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2 Funds for Life Fine Tuning Table
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- เผยแพร่เมื่อ 19 ส.ค. 2024
- Paul Merriman and Chris Pedersen introduce the 2 Funds for Life Fine Tuning table (irp.cdn-websit...) and describe how it can be used by investors of all ages to evaluate various combinations of target-date and small-cap value funds.
Historically, these combinations have produced higher returns and higher safe withdrawal rates with only modest increases in risk compared to the target-date fund alone. The table provides investors a way to see what these differences have been in the past for target-date funds across their lifetimes when combined with 0% to 50% small-cap value in 10% increments.
Paul and Chris also discuss rebalancing approaches and the methodologies used in the backtests. Whether you're a young investor, mid-career, or well into retirement, we think this information will be relevant and hope that it will be life-changing.
Listen to the podcast here- www.paulmerrim...
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Hi Paul, thank you guys for all the research you do on SCV, I have been following your suggestion for years and underperforming SP500. I am glad i moved all of the small cap value into S&P500 in the beginning of 2023.
Thank you for all you do, you are helping a lot of people.
It would be great if had a few real world examples of investors who used this approach or close to it with a target date fund with SMCV added starting back in the 1980’ or similar.
Maybe for a future video and perhaps interviewing them and find out what they thought it was like over the decades and through various market cycles, black swan periods and now living with the fruits of sticking to the plan. Maybe those who quit the plan too and in hindsight was that decision good enough, better or worse?.
Have watched many of your Videos and they have really given me many useful insights, Thank so much as I find them all invaluable.
Such an excellent presentation - many THANKS!
Truly a remarkable table
Dear Chris and Paul this was truly life changing I am very happy to watch it. what can you suggest for the unfortunate non US residents that do not have access to TDF. Even SCV US 13,9 % CAGR itself.
I'm sorry, but we aren't experts on investing outside the US. It's worth noting, though, that the small and value premiums have been validated across multiple geographies, so it's reasonable to think an international portfolio of total stocks plus small-cap-value and the right percentage of bonds for the risk capacity of the individual could provide similar benefits.
@chriskpedersen...Hi Chris - This is exactly what I wanted to ask! Thank you for covering it. Best wishes
It just occurred to me that the target date fund concept is what Social Security should become now. I wonder if such a change in paradigm could revitalize Social Security. 10:29
I’m a little confused. Aren’t the CAGR’s etc. for each box assume the person would stay with that allocation for 52 ? But the allocations in the TDF will change every year and so you won’t be staying with that allocation forever except for the last column. Or am I misunderstanding. If my understanding is correct, then isn’t the last column the one to choose since the withdrawal rates are better. The 40% small cap is actually best 4.9%. What that is is a 58/42 portfolio with 40% SCV in the equity portion
You're right that someone who invests in a TDF/SCV combo and doesn't periodically switch the TDF will experience a changing asset allocation as they march to the right across the chart and get closer to, then past retirement. Think of the chart as showing you what to expect at 5-year intervals across a lifetime of investing in a TDF/SCV combo.
You’re forgetting that you will have a lot more money in the end if you take a more aggressive strategy. 4% withdrawal will be a different amount of money vs the more conservative strategy taking 4%. In his book 2 funds for life, it shows you what the range of income would be for any particular strategy. If your goal is to have a safe retirement where you never run out of money through all the ups and downs and crashes, a more conservative approach is best for someone who lives modestly. Your lifetime spending power changes with each approach
It would be interesting to see how the 2 fund strategy would work when setting up 529's. We have set up our grandchildren's 529's with 80% TGF, 10% SC, and 10 % Value. I have no idea if that is a good allocation over the 10-15 years investment time period.
It’s perfect from my point of view
Love your show. Have you considered replacing the 10% small cap with the S&P 500 index? I'm curious to see the result.
the target date fund has the S&P 500 in it, that would be redundant
He has all that stuff in his book if you would like to see all the different outcomes /strategies
Don't target date funds already have a small cap component ? Or because its cap weighted the per cent of small cap in a TDF is miniscule..? seems like all asset allocation models use a gov bond as the benchmark, when one can always get higher bond results by using MYGA's or even CD's in most cases, which would tilt the results some.
Yes, TDFs hold some small-cap and value stocks in proportion to their share of the total market, but the only way you get the premiums for small and value is to own a disproportionate amount of them. Put another way, the TDF's small stocks are offset by the large stocks, and the value stocks are offset by the growth stocks. When you own the total market, you get exposure to the market risk premium. When you own a small-cap value fund, you get exposure to the market risk premium, the size risk premium, and the value risk premium. And if you choose wisely, the small-cap value fund may also provide exposure to some of the quality and/or momentum risk premiums.
The reason we use government bonds in our backtests is that we have a long history of returns, but we also build our portfolios around them because past research has shown it's better to seek higher returns with equities while seeking more stability with bonds. My intuitive reasoning is that a portfolio built of more different things will be more diversified and give more opportunities to benefit from rebalancing. When you use total bonds or high-yield bonds, the correlation between the fixed income and equities increases.
Maybe one day the TDF will have more aggressive bond funds / versions
🤘