30-Year Passive Management Lockup

[Steven B]

Hi All,

 

I've been asked to create a portfolio for a trust with one caveat; the portfolio for all intents and purposes will be locked for 30 years (the might be nuclear clauses, but as a truly nuclear option). Figured this would make for a good thought experiment. The first instinct is just put it in a S&P500 ETF, but I was wondering if there were any better options.

 

Thoughts?

[benhacker]

Would strongly lean toward a total world ETF instead.  VT as an example.  Not sure of a compelling reason to pick the S&P500.

 

Pick a provider (Vanguard is a good example) that has a high likelihood of being mostly unchanged and around 30 years from now.

 

I'd buy VT or the open ended equivalent... or one of their set allocation funds.

[no_free_lunch]

Why can you not change the allocation or at least the provider for 30 years?  That seems restrictive to the point of being harmful.

 

If you really can't change anything, then yes I would go with ben's suggestion.

[Jurgis]

Go with Ben's suggestion even though Bogle seems to prefer US Total Market index.

 

I'd guess "nuclear option" includes provider changes if the choice fund disappears (or substantially changes?).

[Steven B]

Let me clarify by saying that the point is really for it to be as passively managed as possible and let compounding do the work instead of sector rotation and market timing (while also keeping the beneficiaries hands of the money). I suppose if I came up with some reasonable guidelines it could work, but the point is that there doesn't need to be ongoing tweaking to justify fees or the like, only when there really is a big issue.

 

So total world over S&P? I guess that makes sense. I guess it's safe to say that fixed-income in this scenario would be a waste of time.

[Jurgis]

It might be worthwhile to look at what's in the total world index and how it's composed country-wise and weight-wise. I haven't looked at it. Some international indexes are really screwed up in terms of composition though (e.g. tons of Japan, no China/other-Asia, etc.). So do some DD. It might be worthwhile to do US Total Market index + International index at some weight. Although same caveat applies to International index.

 

It might not matter long term... or it might ... e.g. if China ascends and there's zero China in portfolio.

 

Good luck.

[rukawa]

If you know its going to be 30 years why not just do small cap value index. Over that long a time period it should outperform.

[chrispy]

The small cap idea makes quite a bit of sense for at least some of the portfolio.  It does outperform over the long term it just may make you sick to your stomach occasionally...  I guess this would be captured in a total stock market index (US) though. 

 

In the interview posted recently Bogle mentioned that he probably would not want to be in an international index right now.  See the list below of the top 5 holdings:

 

1. Japan

2. UK

3. Canada

4. France

5. Germany

 

A betting man would probably put the most of their eggs in the US... Even with Trump's ideas, US companies have so much international exposure that you are getting international companies with any major US index.

[Jurgis]

In the interview posted recently Bogle mentioned that he probably would not want to be in an international index right now.  See the list below of the top 5 holdings:

 

1. Japan

2. UK

3. Canada

4. France

5. Germany

 

That's my concern with international index compositions too. There might be better international indexes if you look around though.

[LC]

I'd go with US exposure. While other countries are improving, the US has (I think) the most "pure" form of capital allocation.

[Steven B]

How much of the emerging market capture would the total world index provide? Would a equal-weighted type international index solve some of issues chrispy mentioned before? I'll definitely look around though. Speaking of which, would an equal weighted option for just  the S&P make sense given the dislocation of valuations even in the S&P itself?

 

Thanks guys it's much appreciated.

[Jurgis]

In the past I've been for equal-weighted indexes. Nowadays, I'm pretty much in the market-cap-weighted camp.

 

IMO the assertion that equal-weighted indexes have better valuation curve than market-cap-weighted indexes is not necessarily true. Tough to prove one way or the other I guess.

 

In the new winner-takes-all world within many (tech) industries, it's possibly a mistake to equal-weight allocate to smaller losing companies.

 

Equal-weighted indexes need constant rebalancing which may not be tax efficient if you care about taxes.

 

Equal-weighted indexes have a problem as soon as they cross the size that requires them to hold more than ~10% of the smallest component. This might not happen, but if it does, they usually can't equal-weight anymore. There also might be issues with liquidity during rebalancing for smaller components.

 

However, in general you might not lose (or gain) much by going equal weighted.

[benhacker]

Total World is just a global market weight (float / liquidity adjusted like most big indices of course) index.

 

Period.

 

it will own EM in proportion to how the global capital markets value EM equity.

 

There is no magic.  it is a global market weight index.

 

All other naval gazing about equal weight, small cap tilt, fundamental indexing, etc etc etc etc may indeed add (or subtract value), but it seems the answer here is obviously KISS.

 

Everyone (on average) will now say "US is best, do that, blah blah blah" but guess what, the US market has RAGED higher vs international components over the last 5-6 years... so most folks would say that because of the recency effect of those who believe that being proven right.

 

5-6 years ago, it was quite fashionable (on this board and others) to overweight international (and esp EM), and to overemphasis the diversification and supposed currency benefits of non-US.  Those folks have been kicked in the teeth with 10 year Developed market equity returns shocking right around 0%.

 

I think it's all likely to rotate back and forth several times in the next 30 years.  To me, you either go with what you *know* captures indexing benefits (low costs, low turnover, low tax, etc) which is MOST captured by market weighting.  Or, you try to outsmart the market by calling certain stocks, sectors, fundamentals, cap sizes, etc to outperform.

 

There is nothing really in between.

 

Side note, I think the fundamental / equal weight / small cap crowd has crowded out the historical advantage here for most countries.  What DFA does in the beginning, fools with a Scottrade account and some RAFI index ETFs do in the end.  I think non-market weights personally are set to do poorly and have their valuations adjusted by toward more historical norms... they don't magically outperform... they have historically been cheap, and that is no longer true.

 

But even if I didn't believe that above, I'd say "buy VT and forget it".

 

It's what I tell prospective clients to do if they don't want to hire me.  It's one and done.  Wake up 50 years from now and you will get equity returns minus Vanguard's tiny rake (which will go down over time as % of AUM).

 

Pick your fav ideas here and do a poll, would be interesting!  I'll vote twice. ;-)