Is there a bogleheads strategy increasing risks for higher returns?

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kotrfa
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Is there a bogleheads strategy increasing risks for higher returns?

Post by kotrfa »

Hi. I am 29, working for tech companies remotely from a cheap country, have mortgage, generally put ~70% of my income into a classic portfolio of 70% ETF world stocks, 15% ETF world small caps, 10% ETF emerging markets; symbols: IWDA, WSML, EMEI.

I am in a group of friends who are in a similar position, all of them buying all those cool "growth stocks" such as stuff from ARKK, TSLA, FANG orgs, Alibaba, ... It's hard not to feel FOMO, but I am doing well and still stick to my plan and only have 5% of the portfolio as play money that I have in e.g. few shares of TSLA or some crypto (mostly as a hedge). My reasoning for sticking to indexes is that it reduces the risk, and the "problem" with their strategy isn't apparent until "something bad happens", which would require them to time the market (which they cannot experience, and none of us have had experienced something like that as we are young). Their argument is simply "we accept higher risk for higher value", EV is therefore higher. I disagree it's higher (as the risk is much bigger -> probability much lower).

Nevertheless, I am curious - is there a "bogleheads-approved" (you know what I mean...) strategy that has a higher EV than my set of index funds, assuming I am willing to accept higher risks? Or this is the sweet spot bogleheads have been able to find out so far? I am already 100% stocks, so that knob is already maxed out. E.g. something like viewtopic.php?p=4693644#p4693644 ?
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by muffins14 »

Your FOMO is misplaced. Your friend’s “awesome investments” were doing great a year ago, but crashed hard this year. In 2022 your portfolio is probably outperforming theirs.

Just stay with your stocks and don’t react to that FOMO feeling.

If anything, you’re already doing “bogleheads-approved” leveraged investing because you have a mortgage.
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nisiprius
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by nisiprius »

The Bogleheads' philosophy is to use stock and bond index funds, and adjust your risk by adjusting the asset allocation between stocks and bonds. If you want more risk, increase your stock allocation.

Any big commitment to individual stocks involves a large element of gambling. Even Jim Cramer's supposed "diversification" by picking five or ten stocks in different sectors still contains an element of gambling. People who gamble sometimes do win. Also, sometimes they lose. Unfortunately, human nature being what it is, for the most part people only talk about it when they have been outperforming, and they are selective--if they have had a mixture of wins and losses, they talk about the wins. And they tend to ascribe the wins to being smart, and the losses to incredible bad luck that nobody could have possibly foreseen.

True story. A friend of mine came back from a weekend at an Atlantic City and said that she "had won." I didn't cross-examine her, but as we chatted about it, it transpired that she really had won. On Saturday. Also, she had lost on Sunday. Also, she had lost more on Sunday than she had on Saturday, but in her mind that didn't count because she had followed her system on Saturday, and on Sunday "I didn't follow it and I outsmarted myself."

There is some theory, I think sound theory, that says that the behavior of an individual stock can be described as a combination of a small number of "risk factors," plus "idiosyncratic" behavior particular to the individual stock. The biggest, by far, of the risk factors is just that stocks are stocks--mostly, they follow the whole market. The efficient market hypothesis is that the "idiosyncratic" behavior follow a random walk and is unrewarded risk. It is obvious that individual stocks are often wildly mispriced, but the mispricing is too high as often as it is too low, and the behavior of investors, bidding on stocks using the same or better information that you have, means they are working as hard as they can to make it random.

So an individual stock = the whole stock market plus idiosyncratic random noise. (In factor investing, an individual stock = the whole stock market plus value factor plus size factor plus idiosyncratic random noise. I'm not convinced about factor investing myself, by the way, but there might be something in it and it's certainly worth understanding).

The way to get the most return for the least risk is to invest in the total market, or at least to invest in hundreds of individual stocks, in a way that is intended to capture those risk factors while letting the unpredictable idiosyncratic risk average out.

In other words, broad index funds may not be exciting, but they are about the best you can do. Buying individual stocks increases your risk without increasing your expected return. Buying individual stocks increases the "potential" for speculative wins, but this is not very different from betting some of your portfolio at a casino or on a sports bet. By adjusting your behavior--picking very risky stocks, using leverage, whenever you win a bet committing all of it to the next bet--you can take as much risk as you like, but it is just gambling.
Last edited by nisiprius on Mon Jul 04, 2022 6:30 pm, edited 1 time in total.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by blaugranamd »

Double post
Last edited by blaugranamd on Mon Jul 04, 2022 8:53 am, edited 1 time in total.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by blaugranamd »

kotrfa wrote: Mon Jul 04, 2022 5:19 am I am in a group of friends who are in a similar position, all of them buying all those cool "growth stocks" such as stuff from ARKK, TSLA, FANG orgs, Alibaba, ... It's hard not to feel FOMO, but I am doing well
If you own index funds, you already own a ton of TSLA, FAANG, Alibaba.

If you're jealous of your friends owning ARKK you must enjoy losing money...
-- Don't mistake more funds for more diversity: Total Int'l + Total Market = 7k to 10k stocks -- | -- Market return does NOT = average nor 50th percentile, rather 80-90th percentile long term ---
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by FoolMeOnce »

blaugranamd wrote: Mon Jul 04, 2022 8:46 am
kotrfa wrote: Mon Jul 04, 2022 5:19 am I am in a group of friends who are in a similar position, all of them buying all those cool "growth stocks" such as stuff from ARKK, TSLA, FANG orgs, Alibaba, ... It's hard not to feel FOMO, but I am doing well
If you own index funds, you already own a ton of TSLA, FAANG, Alibaba.

