A novice's VP: requesting feedback

A place to talk about speculative investing ideas for the optional Variable Portfolio

Moderator: Global Moderator

Post Reply
KodoCastle
Junior Member
Junior Member
Posts: 22
Joined: Tue Jan 15, 2019 1:26 am

A novice's VP: requesting feedback

Post by KodoCastle » Thu Jan 17, 2019 3:42 pm

Hey all,

Getting into investing and I really like the PP.

However, as I am relatively young (27) and the PP provides steady-but-not-great CAGR, the idea of a VP interests me. Trying to apply some PP principles, I created what I think to be a simple portfolio that leans into growth and prosperity but has some backups just in case.

55% SCB (some ETF/fund TBD) 40--70% band
15% LTT (30yr bonds) 8--22% band
15% Cash (T-bills) 8--22% band
15% Gold (1oz coins) 8--22% band

portfoliocharts.com shows this as having a 4.8% | 6.8% | 9.7% (min/med/max) CAGR over 15 years, 5yr worst downturn, and a 6.4% SWR and 5.5% PWR for a 30 year retirement.

Tried messing around with adding some MCB in too (to split the 55% stock allocation), but it didn't seem to help out much/at-all, and I'd prefer to keep the portfolio as simple as possible.

As I'm new to investing, thoughts on my VP would be much appreciated! Especially the banding, really uncertain about how to go about that when all the assets aren't held in the same percent.

Cheers!
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2464
Joined: Fri May 21, 2010 4:16 pm

Re: A novice's VP: requesting feedback

Post by buddtholomew » Thu Jan 17, 2019 5:41 pm

KodoCastle wrote:
Thu Jan 17, 2019 3:42 pm
Hey all,

Getting into investing and I really like the PP.

However, as I am relatively young (27) and the PP provides steady-but-not-great CAGR, the idea of a VP interests me. Trying to apply some PP principles, I created what I think to be a simple portfolio that leans into growth and prosperity but has some backups just in case.

55% SCB (some ETF/fund TBD) 40--70% band
15% LTT (30yr bonds) 8--22% band
15% Cash (T-bills) 8--22% band
15% Gold (1oz coins) 8--22% band

portfoliocharts.com shows this as having a 4.8% | 6.8% | 9.7% (min/med/max) CAGR over 15 years, 5yr worst downturn, and a 6.4% SWR and 5.5% PWR for a 30 year retirement.

Tried messing around with adding some MCB in too (to split the 55% stock allocation), but it didn't seem to help out much/at-all, and I'd prefer to keep the portfolio as simple as possible.

As I'm new to investing, thoughts on my VP would be much appreciated! Especially the banding, really uncertain about how to go about that when all the assets aren't held in the same percent.

Cheers!
Looks reasonable although I would question allocating 55% to Small Cap Blend. Any reason why you would exclude Large Cap stocks (S&P 500) besides simplicity? Maybe 50/50 LCB/SCB or 70/30 to resemble Total Market weight.

Remember backtesting a portfolio doesn’t suggest you will replicate those returns over your timeframe. If you had used SCV I bet you would have seen even more impressive results.
KodoCastle
Junior Member
Junior Member
Posts: 22
Joined: Tue Jan 15, 2019 1:26 am

Re: A novice's VP: requesting feedback

Post by KodoCastle » Thu Jan 17, 2019 6:16 pm

Picking SCB only based on both simplicity, and the idea that since my PP has TSM, I'd already have a lot of LCB exposure.

After I thought about it more (before your post buddtholomew), I was considering having my VP be purely SCB & MCB....

The main reason I had other assets in my first proposal was to make harvesting my gains a straightforward rule. But if I'm serious about sticking to this VP long-term for greater potential returns, it seems okay to go pure stocks, because it's all money I'm willing to lose. The problem is I don't know how to think about harvesting gains there to transfer to my PP.

Would I sell whenever I have to rebalance my PP because stocks are above 35%? Or sell anytime I hit growth over X%?

Do people setup VPs in order to push gains into their PP, or to have a separate portfolio entirely?
Kbg
Executive Member
Executive Member
Posts: 2815
Joined: Fri May 23, 2014 4:18 pm

Re: A novice's VP: requesting feedback

Post by Kbg » Thu Jan 17, 2019 6:44 pm

In terms of the SCB slice...look at a global-ex us and perhaps some emerging market allocation as well. For simplicity, the first.
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2464
Joined: Fri May 21, 2010 4:16 pm

Re: A novice's VP: requesting feedback

Post by buddtholomew » Fri Jan 18, 2019 5:52 am

KodoCastle wrote:
Thu Jan 17, 2019 6:16 pm
Picking SCB only based on both simplicity, and the idea that since my PP has TSM, I'd already have a lot of LCB exposure.

After I thought about it more (before your post buddtholomew), I was considering having my VP be purely SCB & MCB....

