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Allocating assets among retirement portfolio

Hi folks,

I'm a student in the UW CFRM program. I just completed the QFCF certificate and am now working on the CFIN certificate. The only type of portfolio optimization I have worked with, thus far, is mean-variance optimization. Well, I have also experimented with maximum Sortino optimization as well. Then, there is risk-parity and equal weighting, but these are trivial.

Let's say I want together a portfolio of mutual funds for a retirement portfolio, from the below list. The goal of this portfolio is aggressive growth, with little regard to risk. This risky portfolio represents only about 25% of a larger portfolio; the other 75% is invested in risk-free accounts yielding between 2.2% - 4.1%.

Let's say, hypothetically, this portfolio is for a couple aged 71 and 73, who don't need to touch the money. Let's assume they receive pensions that cover all of their expenses, and then some.

Is it actually worth paying a retirement professional something like 1% a year to choose the proper blend of mutual funds for this portfolio?

Would I be just as well off doing mean-variance optimization, or just using equal weighting or volatility-parity weighting on my own? It seems like most retirement professionals don't actually know that much about what they are doing, if you quiz them on what methods they use.

You might ask why the goal is to invest only 25% of the portfolio into risky assets. Well, firstly, one of the owners is highly risk-averse, overall, but wants some exposure to the markets. Secondly, it does seem like the S&P 500 is overvalued, currently, according to the CAPE ratio, P/E ratio, and other valuation methods. The idea, here, is to invest a portion of the portfolio into risky assets now, and potentially add more exposure to risky assets if there is a major correction somewhere down the line. If there is no correction, at least some of the upside is captured.

Any help would be GREATLY appreciated.

Ticker Type Subtype Name
PTRAX Bond Int-Long PIMCO Total Return Admin Bond fund
VBTLX Bond Int-Long Vanguard Total Bond Market Index Adm
VAIPX Bond Int-Long Vanguard inflation protected securities
MHYIX Bond Aggressive MainStay High Yield Corporate Bond I
VFIAX Stock Large-cap Vanguard 500 Index Admiral
NBSTX Stock Social Neuberger Berman Socially Rspns Tr
JVMIX Stock Mid-cap JHancock Disciplined Value Mid Cap I
VIMAX Stock Mid-cap Vanguard Mid Cap Index Admiral
VSMAX Stock Small-cap Vanguard Small Cap Index Adm
VGSLX Stock REIT Vanguard REIT Index Adm
RERCX Stock International American Funds Europacific Growth R3
VTIAX Stock International Vanguard Total Intl Stock Index Admiral
LZEMX Stock International Lazard Emerging Markets Equity Instl
PDRDX Multi-asset Tangible assets Principal Diversified Real Asset Instl
SHSAX Stock Biotech BlackRock Health Sciences Opps Inv A
 
you sure there is no investment overlap in those funds?

This is actually a subset of a larger set of funds. I tried to eliminate funds with high expense ratios, and keep a small number of funds in each category.

There is overlap in the inclusion of two mid-cap funds in this list. JVMIX is actively managed and has had better historical performance, compared to VIMAX, which is passive. However, VIMAX has a lower expense ratio, and we can't say if JVMIX will continue to perform better. If I were devote a portion of the portfolio to mid-cap funds I would either one of these two, or split evenly between these two.

There is a great deal overlap in the international funds. In fact, all three appear to have some assets in common among the top holdings. RERCX invests in continental Europe and the Pacific Basin (Taiwan, Japan, Korea, China, HK, others). VTIAX is meant to track the "FTSE Global All Cap ex US Index," and most of its holdings appear to be in European and Asian companies, similar to RERCX. LZEMX is meant to track the "Morgan Stanley Capital International Emerging Markets index," and most of its holdings appear to be in Pacific markets as well.

I suppose the Biotech fund has some overlap with all of the U.S stock funds.

There is also, MADVX, a high-dividend yield stock fund which I forgot to mention. This would have overlap with all of the US stock funds.

In a broad sense, we have only three categories of funds: bond funds, US stock funds, and international funds. The international funds are very similar, the US stock funds have some differences between them, and the bond funds are each very different from the others.

Anyways, what do you have to say about the original post? Is it really necessary to pay someone else to manage these funds, or is it feasible to come up with a set of weights for each of the three broad categories, and/or weights for each of the funds within these categories, rather than paying someone else 1% a year to do the job?
 
This is actually a subset of a larger set of funds. I tried to eliminate funds with high expense ratios, and keep a small number of funds in each category.

There is overlap in the inclusion of two mid-cap funds in this list. JVMIX is actively managed and has had better historical performance, compared to VIMAX, which is passive. However, VIMAX has a lower expense ratio, and we can't say if JVMIX will continue to perform better. If I were devote a portion of the portfolio to mid-cap funds I would either one of these two, or split evenly between these two.

There is a great deal overlap in the international funds. In fact, all three appear to have some assets in common among the top holdings. RERCX invests in continental Europe and the Pacific Basin (Taiwan, Japan, Korea, China, HK, others). VTIAX is meant to track the "FTSE Global All Cap ex US Index," and most of its holdings appear to be in European and Asian companies, similar to RERCX. LZEMX is meant to track the "Morgan Stanley Capital International Emerging Markets index," and most of its holdings appear to be in Pacific markets as well.

I suppose the Biotech fund has some overlap with all of the U.S stock funds.

There is also, MADVX, a high-dividend yield stock fund which I forgot to mention. This would have overlap with all of the US stock funds.

In a broad sense, we have only three categories of funds: bond funds, US stock funds, and international funds. The international funds are very similar, the US stock funds have some differences between them, and the bond funds are each very different from the others.

Anyways, what do you have to say about the original post? Is it really necessary to pay someone else to manage these funds, or is it feasible to come up with a set of weights for each of the three broad categories, and/or weights for each of the funds within these categories, rather than paying someone else 1% a year to do the job?
people have come up with various schemes of weights for your investment categories. it is not a simple job but i believe paying 1% a year is rather expensive. you always have robo-advisors that charge only 0-0.4% a year for a reasonably good job.
 
i did some extensive studies on asset allocation before and my conclusion was to throw everything into a small cap index fund. this yields the most return in the long run (20-30 years) and i don't have to worry about anything. of course, not everybody has the stomach for small cap.
 
You might ask why the goal is to invest only 25% of the portfolio into risky assets. Well, firstly, one of the owners is highly risk-averse, overall, but wants some exposure to the markets. Secondly, it does seem like the S&P 500 is overvalued, currently, according to the CAPE ratio, P/E ratio, and other valuation methods. The idea, here, is to invest a portion of the portfolio into risky assets now, and potentially add more exposure to risky assets if there is a major correction somewhere down the line. If there is no correction, at least some of the upside is captured.
once you start thinking this way, you are playing the "timing-the-market" game, which is very hard to win.
 
Thanks IntoDarkness.

How about risk-parity weighting?

i.e. do the following:

1.) Calculate risk for each asset using the standard deviation of the previous 60 monthly returns for each asset.

2.) Include all assets, using risk-parity weighting

3.) Recalculate risk and rebalance every quarter.
 
Thanks IntoDarkness.

How about risk-parity weighting?

i.e. do the following:

1.) Calculate risk for each asset using the standard deviation of the previous 60 monthly returns for each asset.

2.) Include all assets, using risk-parity weighting

3.) Recalculate risk and rebalance every quarter.
this one is very easy to backtest. you should try it out and compare the returns/ratios/risks against some benchmark index/portfolio/weight scheme. i hope you can find something that works for you.
 
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