If you're jealous of your friends owning ARKK you must enjoy losing money...
And BABA.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by valleyrock »

nisiprius wrote: Mon Jul 04, 2022 6:20 am The Bogleheads' philosophy is to use stock and bond index funds, and adjust your risk by adjusting the asset allocation between stocks and bonds. If you want more risk, increase your stock allocation.

Investing in individual stocks is gambling. Any big commitment to individual stocks is gambling. Even Jim Cramer's supposed "diversification" by picking five or ten stocks in different sectors is gambling. People who gamble sometimes do win. Also, sometimes they lose. Unfortunately, human nature being what it is, for the most part people only talk about it when they have been outperforming, and they are selective--if they have had a mixture of wins and losses, they talk about the wins. And they tend to ascribe the wins to being smart, and the losses to incredible bad luck that nobody could have possibly foreseen.

True story. A friend of mine came back from a weekend at an Atlantic City and said that she "had won." I didn't cross-examine her, but as we chatted about it, it transpired that she really had won. On Saturday. Also, she had lost on Sunday. Also, she had lost more on Sunday than she had on Saturday, but in her mind that didn't count because she had followed her system on Saturday, and on Sunday "I didn't follow it and I outsmarted myself."

There is some theory, I think sound theory, that says that the behavior of an individual stock can be described as a combination of a small number of "risk factors," plus "idiosyncratic" behavior particular to the individual stock. The biggest, by far, of the risk factors is just that stocks are stocks--mostly, they follow the whole market. The efficient market hypothesis is that the "idiosyncratic" behavior follow a random walk and is unrewarded risk. It is obvious that individual stocks are often wildly mispriced, but the mispricing is too high as often as it is too low, and the behavior of investors, bidding on stocks using the same or better information that you have, means they are working as hard as they can to make it random.

So an individual stock = the whole stock market plus idiosyncratic random noise. (In factor investing, an individual stock = the whole stock market plus value factor plus size factor plus idiosyncratic random noise. I'm not convinced about factor investing myself, by the way, but there might be something in it and it's certainly worth understanding).

The way to get the most return for the least risk is to invest in the total market, or at least to invest in hundreds of individual stocks, in a way that is intended to capture those risk factors while letting the unpredictable idiosyncratic risk average out.

In other words, broad index funds may not be exciting, but they are about the best you can do. Buying individual stocks increases your risk without increasing your expected return. Buying individual stocks increases the "potential" for speculative wins, but this is not very different from betting some of your portfolio at a casino or on a sports bet. By adjusting your behavior--picking very risky stocks, using leverage, whenever you win a bet committing all of it to the next bet--you can take as much risk as you like, but it is just gambling.
And as Bill Bernstein has said, paraphrasing re individual stocks: there are people who know far, far more about a stock than any of us can possibly know. These folks win in a zero sum game. And, very importantly, by the time a stock is in the news, it's too late. The people in the know are way ahead of you.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by JoeRetire »

kotrfa wrote: Mon Jul 04, 2022 5:19 am Nevertheless, I am curious - is there a "bogleheads-approved" (you know what I mean...) strategy that has a higher EV than my set of index funds, assuming I am willing to accept higher risks?
Sure.

I call it the "Bet it all on red" strategy - lots of risk, lots of potentially higher returns.

I am a Boglehead, and I approved this message.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by quattro73 »

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1 Wellesley 60%
2 MCD, JNJ, XOM, UNH 10% each

You beat the S&P by 1.60% CAGR
You have a much lower standard deviation
1/3 the worst year and 1/2 the max drawdown.

Roughly break even for this year.

You heard it here first
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by Dottie57 »

The main Boglehead philosophy is to accept market returns from broad based index funds. By using a total market fund you capture the returns of every sector and stock.

Wishing you a calm mind and clear vision
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by blaugranamd »

valleyrock wrote: Mon Jul 04, 2022 9:01 am And as Bill Bernstein has said, paraphrasing re individual stocks: there are people who know far, far more about a stock than any of us can possibly know. These folks win in a zero sum game. And, very importantly, by the time a stock is in the news, it's too late. The people in the know are way ahead of you.
I think this point is far too infrequently understood. By the time the info gets to the average consumer, the benefit has been acted on multiple billion dollar investment pros. We often forget who we're playing against.

We think we're in the church softball league but really it's all MLB. Better to sit back and get a tiny fraction of MLB salary than think you can step up to the plate and earn your own
-- Don't mistake more funds for more diversity: Total Int'l + Total Market = 7k to 10k stocks -- | -- Market return does NOT = average nor 50th percentile, rather 80-90th percentile long term ---
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by dbr »

Three comments:

1. Yes, the BH route to increased returns at higher risk is to allocate more to stocks. This was mentioned above. Also, the risk of 100% in total stock market is more than most people want.

2. Systematically individual stocks have "diversifiable risk" meaning the extra risk is not matched by increased expected return and the extra risk can be diversified away by investing in lots of stocks.

3. There are risk related sort of BH portfolio constructions involving factor investing. I risk even mentioning that as I would not recommend going down that path unless your really, really understand what it is about, and then you might not want to.

