Another Asset Allocation OUTING

[AlmostDone]

I'm trying to decide how to get into the VG REIT index. When you say to DCA in, do you mean put a specified amount in every time it dips, or put a specified amount in at regular intervals? I thought it would be best to wait for a correction and put the whole amount in. I guess I could end up doing that at the relatively high point of the correction.

 

[samclem]

Rich,

I liked Version 1 better, but that's primarily because I believe there are fundamental reasons (see Graham, W. Bernstein, et al) that value stocks make sense. Yes, there will be periods where growth stocks will outperform--but I think there are some reasons to believe that will be less common in the future (esp in the US). Earnings and fundamental stock value--good in boom times and bust. I also think you'll get a premium for holding small/mids over large size companies, but I'm less convinced that this is an enduring trend. For that reason, I'd probably choose a higher percentage of large cap value stocks than you have in Version 1.

All this is assuming you'll do periodic rebalancing and will hold to your allocation percentages even when you underperform the market in some years. If you think you'll be tempted to sell your value/small holdings when you do worse than the market as a whole, then you'd probably be better off just buying TSM and Intl to mirror the market.

Oh, and I still think 15% REITS is a tiny bit high, unless you've got some unique reason to need protection against RE inflation. If you think you'll eventually want 15%, maybe DCA to the 10% over the coming year and, if prices haven't crumpred, wait for the corrrection many believe is coming to go the rest of the way? (Sorry--market timing slipped in there!)

 

[Rich_by_the_Bay]

I'm trying to decide how to get into the VG REIT index. When you say to DCA in, do you mean put a specified amount in every time it dips, or put a specified amount in at regular intervals? I thought it would be best to wait for a correction and put the whole amount in. I guess I could end up doing that at the relatively high point of the correction.

DCA=equal amounts invested on a fixed schedule. It assures, more or less, that you'll get in at approximately the mean share price for the time period in question. No big wins, no big losses.

 

[Dawg52]

I know you said you will pass on commodities but I would put 7.5% in Reits and 7.5% in commodities.(DJP) In fact, that is what I have done.

 

[Rich_by_the_Bay]

I read it as the Extended Market Index Fund (VEXMX) compliments the S&P 500 index, not the total mkt index. ...Note it said blend, not growth

You (and Saluki) are right; my plan A was more tilted toward value than I realized, and indeed more than I want. I think I can get where i want to be (moderate small/mid cap and value tilt) via total market as my core, then using extended market and value idx in smaller doses than originally specified. Maybe something like:

Total Stock Idx 40%
Extended Mkt 15% (blend, small, medium cap)
Value Index 10% (large value)
Total Intnl Idx 25% (includes 15% EM)
REIT 10%

Of interest, here's a recommended asset allocation plan by none other than John Bogle in his book:

Large cap 50%
Mid cap 10%
Small cap 20%
Internat 10%
Commod 10%

 

[Spanky]

Of interest, here's a recommended asset allocation plan by none other than John Bogle in his book:

Large cap 50%
Mid cap 10%
Small cap 20%
Internat 10%
Commod 10%

Is this a new book from Bogle since it refers to commodities?
Would it be simpler just to own one total market fund instead of three funds (large, mid and small)?

 

[Rich_by_the_Bay]

Would it be simpler just to own one total market fund instead of three funds (large, mid and small)?

Yes, it would be simpler but you can't tilt toward value or small/mid that way. If they had a single fund that had a tilt toward small and value, I'd take it.

 

[saluki9]

Well, you have to sell that to a lot more people than I do, so I can understand that you'd get pushback.

I see it as the value premium and Bernstein's "Four Pillars" pointing out that growth has pretty much underperformed for years. I think that both of those are based on at least 20 years of data.

EM, REITs, commodities-- where's the flashing blue light and the crowds of buyers running away screaming in horror?

I'm not quite sure what your intent was, but I'm not selling anything. Constructing and managing portfolios is all that I do and I would never tilt a portfolio that much.

Growth and value fans can both find long periods where one has outperformed the other. I suppose when we the taxpayers pick up an inflation indexed pension for you it's easier to bet the farm on one premise. Even the folks at Dimensional (who we use and I tend to give a lot of respect) wouldn't suggest that much of a value tilt. Their most value oriented model portfolio doesn't approach the numbers of the first portfolio Rich posted.

I'm too tired to deal with datasets now. when my brain is firing at normal speed I will point out why investors can't afford to bet everything on a value premium they may not realize in their lifetime.

