Below are some frequently asked questions about Discipline Funds. To contact us directly please use the “contact” page above.
- Algorithmic/systematic portfolio management.
- Countercyclical rebalancing.
- Global stock allocation.
- Broad domestic high quality bond allocation.
- Low fees.
- Tax efficiency.
- Disparity in risk due to the overweight of the stock market allocation, which contributes a disproportionate quantity of risk to a balanced index fund.
- Inefficiencies in capital gains distributions caused by rebalancing.
- Bond allocations that do not sufficiently hedge the stock market component.
- If you're a retiree or someone with an inherently conservative risk profile then the Discipline Fund might help you become more comfortable with your portfolio due to its countercyclical rebalancing methodology.
- If you're someone who's frozen in cash because you're worried about stock and bond valuations, the Discipline Fund might be a good solution to getting some exposure without going "all in" on one market.
- If you're someone who struggles with investment discipline, then the Discipline Fund might be right for you.
- If you’re looking for an allocation in your portfolio that provides some stock market exposure, while trying to limit volatility, then the Discipline Fund might be right for you.
- If you're someone who just wants to automate your investments in one simple, tax efficient and globally diversified portfolio that helps you sleep well at night, then the Discipline Fund might be right for you.
- If you're someone who wants income and bond exposure, but feels overwhelmed by the complexity of the bond market and the potential risks in a low interest rate environment then the Discipline Fund might be a good way to achieve some bond exposure from professional bond investors without going "all in" on bonds.
- If you're very tax sensitive, but also need an efficient rebalancing vehicle then the Discipline Fund might be right for you.
As we described above, the stock allocation is constructed to rebalance in a "countercyclical" manner. This is done by quantifying the relative risk of the stock and bond markets across time using a macroeconomic and financial algorithm. For instance, when the economy is booming and the stocks are in a bull market, the Discipline Fund is likely to rebalance away from the stock market over time. Similarly, when the economy is performing poorly and the stock market is declining, the Discipline Fund is likely to rebalance heavier into the stock market.
At a fund specific level, the stock allocation is comprised of 3-4 underlying market-cap weighted ETFs that give us exposure to the global stock market. For instance, if the equity market is seen as a neutral risk and the Discipline Fund holds 50% stocks and 50% bonds at a given time, then the Discipline Fund will hold an underlying stock allocation across 3-4 ETFs that closely reflects the global market cap of stocks (as of 2021, that is roughly 45% U.S. stocks and 55% foreign stocks, leading to an overall allocation within the Discipline Fund of roughly 21% U.S. stocks and 24% foreign stocks).
We hold a global allocation because of the significant academic research showing the benefits of it.¹ Further, we don't try to pick the best parts of the market because we don't pretend to know what will happen in the future. Historically, the relative size of US vs foreign stocks has changed significantly and we don't know if the U.S. economy and U.S. corporations will continue to outperform foreign stocks. In fact, we specifically want to hedge against the potential outcome where the U.S. doesn't do as well against other economies. With that in mind we allocate globally knowing that this allocation gives us exposure to the best performing markets without having to guess which specific market that will be.
¹ See "Global equity investing: The benefits of diversification and sizing your allocation" - Vanguard, 2021
- 20% Short-term and intermediate bonds for liquidity needs
- 40% Discipline Fund for growth and stability
- 40% Diversified stocks for aggressive growth
- It creates a highly diverse allocation, with over 10,000 underlying holdings attributable to the Discipline Fund alone.
- It simplifies the management of the entire portfolio into just a handful of ETFs.
- It compartmentalizes risks across specific behavioral buckets and time horizons.
- It rebalances dynamically to help maintain your profile due to the internal mechanism of the Discipline Fund.
- It improves tax efficiency due to the fund of funds aspect of the Discipline Fund and its rebalancing mechanism.
- The core holding of the Discipline Fund frees up behavioral bandwidth enabling one to more freely take risks in the 40% aggressive bucket.
- 60/40 typically holds US stocks and bonds thereby choosing not to hold 50% of all global stocks and bonds. This exposes the investor to a significant amount of home bias.
- 60/40 actively rebalances back to 60% equities when it grows. For instance, when the stock market booms the 60/40 grows into 70/30 and the fund actively rebalances back to 60% equities. But why does it do this? Why not rebalance back to 50% stocks at times if it's appropriate? This static rebalancing approach exposes the investor to significant declines such as the 35% decline of 2008/9.
- 60/40 holds a bond allocation that yields just 1.3% as of 2021. This portfolio has become so dominated by cash and cash like equivalents that it will struggle to generate sufficient income going forward.
- It actively chooses not to hold 50% of global stocks.
- It actively chooses not to hold global bonds.
- It actively chooses to rebalance annually back to an arbitrary weighting of 60% stocks, which is a full 15% higher than the market cap weighting of global stocks versus bonds as of 2021.