A further note is that if you seriously want to get really rich compared to what BH can expect, then investing in TSLA long enough ago to actually pull it off would work. The outcome of trying that soon enough to make it work is that almost all the time you won't get rich.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by JoMoney »

I'm not a believer in the 'Efficient Market' theory that the market is pricing "risk premiums". There is no simple quantifiable "risk factor" you can find and simply tilt or scale your investments along that factor and expect a return advantage. You can most assuredly take more volatility and coin-flip risk, like leveraging up an investment (which effectively adds negative EV after borrowing costs), but that's not what some promote as being a "risk premium".
There is a lot of evidence out there that runs counter to the risk premium model. There is no shortage of people willing take extra "risk" especially if they think what's being labeled "risk" will lead to making more money (that's not what risk is.) Casinos are filled with people that know they have a negative expected advantage.
What the market does pay up for is better information, and better information is not something most of us are in a position to offer. Most of us are in a position where we're the ones paying (in some form) for a broker or news media to provide us with information. Most of us are more likely to be propagandized or "advertised" to with mis-information to sell us some risky financial product or service than to be offered something with a higher than market return. It's not stock "market" focused, but Robert Shiller's book "Phishing for Phools", or the classic George Akerlof "The Market For Lemons" comes to mind about the information asymmetries in markets.
I like Benjamin Grahams view, that if one is going to go the "Enterprising" (Active) investor route, they need to view their operation as a business operation. Like any other business you have to be competitive and be able to offer something others can't, else if it's something making money you will have competition come in and cut any (above market rate) profits until it's effectively just another commodity product earning a commodity market rate. Most of us would be much better off accepting the market rate (whatever that happens to be), keeping our costs low, and focusing our efforts at steadfastly avoiding the constant barrage of marketing propaganda trying to sell us something inferior, or even 'average' but at a premium price.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by firebirdparts »

Sounds to me like you've already done that with the small/EM tilt. You may be aware that these things some of the time (maybe a long time) just increase risk without increasing returns. So that's certainly a start. Leverage could certainly be a step beyond that that doesn't involve a crystal ball or a time machine.

Work's fun, I would say just enjoy it and don't get in a huge hurry to damage what you're already doing.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by nedsaid »

nisiprius wrote: Mon Jul 04, 2022 6:20 am
Investing in individual stocks is gambling. Any big commitment to individual stocks is gambling. Even Jim Cramer's supposed "diversification" by picking five or ten stocks in different sectors is gambling. People who gamble sometimes do win. Also, sometimes they lose. Unfortunately, human nature being what it is, for the most part people only talk about it when they have been outperforming, and they are selective--if they have had a mixture of wins and losses, they talk about the wins. And they tend to ascribe the wins to being smart, and the losses to incredible bad luck that nobody could have possibly foreseen.

I see what you are saying but you are overstating your case. Pre-Index fund days, the closest thing to Boglehead investing was to buy a portfolio of carefully selected individual stocks, reinvest the dividends, minimize portfolio turnover, and mostly hold the stocks for the long term. Investors who did this mostly invested in the Blue Chips and threw in an occasional fast growth stock. In the days of fixed commissions and loaded mutual funds, this was actually the cheapest way to invest in the stock market.

A stock is not a lottery ticket or a spin on a roulette wheel. It represents shares in a real company with real sales, earnings, assets, management and employees. It represents participation in the economy and in our system of free enterprise and capitalism.

What is true is that you take on more idiosyncratic individual stock risk, a portfolio of 15-25 stocks will likely be more volatile than a broad index fund, and you will have your winners and losers. It is also true that most people attempting to do this will underperform the broad indexes, a lot of this has to do with behavioral errors. A lot depends upon whether an investor is serious about picking stocks representing companies with good prospects going forward or is just speculating on a few hot stock tips. If you are buying individual stocks in very speculative companies, that can rise to the level of gambling but that is not what most people who buy stocks individually are doing.

So again, I see what you are saying but this reminds me of the "Reefer Madness" movie that exaggerated the dangers of Marijuana use (I neither use pot or advocate for its use) and its potential consequences. Yes an investor who has a portfolio of individual stocks is taking on additional risks but somehow it just does not fall to the level of outright gambling. Sort of like you take one puff and a life of crime is certain to follow. I ridiculed both Larry Swedroe and the great Bill Bernstein for what I called "Reefer Madness", for what I felt was exaggerating the risks of owning individual stocks.

There are probably 25,000 people in the US who die in automobile accidents every year, it used to be about 50,000. Getting behind the wheel in a car can expose yourself, your passengers and others to danger but most of us do it all of the time. One reason both cars and drivers are licensed. There are also safety courses, driver tests, traffic laws, and police divisions that enforce those laws. But no one posts, OMG you are gambling your life and the lives of others whenever you get behind the wheel. We all know about risk, responsibility, and prudence.

So Nedsaid, by talking about individual stocks is sort of the tempter on the forum, sort of a stock pusher as it were. Buy a share of one stock and a life of poverty and possibly crime is likely to follow. Sort of like the Sirens whose beautiful music tempted mariners to dash their ships upon the rocks. We need the equivalent of Carrie Nation or Hatchet Granny to take an axe to my posts so that readers don't get intoxicated by individual stock ownership. All it takes is one sip or one stock.

Joking aside, I have recommended to readers that they not buy individual stocks. I have provided guidelines on how to minimize your risks if you choose to do this. Good idea to diversify across industry groups, buy good stocks at reasonable prices, minimize portfolio turnover, and be prepared for long holding periods. If someone wants to do this, probably a portfolio of 15-25 stocks is probably the most individuals can handle. The average investor who does this trails the indexes by 4% a year, mainly due to behavioral errors: excessive trading, performance chasing, speculative investing, etc.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by nedsaid »

kotrfa wrote: Mon Jul 04, 2022 5:19 am Hi. I am 29, working for tech companies remotely from a cheap country, have mortgage, generally put ~70% of my income into a classic portfolio of 70% ETF world stocks, 15% ETF world small caps, 10% ETF emerging markets; symbols: IWDA, WSML, EMEI.