 

[lswswein]

Some data points for Rich

1. Vang Total Stk Mkt (VTSMX)
Lg: 73; Mid: 19; Sm: 9
2. Vang S&P 500 (VIIIX)
Lg: 89; Mid: 11; Sm: 0
3. Vang Ext Mkt (VEXMX)
Lg: 6; Mid: 52; Sm: 41

4. 50% each of VIIIX & VEXMX
Lg: 48; Mid: 31; Sm: 14
5. 50% each of VTSMX & VEXMX
Lg: 40; Mid: 35; Sm: 25
6. 79% VIIIX & 21% VEXMX
Lg: 73; Mid: 19; Sm: 9


A few notes. The total investible securities in the US is about 7000 stocks and the Wilshire 5000(a misnomer nowadays) tracks that according to Mkt cap. The Vang Total Mkt tries to replicate this benchmark but does not own all the securities, instead it does a sampling.

The S&P 500(VIIIX or other flavors of it) own the 500 in the S&P. The VEXMX, ext mkt fund tries to won the rest of the mkt to complete the Total Mkt. A ratio of 79% VIIIX and 21% VEXMX is exactly the same as the VTSMX. The total investible stock mkt of the US is 80% composed of the S&P 500 stocks - they are the largest capitilization securities (There is a Brk exception here)

Anyway the moral of the story is that always start with VTSMX and then add others. Also remember when you are adding SmV you are overweighting a part if the market - my argument when I said only add SmV and get rid of VEXMX is that SmV is a volative but great diversifier. VEXMX is just fluff - yeah it has Midcaps etc but you already own them (a small % I agree) in VTSMX. You are only getting too far away from Total Mkt but adding VEXMX into the mix.

Also I strongly second wab's post - you should first come out and state what your philosophy is, and what all you are ready to stick with! This means reading Intelligent Investor Again and writing down these are the tilts I want and why and that you will stick with certain % The problem is when a new study comes out and shows some other premiums if you don't really believe in some of the stuff you might bolt and that might be the biggest blow to you Portfolio

hope this is useful
-h

 

[samclem]

I'm not quite sure what your intent was, but I'm not selling anything. . .

I suppose when we the taxpayers pick up an inflation indexed pension for you it's easier to bet the farm on one premise.

Wow. Maybe a little sleep IS in order.
As far as the taxpayers--they offerred a deal and some folks accept it. It's a widely available deal, you don't have to know anybody specal to take advantage of it. If the taxpayer's deal is so generous, you'd think folks would be beating down the doors to take it.

 

[kenepp1]

I can understand wanting to be a little value tilted. I have run several models with large and s/c values. Over the last 10 years value has helped take the volatility out of the bad years and has beaten the TSM and S/C and ext'd market indexes on the total average. I think age is a heavy factor to consider. At 65 I cannot stand 3 years of double digit negative losses as happened to the combination of those funds in 2000-2002. I know 10 years may not be far back enough, but it is at least an indicator. The Coffehouse Investor also is tilted to value.

 

[saluki9]

Wow. Maybe a little sleep IS in order.
As far as the taxpayers--they offerred a deal and some folks accept it. It's a widely available deal, you don't have to know anybody specal to take advantage of it. If the taxpayer's deal is so generous, you'd think folks would be beating down the doors to take it.

Nords is a tough character, that shouldn't offend him (It was not intended to) but this has come up before. There are some people here who forget that it is easier to wait around 5, 10, or more years for the "value premium" to reappear when you have a pension to count on for your daily living expenses. Most people need a portfolio with a higher R squared to the broader market.

 

[Rich_by_the_Bay]

Some data points for Rich

I really appreciate your perspective and information. Rethinking a bit. Maybe rather than extended market, I'll select a pure small- or small value fund to tilt the TSM fund a little, along with value idx to do the same on the large cap side. Or maybe just stick with TSM and skip the "tilt" altogether; long term it may come out in the wash.

As to goals, this is my "bucket 3" - long term earnings engine with moderate risk tolerance and 10-to-15 year horizon, occasional rebalancing to retain the allocation. I'm pretty disciplined so once it's set, barring unforeseen outside changes, it will probably vary little.

BTW, did you get your market cap information from the Vgd web site? I wasn't able to easily find this information on my own.

Thanks again.

 

[lswswein]

BTW, did you get your market cap information from the Vgd web site? I wasn't able to easily find this information on my own.
Thanks again.

Forgot to add that info. I got the mkt cap stuff from morningstar.com Go click on tools and you will see Instant X ray in there. Add a fund and say you hold $1 in it. Then click show X-ray and you should see the 9x9 box will Cap and Style(Value, Blend & Style) Info. I just added across the style to get Cap info.

-h

 

[ats5g]

I really appreciate your perspective and information. Rethinking a bit. Maybe rather than extended market, I'll select a pure small- or small value fund to tilt the TSM fund a little, along with value idx to do the same on the large cap side. Or maybe just stick with TSM and skip the "tilt" altogether; long term it may come out in the wash..

