Jason's review of his retirement plan indicates that his straightforward approach is outperforming the efficient frontier. Is he correct, or is there something he's overlooking?
Minerva is concerned about how tax inefficiencies could affect her wealth. Are her investments allocated properly?
Scott feels stuck because he doesn't grasp the complexities of the efficient frontier. Where can he find a simplified explanation to help him start making decisions?
Former financial planner Joe Saul-Sehy and I address these three inquiries in today’s episode.
Enjoy!
P.S. If you have a question, feel free to leave it here.
Resources Mentioned:
Episode 577 - qa-the-efficient-frontier-was-perfect-until-hr-got-involved/ | Podcast Episode
Episode 547 - ask-paula-we-have-2-million-at-40-now-what/ | Podcast Episode
Your Next Raise | Course
Asset Allocation Made Simple | Free Download
The Truth About Making the Efficient Frontier Work in Real Life
Acorns Bonus Link
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Jason asks (at 02:24 minutes): Is it possible that my straightforward portfolio is already outperforming the efficient frontier, or am I misunderstanding the information?
I've been captivated by discussions about the efficient frontier over the past year, particularly episode 577, where Joe assisted a listener, Kelsey, in navigating limited 401(k) options. As a public safety officer, my situation is quite similar.
I have access to both a 457(b) and a 401(a), in addition to a pension that guarantees income. Hence, I’ve adopted a relatively aggressive 90/10 stock-to-bond allocation. According to Portfolio Visualizer, this combination has an expected return of 13.22 percent with a standard deviation of 14.33.
To compare, I asked ChatGPT to generate a 90/10 allocation that aligns with the efficient frontier using the funds available in my 401(a). It suggested a mix of 25 percent S&P 500, 25 percent large cap growth, 15 percent mid cap, 15 percent small cap, 10 percent international, and 10 percent bond.
However, when I input that allocation into Portfolio Visualizer — adhering to the 30 percent maximum weight guideline — the expected return decreases to 12.9 percent, with a higher standard deviation of 16.75.
Furthermore, if I align the standard deviation of my current portfolio (14.33), the return further declines to 11.65 percent, which contradicts my understanding from your episodes. I believed the efficient frontier was supposed to help me boost returns for the same risk level.
I’m quite content with a VTSAX-and-chill strategy, but if the efficient frontier indeed offers improved returns at a similar risk level, I would love to learn how to leverage it.
Am I misunderstanding something here?
Minerva asks (at 37:20 minutes): What is the best approach to avoid paying excessive taxes on investments without resorting to unethical practices?
As my spouse and I near retirement, we are beginning to think about the locations of our investments. Thus far, we have primarily focused on tax-advantaged retirement accounts, but we are now ready to expand our brokerage account to complete our tax triangle.
This raises an important question: Which types of funds should be held in each account category?
Which investments are better suited for IRAs or 401(k)s due to high tax drag, and which are more effective to keep in a taxable brokerage account because they produce minimal gains over time?
We would appreciate an in-depth exploration of tax-efficient asset placement, particularly for those of us nearing retirement.
Scott asks (at 01:19:19 minutes): Do you have any clear resources that explain the efficient frontier and provide actionable steps for someone looking to progress beyond a basic index fund strategy?
I found Joe’s insights on the “VTSAX and chill” strategy versus optimizing for the efficient frontier quite enlightening. I’m interested in the possibility of taking a short time to adjust my portfolio toward greater efficiency, but I’m uncertain where to begin.
Part of the appeal of VTSAX is its simplicity and the clearly defined steps involved, thanks to JL Collins. Are there any articles, videos, or guides that explain the efficient frontier in a similar straightforward manner?
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Jason's evaluation of his retirement strategy indicates that the straightforward approach surpasses the efficient frontier. Is he correct, or is there something he might be overlooking?