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Equity Allocation - would love feedback
Old 12-06-2018, 07:32 AM   #1
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Equity Allocation - would love feedback

Hi there.
I post often, but rarely start threads.
I am going to see my Fidelity rep (no cost) on Monday and would love to get some feedback from you smart folks on my Equity allocation. I just started using index funds last year.
Been retired 16 months with "retirement calculator" planning of 34 more years.

Total AA - 55/45
Equity AA: All low cost index funds. I use a bandwidth of 50-60 AA with an individual index bandwidth of 10% with Nasdaq at 25%.
S&P 500 - 35%
Mid Cap - 20%
International - 20%
Small Cap - 15%
Nasdaq - 10%

My questions are as follows:
1) Do these relative allocations seem reasonable given I wish to keep the total Equity portion at 55%?
2) Is it worth just going to a total US based Equity index plus a total International equity index?
3) I know it is recency bull market bias, but over the last 10 years, Small caps and International have not performed as well; so was wondering about keeping these allocations.

General Statement:
All index funds are in TIRA/Roth accounts, so can easily adjust the allocation without a tax event.
I would like to spend more time on the Fixed Income side yield chasing etc rather than adjust the equity side too frequently.

Thanks all.
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Old 12-06-2018, 07:47 AM   #2
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I’ve said this so many times in this forum and others. Your planning should start with expenses and or your desired income budget. Then work backwards into your allocation.
I was surprised to find, with a big safety net, that I really didn’t need much in equities at all to reach my goals, but everyone is so completely different.
Use the Fido planner and Firecalc and see what AA’s help you reach your income goals.
I am a believer in taking only as much risk as you need as long as you have some bumpers in place.
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Old 12-06-2018, 08:21 AM   #3
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Your current setup seems fine to me, although just using total US and total ex-US would be simpler.

Regarding #3 - don't try to time the market. Create your plan and stick with it.
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Old 12-06-2018, 08:28 AM   #4
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Originally Posted by mrfeh View Post
Your current setup seems fine to me, although just using total US and total ex-US would be simpler.
I use TSM index funds as significant holdings. But you need to remember that if you're using cap weighted funds (as most are), your large cap allocation will be MUCH larger than what OP is currently holding. That is, your suggestion would yield more simplicity but would also mean moving to a higher weighting in large caps. OP would need to be sure that consequence is something he intends.
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Old 12-06-2018, 08:31 AM   #5
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I use TSM index funds as significant holdings. But you need to remember that if you're using cap weighted funds (as most are), your large cap allocation will be MUCH larger than what OP is currently holding. That is, your suggestion would yield more simplicity but would also mean moving to a higher weighting in large caps. OP would need to be sure that consequence is something he intends.
Correct, although I think the difference wouldn't be significant.

OP - you could construct a style box to see what the differences would be:

https://corporate.morningstar.com/US...FactSheet_.pdf
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Old 12-06-2018, 08:57 AM   #6
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Originally Posted by COcheesehead View Post
Iíve said this so many times in this forum and others. Your planning should start with expenses and or your desired income budget. Then work backwards into your allocation.
I was surprised to find, with a big safety net, that I really didnít need much in equities at all to reach my goals, but everyone is so completely different.
Use the Fido planner and Firecalc and see what AAís help you reach your income goals.
I am a believer in taking only as much risk as you need as long as you have some bumpers in place.
I did indeed start with my expenses. I have a detailed 18 line item budget in which I have been keeping track of all spending since 2014.
I am comfortable risk wise with a 50-60% equity AA. Thus in moving to a Clyatt % of remaining portfolio concept, it is more the case that this will drive/tweak my expense budget in the future.

My question was more of the allocation breakdown, not whether 55% is okay.
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Old 12-06-2018, 08:58 AM   #7
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Correct, although I think the difference wouldn't be significant.

OP - you could construct a style box to see what the differences would be:

https://corporate.morningstar.com/US...FactSheet_.pdf
Thanks, yes I can see this type of analysis on Fidelity.
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Old 12-06-2018, 08:59 AM   #8
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I use TSM index funds as significant holdings. But you need to remember that if you're using cap weighted funds (as most are), your large cap allocation will be MUCH larger than what OP is currently holding. That is, your suggestion would yield more simplicity but would also mean moving to a higher weighting in large caps. OP would need to be sure that consequence is something he intends.
Thanks, didn't think of that angle too.
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Old 12-06-2018, 09:00 AM   #9
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Looks good to me. You might have more flexibility than you think in rebalancing...If your goal is to maintain an AA across taxable and non taxable, you do whatever you need to in after tax accounts, then swizzle the allocation in the pre-tax accounts. So let's say you need spending money from after tax and you sell equities in a down market... simply buy those same ones inside the IRA and your result is that you didn't sell low.
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Old 12-06-2018, 09:04 AM   #10
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Looks good to me. You might have more flexibility than you think in rebalancing...If your goal is to maintain an AA across taxable and non taxable, you do whatever you need to in after tax accounts, then swizzle the allocation in the pre-tax accounts. So let's say you need spending money from after tax and you sell equities in a down market... simply buy those same ones inside the IRA and your result is that you didn't sell low.
Interesting thought. Currently, I don't have equities in my after tax account. I only have cash like assets. (Discovered true investing and this site just last year).
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Old 12-06-2018, 09:24 AM   #11
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Interesting thought. Currently, I don't have equities in my after tax account. I only have cash like assets. (Discovered true investing and this site just last year).
More info on this topic here: https://www.bogleheads.org/wiki/Tax-...fund_placement

