Comments on Portfolio Allocation

[veritasophia]

From information I've garnered from this site and books (4 pillars, stocks for the long run, lazy person's guide to investing...) I came up with the following portfolio. Its all with vanguard funds. Please let me know what you think. So far I have 70k vested in it (though I don't have all of the funds yet).

STOCKS500 Index8%
L/C Value12%
S/C Index8%
S/C Value12%
Total International12%
International Value16%
REIT12%
BONDSS/T Investment Grade5%
GNMA5%
H/Y Corporate5%
L/T Investment Grade5%


Its aggressive with a leaning toward value funds (higher historical returns and higher dividends). Do you see any problems with this allocation?

[wildcat]

How old are you? What kind of time horizon are we talking about? What family of funds do you have?

(I am assuming you own VG funds if you are basing it on WB's book) Any reason why you didn't buy the VG Bond Index as part of your 20%? Pretty much a smathering of all bonds with the avg dur falling into the intermediate category - from what I know it is the highest return for the level risk. Might be able to save some $$ on expenses by doing so.

[veritasophia]

Quote:

Originally Posted by wildcat How old are you? What kind of time horizon are we talking about? What family of funds do you have? (I am assuming you own VG funds if you are basing it on WB's book) Any reason why you didn't buy the VG Bond Index as part of your 20%? Pretty much a smathering of all bonds with the avg dur falling into the intermediate category - from what I know it is the highest return for the level risk. Might be able to save some $$ on expenses by doing so.

I'm in my mid 20s, from what I've gathered on this forum, unless I can make a lot of $$$, my time horizon is about 20 years (around 45 yo). By the time I retire the allocation will be 60/40 instead of 80/20.

You are right, I am using VG. The only reason I didn't use the VG Bond Index is that I assumed its possible to get higher returns by having more exposure to junk and RE bonds. The expense is higher (.23 v .20), however the historical returns are higher for the split (8.54 v 6.96). To tell you the truth I know very little about the bond market, maybe historical returns are not the best method for choosing bonds?

[LOL!]

Hmmm, after carefully considering your allocations, I might suggest you go with 9% S/C Index and 11% S/C Value. *Otherwise, it looks pretty good to me.

[veritasophia]

Quote:

Originally Posted by LOL! Hmmm, after carefully considering your allocations, I might suggest you go with 9% S/C Index and 11% S/C Value. Otherwise, it looks pretty good to me.

Thanks for the suggestion. Can you explain? Does it have to do with historical returns? Risk?

Also can anybody comment on mid-cap funds? Most of the writing does not include these, my understanding is that Large and Small caps cover the "4 corners" of the US market and are therefore better at decreasing volatility than mid cap. Is this correct?

[LOL!]

Quote:

Originally Posted by Veritasophia Thanks for the suggestion. Can you explain? Does it have to do with historical returns? Risk?

Nope, I can't explain.* I confess I was just pulling your leg.* Any of number of similar allocations will do about the same or better than what you have proposed.

I like Mid-caps despite folks like Bernstein and Merriman seeming to ignore them.* Some of my best performing funds are MDY and VMCIX.

[veritasophia]

Quote:

Originally Posted by LOL! Nope, I can't explain. I confess I was just pulling your leg.

As you can tell I'm easily duped Maybe I should stop fretting about the details, on second thought maybe 9% would be better...

Quote:

I like Mid-caps despite folks like Bernstein and Merriman seeming to ignore them. Some of my best performing funds are MDY and VMCIX.

Yeah Mid-caps seem to do quite well, I wonder why they are so often ignored?

[d]

since you asked!

you state that "its aggressive with a leaning towards value"; since the index funds include value, and your value picks outweigh your index picks, is seems to have a heavy value bias. But the equal weighting of small-caps is quite aggressive. Nothing wrong with all that is that is in fact where you want to be, but it seems somewhat inconsistent.

I too think it unwise to overlook the mid-caps ... they've done well by me.

A 20% allocation to bonds seems rather conservative for your age, esp if you are looking to be somewhat aggressive ... but half the bond choices are on the riskier side.*

Your allocation to REITs is in my opinion excessive, but others would likely disagree.

for what it might be worth!

[Ed_The_Gypsy]

Index funds include the mid-caps. I have indexes but also small cap value on the side to overweigh in SCV. While I am a big indexer, I don't like capitalization-weighted indexes. I like to have more different companies instead of more Microsoft stock.

I think Gummy addresses such choices in his take on slice-and-dice:

http://www.gummy-stuff.org/slice-dice.htm

Here is an unsettling one:

http://www.gummy-stuff.org/Sam-retires.htm

Gummy is a retired math prof who is a wiz with Excel and a lot of other things. You and I could learn a lot from him.

Cheers!

