Another Asset Allocation OUTING

[Nords]

Quote:

Originally Posted by saluki9 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.

Well, you have to sell that to a lot more people than I do, so I can understand that you'd get pushback.

I see it as the value premium and Bernstein's "Four Pillars" pointing out that growth has pretty much underperformed for years. I think that both of those are based on at least 20 years of data.

EM, REITs, commodities-- where's the flashing blue light and the crowds of buyers running away screaming in horror?

[audreyh1]

15% REIT just seems too high relative to the other equity asset classes. REIT is a very specialized asset class. Most recommendations seem to be for 10% or less. Having a small amount of it helps diversify a portfolio, but a large amount of it in a portfolio has the opposite effect. Seems like value index deserves more - this is a nice broad (not specialized) asset class.

Audrey

[d]

Quote:

15% REIT just seems too high relative to the other equity asset classes. REIT is a very specialized asset class.

ditto

[Cb]

Quote:

Originally Posted by Nords EM, REITs, commodities-- where's the flashing blue light and the crowds of buyers running away screaming in horror?

EM & REITs give me the willies just now. I'll own them eventually...

http://stockcharts.com/charts/perfor...IX,PCRIX,VEIEX

(pull the slider all the way to the left to show 1046 days - including dividends, btw)

Cb

[Dude]

Quote:

Originally Posted by Rich_in_Tampa 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. Looks like they would be complementary. Am I misreading or misunderstanding that?

I read it as the Extended Market Index Fund (VEXMX) compliments the S&P 500 index, not the total mkt index. Also, all of my Vanguard IRA holdings are currently in Target Retirement 2035, which contains Total Stock Market Idx. If I do the Vanguard analysis on these IRAs, it says the Total Stock Market Idx is 64% large cap blend, 27% mid cap blend, and 9% small cap blend. Note it said blend, not growth. Hope that helps. I have also been looking at the extended market index to compliment a very low expense (0.05% ER) S&P 500 index fund that I have access to in my 401(k).

[AlmostDone]

I'm trying to decide how to get into the VG REIT index. When you say to DCA in, do you mean put a specified amount in every time it dips, or put a specified amount in at regular intervals? I thought it would be best to wait for a correction and put the whole amount in. I guess I could end up doing that at the relatively high point of the correction.

[samclem]

Rich,

I liked Version 1 better, but that's primarily because I believe there are fundamental reasons (see Graham, W. Bernstein, et al) that value stocks make sense. Yes, there will be periods where growth stocks will outperform--but I think there are some reasons to believe that will be less common in the future (esp in the US). Earnings and fundamental stock value--good in boom times and bust. I also think you'll get a premium for holding small/mids over large size companies, but I'm less convinced that this is an enduring trend. For that reason, I'd probably choose a higher percentage of large cap value stocks than you have in Version 1.

All this is assuming you'll do periodic rebalancing and will hold to your allocation percentages even when you underperform the market in some years. If you think you'll be tempted to sell your value/small holdings when you do worse than the market as a whole, then you'd probably be better off just buying TSM and Intl to mirror the market.

Oh, and I still think 15% REITS is a tiny bit high, unless you've got some unique reason to need protection against RE inflation. If you think you'll eventually want 15%, maybe DCA to the 10% over the coming year and, if prices haven't crumpred, wait for the corrrection many believe is coming to go the rest of the way? (Sorry--market timing slipped in there!)

[Rich_by_the_Bay]

Quote:

Originally Posted by AlmostDone I'm trying to decide how to get into the VG REIT index. When you say to DCA in, do you mean put a specified amount in every time it dips, or put a specified amount in at regular intervals? I thought it would be best to wait for a correction and put the whole amount in. I guess I could end up doing that at the relatively high point of the correction.

DCA=equal amounts invested on a fixed schedule. It assures, more or less, that you'll get in at approximately the mean share price for the time period in question. No big wins, no big losses.

[Dawg52]

I know you said you will pass on commodities but I would put 7.5% in Reits and 7.5% in commodities.(DJP) In fact, that is what I have done.