The main reason I had other assets in my first proposal was to make harvesting my gains a straightforward rule. But if I'm serious about sticking to this VP long-term for greater potential returns, it seems okay to go pure stocks, because it's all money I'm willing to lose. The problem is I don't know how to think about harvesting gains there to transfer to my PP.

Would I sell whenever I have to rebalance my PP because stocks are above 35%? Or sell anytime I hit growth over X%?

Do people setup VPs in order to push gains into their PP, or to have a separate portfolio entirely?
Overthinking is the enemy, believe me I know...

Keep the VP separate from the PP unless you look at them holistically (which I thought you had done above).

55% stocks (PP + VP) in TSM + SCB is fine and a good starting point with 15 each in Gold, LTT’s and Cash. Set your rebalance bands for this allocation if you choose to hold indefinitely so harvested gains are redistributed to restore the AA.
User avatar
sophie
Executive Member
Executive Member
Posts: 1959
Joined: Mon Apr 23, 2012 7:15 pm

Re: A novice's VP: requesting feedback

Post by sophie » Fri Jan 18, 2019 6:18 am

Sounds like you're not really asking about a VP, but about an alternative buy and hold portfolio that may provide greater returns over time than the PP. Completely reasonable, at your age.

How about this strategy: you probably have the majority of your savings in a 401K plan with limited investment options. Many of us have struggled with incorporating these accounts into a PP, and gave up. Set yours up with a stock/bond allocation of your choice, or a target date fund, and you're done. Use the PP for your taxable savings plus accounts you have full control over and can access if neeeded, like a Roth IRA and HSA. It's really a beautiful portfolio when used this way, because the cash allocation automatically provides your emergency fund.
User avatar
Kriegsspiel
Executive Member
Executive Member
Posts: 4052
Joined: Sun Sep 16, 2012 5:28 pm

Re: A novice's VP: requesting feedback

Post by Kriegsspiel » Fri Jan 18, 2019 9:55 am

sophie wrote:
Fri Jan 18, 2019 6:18 am
Sounds like you're not really asking about a VP, but about an alternative buy and hold portfolio that may provide greater returns over time than the PP. Completely reasonable, at your age.
I thought the same thing. If you want to have a buy and hold VP, why hedge it like that, with LTTs and cash? LTTs and cash are there to smooth out the ups and downs of stocks and cash, and vice versa. It implies you aren't really willing to lose that money. Why not, instead, just slightly increase the total amount of your wealth inside the PP bucket, and take more risk with your (smaller) VP?
How about this strategy: you probably have the majority of your savings in a 401K plan with limited investment options. Many of us have struggled with incorporating these accounts into a PP, and gave up. Set yours up with a stock/bond allocation of your choice, or a target date fund, and you're done. Use the PP for your taxable savings plus accounts you have full control over and can access if neeeded, like a Roth IRA and HSA. It's really a beautiful portfolio when used this way, because the cash allocation automatically provides your emergency fund.
Shazam! That's what I do. Except for the HSA, that's all VT, with a bit of cash waiting to be investing into VT.
KodoCastle
Junior Member
Junior Member
Posts: 22
Joined: Tue Jan 15, 2019 1:26 am

Re: A novice's VP: requesting feedback

Post by KodoCastle » Fri Jan 18, 2019 10:22 am

Kriegsspiel wrote:
Fri Jan 18, 2019 9:55 am
I thought the same thing. If you want to have a buy and hold VP, why hedge it like that, with LTTs and cash? LTTs and cash are there to smooth out the ups and downs of stocks and cash, and vice versa. It implies you aren't really willing to lose that money. Why not, instead, just slightly increase the total amount of your wealth inside the PP bucket, and take more risk with your (smaller) VP?
I agree the hedging doesn't really make sense; that's what my second post was about, going pure stocks (MCB & SCB) for my VP. The reason for the LTTs and cash in my first plan is that I don't have a good intuition or plan for when to capture gains from my VP and place it into my PP, so I thought I'd steal the general idea of capturing gains via bands and rebalancing from the HBPP theory.

I'm happy to let it all ride with stocks for my VP, as I think the US economy does trend towards prosperity, but once I see a big return I think it makes sense to capture those gains by reinvesting them into my PP. Do any of you try to do something similar? If so, do you have a preset growth mark you capture by, or what does your capture strategy look like?
KodoCastle
Junior Member
Junior Member
Posts: 22
Joined: Tue Jan 15, 2019 1:26 am

Re: A novice's VP: requesting feedback

Post by KodoCastle » Fri Jan 18, 2019 10:27 am

sophie wrote:
Fri Jan 18, 2019 6:18 am
Sounds like you're not really asking about a VP, but about an alternative buy and hold portfolio that may provide greater returns over time than the PP. Completely reasonable, at your age.
Actually, I like the PP a lot and I'm smart enough to know I'm not smart enough to modify the PP ;D , just wanted a potential for more growth by betting on US prosperity a bit.