I have nothing but equities in our taxable accounts.
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Old 12-06-2018, 09:39 AM   #12
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More info on this topic here: https://www.bogleheads.org/wiki/Tax-...fund_placement

I have nothing but equities in our taxable accounts.
I have read this in the past and yes agree. Unfortunately, I just went along with the concept in my working years to save monies in my 401k accounts with some matching by Megacorp.
Thus besides some minor equity only conversions into Roth accounts, I did not construct a dividend type play in a non taxable account.
Additionally, I am managing ACA income down to low levels (20k), so there is that restriction, where I have some cash in taxable for supplemental income.

As an aside, there will most likely be decent size taxable account type inheritance (not in my calculations)down the road, whereby I could allocate in a more tax efficient way.
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Old 12-06-2018, 12:50 PM   #13
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As I recall, the success rate of anything between 30/70 and 70/30 is about the same so 50-60% equities sounds fine. As far as slicing and dicing within domestic equities as you have done, I don't know... it is more complicated than I would care for but if you want to introduce some tilts within domestic equities then that seems fine... you might test it for some relevant periods using portfoliovisualizer and compare your tilts to a straight total stock allocation. I personally just go with Total Stock and Total International Stock on the equity side as I prefer to keep things simple.
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Old 12-06-2018, 01:17 PM   #14
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As I recall, the success rate of anything between 30/70 and 70/30 is about the same so 50-60% equities sounds fine. As far as slicing and dicing within domestic equities as you have done, I don't know... it is more complicated than I would care for but if you want to introduce some tilts within domestic equities then that seems fine... you might test it for some relevant periods using portfoliovisualizer and compare your tilts to a straight total stock allocation. I personally just go with Total Stock and Total International Stock on the equity side as I prefer to keep things simple.
Yeah that is where my the thoughts are heading for 2 reasons.
Even though my net fees are in the 3 bps range, Fidelity does have 2 zero based index funds for total US and total Intl.
If I pass first, it would a little easier for the DGF to manage.
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Old 12-06-2018, 01:38 PM   #15
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1) Do these relative allocations seem reasonable given I wish to keep the total Equity portion at 55%?
Reasonable, yes, but IMO unnecessarily complex. You're sort of buying the whole US market in pieces. The international component is probably low. There is a good Vanguard paper/PDF here: https://personal.vanguard.com/pdf/icriecr.pdf It suggests that 30-40% international is the sweet spot for minimum equity portfolio volatility. Guru Ken French (here: https://famafrench.dimensional.com/v...home-bias.aspx) argues against any home country bias, which would mean an international allocation of around 50%. https://en.wikipedia.org/wiki/Kenneth_French

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2) Is it worth just going to a total US based Equity index plus a total International equity index?
IMO yes. That is what we are doing. We hold a lot of VT, which is everything in the world, and we hold a total us market fund and a total international market fund 50/50 for the balance of our equities.

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3) I know it is recency bull market bias, but over the last 10 years, Small caps and International have not performed as well; so was wondering about keeping these allocations.
Yup. We all wonder that and we would all like to know which sectors are the best bets. But history tells us that no one has figured out how to predict the future, so we just sit tight. If you can't resist playing with your food a little bit, you might consider what regression to the mean might tell you about the future.
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Old 12-06-2018, 02:32 PM   #16
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My AA is similar to yours, I'm at 56/44. I've been selling off my tilts and trying to get back to just a few broad market funds, though I have legacy active funds in taxable so I'll be living with those for a while (PRIMECAP among others, so that is good).

For my top-level equity AA I'm following Rick Ferri's old Core-4 split with 60% U.S., 30% International and 10% REIT. So that is 60/30/10 of 56%. After futzing with different approaches for a while Ferri's splits just struck me as simple and memorable enough, so I went with it.

So my overall AA target this year is:

U.S. 33.6%
Int. 16.8%
REIT 5.6%
Bond 40%
Cash 4%

My rebalancing band is +6%/-5% on equities, ratioed out for the categories.
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