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Old 07-02-2010, 11:34 AM   #1
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AA question

Hi all,

I'm going to make changes to my portfolio, and a guy on Bogleheads recommended the following to me:

35% Total Stock Market
20% Small Cap Value Index
15% FTSE All-World Ex-US
5% Emerging Markets
25% Bonds

All of this is in a taxable account. My portfolio is around $385k, and I don't feel comfortable with such a large portion going to Total Stock Market. I was wondering what you guys think. Would you break up the domestic portion into more funds?
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Old 07-02-2010, 11:40 AM   #2
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Do you also have tax-deferred or tax-free retirement accounts (IRA, 401K, Roth)? If you do, I'd shift all my bonds over into that space, as bonds generate a lot of taxable current income at your marginal income tax rate. I'd leave the taxable space to the equities, where you only pay taxes on the dividends and realized capital gains.

And frankly, in a taxable account I'd prefer to use index ETFs rather than mutual funds, because that way you generate *no* taxable capital gains until you sell -- the only current taxes are on dividends.

As for whether a 75/25 AA is too aggressive, as always it depends on your risk tolerance, age/time horizon and perhaps whether you have other sources of retirement income (i.e. a pension) that will meet much or most of your income needs.
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Old 07-02-2010, 11:40 AM   #3
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The overall allocation is a reasonable one to start with. This seems like a reasonable allocation (75-25) without knowing:
* Your age
* If you have an emergency fund
* Your level of debt
* How long you plan on working

If you'd like to learn more about asset allocation, pick up All About Asset Allocation by Rick Ferri. He posts often on Bogleheads. You can find it on Amazon.
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Old 07-02-2010, 11:59 AM   #4
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Wow, thanks for the quick response!

Some more information about me:

I'm 37, plan to work at least another 10 years. No debt. I work in Japan and take the Foreign Earned Income Exclusion, so I can't invest in a Roth. I'm thinking that for the fixed-income portion I'll invest in I-Bonds (up to $10k/year is the limit I think) and to put the rest in VMLTX (Limited Term Tax Exempt) unless you guys have a better recommendation.

I'll take a closer look at ETFs but I should add that I will be adding to my investments monthly. Is there a way to figure out which would be cheaper, since ETFs have transaction costs?

The reason I asked about the asset allocation was that I read Swedroe's book, and he goes through a six-step procedure to diversify a portfolio. In his book he has equal allocations to S&P 500 Index, U.S. Large Value, U.S. Small, and U.S. Small Value. On the other hand, by following the Boglehead poster's advice, I would buy the Admiral Shares of Total Stock Market and save on ER. Maybe there is no right answer, but I just wanted to get your thoughts as I am still a novice investor.

I've heard of Rick Ferri, but never read his books. I'll order that one from Amazon. Thanks!
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Old 07-02-2010, 12:07 PM   #5
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Originally Posted by kmoeini View Post
I'll take a closer look at ETFs but I should add that I will be adding to my investments monthly. Is there a way to figure out which would be cheaper, since ETFs have transaction costs?
More and more brokerages are offering some ETFs with no trading commissions. Schwab, Fidelity and Vanguard all do.
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Old 07-02-2010, 12:17 PM   #6
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Oh, that's great! I just checked out the commissions table at Vanguard.
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Old 07-02-2010, 03:02 PM   #7
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Keep coming back! One day at a time.

Oh wait, that's the other AA, isn't it.

Oh well, good advice for here too.
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Old 07-02-2010, 04:34 PM   #8
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Originally Posted by kmoeini View Post
Hi all,

I'm going to make changes to my portfolio, and a guy on Bogleheads recommended the following to me:

35% Total Stock Market
20% Small Cap Value Index
15% FTSE All-World Ex-US
5% Emerging Markets
25% Bonds

All of this is in a taxable account. My portfolio is around $385k, and I don't feel comfortable with such a large portion going to Total Stock Market. I was wondering what you guys think. Would you break up the domestic portion into more funds?
This allocation is a reasonable one. I am assuming you have no other assets (e.g. IRA, 401K) otherwise it is pointless to discuss AA without looking at the total.

I'd be inclined to have a bit more International and since the FTSE AW has emerging markets already weighted, I'd consider something like 15% FTSE AW and 10% FTSE Small Cap. Take the extra 5% from TSM or SCV.

On your bond question, regarding Ltd Term TE, if this is money you don't need to use any time soon you might want to stretch out the duration and look at the Intermediate Term TE fund. The yield curve is pretty steep and the incremental yield for additional duration is attractive.
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Old 07-02-2010, 04:49 PM   #9
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I would recommend that you understand what Larry Swedroe et al. and others are saying. Also the folks on Bogleheads. There are two main sets of folks on Bogleheads: The folks who slice-and-dice between large-cap and small-cap and like a value tilt to their portfolios. This is the Fama & French 3-factor model followed by most people over there. If you see Swedroe recommend it, then Merriman, then Fama, then French, then Ferri, then Armstrong, etc it just means that they have all read the papers by Fama & French and not that they have come up with anything new.

The second main faction is the "Total Stock Market" weights portfolio recommended mostly by Jack Bogle and nobody else.

Many folks will use Total Stock Market plus a Small Cap Value fund to get the same result as the Fama & French 3-factor model with low costs and simplicity. It is not quite there, but it is close enough.

What camp do you want to follow? Why? This is where reading more will help you out. Since you are familiar with the Boglheads forum, this is hashed out endlessly over there, so you can poke around more to find the arguments on all sides.
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Old 07-02-2010, 05:17 PM   #10
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I would recommend that you understand what Larry Swedroe et al. and others are saying. Also the folks on Bogleheads. There are two main sets of folks on Bogleheads: The folks who slice-and-dice between large-cap and small-cap and like a value tilt to their portfolios. This is the Fama & French 3-factor model followed by most people over there. If you see Swedroe recommend it, then Merriman, then Fama, then French, then Ferri, then Armstrong, etc it just means that they have all read the papers by Fama & French and not that they have come up with anything new.

The second main faction is the "Total Stock Market" weights portfolio recommended mostly by Jack Bogle and nobody else.

Many folks will use Total Stock Market plus a Small Cap Value fund to get the same result as the Fama & French 3-factor model with low costs and simplicity. It is not quite there, but it is close enough.

What camp do you want to follow? Why? This is where reading more will help you out. Since you are familiar with the Boglheads forum, this is hashed out endlessly over there, so you can poke around more to find the arguments on all sides.
This is good advice. I would also add, a tilting strategy is something that takes patience and a bit of nerve. Make sure you understand tracking error (vs. the broad market) and can deal with it. Don't try this strategy for a short period of time -- 15-20 years may be required for it to work (if it does).

We went 60-70% of our equity in small/mid-cap with mostly value tilt in the mid-late 80s. There were periods of time when things moved sideways while the rest of the market was going up (especially during the tech boom). But the gamble paid off. 15+ years with an average annual return of 15% - paid for early retirement.
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Old 07-05-2010, 06:15 AM   #11
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LOL and jebmke, thanks so much for your advice. My grasp of this stuff is pretty shaky and I do need to read more.
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Old 07-05-2010, 01:02 PM   #12
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I'm 37, plan to work at least another 10 years.
Rule of thumb for equity allocation: 100 - age. That means that your stock allocation should be about 63%, which should be adjusted based on your risk tolerance.
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Old 07-05-2010, 09:16 PM   #13
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Oh, sorry, didn't read the other posts firsts. However, I know some people who can help with other AA questions.
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