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Simple diversification question
Old 02-25-2007, 05:13 PM   #1
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Simple diversification question

If you knew someone who was 100% invested in VTSMX, and could only give them one recommendation for one other investment and further, that they wanted to limit their asset allocations to 10% increments, what would your advice be?

For example, one recommendation could be 90% VTSMX / 10% VBMFX. Another might be 80% VTSMX / 20% cash.

Further assume the person is 37 years old and has a moderate nest egg, looking to retire around 55.

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Re: Simple diversification question
Old 02-25-2007, 05:29 PM   #2
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Re: Simple diversification question

100% Vanguard Target Retirement 20XX, pick the year you want.
0% VTSMX
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Re: Simple diversification question
Old 02-25-2007, 06:13 PM   #3
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Re: Simple diversification question

Well, other than the last answer, which is good...

OK, one other investment. Maybe they should put 30% or so into international. I am assuming they have sufficient bonds elsewhere to deal with their own risk aversion.

Please, please please DON'T regard this as expert advice. I have a lot to learn but jumping into these threads seems like a good way to do that.
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Re: Simple diversification question
Old 02-25-2007, 07:21 PM   #4
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Re: Simple diversification question

Quote:
Originally Posted by SecondCor521
If you knew someone who was 100% invested in VTSMX, and could only give them one recommendation for one other investment and further... what would your advice be?
Either of the above could be good options.

But of course it depends on your reasons for diversifying - as well as the rest of your situation.
Do you already have an emergency fund? Are you in a pension plan? Are you looking primarily for long term growth and able to sleep easy through the bumps? Or are you looking to start reducing your exposure to downside risk compared to what your've been doing? Etc.

To buffer volatility or reduce risk- perhaps add total bond market index

To diversify among equity classes - add some total international

To cover most of your bases in one swoop - dump it all into a target retirement fund.

Are you 100% in equities with very little immediate liquidity - add some emergency cash or equivalents.

Two articles that I've found provide very useful overviews of asset allocation
and risk tolerance are freely available on www.fundadvice.com. They are:

"The ultimate buy and hold strategy" and "Fine tuning your asset allocation"

Perhaps they'd help.

Simplest solution is probably target retirement - assuming you have emergency funds.


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Re: Simple diversification question
Old 02-25-2007, 07:24 PM   #5
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Re: Simple diversification question

Fully funded emergency fund -- the 100% VTSMX number is of FIRE assets, not all assets.
No pension.
FIRE funds are in traditional IRA, Roth IRA, 401(k).
Reasons for diversifying would be to reduce volatility.

Will take a look at target retirement funds. Would probably pick a notch or two beyond actual retirement. I prefer to be more agressive than what those funds do I think.

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Re: Simple diversification question
Old 02-25-2007, 07:38 PM   #6
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Re: Simple diversification question

With creative arithmetic:

2015 Target Retirement for the 58 year old - actually 63 but young at heart.

The individual stocks - I creatively can not count for this exercise(retirement would survive without them) - that account is for hobbies, male hormone treatments, kayaks and wild wild women.

You know I didn't even think of 100% and 0% when I read the thread starter - good one.

heh heh heh - if your thinking 4% swr and FireCalc - plug in ?? 30 or40% or so total bond market and soldier on.
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Re: Simple diversification question
Old 02-25-2007, 11:02 PM   #7
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Re: Simple diversification question

I'll take a contestable stance, because I need a change of pace.

Leave it right where it is. 18 years until retirement, all vtsmx is fine, although a 20% stake in total bond market would reduce volatility without dampening returns too much.

I might take the dividends thrown off from vtsmx and autoinvest in total bond market. Over the next 20 years that'd take your friend to a 70/30 mix if he stayed with 100% TSM. Aggressive but good returns based on historic data.

If he starts with a 20% peeled off stake in TBM and does the dividend investment rom TSM to TBM, and reinvested TBM to itself, he'd be dang close to 50/50 TSM/TBM by the time he retired.

Tax efficient, sensible, cheap.
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Re: Simple diversification question
Old 02-25-2007, 11:24 PM   #8
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Re: Simple diversification question

I would question the wisdom of investing all of their money in one investment and inquire why one would want to do so. History has shown there are multiple times where any single asset class gets totally squashed. For one investment in increments of 10 percent I would reccomend they invest as much in bonds as I could convince them, which would not be much if they are already happy 100% stocks.

The lack of a bond portion affords no opportunity to rebalance after major market declines, which speeds portfolio recovery.
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Re: Simple diversification question
Old 02-26-2007, 04:18 AM   #9
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Re: Simple diversification question

20% Vanguard International Stock Fund, or alternatively the cheaper Fidelity Spartan International Index.

Eventually, yes he should have some bonds but if doesn't start invested in bonds for another 5 or 10 years probably no harm done, and potentially moderately higher returns.
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