, notes, CDs) made a significant difference when compared with a bond fund? I would imagine they’re not that far apart in terms of results in the grand scheme of things?
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Re: William Bernstein’s complicated portfolios

Post by dbr »

Volando wrote: Sat Jan 22, 2022 1:23 pm Thanks for sharing! I wonder, has that approach (favoring t bills, notes, CDs) made a significant difference when compared with a bond fund? I would imagine they’re not that far apart in terms of results in the grand scheme of things?
In the grand scheme of things it is impossible to prove that it makes any difference, just as impossible for Mr. Bernstein, for you, for me, or for anyone else. A twist in the works is that you can't assume that different choices in fixed income do not allow different choices in stock/bond allocation.

A missing piece is how much of the retirement depends on investments distinct from pensions, annuities, and Social Security. We won't even mention real estate and farm land. I liked having my "shares of beneficent interest" in a gas trust. Of course after paying 10% for some time all the gas was gone along with the payments and the trust itself. My interest in the Kindermorgan pipelines was taken away when they went private. The TIPS LMP is a creative way of shifting from assets to income but lacks some fundamental properties such as life payments and pooling of longevity risk and in that sense is fundamentally flawed, but not necessarily a bad idea.
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Re: William Bernstein’s complicated portfolios

Post by aj76er »

dbr wrote: Sat Jan 22, 2022 11:27 am I also find the 20x or whatever it is to be an odd comment, but keep in mind that applies only when x is what one absolutely needs to spend. I think that path takes you into deep woods in a hurry.

I do agree a lot of the thinking you get with Mr. Bernstein takes a while to parse out.

I don't think much of what he talks about is much different in the end from any of the other generally Boglehead ideas about things, as long as you think about it and don't take anything too literally right off the top.
Yes, 20X is Residual Living Expenses (RLE) “after” subtracting pensions, annuities, social security, and (optionally) 50% of your annual equity dividends (as long as you’re using a diversified index).

RLE includes basic housing (e.g. property taxes or rent), food (grocery), and health care.

RLE does not include vacations, cars, restaurants, TVs, etc…
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
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Re: William Bernstein’s complicated portfolios

Post by UpperNwGuy »

livesoft wrote: Sat Jan 22, 2022 8:35 am Everybody is human and has a past. I think Bernstein is human and has previously made investments that he holds to this day. Does he then diss himself for what he has done in the past? Most unlikely. I would not diss myself. :)
Actually, you are quite honest and have told a few stories that could be described as dissing yourself. It's part of what gives you the credibility that you enjoy here.
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Re: William Bernstein’s complicated portfolios

Post by shess »

Volando wrote: Sat Jan 22, 2022 1:23 pm Thanks for sharing! I wonder, has that approach (favoring t bills, notes, CDs) made a significant difference when compared with a bond fund? I would imagine they’re not that far apart in terms of results in the grand scheme of things?
Over the long term (grand scheme of things), it's all going to balance out, since the mutual fund holds those same securities net of a tiny expense ratio. Periodically the specific-securities approach will go ahead of the fund approach, periodically the fund with go ahead of the specific-securities approach, so if you chose those crossings as your time period, it would work out to a net of around $0.

Choose the option whose advantages favor your situation. For instance, if I knew for a fact what my next 10 years worth of liabilities were, I'd probably prefer a bunch of specific liability-matching securities over using a bond fund with an appropriate estimated duration which would need tweaking periodically to keep the duration in the right ballpark for my liabilities. On the other hand, if I just have a "fixed income" position with no particular goal other than diversifying against stocks, I'd prefer a bond fund rather than managing a bunch of specific securities against an ambiguous goal (I mean I'd prefer to just purchase a bond fund rather than manually replicating a bond fund).

[Note that someone managing a Vanguard bond index fund PROBABLY has much better tools and cheaper access to the market than you. It's easy to assume that the ER means the fund will always come out slightly behind, but improved transactional skill can sometimes make up for the ER, especially if you're transacting on the secondary markets.]
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Re: William Bernstein’s complicated portfolios

Post by Horton »

Here’s your answer:
And, as I’ve said, there’s nothing wrong with an all-in-one target retirement fund, as long as it has low expenses.
http://efficientfrontier.com/ef/0adhoc/ifyoucan.pdf
80% global equities (faith-based tilt) + 20% TIPS (LDI)
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Re: William Bernstein’s complicated portfolios

Post by bog007 »

send him pm
Don’t let anyone else ruin your portfolio. It’s your portfolio. Ruin it yourself!!!
59Gibson
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Re: William Bernstein’s complicated portfolios

Post by 59Gibson »

willthrill81 wrote: Sat Jan 22, 2022 12:05 pm
loukycpa wrote: Sat Jan 22, 2022 11:48 am
galeno wrote: Sat Jan 22, 2022 10:59 am A 50/50 port, not counting pensions, and using a 4% AWR holds 12.5 years of safe assets.