[Rich_by_the_Bay]

Quote:

Originally Posted by Dude I read it as the Extended Market Index Fund (VEXMX) compliments the S&P 500 index, not the total mkt index. ...Note it said blend, not growth

You (and Saluki) are right; my plan A was more tilted toward value than I realized, and indeed more than I want. I think I can get where i want to be (moderate small/mid cap and value tilt) via total market as my core, then using extended market and value idx in smaller doses than originally specified. Maybe something like:

Total Stock Idx 40%
Extended Mkt 15% (blend, small, medium cap)
Value Index 10% (large value)
Total Intnl Idx 25% (includes 15% EM)
REIT 10%

Of interest, here's a recommended asset allocation plan by none other than John Bogle in his book:

Large cap 50%
Mid cap 10%
Small cap 20%
Internat 10%
Commod 10%

[Spanky]

Quote:

Originally Posted by Rich_in_Tampa Of interest, here's a recommended asset allocation plan by none other than John Bogle in his book: Large cap 50% Mid cap 10% Small cap 20% Internat 10% Commod 10%

Is this a new book from Bogle since it refers to commodities?
Would it be simpler just to own one total market fund instead of three funds (large, mid and small)?

[Rich_by_the_Bay]

Quote:

Originally Posted by Spanky Would it be simpler just to own one total market fund instead of three funds (large, mid and small)?

Yes, it would be simpler but you can't tilt toward value or small/mid that way. If they had a single fund that had a tilt toward small and value, I'd take it.

[saluki9]

Quote:

Originally Posted by Nords Well, you have to sell that to a lot more people than I do, so I can understand that you'd get pushback. I see it as the value premium and Bernstein's "Four Pillars" pointing out that growth has pretty much underperformed for years. I think that both of those are based on at least 20 years of data. EM, REITs, commodities-- where's the flashing blue light and the crowds of buyers running away screaming in horror?

I'm not quite sure what your intent was, but I'm not selling anything. Constructing and managing portfolios is all that I do and I would never tilt a portfolio that much.

Growth and value fans can both find long periods where one has outperformed the other. I suppose when we the taxpayers pick up an inflation indexed pension for you it's easier to bet the farm on one premise. Even the folks at Dimensional (who we use and I tend to give a lot of respect) wouldn't suggest that much of a value tilt. Their most value oriented model portfolio doesn't approach the numbers of the first portfolio Rich posted.

I'm too tired to deal with datasets now. when my brain is firing at normal speed I will point out why investors can't afford to bet everything on a value premium they may not realize in their lifetime.

[lswswein]

Some data points for Rich

1. Vang Total Stk Mkt (VTSMX)
Lg: 73; Mid: 19; Sm: 9
2. Vang S&P 500 (VIIIX)
Lg: 89; Mid: 11; Sm: 0
3. Vang Ext Mkt (VEXMX)
Lg: 6; Mid: 52; Sm: 41

4. 50% each of VIIIX & VEXMX
Lg: 48; Mid: 31; Sm: 14
5. 50% each of VTSMX & VEXMX
Lg: 40; Mid: 35; Sm: 25
6. 79% VIIIX & 21% VEXMX
Lg: 73; Mid: 19; Sm: 9


A few notes. The total investible securities in the US is about 7000 stocks and the Wilshire 5000(a misnomer nowadays) tracks that according to Mkt cap. The Vang Total Mkt tries to replicate this benchmark but does not own all the securities, instead it does a sampling.

The S&P 500(VIIIX or other flavors of it) own the 500 in the S&P. The VEXMX, ext mkt fund tries to won the rest of the mkt to complete the Total Mkt. A ratio of 79% VIIIX and 21% VEXMX is exactly the same as the VTSMX. The total investible stock mkt of the US is 80% composed of the S&P 500 stocks - they are the largest capitilization securities (There is a Brk exception here)

Anyway the moral of the story is that always start with VTSMX and then add others. Also remember when you are adding SmV you are overweighting a part if the market - my argument when I said only add SmV and get rid of VEXMX is that SmV is a volative but great diversifier. VEXMX is just fluff - yeah it has Midcaps etc but you already own them (a small % I agree) in VTSMX. You are only getting too far away from Total Mkt but adding VEXMX into the mix.

