ETF Ive finally rejigged my portfolio to indexing

Interesting thread.

Makes a lot of sense to me Dkmc, I can see myself doing something similar to yourself when I'm able to.

 

Yeah me too, I'm looking forward to my portfolio over again. Won't do it though for a couple of years.. sigh.

 

Which means what exactly? You're "out" of the market for now??

Might have missed that post if that is in fact the case.

Cheers,
Michael

PS Thanks dkmc, some great food for thought. I might even PM you for some details so I can see how readily I can apply it to my portfolio. I like Travis Morien too and the simple concept of diversification reducing your Beta. I must admit to considering going about it via STW or equivelant. My entire share portfolio is ASX at the moment, so I should probably look for some international exposure too.

 

I think I missed typing a word or two.. must have been half asleep. What I meant to say was that I'm looking forward to starting my portfolio over again. Currently I've got Navra wholesale, Platinum Intl, some property trusts, some Aussie ASX200 retail trusts, that kinda thing. It's done ok up until now, but if I had my time over again I wouldn't pick them again.

I plan on selling it all in a couple of years time, when my portfolio = mortgage (currently mortgage is quite a bit bigger than portfolio), paying off the mortgage, then redrawing and starting again with either index funds or instalment warrants. Until then I'm in a bit of a boring old holding pattern..

 

Cheers michael
Ive been strong on LIC/ ETFs - and now that ishares is available
thats a more viable method
Have a look at the MER of the US fund - thats incredibly low
I just find it a hassle to rebalance the portfolio - You will also be tempted to time LICs or ETFs - eg last friday - dip in US market, black monday on monday - I put in a sell order for monday for STW hoping to pick up STW at a lower price - again emotional logic, stw dropped low too quickly for me to make the sale and I cancelled the order anyway after more thought
I suspect michael that you will be tempted by this too


Still - I always want to outperform the market index and adding - DFA at the expense of using a planner and wrap platform - say about 0.6% above that of using ETFs, I think is worth it
It also provides access to some emerging market funds
A good planner will provide good support
consolidated reporting, rebalancing,
and generally automation and peace of mind

 

dkmc,

I notice that the minimum is $1m for each fund. Is that why you must use a wrap platform ?

Could you explain the term "alpha" please.

I find the fact that you must use a finacial planner a bit offputting however I could probably benefit from this due to my limited time and knowledge.

I am looking for a suite of mgd funds for about half of my smsf approx $80k.

 

Dr Lobster
Yes DFA insist that one uses an advisor who is trained / up to date in the theory behind DFA and the academic material to support it. It is one way for the fund not to have investors buying and selling all the time, reducing the overall efficiency of the fund.
Look for a fee for service financial planner with no vested interests to taking commissions. There are only a handful in australia
Interview a few of them and see who you like. Thats how I did it.
A planner would have a good idea on the tax side of super and keep up to date - which is something that keeps on changing

Because minimum is 1million - you need wrap to get in
But a lot of advisors can get huge discounts on wraps if they are with a large firm, and get discounts on margin loans.

Explaining alpha
now thats a hard question given that I have not studied the mathematics behind this concept properly
From around the web the best one liners I can find are

"Alpha" is the amount of money you make at the expense of other investors. "Beta" is the amount of money everyone makes due to the return of the market itself.
from Travis Morien - die hards forum

http://www.ilukacg.com/articles/Tao of Alpha.pdf
If the total market return per unit of risk were a pie, beta would be an investor’s fair share and
alpha would be extra pieces—or bites or crumbs—taken from others.

 

Hi DKMC,

Personally I'm a bit sceptical about pure FFS.
They'll take your money and then bugger off...

Go figure...

Cheers,

Dan

 

Dkmc,

I appreciate your answers mate, thanks.

Would you be willing to tell me which FP yar using to access DFA. The one I was going to use wanted to charge $4k for a $75k allocation (a polite way of saying it aint worth it to us).

Thanks

 

If you'd like to send me a PM I can give you the details of a good DFA advisor who has very reasonable FFS charges.

Regards,

PW

 

The ideas present show a nice & easy portfolio that should do well over the long term. The thing that concerns me is the idea of portfolio balancing. your portfolio is going to have some winners (funds making higher returns than the rest of the portfolio) and some pigs (funds returning lower than the rest of your portfolio). Auto balancing effectively cuts the nuts off your winners, and feeds them to your pigs, no?

