Another Asset Allocation OUTING

[Rich_in_Tampa]

Another asset allocation outing (bonds are elsewhere, about 45%). I'm in the process of transferring a big chunk of change from management at AllianceBernnstein into my IRA and hope I have a sensible allocation in mind:

Vgd REIT 15%
Vgd Total Stk Idx 15%
Vgd Ext Mkt Idx 15%
Vgd Value Idx 15%
Vgd Sm Val Idx 15%
Vgd Tot Intl 25%

I'd rather not slice and dice much more, and feel like I can skip commodities and similar fine-tuning. Wouldn't mind consolidating the two value index funds, but couldn't quite find a suitable fund to do this in (with a good mix of small and large). Any major gaffes here? I'm all ears (well, eyes, really).

Thanks.

[samclem]

Rich,

Looks good to me. A tilt to small/value, but not excessive (IMO). Many folks argue for more international, but my allocation is just about like yours. I'd probably go a little lighter on REITs, my target for those is in 8-12% range and (forgive me all for I am a sinner and know my market timing will come to no good) I just can't help but feel that they are due for a correction soon.
Is all your stash in IRAs, no ugly complications caused by needing to put tax inefficient stuff somewhere else? That's very clean. My accounts are much messier due to these other factors.

[Rich_in_Tampa]

Originally Posted by samclem

Is all your stash in IRAs, no ugly complications caused by needing to put tax inefficient stuff somewhere else? That's very clean. My accounts are much messier due to these other factors.

Virtually all in the IRA, save some cash. Makes it very clean.

Unfortunately, it all has to be "grossed up" for taxes when withdrawal time comes around.

[lswswein]

Obviously no major gaffes! You are doing things pretty well but since you asked to be nitpicked here it goes.


Vgd REIT 10%
Vgd Total Stk Idx 30%
Vgd Value Idx 15%
Vgd Sm Val Idx 15%
Vgd Tot Intl 30%

Comments - I removed Ext Mkr Index because, it is part of Total Mkt. If you want more small stock exposure, increase your SmV. Decreased you REITs, because of correlation between SmV and REITs. Increased Total Intl for more diversification. Btw both portfolios would work, I just saw an opportunity to get rid of a fund and still be close!

[saluki9]

Sorry Rich, me no like

My professional opinion is that there is too much small and too much value.

I will run the numbers when I get to the office, but that is my gut. Also, I'd hold off on allocating 15% of anything to the REIT fund (yes, I know what that makes me)

[Rich_in_Tampa]

Originally Posted by lswswein

Comments - I removed Ext Mkr Index because, it is part of Total Mkt. If you want more small stock exposure, increase your SmV.

Thanks, Iswswein. Vanguard says the ext mkr idx is "designed to track the performance of the Standard & Poor’s Completion Index, a broadly diversified index of stocks of small and medium-size U.S. companies" while its total mkt idx is heavily tilted toward large growth.

Good point on REITs - thx.

Looks like they would be complementary. Am I misreading or misunderstanding that?

[Rich_in_Tampa]

Originally Posted by saluki9

My professional opinion is that there is too much small and too much value.

Thanks, Saluki.

Is that cause of shorter term concerns, or also the case for a long horizon (15y)?

Could you share your REIT concerns (again, long term)?

Rich

[Spanky]

Originally Posted by Rich_in_Tampa

Another asset allocation outing (bonds are elsewhere, about 45%). I'm in the process of transferring a big chunk of change from management at AllianceBernnstein into my IRA and hope I have a sensible allocation in mind:

Vgd REIT 15%
Vgd Total Stk Idx 15%
Vgd Ext Mkt Idx 15%
Vgd Value Idx 15%
Vgd Sm Val Idx 15%
Vgd Tot Intl 25%

I'd rather not slice and dice much more, and feel like I can skip commodities and similar fine-tuning. Wouldn't mind consolidating the two value index funds, but couldn't quite find a suitable fund to do this in (with a good mix of small and large). Any major gaffes here? I'm all ears (well, eyes, really).

Thanks

If you want simplicity, you could reduce it to three funds:
Total Stock Index
Total International
REIT

Specific allocation to each of these funds is personal. Most of readings suggest splitting U.S and International equally.

[Spanky]

Originally Posted by Rich_in_Tampa

Thanks, Saluki.

Is that cause of shorter term concerns, or also the case for a long horizon (15y)?

Could you share your REIT concerns (again, long term)?

Rich

REITs are fine for longer term, but it is due for a correction soon. No one has any idea as to when or to what extent. The approach is slowly putting money into it (such as dollar cost averaging).

[LOL!]

FWIW, Paul Merriman has added REITs as a specific allotment to the portfolios at www.fundadvice.com.

Furthermore, Merriman has always had a tilt to value. I guess that's because of Fama and French. Vanguard though believes in owning growth and value without overweighting either.