A 30/70 port, not counting pensiones, and using 4% AWR holds 17.5 years of safe assets.

"I typically feel like the most conservative person in the room, and having 12 or 13X in safe assets is enough to help even me sleep at night. 20 to 25X as he suggests seems a bit to the extreme side. Perhaps fine if you have way more than enough, have long ago won the game and even your legacy goals have been met."
He even goes as far as to say if 20 to 25X is all you have then it should all be safe assets in a liability matching portfolio. If you want a risk portfolio, have to keep working/saving. I'd have to find the quote but I know I've read this from him.

In that situation most Bogleheads are going to tell you to keep at least 20% to 30% in equities. Never any reason to go below 20%.
Yes, he firmly endorses the LMP approach. That's a perfectly viable approach for risk averse retirees who aren't expecting a longer retirement than around 30 years. And yes, I agree that retirees' stock allocations should virtually never be lower than 20% of their total portfolio, including the LMP.

Among the potential problems with the LMP strategy are (1) the cost of creating a 30 year ladder of TIPS/I bonds may be prohibitively high, (2) the necessity of accurate estimates of one's expenses many years into the future, (3) the inability to set up a TIPS/I bonds ladder beyond 30 years, (4) the potentially very low resulting withdrawal rate of the strategy, perhaps lower than the historic perpetual withdrawal rate, (5) the potential for outliving your LMP, and (6) the loss of virtually all upside potential for a large proportion of one's portfolio.

None of the above invalidate the LMP strategy, but it's certainly not the be-all-that-ends-all strategy for everyone. It has its warts just like every other approach.
Regarding the LMP at 25X, I've always taken it as meant for someone with 50X+ so they're @ a 50/50 AA. He did state 2% swr is "bulletproof".
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Re: William Bernstein’s complicated portfolios

Post by Zardoz »

willthrill81 wrote: Sat Jan 22, 2022 12:05 pm Yes, he firmly endorses the LMP approach. That's a perfectly viable approach for risk averse retirees who aren't expecting a longer retirement than around 30 years. And yes, I agree that retirees' stock allocations should virtually never be lower than 20% of their total portfolio, including the LMP.

Among the potential problems with the LMP strategy are (1) the cost of creating a 30 year ladder of TIPS/I bonds may be prohibitively high, (2) the necessity of accurate estimates of one's expenses many years into the future, (3) the inability to set up a TIPS/I bonds ladder beyond 30 years, (4) the potentially very low resulting withdrawal rate of the strategy, perhaps lower than the historic perpetual withdrawal rate, (5) the potential for outliving your LMP, and (6) the loss of virtually all upside potential for a large proportion of one's portfolio.

None of the above invalidate the LMP strategy, but it's certainly not the be-all-that-ends-all strategy for everyone. It has its warts just like every other approach.
A multi-decade LMP strategy is indeed challenging for the reasons you mention, especially for those who aren't eligible for Social Security. But since many people here are eligible for Social Security, it's worth mentioning that LMP actually works quite well as income bridge up to age 70. No need to buy 30 years of TIPS - just buy enough TIPS to match your expected Social Security income at age 70. For example, if retiring at age 60, you just need a 10 year TIPS ladder.

In this way you have a guaranteed income floor that is indexed to inflation, for life. Then your extra money can go into the stock market, to support discretionary spending.
Withdrawal Phase Plan: Equities <= 50% | TIPS, I Bonds | VPW Worksheet | TPAW | Social Security @70
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tooluser
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Re: William Bernstein’s complicated portfolios

Post by tooluser »

Relative to portfolio composition vs years of spending in bonds:
A table I made some time ago for my own planning. Anyone could do this, but here it is in case you haven't.