I am in a group of friends who are in a similar position, all of them buying all those cool "growth stocks" such as stuff from ARKK, TSLA, FANG orgs, Alibaba, ... It's hard not to feel FOMO, but I am doing well and still stick to my plan and only have 5% of the portfolio as play money that I have in e.g. few shares of TSLA or some crypto (mostly as a hedge). My reasoning for sticking to indexes is that it reduces the risk, and the "problem" with their strategy isn't apparent until "something bad happens", which would require them to time the market (which they cannot experience, and none of us have had experienced something like that as we are young). Their argument is simply "we accept higher risk for higher value", EV is therefore higher. I disagree it's higher (as the risk is much bigger -> probability much lower).

Nevertheless, I am curious - is there a "bogleheads-approved" (you know what I mean...) strategy that has a higher EV than my set of index funds, assuming I am willing to accept higher risks? Or this is the sweet spot bogleheads have been able to find out so far? I am already 100% stocks, so that knob is already maxed out. E.g. something like viewtopic.php?p=4693644#p4693644 ?
Kotrfa, you are taking the prudent course and it is pretty likely that your investment returns will leave those of your friends in the dust. First, High Tech is a volatile industry and within my investment career have seen big changes in industry leadership. A big example is how quickly Google overtook Yahoo and other search competitors. Second, valuations matter. If there is too much enthusiasm for certain stocks, even great companies can turn into poor investments. Third, people performance chase. They buy stocks after they have done really well only to see them turn from hot to ice cold soon after they buy them. Ask people that got aboard the ARK funds, I suspect lots of folks got in just as the market for the stocks that ARK invests in were peaking.

There are a few things you can do to increase returns and risk at the same time. As Nisiprius suggested, you can increase the percentage of stocks in your portfolio and decrease your bond allocation. If you believe in the Academic Research, you could attempt factor tilting. Third, you can do what you have already done and that is to allocate 5% of your portfolio to more speculative investments. Just keep in mind that if you ratchet up risk too much, you both increase risk and reduce return. Valuations matter as does sentiment and you don't want to put money into speculative bubbles. There can be a fine line between high growth investments and pure speculation. Researching your more risky investments will increase your odds for success, no guarantees of course.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by garlandwhizzer »

The traditional Bogleheads strategy to increase expected returns by increasing risk exposure is simply to adjust stock bond mix by increasing equity exposure relative to quality bonds. Equity exposure however remains in low cost, broadly based index funds which IMO may or may not include value tilts, INTL funds, dividend tilts, and even a very modest (less than 5%) allocation to alternates in some circumstances. Bogle in his latest years, concerned about excessive valuation of over-hyped darlings, added a small exposure to gold perhaps due to his expectation that bond and stock returns going forward carried more expected risk and lower expected returns than we got accustomed to for decades after 1982.

Bogle was not rigidly doctrinaire except for the principals of low cost indexing and very broad diversification. He strongly believed in those principals but made rare portfolio changes in response to circumstances which in retrospect proved massively successful. He sold equity in favor of bonds just before the dot com bubble popped, and he kept 100% in the US avoiding INTL during his entire career during which US massively outperformed INTL. He believed strongly in a few simple principals but was not a slave to investing theory and made rare and prescient portfolio adjustments.

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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by Logan Roy »

I also don't really subscribe to the idea the market prices risk premiums. I believe Bogle thought, over long enough, stocks and bonds would probably return the same (they did through most of the 19th century. Of course the average stock only returns the same as T bills – which is the level things are generally valued at. The collective behaviour of different asset classes is all macroeconomics, imo).

Bogle's recommended approach for increasing returns was leverage (so long as you had someone to bail you out at the bottom). Institutional investors worked out a long time ago that the active side of investing and asset allocation is far better suited to controlling risk, while leverage is a much simpler way to double or triple returns. Private Equity can function as leveraged beta.

I did buy BABA a few weeks back. I also bought MSCI China. Fun money. What I do is ladder into a position – so my exposure starts at 0.25%; by the time it's a 1% position, I may already be up 8-10% (I think I am with BABA now). So by that point, I may want some Stop Losses in – I only want to be in the trade if it's trending up. I think Druckenmiller used to say: the fundamentals tell you the what, the technicals tell you the when. I do believe if you're going to mess around with individual stocks, you have to have a hard limit on losses (unless a real fundamentals investor – which I'm not). Soros would cut trades on 3-5% losses, and move on. But when you get a 10-bagger or whatever, you want to be able to swing for the fences, and keep your protections in. Fun money.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by Taylor Larimore »

kotfra:

I am unable to write a better reply than the one by Nisiprius.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objective, your time horizon, your level of comfort with risk, and your financial resources. Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by KyleAAA »

Yeah you can tilt more heavily to small and value.
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kotrfa
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by kotrfa »

Thanks everyone for sharing your thoughts and ideas, I have something to ponder about :-) . For now, I hold the course.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by skierincolorado »

kotrfa wrote: Mon Jul 04, 2022 5:19 am Hi. I am 29, working for tech companies remotely from a cheap country, have mortgage, generally put ~70% of my income into a classic portfolio of 70% ETF world stocks, 15% ETF world small caps, 10% ETF emerging markets; symbols: IWDA, WSML, EMEI.

