4 comments on “Advice for Buy-and-Hold Investors

  1. Your expectation is that this portfolio will beat the market by 3% over the next decade?

    Beating the market by 3% is not really “beating”. It’s *absolutely crushing*. Like, you’re-the-legit-Bernie-Madoff kind of crushing. I believe that overweighting in small-caps and emerging markets might generate these kind of returns under the right conditions. I also suspect they would underperform by 3% in fairly typical bad conditions, whether the funds were “low volatility” or not.

    This looks like a portfolio designed to take advantage of high volatility, in fact. Which might be a great portfolio for a sensible, informed buy-and-hold investor, but that portfolio would probably need a hefty bond or cash-equivalent portion that gave you the ability to re-balance during frequent, significant dips and surges.

  2. Re: https://www.reddit.com/r/investing/comments/3mn26x/is_this_bayesian_advice_for_buyandhold_worth/:

    Diversity wasn’t my top goal here. I highly recommend diversity when it’s available at virtually no cost (e.g. internationally diversified funds instead of funds that focus on whatever country you happen to live in).

    I haven’t found much reason to worry about modest deviations from optimal diversity when I’m pursuing strategies that are designed to be low risk. For the low volatility and fundamental weighting strategies, I believe they have a tendency to underweight stocks that will crash, which offsets the risks associated with moderately lower diversity.

    Still, I should have looked at the industry weightings, and if I had done so, I would have suggested somewhat different weightings: less XSLV, and more PDN. 15% XSLV and 25% PDN would bring finance down from about 34% to about 32% according to the numbers that TheLateOne provided, without sacrificing the benefits that I’m looking for.

    Have you got the grit (or apathy perhaps) to walk away from your portfolio for years at a time in order to maximize your long term returns?

    That is close to a key question. My post was designed for people who, at most, rebalance their portfolio once or twice a year to ensure that one of the funds doesn’t grow into an unusually large fraction of their portfolio. (I expect such rebalancing to be desirable, but not very important, for people who are following the strategy I suggested here). Such investors shouldn’t try to analyze industries.

    There are lots of people who think they can do better, and that they can evaluate individual industries and select ones that are safer and/or likely to outperform. Most such people will be wrong, and won’t follow the advice I have here.

    I’m unclear whether TheLateOne believes that he or she knows better how to pick industries than automated strategies for low volatility and fundamental weighting. The strategies have good long-term track records. I don’t see a track record for TheLateOne.

    I consider it quite reasonable to believe that this is a good time to overweight banks and real estate. The problems of 2008 are still fairly vivid in the minds of enough people that banks and real estate companies are less likely than normal to take the risks that they took in 2003-2007. And investors are likely being cautious about buying those industries due to those same vivid memories. I expect low volatility and fundamental weighting strategies to take advantage of such effects

    This fund focuses on spinoffs so presumably most of the alpha comes from a fund manager’s analysis of the deals happening.

    No, the alpha comes from a pattern of spinoffs being underpriced. It invests in all spinoffs that meet some basic constraints such as size and timing.

  3. Thanks for replying.

    I was already planning to use your advice, but the criticism, particularly the “actually it’s high-volatility” claim, gave me some pause.

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