Rich,

I do a similar thing. I use a S&P 500 index fund + Wilshire completion fund to mimic a TSM fund [401(k) constraints], and then I just use Vanguard's Small Cap Value fund for a small and value tilt in 1 fund.

If you're just starting from scratch, I think starting with a TSM fund, and then adding one value and/or small value fund will cut down on the number of funds. For example:

40% TSM
5% LV
10% SV
10% REIT
35% Int'l

or even

40% TSM
15% SV
10% REIT
35% Int'l

**Note that Vanguard's value index fund don't tilt as much to small or value as DFA's.

- Alec

 

[Rich_by_the_Bay]

Round 3:

Goal: at least slightly outperform the market long term, moderate value/small tilt, moderate risk tolerance, broadly diversified for periodic rebalancing, with fairly low correlation of the classes:


Vgd Total Stk Idx 45%
Vgd Ext Mkt Idx 10% (or maybe Small Val, though I like boosting midcap, too)
Vgd Value Idx 10%
Vgd Tot Intl 25%
Vgd REIT 10% (DCA in)


(I catch a little large value in Wellesley, which is in my bucket 2, so that piece is actually little higher than shown here.)

I tried to capture the great suggestions made above, though could go a little higher on international. Does it seem to fit my stated goals reasonably well?

Rich

 

[bpp]

Vgd Ext Mkt Idx 10% (or maybe Small Val, though I like boosting midcap, too)

Vanguard's small value index fund (VISVX) holds a fair amount of mid-cap, too, while avoiding the black hole of small-growth.

But generally you look like you are meeting your goals.

 

[FinanceDude]

Round 3:

Goal: at least slightly outperform the market long term, moderate value/small tilt, moderate risk tolerance, broadly diversified for periodic rebalancing, with fairly low correlation of the classes:


Vgd Total Stk Idx 45%
Vgd Ext Mkt Idx 10% (or maybe Small Val, though I like boosting midcap, too)
Vgd Value Idx 10%
Vgd Tot Intl 25%
Vgd REIT 10% (DCA in)


(I catch a little large value in Wellesley, which is in my bucket 2, so that piece is actually little higher than shown here.)

I tried to capture the great suggestions made above, though could go a little higher on international. Does it seem to fit my stated goals reasonably well?

Rich

Looks good to me, but what do I know, I only do this for a living...........

 

[lswswein]

Looks good to me, but what do I know, I only do this for a living...........

Hi FD
Run some simulations, and present some ideas to help the man. You are not being paid to laugh man Oh I forgot none of us are etting paid...

-h

 

[donheff]

Rich:

Could you post the overall numbers? I.e what % this bucket involves; % in bucket 2 and how composed; % in bucket 1 and how composed?

 

[Rich_by_the_Bay]

Could you post the overall numbers? I.e what % this bucket involves; % in bucket 2 and how composed; % in bucket 1 and how composed?

Sure. For the uninitiated or otherwise interested, this is a Ray Lucia Buckets of Money format but modified for my particulars, with a healthy dose of early-retirement.org wisdom built in. Don't want this great discussion to digress into a bucket thread, but for the record:

Bucket 1 will hold about 3 yrs of expenses while I am part time, building to 6 when I fully retire well down the road. Mostly short-term federal bonds, MMF.

Bucket 2 will be essentially Wellesley or Wellesley-like, maybe with a dollop of TIPS, and contain about 6 yrs of expenses. Wellesley is roughly 35% dividend stocks and 65% diverse bonds.

Using a 4.25% SWR, that leaves anywhere from 62% (part time FIRE) to 50% (full time FIRE) for stocks in bucket 3. Bucket 3 holdings is what this thread was about.

 

[FinanceDude]

Hi FD
Run some simulations, and present some ideas to help the man. You are not being paid to laugh man Oh I forgot none of us are etting paid...

-h

My advice is usually not well-received here, so I generally stay away from these type of topics. However, Rich used to live in Wisconsin, so we have that connection................

 

[tomz]

Rich:

I've been following this thread from the sidelines. Very good stuff. Your allocation approach is very close to what I'm thinking about. Are you distinguishing between pre tax and tax-deferred in your allocations or are you lumping them all together?

 

[Rich_by_the_Bay]

My advice is usually not well-received here, so I generally stay away from these type of topics. However, Rich used to live in Wisconsin, so we have that connection................

dude,

Turn-about is fair play. .

Your thoughts appreciated, though I understand if you just want to stay on the sidelines.

Rich

 

[Rich_by_the_Bay]

Rich:

I've been following this thread from the sidelines. Very good stuff. Your allocation approach is very close to what I'm thinking about. Are you distinguishing between pre tax and tax-deferred in your allocations or are you lumping them all together?

Almost all pretax dollars.