Personal Investments • Why I prefer multiple asset classes to the BH 3 fund portfolio

I've discussed this topic in other threads, but thought it would be reasonable to start a new thread and perhaps pull in a different audience.

I've looked through several threads on the 3 fund portfolio and other "lazy" portfolios and I completely agree with that approach, particularly for those in the accumulation phase and those who would prefer to spend less time managing their investments. But is simpler always better?

Personally, my wife and I retired at the beginning of 2022 and I implemented an AA spread across many more asset classes covering various duration bond funds, large cap, small cap, emerging markets, developed markets, value, growth, REITs, treasuries, etc. I use this AA to dictate which funds to harvest "income" from to pay the bills each month along with threshold rebalancing.

One validation of this more diversified portfolio is a chart found on this site and pasted below: https://novelinvestor.com/asset-class-returns/

I've also been watching a mock portfolio I set up a couple years ago and find the ebb and flow of different index funds quite interesting. As I type this, my growth index fund is up .5% while value and REIT index funds are down .25%.

I also posted a backtest using the data from that site showing how more diversification greatly reduces sequence of return risk in down markets: viewtopic.php?t=421775

I also ran across this video from Rob Berger regarding threshold rebalancing: https://www.youtube.com/watch?v=rAjIiaN6zHM

I found this quote in the study Rob referred to that seems to validate my approach:

Rebalancing benefits can be increased by using more uncorrelated classes, to increase the number of buy-low/sell-high opportunities. In contrast, the move to lump a number of equity classes into a core holding (for the purpose of reducing trading costs or gaining tax deferrals) is contrary to our studies, which show that rebalancing benefits swamp these costs.
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We believe our five asset-class results establish a lower reasonable bound to rebalancing benefits.

Of course, the downside of my approach is the complexity and monitoring to reap the benefits mentioned in the study. I've been monitoring our investments daily for decades and I've developed tools that allow me to execute monthly harvesting or threshold rebalancing in minutes. Bottom line, I have the time, tools and interest so the complexity involved isn't a factor for me.

One other advantage of more asset classes is tax loss harvesting in a taxable account which wouldn't be available with multiple classes combined in a total market fund.

My question is, aside from the complexity mentioned, are there other downsides to diversification across multiple asset classes? Are there any studies that show increased returns through a total market index vs. multiple funds covering the same spectrum of stocks/bonds? Does anyone else use more multiple asset classes or do you prefer the three fund portfolio?


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Statistics: Posted by murrays — Mon May 20, 2024 1:02 pm — Replies 7 — Views 493

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