I am in a group of friends who are in a similar position, all of them buying all those cool "growth stocks" such as stuff from ARKK, TSLA, FANG orgs, Alibaba, ... It's hard not to feel FOMO, but I am doing well and still stick to my plan and only have 5% of the portfolio as play money that I have in e.g. few shares of TSLA or some crypto (mostly as a hedge). My reasoning for sticking to indexes is that it reduces the risk, and the "problem" with their strategy isn't apparent until "something bad happens", which would require them to time the market (which they cannot experience, and none of us have had experienced something like that as we are young). Their argument is simply "we accept higher risk for higher value", EV is therefore higher. I disagree it's higher (as the risk is much bigger -> probability much lower).

Nevertheless, I am curious - is there a "bogleheads-approved" (you know what I mean...) strategy that has a higher EV than my set of index funds, assuming I am willing to accept higher risks? Or this is the sweet spot bogleheads have been able to find out so far? I am already 100% stocks, so that knob is already maxed out. E.g. something like viewtopic.php?p=4693644#p4693644 ?
This thread is based on a book written by two Yale economists with research to back it up. Time diversification is less risky. Most people do most of their investing during their 50s. Their investments during their 20s and 30s are small and insignificant. Diversifying investments across time by using leverage produces higher expected returns with less variance. Over the last 120+ years of U.S. stock returns, leveraging while young was both less risky and produced higher returns. Diversification is one of the only free lunches, and that includes time diversification. This finding historically holds true in foreign markets as well.

As someone with a high savings rate, these principles would be highly relevant to you, especially if you plan to work for at least 4 or 5 more years. It would mitigate the risk that the market does very well during the next 5+ years while you have significantly less wealth than you will have 10 or 20 years from now. Diversify your risk taking across time rather than taking much more risk in your late 30s than your late 20s. It would depend how much longer you plan on working, but based on your age and savings rate, most likely the book would say you are a phase I accumulator and should be 2x leveraged. I am 33 and am currently 1.5x leveraged. It would be higher except I am unsure if I will work full-time after age 40. Knowing that I have most of my lifetime investments already made lets me sleep easier at night. It would be much more stressful to slowly accumulate wealth and do most of my investing in my 40s or 50s. Making my investments today knowing they have a 30-70 year time horizon is much less stressful and safer.

You may ask how does the cost of leverage play into all of this. The decision to borrow $1 and invest it in the market is no different than the decision to invest $1 in the stock market that you could have instead invested into short term bonds. In either case you choose to take more risk for more expected return. Anyways, the cost of leverage is taken into consideration in the research by the authors.

I highly suggest reading the first and last few pages, skimming the rest of the thread, and reading the actual book (or listening to the audiobook).

viewtopic.php?f=10&t=274390

I started a thread based on the above strategy, but also leveraging bonds to further increase diversification. There is a nice summary document linked in the original post written by another forum member.

viewtopic.php?t=357281

The origianal HFEA thread you linked to is too bond heavy and too overfit to recent decades.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by Blue456 »

Investing in small cap value would be one of the strategies that I have seen being used here.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by danbdzs »

Good thread,

OP, your portfolio looks solid.
+ You have a mortgage. You've got leverage on.
...I am 29, working for tech companies remotely from a cheap country, have mortgage...
I'm in a similar position as you and decided to turn up the risk with leverage.
I started HFEA on 2021.. you can imagine how that's been going.

Also, wanted to say, Nisi's reply is awesome.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by typical.investor »

kotrfa wrote: Mon Jul 04, 2022 5:19 am Nevertheless, I am curious - is there a "bogleheads-approved" (you know what I mean...) strategy that has a higher EV than my set of index funds, assuming I am willing to accept higher risks? Or this is the sweet spot bogleheads have been able to find out so far? I am already 100% stocks, so that knob is already maxed out. E.g. something like viewtopic.php?p=4693644#p4693644 ?
Higher expect returns ... you did some of it with a tilt towards small caps and emerging.

And by holding international which is cheaper, you had higher expected returns there.

And yeah the Hedgefundie portfolio (which has been crushed with triple leveraged long bonds during rate hikes and triple leveraged stock losses) has a higher expected returns.

Higher expected returns means basically a wider range of returns - for better or worse.

FWIW, a value tilt will have higher expected returns too but until recently it's been a long run of the worse variety.

If you are going to be switching strategies because your expected return didn't materialize, then you are at risk of continually selling out at the bottom. Top or bottom who knows, so get a plan and stick with it.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by whodidntante »

Pick up a copy of the book "Lifecycle Investing." Read it three times before doing anything.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by burritoLover »

The Boglehead method for taking additional risk on the equity side is to underweight international stocks or don't invest at all in international.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by arcticpineapplecorp. »

I agree with George Sistri in his latest investment newsletter Vectors:
Although the S&P 500 Index has never failed to fully recover the losses sustained in a bear market, the same can’t be said for individual stocks. Owning individual stocks brings unnecessary additional risk into your portfolio. I don't care if Grandpa worked for the company. I don't care if it has been a blue-chip standout for a hundred years. Any company is a year away from being ground into powder by mismanagement or by more adept competitors and handing it shareholders a 100% loss. So, while investing means taking risk for expected reward, investors should mitigate risks where they can. Diversification is the most important risk mitigation tool. Own the global stock market, not just selected segments, or geographical areas.

source: https://oncoursefp.com//images/Vectors% ... 0final.pdf
William Bernstein said in The Four Pillars of Investing:
In other words, concentrating your portfolio in a few stocks maximizes your chances of getting rich. Unfortunately, it also maximizes your chance of becoming poor. Owning the whole market—indexing—minimizes your chances of both outcomes by guaranteeing you the market return.
there's also this by George Sistri in March 2022 Vectors:

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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by nisiprius »

nedsaid wrote: Mon Jul 04, 2022 12:32 pm
nisiprius wrote: Mon Jul 04, 2022 6:20 amInvesting in individual stocks is gambling. Any big commitment to individual stocks is gambling. Even Jim Cramer's supposed "diversification" by picking five or ten stocks in different sectors is gambling. People who gamble sometimes do win. Also, sometimes they lose. Unfortunately, human nature being what it is, for the most part people only talk about it when they have been outperforming, and they are selective--if they have had a mixture of wins and losses, they talk about the wins. And they tend to ascribe the wins to being smart, and the losses to incredible bad luck that nobody could have possibly foreseen.
I see what you are saying but you are overstating your case.... A stock is not a lottery ticket or a spin on a roulette wheel. It represents shares in a real company with real sales, earnings, assets, management and employees.
Yes, I see your point. I shouldn't have said "is" gambling. It's more a matter of mixture and blend.

