Small cap, REIT and Tips needed in 401?

[tsturbo]

My AA is 60% equities (48% of that split between VG total stock index and S&P index and 12% VG International index). The 40% is in the VG total bond index.

Questions, how important is it to have some small cap and Reit exposure on the equity side and Tips exposure on the bond side?

I am 51 and plan to contribute about $2,500 each month combined between my account and my spouses for another 10 years hopefully. Our total combined portfolio is 510k.

Thank you.

 

[jebmke]

Small cap value and REITs have shown higher returns and less than perfect correlation with TSM. The theory of titlting here is that you can further diversify your equity allocation and increase the expected return on equity by adding these slices. This can allow you to reduce your total equity allocation and achieve the same expected return of the overall portfolio with less equity risk and, hopefully, less "fat tail" risk. One of the consequences is that your equity value will demonstrate some tracking error.

Historical performance of these sectors has been consistent with this theory. It is anyone's guess as to whether the same conditions will hold in the future.

I personally don't worry about the tracking error because I look at the total portfolio volatility and the SCV and TIPS have reduced the overall volatility for me because I have reduced equity from 50% to 40%. When I was in the accumulation phase I was heavily tilted to SCV and MCV. The average return of these two sectors was 15% per year for almost 15 years. But the tracking error was quite large - not for the faint of heart.

 

[BigNick]

My portfolio is 45% in stocks (30% if you include guaranteed future DB pensions) and of those, nearly half are in small caps or emerging markets. I just don't see the potential for growth in US and European blue chips.

 

[RonBoyd]

The theory of titlting

??

 

[DblDoc]

Questions, how important is it to have some small cap and Reit exposure on the equity side and Tips exposure on the bond side?
Thank you.

Its not important. Really. The two biggest determinants of your portfolio growth by far are 1) How much you save and 2) Your equity:bond ratio. Everything beyond that is fiddling at the edges. Now if you believe that SC and REIT's have some negative correlation with your other equity holdings long term, have the time and interest in keeping track and rebalancing 2 more slices, and have room in your tax deferred account as those classes are tax inefficient then have at it. Ditto for TIP's.

DD

 

[HFWR]

Not sure why SC would be particularly tax-inefficient, but REITs are.

 

[ESRwannabe]

I would not buy REITs right now. Last time I looked the REIT index had a yield of like 2.5% if you exclude return of capital. Going by memory here... by law REITs have to give back 90% of profits in dividends. So, a 2.5% yield is pathetic. I would not buy REITs until the yield, excluding return of capital, is at least 4%, which is just a subjective number I pulled out of thin air. I choose that because it seems reasonable as a minimum. FYI, you can buy individual dividend growth stocks like KO and PEP with yields over 3% right now.

Many bogleheads advocate a small value tilt. Maybe it will work out. Hard to say. It is probably an ok risk to take based on the Famma & French research.

 

[DblDoc]

Not sure why SC would be particularly tax-inefficient, but REITs are.

According to the bogleheads wiki Principles of Tax-Efficient Fund Placement - Bogleheads - moderately inefficient, better if held as an ETF.

DD

 

[jebmke]

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Value Tilting - Stock - Bogleheads