How to Fix the Flawed Tilt with the PP's Equity Component

Discussion of the Stock portion of the Permanent Portfolio

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MachineGhost
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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by MachineGhost » Wed Mar 25, 2015 7:56 pm

Kbg wrote: So everyone is correct here...MG for focusing on cap size and others for cost. I think Marjory asked the best question which was also the answer...get a large cap and a small cap and get the really cheap cost ones. If you do a simple 50/50 split between the two you are going to get high 90% of the benefit. Let the two ride until you have to do an overall portfolio rebalance.
I used the lowest cost funds available.

This is what a 50/50 VTI/VTWO looks like:

Mega    20.95%
Large    15.01%
Mid    14.21%
Small    32.95%
Micro    16.90%

Too tilted.

Or a 50/50 VTI/VIOO:

Mega    20.95%
Large    15.01%
Mid    10.22%
Small    36.17%
Micro    17.67%

Still too tilted.

Caps go in and out of favor, so being tilted is unwise.
Last edited by MachineGhost on Wed Mar 25, 2015 8:00 pm, edited 1 time in total.
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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by Kbg » Thu Mar 26, 2015 10:02 pm

I must not be understanding your first post as it sure seems to me a 50/50 split is good enough for government work
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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by MachineGhost » Fri Mar 27, 2015 9:31 am

Kbg wrote: I must not be understanding your first post as it sure seems to me a 50/50 split is good enough for government work
"Government work"???
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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by sixdollars » Fri Mar 27, 2015 3:41 pm

MG,

Great work, the only qualm I have with implementing something like this is that adding 2 to 3 more funds feels like a big hit to re-balancing simplicity.  If you find any way to implement this with less (i.e. two funds), please let me know :)

I'm mostly invested in VTSAX for my stock portion of the portfolio at the current time.
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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by Kbg » Fri Mar 27, 2015 5:49 pm

MachineGhost wrote:
Kbg wrote: I must not be understanding your first post as it sure seems to me a 50/50 split is good enough for government work
"Government work"???
Close enough.
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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by MachineGhost » Fri Mar 27, 2015 5:53 pm

That's why Motif is ideally suited.  You can rebalance up to 30 stocks/ETF's for $9.95 and do it by setting exact weight percentages.  And since you would need to rebalance annually to match a marketcap weighted fund's rebalancing frequency, that is really nothing.  However, Schwab does look superior at this point in terms of overall fees.  I'm not too familiar with their order management system -- anyone know if they have a portfolio rebalancing by weight feature?
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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by MachineGhost » Fri Mar 27, 2015 5:56 pm

Kbg wrote:
MachineGhost wrote:
Kbg wrote: I must not be understanding your first post as it sure seems to me a 50/50 split is good enough for government work
"Government work"???
Close enough.
Explain what the hell you mean?
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by Dieter » Fri Mar 27, 2015 9:56 pm

sixdollars wrote: MG,

Great work, the only qualm I have with implementing something like this is that adding 2 to 3 more funds feels like a big hit to re-balancing simplicity.  If you find any way to implement this with less (i.e. two funds), please let me know :)

I'm mostly invested in VTSAX for my stock portion of the portfolio at the current time.
I don't have the fancy tools, but per free MorningStar Portfolio X-Ray:

VTSAX: 40% (VG Total Stock Market)
VEXAX: 60% (VG Extended Market)

Gives:
Large: 33%
Mid:    36%
Small: 31%

Or:
38/34/27 if replace Total Stock with VLCAX (VG Large Cap Index)
34/32/34 with 40% VLCAX Large Cap Index; 60% VSMAX Small Cap Index

Far from exact, but closer in two funds and more balanced cap-wise than total by itself... (73/18/9 per MorningStar)
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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by MachineGhost » Sat Mar 28, 2015 5:49 pm

I thought that was interesting.  I've taken out Mega/Large in a backtest from 1972 to 2014 to see their contributions towards returns:

[align=center][img width=800]http://i.imgur.com/qmPoTXz.png[/img][/align]

The EW PP weights were:

Mega    0%
Large    0.29%
Mid    17.20%
Small    20.00%
Micro    20.00%

Difference from 100% in T-Bills.  So basically all market caps other than Mega/Large contribute 94% vs long-term market cap weighted returns.  Mega/Large contributes only 6%.  Too bad I can't eliminate Mega only.  That might have been a bigger eye opener.
Last edited by MachineGhost on Sat Mar 28, 2015 5:57 pm, edited 1 time in total.
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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by Greg » Wed Apr 08, 2015 11:59 am

MachineGhost wrote:
Kbg wrote:
MachineGhost wrote: "Government work"???
Close enough.
Explain what the hell you mean?
Good enough for government work definition:

sufficiently close; done just well enough. (Alludes to the notion that work for the government is not done with care or pride.)
"I didn't do the best job of mending your shirt, but it's close enough for government work."
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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by Kbg » Sun Apr 12, 2015 3:28 pm

1NV35T0R (Greg) wrote:
MachineGhost wrote:
Kbg wrote: Let's go with sufficiently close...vice the rest.

Close enough.
Explain what the hell you mean?
Good enough for government work definition:

sufficiently close; done just well enough. (Alludes to the notion that work for the government is not done with care or pride.)
"I didn't do the best job of mending your shirt, but it's close enough for government work."
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Re: How to Fix the Flawed Tilt with the PP's Equity Component

Post by fi50@fi2023 » Sun Apr 12, 2015 3:41 pm

I use the Paul Merriman "Ultimate Buy and Hold Portfolio" for my equity component.  It is equal weighted between US/International and diversified between, large, large value, small, and small value.  I use the "aggressive" split, which does not include any bond/cash allocation, since I address those needs elsewhere.
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