The efficient market hypothesis says that stock prices are often different from proper valuation but that the departures are a random walk and can't be exploited. If the hypothesis holds, then it's not too distorted to say that betting on these departures is gambling. But the underlying market factor gets you a long-term positive return, which is completely different from pure gambling situations.

Holding a total market index fund gets you the market factor.

Holding a portfolio of 20 well-chosen well-diversified stocks gets you the market factor plus some roulette wheel.

Holding 5 stocks gets you the market factor plus more roulette wheel.

Holding 1 stock gets you the market factor plus even more roulette wheel.

And the Bogleheadish strategy would be, if you want more return and are willing to take more risk, add more market factor, don't add roulette wheel.

I edited my posting to read "Any big commitment to individual stocks involves a large element of gambling. Even Jim Cramer's supposed 'diversification" by picking five or ten stocks in different sectors still contains an element of gambling."
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by deanmoriarty »

burritoLover wrote: Mon Jul 04, 2022 5:28 pm The Boglehead method for taking additional risk on the equity side is to underweight international stocks or don't invest at all in international.
I laughed very hard at this one... but perhaps I should cry. I am still sticking to my ~30% international allocation for over a decade, and I feel most of my contributions constantly go into the poorly performing VTIAX...
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by nedsaid »

nisiprius wrote: Mon Jul 04, 2022 6:22 pm
nedsaid wrote: Mon Jul 04, 2022 12:32 pm
nisiprius wrote: Mon Jul 04, 2022 6:20 amInvesting in individual stocks is gambling. Any big commitment to individual stocks is gambling. Even Jim Cramer's supposed "diversification" by picking five or ten stocks in different sectors is gambling. People who gamble sometimes do win. Also, sometimes they lose. Unfortunately, human nature being what it is, for the most part people only talk about it when they have been outperforming, and they are selective--if they have had a mixture of wins and losses, they talk about the wins. And they tend to ascribe the wins to being smart, and the losses to incredible bad luck that nobody could have possibly foreseen.
I see what you are saying but you are overstating your case.... A stock is not a lottery ticket or a spin on a roulette wheel. It represents shares in a real company with real sales, earnings, assets, management and employees.
Yes, I see your point. I shouldn't have said "is" gambling. It's more a matter of mixture and blend.

The efficient market hypothesis says that stock prices are often different from proper valuation but that the departures are a random walk and can't be exploited. If the hypothesis holds, then it's not too distorted to say that betting on these departures is gambling. But the underlying market factor gets you a long-term positive return, which is completely different from pure gambling situations.

Holding a total market index fund gets you the market factor.

Holding a portfolio of 20 well-chosen well-diversified stocks gets you the market factor plus some roulette wheel.

Holding 5 stocks gets you the market factor plus more roulette wheel.

Holding 1 stock gets you the market factor plus even more roulette wheel.

And the Bogleheadish strategy would be, if you want more return and are willing to take more risk, add more market factor, don't add roulette wheel.

I edited my posting to read "Any big commitment to individual stocks involves a large element of gambling. Even Jim Cramer's supposed 'diversification" by picking five or ten stocks in different sectors still contains an element of gambling."
Jeez, making choices out of many options is not gambling. It is making a rational choice. Particularly if you are using rational criteria to make your selections.

You are also ignoring the issue of sampling. The Fidelity Zero Total Market Index uses fewer stocks to replicate the Total Market than Vanguard. So is Fidelity gambling to the extent that it uses fewer stocks to represent the total market than Vanguard? Is the use of a sample to represent a population gambling? The logic just does not follow.

Idiosyncratic single stock risk increases as you have less and less stocks in the portfolio. But that does not equate to gambling.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by muffins14 »

nedsaid wrote: Mon Jul 04, 2022 7:37 pm Is the use of a sample to represent a population gambling?

Idiosyncratic single stock risk increases as you have less and less stocks in the portfolio. But that does not equate to gambling.
Sort of, yes. Sampling gives rise to variance even if unbiased, which drives tracking error. So yes, it is a gamble (random risk) that the sampling does not deviate beyond expectations and the index is tracked. The word “gambling” is charged, or controversial, perhaps
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by Mountain Doc »

nedsaid wrote: Mon Jul 04, 2022 7:37 pm
nisiprius wrote: Mon Jul 04, 2022 6:22 pm
nedsaid wrote: Mon Jul 04, 2022 12:32 pm
nisiprius wrote: Mon Jul 04, 2022 6:20 amInvesting in individual stocks is gambling. Any big commitment to individual stocks is gambling. Even Jim Cramer's supposed "diversification" by picking five or ten stocks in different sectors is gambling. People who gamble sometimes do win. Also, sometimes they lose. Unfortunately, human nature being what it is, for the most part people only talk about it when they have been outperforming, and they are selective--if they have had a mixture of wins and losses, they talk about the wins. And they tend to ascribe the wins to being smart, and the losses to incredible bad luck that nobody could have possibly foreseen.
I see what you are saying but you are overstating your case.... A stock is not a lottery ticket or a spin on a roulette wheel. It represents shares in a real company with real sales, earnings, assets, management and employees.
Yes, I see your point. I shouldn't have said "is" gambling. It's more a matter of mixture and blend.