[saluki9]

Originally Posted by Rich_in_Tampa

Thanks, Saluki.

Is that cause of shorter term concerns, or also the case for a long horizon (15y)?

Could you share your REIT concerns (again, long term)?

Rich

Rich

Ok, I have run the numbers. As I thought, this proposed portfolio has an ENORMOUS value tilt (43/1 to be exact. You can also see that in the avg Price / Book ( a measure of the relation of market value to book value) which measures 2.49 as opposed to the S&P 500 at .85. The portfolio also has a huge small tilt in that it's weighted avg market cap is only .19 that of the S&P

The returns of course have been huge with a 10 year mean of 10.48 and a 3 year of 17.71 but much of that is due to the REIT and Small Cap Value fund.

One other nifty little fact is that when you take out the high beta of this portfolio (1.21) it has a very high R Squared as compared to the S&P 500 at 81% which means that after all that slicing and dicing, 81% of the performance can be attributed to movements in the S&P 500

I've saved this so let me know if there is anything else you want to know. (I'm waiting for the first person in my office to log into our portfolio database and ask "Who is Rich in Tampa?")

[Nords]

Originally Posted by saluki9

Ok, I have run the numbers. As I thought, this proposed portfolio has an ENORMOUS value tilt (43/1 to be exact. You can also see that in the avg Price / Book ( a measure of the relation of market value to book value) which measures 2.49 as opposed to the S&P 500 at .85. The portfolio also has a huge small tilt in that it's weighted avg market cap is only .19 that of the S&P
The returns of course have been huge with a 10 year mean of 10.48 and a 3 year of 17.71 but much of that is due to the REIT and Small Cap Value fund.
One other nifty little fact is that when you take out the high beta of this portfolio (1.21) it has a very high R Squared as compared to the S&P 500 at 81% which means that after all that slicing and dicing, 81% of the performance can be attributed to movements in the S&P 500

And the bad news would be... high volatility? Is that the reason you don't like the asset allocation?

[saluki9]

Originally Posted by Nords

And the bad news would be... high volatility? Is that the reason you don't like the asset allocation?

Sorry, I suppose I should have elaborated.

I don't like it because there is too much of a value tilt. If I were to make all of my portfolio decisions based on recent performance I would suggest he put 100% of his portfolio into the REIT fund and be done with it. The fact is that even strong proponents of the value premium do not suggest such a heavy tilt towards small/value. Large and small growth does have it's time in the sun (some times) and allocating such a paltry amount to it doesn't seem prudent in my book. Also, the portfolio is 98.5% invested in developed markets, so I would consider making a strategic allocation to EM.

Also I'm not uncomfortable with the volatility because rich said that his fixed income is elsewhere so I didn't account for that. I just thought it was an interesting tidbit.

[Rich_in_Tampa]

Originally Posted by saluki9

Ok, I have run the numbers.

I appreciate your more quantitative analysis.

Looks like I overshot on value and small cap, though long term these have performed better than large and growth, true?

I'll tone it down a bit, I guess. REIT sounds like something I should DCA into rather than a lump sum in the near future.

Total intn'l has about 15% in EM if I recall for a total position of 3.75% in EM as it is-- not enough?

Thanks for the sanity checks.

[lswswein]

saluki9 & Rich
a few comments on the analysis:

1. Can you please do an analysis of the 60% TSM, 30% Intl & 10% REITs and then post the 2 numbers side by side? This is important because you want to know what the baseline is here.
2. Also can you check the R squared for different time periods, like 5yrs, 10yrs and 15yrs? I am asking this because I expect to see a whole lot of variation across time periods.

thanks
-h

[Rich_in_Tampa]

Round 2:
I want to keep a value and small tilt but not as much as I had done before:

Total Stock Idx 30% (essentialkly large growth)
Extended Mkt 20% (value and growth, small, medium cap)
Value Index 10% (large value)
Total Intnl Idx 25% (includes 15% EM)
REIT 15% (DCA in rather than lump sum)

More comfortable?

[wabmester]

Originally Posted by Rich_in_Tampa

Total intn'l has about 15% in EM if I recall for a total position of 3.75% in EM as it is-- not enough?

Vanguard tries to use a weighting that roughly matches the way to world allocates their capital. If you want to leverage all the world's experts, the "correct" portfolio would be something like 50% total us stock, and 50% total international.

I'm not sure what the point is in asking people to evaluate your portfolio unless you also tell them what your strategy/plan/philosophy is.

E.g., if you believe small and value will outperform in the long run, why not 100% small/value?

[JustCurious]

I don't like it because it is 100% equity. Too risky for my blood. There have been studies that have shown that an 80/20 equity/bond allocation performs almost as well as a 100% equity allocation, but with significantly less volatility. Therefore, in my humble opinion, it doesn't make sense to take on 100% equity risk, and the most equity risk I would take is 80%.