Also I strongly second wab's post - you should first come out and state what your philosophy is, and what all you are ready to stick with! This means reading Intelligent Investor Again and writing down these are the tilts I want and why and that you will stick with certain % The problem is when a new study comes out and shows some other premiums if you don't really believe in some of the stuff you might bolt and that might be the biggest blow to you Portfolio

hope this is useful
-h

[samclem]

Quote:

Originally Posted by saluki9 I'm not quite sure what your intent was, but I'm not selling anything. . . I suppose when we the taxpayers pick up an inflation indexed pension for you it's easier to bet the farm on one premise.

Wow. Maybe a little sleep IS in order.
As far as the taxpayers--they offerred a deal and some folks accept it. It's a widely available deal, you don't have to know anybody specal to take advantage of it. If the taxpayer's deal is so generous, you'd think folks would be beating down the doors to take it.

[kenepp1]

I can understand wanting to be a little value tilted. I have run several models with large and s/c values. Over the last 10 years value has helped take the volatility out of the bad years and has beaten the TSM and S/C and ext'd market indexes on the total average. I think age is a heavy factor to consider. At 65 I cannot stand 3 years of double digit negative losses as happened to the combination of those funds in 2000-2002. I know 10 years may not be far back enough, but it is at least an indicator. The Coffehouse Investor also is tilted to value.

[saluki9]

Quote:

Originally Posted by samclem Wow. Maybe a little sleep IS in order. As far as the taxpayers--they offerred a deal and some folks accept it. It's a widely available deal, you don't have to know anybody specal to take advantage of it. If the taxpayer's deal is so generous, you'd think folks would be beating down the doors to take it.

Nords is a tough character, that shouldn't offend him (It was not intended to) but this has come up before. There are some people here who forget that it is easier to wait around 5, 10, or more years for the "value premium" to reappear when you have a pension to count on for your daily living expenses. Most people need a portfolio with a higher R squared to the broader market.

[Rich_by_the_Bay]

Quote:

Originally Posted by lswswein Some data points for Rich

I really appreciate your perspective and information. Rethinking a bit. Maybe rather than extended market, I'll select a pure small- or small value fund to tilt the TSM fund a little, along with value idx to do the same on the large cap side. Or maybe just stick with TSM and skip the "tilt" altogether; long term it may come out in the wash.

As to goals, this is my "bucket 3" - long term earnings engine with moderate risk tolerance and 10-to-15 year horizon, occasional rebalancing to retain the allocation. I'm pretty disciplined so once it's set, barring unforeseen outside changes, it will probably vary little.

BTW, did you get your market cap information from the Vgd web site? I wasn't able to easily find this information on my own.

Thanks again.

[lswswein]

Quote:

Originally Posted by Rich_in_Tampa BTW, did you get your market cap information from the Vgd web site? I wasn't able to easily find this information on my own. Thanks again.

Forgot to add that info. I got the mkt cap stuff from morningstar.com Go click on tools and you will see Instant X ray in there. Add a fund and say you hold $1 in it. Then click show X-ray and you should see the 9x9 box will Cap and Style(Value, Blend & Style) Info. I just added across the style to get Cap info.

-h

[ats5g]

Quote:

Originally Posted by Rich_in_Tampa I really appreciate your perspective and information. Rethinking a bit. Maybe rather than extended market, I'll select a pure small- or small value fund to tilt the TSM fund a little, along with value idx to do the same on the large cap side. Or maybe just stick with TSM and skip the "tilt" altogether; long term it may come out in the wash..

Rich,

I do a similar thing. I use a S&P 500 index fund + Wilshire completion fund to mimic a TSM fund [401(k) constraints], and then I just use Vanguard's Small Cap Value fund for a small and value tilt in 1 fund.

If you're just starting from scratch, I think starting with a TSM fund, and then adding one value and/or small value fund will cut down on the number of funds. For example:

40% TSM
5% LV
10% SV
10% REIT
35% Int'l

or even

40% TSM
15% SV
10% REIT
35% Int'l

**Note that Vanguard's value index fund don't tilt as much to small or value as DFA's.

- Alec