The efficient market hypothesis says that stock prices are often different from proper valuation but that the departures are a random walk and can't be exploited. If the hypothesis holds, then it's not too distorted to say that betting on these departures is gambling. But the underlying market factor gets you a long-term positive return, which is completely different from pure gambling situations.

Holding a total market index fund gets you the market factor.

Holding a portfolio of 20 well-chosen well-diversified stocks gets you the market factor plus some roulette wheel.

Holding 5 stocks gets you the market factor plus more roulette wheel.

Holding 1 stock gets you the market factor plus even more roulette wheel.

And the Bogleheadish strategy would be, if you want more return and are willing to take more risk, add more market factor, don't add roulette wheel.

I edited my posting to read "Any big commitment to individual stocks involves a large element of gambling. Even Jim Cramer's supposed 'diversification" by picking five or ten stocks in different sectors still contains an element of gambling."
Jeez, making choices out of many options is not gambling. It is making a rational choice. Particularly if you are using rational criteria to make your selections.

You are also ignoring the issue of sampling. The Fidelity Zero Total Market Index uses fewer stocks to replicate the Total Market than Vanguard. So is Fidelity gambling to the extent that it uses fewer stocks to represent the total market than Vanguard? Is the use of a sample to represent a population gambling? The logic just does not follow.

Idiosyncratic single stock risk increases as you have less and less stocks in the portfolio. But that does not equate to gambling.
I think many people use the word “gambling” when referring to an activity where the odds are stacked against you. Stocks have a positive expected return, so buying individual stocks does not meet that definition of gambling. However, the odds are stacked against you when trying to outperform the index with individual stocks. In that sense, when comparing the two strategies against each other rather than against a baseline of zero return, buying individual stocks might rightly be referred to as gambling.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by arcticpineapplecorp. »

Mountain Doc wrote: Mon Jul 04, 2022 8:22 pm I think many people use the word “gambling” when referring to an activity where the odds are stacked against you. Stocks have a positive expected return, so buying individual stocks does not meet that definition of gambling. However, the odds are stacked against you when trying to outperform the index with individual stocks. In that sense, when comparing the two strategies against each other rather than against a baseline of zero return, buying individual stocks might rightly be referred to as gambling.
is it true that stocks in general have a positive expected return or the stock market as a whole?

Bessembinder's findings seem to indicate that 57% of stocks performed worse than one-month treasuries:
Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.

source: https://papers.ssrn.com/sol3/papers.cfm ... id=2900447
But if these 57% of stocks return 1% CAGR while one month treasuries earn 1.27% are we still saying these stocks have a "positive expected return" just because it's >0%?
Key findings

“The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform,” says Bessembinder, who found that the largest returns come from very few stocks overall — just 86 stocks have accounted for $16 trillion in wealth creation, half of the stock market total, over the past 90 years. All of the wealth creation can be attributed to the thousand top-performing stocks, while the remaining 96 percent of stocks collectively matched one-month T-bills.

source: https://wpcarey.asu.edu/department-fina ... sury-bills
Also let's not forget that:
Individual common stocks tend to have rather short lives. The median time that a stock is listed on the CRSP database between 1926 and 2016 is seven-and-a-half years.

source: https://deliverypdf.ssrn.com/delivery.p ... INDEX=TRUE
we don't know whether those stocks went out of business or were bought out or went private, but it's certainly true that some of those companies went bankrupt. Unfortunately, there's no way to know that ahead of time. If you own the market, it is a rounding error, but not so if your portfolio is more concentrated.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by hnd »

In my opinion I would say over the long haul, for someone who is willing to take on additional risk, it may make sense to tilt to Midcap and Small cap indexes. You are taking more risk which over a long period of time you can reasonably expect better returns.You are still passively investing for the most part and while historical info is no sign of future returns, tilting midcap and small cap over the past 50 years has resulted in higher returns.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by nedsaid »

muffins14 wrote: Mon Jul 04, 2022 7:40 pm
nedsaid wrote: Mon Jul 04, 2022 7:37 pm Is the use of a sample to represent a population gambling?

Idiosyncratic single stock risk increases as you have less and less stocks in the portfolio. But that does not equate to gambling.
Sort of, yes. Sampling gives rise to variance even if unbiased, which drives tracking error. So yes, it is a gamble (random risk) that the sampling does not deviate beyond expectations and the index is tracked. The word “gambling” is charged, or controversial, perhaps
I guess my definition of gambling is narrower than others. In life, you take a chance no matter what you do. Every day, I have to decide either to get up and face the day or just cower in fear and hide from the world. All kinds of bad things can happen. You look at your options and you make a rational choice. If at the end of a six month job search and I have 3 job offers, I will weigh each offer the best I can and make what seems the best choice. Similarly, choosing some stocks over others based on rational criteria isn't drawing straws or rolling dice. Yes, there is risk involved, a chance that things won't go as foreseen but we are making rational choices. Life is just like that. I suppose the Boglehead approach would be to accept all three job offers because to do otherwise is gambling.

I don't the equate the possibility of tracking error with an index to be gambling. Shoot, the Bogleheads are reduced to what I call "Index Picking". We argue over the "right" index to pick over another one. We don't argue about "tracking error" of picking one Small Cap Index over another Small Cap Index. We aren't consistent in how we apply our thinking and how we apply the definitions of words.