EDIT: To be more clear, I am trying to invest at least 25% of my take-home income. Of the 25%, 20% is going into a PP and I'd like to place the remaining 5% into a VP.
sophie wrote:
Fri Jan 18, 2019 6:18 am
How about this strategy: you probably have the majority of your savings in a 401K plan with limited investment options. Many of us have struggled with incorporating these accounts into a PP, and gave up. Set yours up with a stock/bond allocation of your choice, or a target date fund, and you're done. Use the PP for your taxable savings plus accounts you have full control over and can access if neeeded, like a Roth IRA and HSA. It's really a beautiful portfolio when used this way, because the cash allocation automatically provides your emergency fund.
Unfortunately I work at a startup w/ no 401K, but if that changes I'd definitely do this.
Last edited by KodoCastle on Fri Jan 18, 2019 12:50 pm, edited 2 times in total.
User avatar
ochotona
Executive Member
Executive Member
Posts: 3353
Joined: Fri Jan 30, 2015 5:54 am

Re: A novice's VP: requesting feedback

Post by ochotona » Fri Jan 18, 2019 11:18 am

Research Affiliates and GMO, even Schwab think more return in non-US stocks over next decade
User avatar
Kriegsspiel
Executive Member
Executive Member
Posts: 4052
Joined: Sun Sep 16, 2012 5:28 pm

Re: A novice's VP: requesting feedback

Post by Kriegsspiel » Fri Jan 18, 2019 7:56 pm

KodoCastle wrote:
Fri Jan 18, 2019 10:22 am
my second post was about, going pure stocks (MCB & SCB) for my VP. The reason for the LTTs and cash in my first plan is that I don't have a good intuition or plan for when to capture gains from my VP and place it into my PP, so I thought I'd steal the general idea of capturing gains via bands and rebalancing from the HBPP theory.

I'm happy to let it all ride with stocks for my VP, as I think the US economy does trend towards prosperity, but once I see a big return I think it makes sense to capture those gains by reinvesting them into my PP. Do any of you try to do something similar? If so, do you have a preset growth mark you capture by, or what does your capture strategy look like?
Ah, I see. Well, no matter how you set your VP up, you could have ceiling at a certain % of your net worth. Say 15%. So if your net worth is $100,000, you would have a maximum of $15,000 in the VP.

Or you could cap it at a certain number of expense-years. So if you decide you want 2 expense-years worth of VP, and you spend $10,000 a year, you would have a VP-max of $20,000.

In addition, you can shunt the dividends from your VP stocks into the PP cash bucket instead of reinvesting them.
User avatar
Kriegsspiel
Executive Member
Executive Member
Posts: 4052
Joined: Sun Sep 16, 2012 5:28 pm

Re: A novice's VP: requesting feedback

Post by Kriegsspiel » Fri Jan 18, 2019 7:58 pm

And to piggy back off ocho, I believe Harry Browne talked about the VP as a place to engage in educated speculation. I don't know if pumping money into US stocks is the educated speculation at this point.
User avatar
sophie
Executive Member
Executive Member
Posts: 1959
Joined: Mon Apr 23, 2012 7:15 pm

Re: A novice's VP: requesting feedback

Post by sophie » Sat Jan 19, 2019 7:06 am

KodoCastle wrote:
Fri Jan 18, 2019 10:27 am
Unfortunately I work at a startup w/ no 401K, but if that changes I'd definitely do this.
If you're paid as an employee, I guess you're left with traditional vs. Roth IRA, then.

Sounds like you want to generally bet on prosperity, but don't want to actively buy and sell stocks or stock funds. You can accomplish that goal simply by holding a single stock fund outside of your PP and letting it sit and do its thing for a few decades. A target date fund would be a useful option, but you could look at an actively managed fund too.

If you are thinking of periodically selling off some of it to capture big gains, you probably don't want this in taxable. In practice though, you'll mostly be adding to it. During a big market upturn, you might just redirect more contributions to the PP rather than the stock fund as a way of accomplishing the same thing without actually selling.
KodoCastle
Junior Member
Junior Member
Posts: 22
Joined: Tue Jan 15, 2019 1:26 am

Re: A novice's VP: requesting feedback

Post by KodoCastle » Sat Jan 19, 2019 3:47 pm

Thanks for the ideas Kriegsspiel. And that's a good point about educated speculation, I'm very much not educated in this area. Perhaps I'll just pour everything into the PP until something jumps out at me.

Thanks for all the advice! Will look into target date funds and stock funds including world and emerging markets and try to find something that look good to me. (Although I don't mean to stop the conversation if people have more thoughts.)
User avatar
ochotona
Executive Member
Executive Member
Posts: 3353
Joined: Fri Jan 30, 2015 5:54 am

Re: A novice's VP: requesting feedback

Post by ochotona » Sat Jan 19, 2019 6:35 pm

If you like rules of thumb, think about the 15/50 allocation when looking at your whole entire portfolio together.

If you have 15 years left to live, have 50% in equities. Rebalance if it goes lower than 45% or more than 55%. That's all.

So if 1/2 of your holdings are HBPP, then we're talking about a 75% equity VP.
Post Reply