I read a recent article on the PoF Facebook site about some stock picker who crushes it at least according to him. I beat the market by living on the “efficient frontier”. Here is an example:
This is 1M invested in a BH3 Vanguard fund portfolio with a WR of 4% over 30 years and normal SORR and historic inflation. The graph uses a log scale on the y axis since it makes running out of money look more dramatic and the graph is inflation adjusted. On the 10% line you are doomed at 23 years and have only 1/4 of your starting portfolio at the 25% line. You are essentially even at 50%. This is a 50/50 scenario half the people do well half do poorly some so poorly they run out of money.
This is a 80/20 US stocks US Bonds Vanguard portfolio made up of the same US funds used in the BH3. The foreign fund is eliminated and that amount is added to US stocks. The 80/20 lives on the efficient frontier. All other parameters the same as above only the asset mix has changed to move the portfolio to a less risky risk return position on the EF plane.
Notice the success rate of the portfolio is 93% in the 80/20 as opposed to 82% in the BH3. Notice ALL lines still have money at 30 years. The 25% in the BH3 had 1/4 of the start amount. In the 80/20 nearly 1/4 is still in the 10% line’s portfolio. And the 50/50 split where “half do worse half do better” is now the 25% line, so in the 80/20 scenario 3 out of 4 do better. Notice the 90% end value of 5.1M in he BH3 and 8.3M in the 80/20. If the BH3 is supposed to represent “the well diversified market”, the 80/20 clearly beats the market and not by a little. On the 50% line you have doubled your money and considerably improved your longevity simply by choosing the the more efficient portfolio. Specifically at the 50% rate of return line the 80/20 effectively has an additional 2.2% of return compounded over 30 years
That’s called beating the market! In my last post I talked about choosing what is essential. Clearly choosing an efficient portfolio is essential. Just as clear by eliminating the Foreign fund, the FOMO turns to the JOMO. The fear of missing out becomes the joy of missing out. This is essentialism and parsimony in practice.