I think the term gambling is used here in a very loose manner, to the point where the word has little meaning. It is like we take a word and stretch it on a rack until it screams out in pain to mean whatever we want it to mean. Just as we can torture numbers until they confess to what we want them to say, I suppose we can torture words in the same manner.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by dbr »

nedsaid wrote: Tue Jul 05, 2022 8:45 am

I think the term gambling is used here in a very loose manner, to the point where the word has little meaning. It is like we take a word and stretch it on a rack until it screams out in pain to mean whatever we want it to mean. Just as we can torture numbers until they confess to what we want them to say, I suppose we can torture words in the same manner.
Trying to parse whether not investing is or isn't some kind of gambling or similar to gambling does not produce anything useful. So I am with you on this.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by pascalwager »

In RISMAT, William F. Sharpe discusses Betting (gambling) versus Investing. He doesn't even refer to individual stock holdings. I guess that's so far "beyond the pale", in an age when we have easy access to diversified index funds, that it doesn't even enter his consciousness or deserve mention.

On the other hand, Harry Markowitz' stock holdings are comprised of companies located in the state of Georgia that specialize in natural disaster repairs. So, at least/most, he's somewhat diversified in holding multiple companies.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by Mike Scott »

The only suggestion I don't see above is to save/invest more money. As already mentioned, you could borrow money to invest (directly or indirectly)and tilt to US stocks along with your other tilts. Time and patience are your best bets. I would move the 5% play money into the index funds as well. Depending on where you are, there may be tax advantages in favor of some investments relative to others.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by corpgator »

What's the justification for small/mid tilt? There's no indication it ever worked in the past with complete data or that it ever will in the future.

Leverage is the only surefire way to juice returns via higher risk if you have the stomach for it.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by Nathan Drake »

corpgator wrote: Tue Jul 05, 2022 3:19 pm What's the justification for small/mid tilt? There's no indication it ever worked in the past with complete data or that it ever will in the future.

Leverage is the only surefire way to juice returns via higher risk if you have the stomach for it.
There’s lots of evidence a small cap value tilt has/does work
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by Tellurius »

My understanding is most individual stocks themselves underperform the market return due to there being few big winners which provide most of the market returns. Since they can’t be predicted in advance with certainty (would you have bought Yahoo or Google?), most investors who choose few stocks will underperform because they are less likely to include one of the big winners.

It doesn’t mean the underperformance will be terrible. I do wonder how much people underperform by.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by er999 »

From reading the bogleheads for more than a decade here’s what I’ve learned about boglehead approved ideas to improve return with increasing risk:
1. 100% stocks (and you have to decide how much international %)
2. Small cap value tilt (some say this will outperform, some don’t)
3. Leverage up by having a large mortgage and investing in the stock market is approved by many (but leveraged etfs are not)

Suggested by only a small fraction but based on boglehead ideas):
1. Leveraged up typical 60/40 boglehead approved portfolio of s&p 500 / bonds 3 times using leveraged etfs (see Hedgefundie excellent adventure threads). Has crashed 50% this year so might be a good time to start.

Nonbogleheads approved methods and will work for only a minority but will give lottery like returns for some and I’ve read about people successfully using on here:
1. Sector funds.
2. Leveraged sector funds
3. Individual stocks
4. Purely speculative assets like cryptocurrency.

Personally if I was 29 and in tech I’d look at taking careers risks as that is more likely to succeed over the next decade and do standard mostly index stuff with investing.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by BogleFan510 »

Not a bad set of summaries.

Better returns can be found in active investments like real estate (where one knows the market very well and value is there) or solid private businesses. These require work to find inefficiencies in either asset prices or competing service delivery models and building a team to exploit those inefficiencies.

Returns superior to efficient stock portfolios require one to have knowledge or perform work to a level superior to the average corporate manager. This is not impossible, but most people do not have either the knowledge or training to do this. For example, a business trained Dentist can do very well building a dental practice and perhaps rehabbing a vacant building to be their office. Very likely this outperforms a stock portfolio, if successful.

If one wants to pick stocks, work as an auditor or management consultant for a big 4 Accounting or Top consulting firm for 10+ years in a target industry, retire and exploit the knowledge gained. This is the reason managers in Big 4 firms register every asset and trade and are forbidden to trade in client securities for the whole firm (believe me it is a pain, and a temptation).

Just a few examples.

Or you can accept market returns and spend your time enhancing your career to earn more, travelling or working in your hiking fitness level. Thats my solution.
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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by Broken Man 1999 »

I suppose my increasing the equity % of our retirement portfolio AA increases risks for a higher return, maybe. The vast majority of our equity holdings are in Total Stock Market Index and Developed Markets Index funds. I still have some individual stock holdings but I have sold them down to a tad bit less than $100,000. So, nothing major any longer.

I think Larry Swedroe recommended taking your risk on the equity side. The vast majority of our fixed income portion is in US Treasury obligations.

And, although I don't need to take risk, I am able and willing to take risk under Larry's ideas outlined in his writings.

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Re: Is there a bogleheads strategy increasing risks for higher returns?

Post by Picasso »

quattro73 wrote: Mon Jul 04, 2022 9:06 am World’s greatest back-tested portfolio for juicing returns and cutting the risk:

1 Wellesley 60%
2 MCD, JNJ, XOM, UNH 10% each

You beat the S&P by 1.60% CAGR
You have a much lower standard deviation
1/3 the worst year and 1/2 the max drawdown.

Roughly break even for this year.

You heard it here first
UNH has been a GREAT one. Finance runs that company.
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