 

By auto rebalancing
The way I do it is
Not selling

When I feed more money into the fund
A higher allocation gets fed to the worst performing fund
to rebalance my original allocation targets

Its the concept of buying low
Its automated in that - if you put 30k in - that money gets distributed through all the funds - but a bit more to the lowest performing funds

Studies have been done on auto rebalancing, by selling high and buying low on a yearly basis
Outcome - no big difference

I just find it easy not having to calculate my asset allocation every time i put money in. Just feed it money and the system will keep your portfolio allocations to your original target

You set your allocation according to your risk tolerance and profile
and invest accordingly

If I let the winners ride too high such that the allocation is a lot higher than originally- then the risk profile of the portfolio changes

 

Sim
I would suspect at some point once you have quite a few funds in the bag, you would start to approach the market average anyway...?
Seems a lot of work and costs just to average out a portfolio.
Why not just grab a few shares of berkshire and be done with it!

 

Sim
Ill try and make a thoughtful response
Dont take it as criticism

I see risk as determined by the underlying asset, its volatility or standard deviation,

I see return as primarily generated by asset allocation, low fees

Ive given up trying to time a fund or share.
I realise that past performance should never figure into the equation
There are plenty of studies looking at investing in past good performers which has shown that you would be much worse off
There is the theory of momentum investing which has some credit and DFA is trying to tap this
There are also plenty of studies looking at active trading, and trying to pick highs and lows which show most underperform the index after fees

some concepts to look at
Markets Work
Diversification

 

dkmc: why DFA (just out of interest)? Did the FP suggest them or had you researched them particularly? What sets them apart from other fund managers in your opinion? Thanks!

 

All my research is done independent of a FA
After I did my research I went out researching the best way to access them, and researched advisors

DFA - are an index - but the only indexes to show a value, and small company tilt.
On the academic side of things its been shown that value and small company tilts will both increase returns
DFA only deal with large investors 1million and above, and have the advantage of doing block trading
It also means they dont have investors buying and selling - creating capital gains - so they are tax efficient
The directors - are the most qualified of any company - they have 2 nobel prize winners in finance or economics - they follow their research and are at the cutting edge.

Im sounding like im just trying to sell DFA. But do your own research on what evidence is there that drives returns
Ie ask yourself - how are you picking funds
we know past performance is a bad way to pick funds
we know picking the management works a bit - but then they get head hunted to other management companies
We know 80-90% of active investors do worse than the index
Theres strong evidence that you can increase the returns of an index by tilting toward small growth and value.
But you must do it in the context of a whole portfolio

When you pick funds - ask yourself what are you basing this on
And run through all the logic, take away the emotion

Compare the track record of funds against DFA value and small - exclude geared funds as you can gear into dfa - and Id have trouble finding any funds beating it. I did this prospectively and watched it for 4yrs - I wasnt looking at past performance but setup a watchlist of funds 3-4yrs ago.

There is no other index tilted toward value as measured by the book to market ratio and small growth in australia
In the US vanguard do it a bit


If you have a strategy that can beat the after tax index returns by several %
with low volatility please let me know
Tell me about the evidence behind it, whether its been validated over different time periods and different countries.

Also why do you think you can beat professional managers with access to better information, who work on this all day? Most of those guys do worse than the index too. Yes there is the occasional winner who is either lucky, happened to land on one end of the bell curve, or actually has skill - very rare.

Im still reading and learning

 

readings
A good start is
Presentations page

The podcasts on Index Funds | DFA Funds Approved Advisor - Dimensional Fund Advisors Approved

The following books - in particular read the comments
Amazon.com: The Bogleheads' Guide to Investing: Books: Taylor Larimore,Mel Lindauer,Michael LeBoeuf,John C. Bogle

Amazon.com: Index Funds: The 12-Step Program for Active Investors: Books: Mark T Hebner

Amazon.com: All About Asset Allocation: Books: Richard A. Ferri
Shows how to improve return and reduce risk with asset allocation

another forum
Guide to the Vanguard Diehards Forums
though I think it is too US centred to be of any use to us though

DFA Funds: The Porsche of Index Funds » My Money Blog


Once you understand it all its such a big relief that you can invest large sums of money, with the confidence of a passive strategy, that you have done all the research behind it and there are not a lot of decisions to be made
You dont have to decide when to buy and sell stocks - you dont have regret of having sold too early or bought too late


dkmc

 

I dont want to repeat previous mistakes

I previously chose funds that were sexy - without the entry fee
ie at various times
colonial first state imputation, future leaders
bt imputation
platinum asia
platinum brands
various stocks that Id tried to pick
tech stocks - at a time where I thought you couldnt go wrong before the tech bust
-- its a bit like china and resources now - you emotionally feel that it is a sure thing, and invest a large amount of your portfolio in this area
However over time you learn you cant really time very well
you are taking on higher risk, higher volatility
You buy and sell a lot more and generate taxable gains or losses

Youd do worse with the above approach than the index approach im suggesting
This is from my experience. I hope some of you can take this on earlier so that you dont repeat my mistakes

Things become so much clearer, easier, and you can focus your time on better things in life