Code: Select all

Years of spending in bonds											
%WR	x Income	% Bonds in Portfolio:									
		10%	20%	30%	40%	50%	60%	70%	80%	90%	100%
20.00%	5	0.5	1.0	1.5	2.0	2.5	3.0	3.5	4.0	4.5	5.0
10.00%	10	1.0	2.0	3.0	4.0	5.0	6.0	7.0	8.0	9.0	10.0
6.67%	15	1.5	3.0	4.5	6.0	7.5	9.0	10.5	12.0	13.5	15.0
5.00%	20	2.0	4.0	6.0	8.0	10.0	12.0	14.0	16.0	18.0	20.0
4.50%	22.2	2.2	4.4	6.7	8.9	11.1	13.3	15.6	17.8	20.0	22.2
4.00%	25	2.5	5.0	7.5	10.0	12.5	15.0	17.5	20.0	22.5	25.0
3.50%	28.6	2.9	5.7	8.6	11.4	14.3	17.1	20.0	22.9	25.7	28.6
3.33%	30	3.0	6.0	9.0	12.0	15.0	18.0	21.0	24.0	27.0	30.0
3.00%	33.3	3.3	6.7	10.0	13.3	16.7	20.0	23.3	26.7	30.0	33.3
2.86%	35	3.5	7.0	10.5	14.0	17.5	21.0	24.5	28.0	31.5	35.0
2.50%	40	4.0	8.0	12.0	16.0	20.0	24.0	28.0	32.0	36.0	40.0
2.22%	45	4.5	9.0	13.5	18.0	22.5	27.0	31.5	36.0	40.5	45.0
2.00%	50	5.0	10.0	15.0	20.0	25.0	30.0	35.0	40.0	45.0	50.0
1.82%	55	5.5	11.0	16.5	22.0	27.5	33.0	38.5	44.0	49.5	55.0
1.67%	60	6.0	12.0	18.0	24.0	30.0	36.0	42.0	48.0	54.0	60.0
1.54%	65	6.5	13.0	19.5	26.0	32.5	39.0	45.5	52.0	58.5	65.0
Like good comrades to the utmost of their strength, we shall go on to the end. -- Winston Churchill
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arcticpineapplecorp.
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Re: William Bernstein’s complicated portfolios

Post by arcticpineapplecorp. »

loukycpa wrote: Sat Jan 22, 2022 8:28 am I remember thinking he was a bit condescending when saying (paraphrasing) "I'll assume you are an adult and already know to tilt your portfolio toward value and small value".
what Dr. Bernstein actually wrote is:
You're an investment adult, so you know that the future efficient frontier lies well beyond our ken; presumably you already know all about the mechanics, long-term benefits, as well as the uncertainties, of wide diversification and factor tilt using low-cost, efficient vehicles and the risk/reward spectrum between all-fixed-income and all-equity portfolios. This booklet contains no magic formula for the "perfect portfolio," but rather with luck, a framework within which to think more clearly about risk.
couldn't have said it better myself and I find nothing condescending about what Dr. Bernstein wrote above. In fact, he's admitting that despite the preponderance of pushing small cap and value, no one can really know where the future efficient frontier lies (just because of the past efficient frontier may have been in small cap and value tilts), along with the fact that the perfect portfolio will only be known after the fact. Finally, I find his brand of truth telling fairly refreshing considering so many continue to believe they can have something for nothing (reward without risk).
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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Re: William Bernstein’s complicated portfolios

Post by loukycpa »

arcticpineapplecorp. wrote: Sat Jan 22, 2022 9:15 pm
loukycpa wrote: Sat Jan 22, 2022 8:28 am I remember thinking he was a bit condescending when saying (paraphrasing) "I'll assume you are an adult and already know to tilt your portfolio toward value and small value".
what Dr. Bernstein actually wrote is:
You're an investment adult, so you know that the future efficient frontier lies well beyond our ken; presumably you already know all about the mechanics, long-term benefits, as well as the uncertainties, of wide diversification and factor tilt using low-cost, efficient vehicles and the risk/reward spectrum between all-fixed-income and all-equity portfolios. This booklet contains no magic formula for the "perfect portfolio," but rather with luck, a framework within which to think more clearly about risk.
couldn't have said it better myself and I find nothing condescending about what Dr. Bernstein wrote above. In fact, he's admitting that despite the preponderance of pushing small cap and value, no one can really know where the future efficient frontier lies (just because of the past efficient frontier may have been in small cap and value tilts), along with the fact that the perfect portfolio will only be known after the fact. Finally, I find his brand of truth telling fairly refreshing considering so many continue to believe they can have something for nothing (reward without risk).
Sounds like he was misquoted. :wink:

