Comments On Asset Allocation?

[Vincenzo]

Greetings All,

I have FINALLY rolled over some old 401K plans that I had with previous employers into Vanguard. I currently have the money in the Vanguard Prime MM Fund until I figure out how I want to allocate it.

I've read most of Bob Clyatt's book, especially the section detailing the "Rational Investing Portfolio" and it looks pretty enticing considering the historical returns and low volatility. But I don't want to go through the trouble of finding an advisor who has access to DFA funds, nor do I want to go through the trouble of finding out where to put the "Private Equity" portion. And anyway, I think the portfolio is for those who have already FIREd. Since I have some years before I get there, perhaps this is too conservative.

I've put together an allocation that I THINK is reasonable but would like comments please. A little background - I'm turning 40 in the next few months and DW is 41. We hope to have the abode paid off in the next five years and hope to FIRE in the next 10. The below allocations are only for my tax sheltered money, and hence, will not be touched for at least 15 years. I still have to figure out what I want to do with my taxable money. Here it is:

Vanguard Small Cap Index (NAESX) - 15%
Vanguard 500 Index Fund Investor Shares (VFINX) - 15%
Vanguard European Stock Index Fund Investor Shares (VEURX) - 15%
Vanguard Pacific Stock Index Fund Investor Shares (VPACX) - 15%
Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX) - 5%
Vanguard REIT Index Fund Investor Shares (VGSIX) - 15%
Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) - 20%

And, by the way, I have tax sheltered money (solo 401K) in foreign bonds and commodities already hence my not including it here.

OK, give it to me straight. Don't hold back

 

[Spanky]

Your portfolio looks solid and diversified. If you want more input, try the Diehard forum.

 

[mb]

This allocation looks fine but you should also look at you over all allocation that includes the tax sheltered accounts.

MB

 

[Cb]

I'll be in a similar situation within the next few weeks, and I'm having a tough time rationalizing putting 1/n allocations into Emerging Markets and REITS after their (record?) performance over the past several years.

Here's my current thinking: If I divvy my portfolio up into roughly equal %'s (my wife's 401K is still tied up primarily in LB due to poor alternatives) of the following indexes:

US LB
US LV
US SV

Euro
Pacific
Int'l Value

PCRIX (commodities futures)
Short-Medium term Bond Index
TIPS

as well as owning a ~$250K house, and decent (future) pension & SSI entitlements.

...I figure we'll have a pretty well diversified portfolio even if I put off allocating anything to EM and REITS for another 4 or 5 years. As raddr is fond of saying, "...there are a lot of good asset classes, you don't need to own them all..."

That's where I am tonight anyway,

Cb

 

[brewer12345]

Vincenzo, looks OK to me, but I probably would not put quite that much in REITs.

 

[AltaRed]

I would agree. REITs are high priced and the RE market is shaky right now. Would suggest dropping that to 5-10% and topping up the Vanguard 500 instead. Can always make adjustments in 2-4 years.

 

[Brat]

After I rejected Lucia's REIT deal I started to look at REIT mutual funds and stocks. It is a rare mutual fund that doesn't include mortgage and construction companies. The one I did find that had office, retail and residential had a crummy dividend. I concluded that when the time is right I will buy the REITs themselves and cut out the middle-man. IMHO if an REIT pays out 6% + and the stock just keeps up with inflation I will have a keeper.

 

[Rich_by_the_Bay]

After I rejected Lucia's REIT deal I started to look at REIT mutual funds and stocks. It is a rare mutual fund that doesn't include mortgage and construction companies. The one I did find that had office, retail and residential had a crummy dividend. I concluded that when the time is right I will buy the REITs themselves and cut out the middle-man. IMHO if an REIT pays out 6% + and the stock just keeps up with inflation I will have a keeper.

So where would you find or purchase such a holding?

 

[CCdaCE]

Could also substitute Vanguard Total Stock Market Index Fund (VTSMX) instead of the 500 fund, but that's probably splitting hairs. TSM gives you some mid cap and small cap exposure, although relatively minimal, 2% (or so?) of TSM is REIT, etc. etc.

Could just use the Vanguard Total International Stock Index Fund (VGTSX) instead of European, Pacific and Emerging. You'd have the market weighting of the three funds (wouldn't have to worry about rebalancing between the three). But, maybe you want to rebalance yourself.

It all depends on how much you want to "slice-n-dice" vs. simplify.

TSM, Total Int'l., Total Bond, plus maybe some REIT could be the simplest. After that, it's just more rebalancing with a slight expected increase in return.

I'm assuming you have enough from the 401k rollover that you aren't getting hit with $20 fees every year for every one of the funds you have in your list. Reduction of the number of funds might save you a couple bucks in fees if you don't have $10k in each fund (or whatever their minimum is).

Overall, your plan looks like a good one to me.

-CC

 

[Brat]

Rich:
First I am sneaky... I looked to see the holdings of REIT mutual funds (including the fund someone mentioned in Canada), I noticed that several hold EOP and EQR, I knew about O (from a seatmate on a long flight who worked for the firm), then I recall that Forbes had an article on REITs a couple years back and mentioned one that invested in mobile home parks.  From that I list I looked at Fidelity's reasurch tool, asked about similar firms and found LRY is highly regarded.  I have my biases.  Kimco is a good hotel REIT but that is not a market that suits me.  And so on.  I am starting to build a watch list.

I shall wait until realestate is out of favor.  O has a nice current return, EOP, EQR and LRY's dividends are too low based on current valuation to interest me now.   I can be patient. 

 

[Alex]

Here is my two cents - If you have an asset allocation, you don't need to worry about whether or not an asset class has had a recent run-up. If your AA calls for 15% Reit, put 15% in. Invest the rest as per your AA. Then in a year (actually I only rebalance every 13-18 months for tax purposes) you rebalance your portfolio to meet your asset allocation. Simple and effective.

 

[Vincenzo]

Thanks for your input, everybody.

AltaRed,

I took Brewers advice and only allocated 5% to REITs, although I thought his reasoning was simply that the allocation that I had was too high for an allocation to REITs, not because of the run-up. Anyway, I can always exchange some shares of another fund to up my allocation in the REIT fund in the future.


CCdaCE,

Yes, the simple approach also appealed to me but I like the "slice and dice" approach better. Perhaps when I get older and don't have the patience or interest in this stuff anymore I'll go with the simple approach but for now, I like the idea of being able to rebalance if, say, small-caps or Eurpoean equities develop a bubble. I enjoy nurturing my portfolio for now. We'll see if that's still the case in 10 years .