I retract. What he actually wrote (.....long term benefits, as well as the uncertainties) is pretty much my humble (and likely much, much less informed) opinion also.
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Re: William Bernstein’s complicated portfolios

Post by Blue456 »

I read several of his books and my impression is that in general he recommends tilting and splicing as this is his personal preference and enjoying doing so for the added rebalancing bonus. However he made it very clear that is it important to stick to a plan and you will have to come up with your own portfolio that you will feel comfortable sticking with. This will require some exploration of yourself. For those who have difficulty maintaining complicated portfolio he has recommended keeping it simple. How simple again depending on the investor but he has recommended anything from very complicated to hiring a financial advisor simple. My bet is that if you tell him that you can stick with target date fund in taxable for 30 years but you can't stick with 3 fund portfolio he would wholeheartedly endorse you target date fund despite its drawbacks. His message has been pretty much consistent, you can maximize profits by slicing and dicing via factors, geographically and even into precious metals but you will need to find out if your behavior will allow you to do this and you may want to stick with something very simple as long as you stick to the plan. I feel like his philosophy agrees with Paul Merriman and Jack Bogle but emphasizes that you need to figure out which one you can follow through. His message has been very consistent throughout his books and has been really inspirational to stay a boglehead.
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Re: William Bernstein’s Three-Fund Portfolio

Post by Taylor Larimore »

Bogleheads:

In his 2014 book "If You Can" Dr. Bernstein wrote:
Would you believe me if I told you that there's an investment strategy that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90 percent of finance professionals in the long run, and make you a millionaire over time?

Well, it is true, and here it is: Start by saving 15 percent of your salary at age 26 into a 401(k) plan, an IRA, or a taable account or all three). Put equal amounts of that 15 percent into just three different mutual funds:

* A U.S. total stock market index fund

* An international total stock market index fund

* A U.S. total bond market index fund.
Dr. Bernstein's Three-Fund Portfolio is also my favorite portfolio. This is the link.
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: William Bernstein’s Three-Fund Portfolio

Post by abuss368 »

Taylor Larimore wrote: Sun Jan 23, 2022 11:01 am Bogleheads:

In his 2014 book "If You Can" Dr. Bernstein wrote:
Would you believe me if I told you that there's an investment strategy that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90 percent of finance professionals in the long run, and make you a millionaire over time?

Well, it is true, and here it is: Start by saving 15 percent of your salary at age 26 into a 401(k) plan, an IRA, or a taable account or all three). Put equal amounts of that 15 percent into just three different mutual funds:

* A U.S. total stock market index fund

* An international total stock market index fund

* A U.S. total bond market index fund.
Dr. Bernstein's Three-Fund Portfolio is also my favorite portfolio. This is the link.
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
Simplicity wins Taylor! You certainly taught me that sir and I will always be thankful!

Tony
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Re: William Bernstein’s complicated portfolios

Post by nedsaid »

I feel vindication in this thread, I have consistently posted here that investors should tilt their portfolios if they believe the Academic Research and use the simpler 3-5 fund index portfolios if they don't. It sounds about what Dr. Bernstein has been saying.
A fool and his money are good for business.
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Re: William Bernstein’s complicated portfolios

Post by konik »

I just finished the whole "Investing for adults series" and have a question on risk discussion. Bernstein proposes two types of risk - shallow (when the capital is lost temporarily) and deep (when the capital is lost forever). The thing I don't exactly get is when should one worry more of which?

My understanding is that deep risks are related to your financial capital, so they are much more important for older investors with sufficient funds. This is also supported by the idea that bonds are more deep-risky and you hold more of them in retirement. But Bernstein explicitly says that deep risk are of more concern while your financial capital is less than human and shallow risks are more important when human capital is relatively small. I don't get it.
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Re: William Bernstein’s complicated portfolios

Post by heyyou »

Retirees can do better by striving to live within their means, than by trying for more income from various index stock fund allocations.

The stock/bond ratio still matters, but there is a wide spectrum of stock index fund allocations that have each previously been good enough, but some have shined for periods that matter to specific age cadres of retirees. Thus the never ending debate here is about slice-and-dice factor investing versus total market funds. The seldom mentioned answer is that both are good enough, but greed drives the constant seeking of which one is optimal--and that will likely continue to vary in the future.
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