Ed

[wildcat]

Yeah I suppose you could get some extra return by splitting the bonds. *Mid-20s - I am a yr or two older than you and I hold zero bonds. *I chose a little sideline cash and some commodities exposure via PCRIX over bonds.

If you want a more aggressive stock allocation I would consider doing something with the S&P. *I would replace the S&P with a mid cap index. *I would rather capture the value prem on the large caps and pocket the dividends they offer. *However, in terms of the growth/blend split I do not think the S&P is as attractive as the mid cap index for someone your age. *Just a thought. *With 20 years and continuous contributions I think you can afford to be aggressive.


Also for my allocation, instead of holding the small cap index, I hold the BRSIX fund - micro quasi-active fund with low expenses. *I feel it really captures the small market growth stocks *more adequately than the VG sc index. *It also provides a lower correlation to the S&P for diversification purposes. *Another difference in our allocation is that I only hold the VG intl and scrapped the index. *No reason really other than I am going for the intl value prem and I think it provides me with adequate intl diversification.

Just my thoughts but go with what you are comfortable with in terms of allocation. *And FYI I do believe I am more aggressive than your avg investor my age so take it with a grain of salt.

[wildcat]

Ed -

Brideway also offers a large cap index fund - Blue Chip I think it is called. Low exp and unlike just about every other index fund out there, it is equally weighted so it naturally buys low and sells high - dirty market timing fund. Just in care you are interested.

[Ed_The_Gypsy]

Thanks, Wildcat. I have heard of it, but have been too bogged down in daily life to do a major revamp of my portfolio. I hear it does better than the cap-weighted indexes! One day?

[JPatrick]

Well I'm just impressed that someone your age has thought through the process and come up with what you have. *NOW GET YOUR BUTT OUT THERE AND CHASE DOWN SOME CHICKS. * WHILE YOU ARE AT IT PICKUP A NEW CORVETTE WITH ABOUT A 108 MONTH FINANCE PLAN @ 15%. *

OK, I'm all right now- -that just seemed to slip out.
Comments. *I've never liked VG international funds as compared to Fido, but your there so I'd just say, find a way to pickup about 5% of VEIEX. If you do want to look at FIDO, check FSCOX. *I posted about this when it first was opened and it has doing nicely.
Given your propensity for financial research, I'd look at putting a little cash in a sector fund or two. *Energy and gold have been the recent no-brainers, but it is up to you to track down what is next.

[wildcat]

Before you decide whether or not to add the emerging markets into your mix just be aware that your VG intl value fund has a 20% allocation to emerging market companies.

Ed - maybe over the long run (at least I think it would) but it hasn't seemed to as of late. Maybe chalk up a point for tradition index funds - dirty momentum funds.

[Saver]

Congratulations on having a plan (and so much money) at such a young age! I have a few suggestions:

1) Although your LT high-grade bond allocation is not large, I would point out that as you move out on the yield curve (from 1 year bonds to 20 yrs, etc), there is not much additional yield benefit beyond a certain point ... I think around the 5 year mark. However, there is alot more volatility/risk as you go out further on the curve. Of course, you may want more volatility, but I'd rather get a similar yield for alot less risk.

2) On the stock side you're buying index funds and the value component of the index. I would suggest buying the growth and value components and skipping the overall index. Growth and value can have very different returns in a given year, and by splitting the two you can be more specific when selling your winners or loading up on your losers. By buying an overall index you may be buying into both a strong value stock market and a weak growth stock market at the same time (or visa versa).

3) I agree with "d" when s/he states that your portfolio has a very heavy value bias. Not a horrible thing, but I would note the bet you are making.

4) I would not worry about the mid caps. I'm 98% sure that you already own midcaps when you buy large and small-cap funds.

I hope that helps. Best of luck, Saver

[Nords]

Welcome back, Saver! How's the ER country search going?

[brewer12345]

Looks generally OK to me, although I would probably reduce the US bond exposure (especially junk). I would also add some commodities exposure and some unhedged foreign bond exposure.

[veritasophia]

Thank you everyone for the replies.

This is what I've gathered so far:

• I may be leaning a little to heavily on value funds. Especially since the index funds are a blend.
• Rethink my bond allocation. L/T bonds may not be worth it, and too much US and junk bonds.
• Research additional small/mid/international options.
• REIT allocation may be too high. I haven't bought any of these yet, they seem overvalued. I'll keep investing in the rest and wait hope for the crash.

Quote:

Before you decide whether or not to add the emerging markets into your mix just be aware that your VG intl value fund has a 20% allocation to emerging market companies.

One of the reasons I chose the VG intl value was because of this 20% allocation to emerging market companies. VG emerging market fund has that pesky .5% buy and sell fee which put me off.

Quote:

I think Gummy addresses such choices in his take on slice-and-dice: http://www.gummy-stuff.org/slice-dice.htm Here is an unsettling one: http://www.gummy-stuff.org/Sam-retires.htm

Cool site! I'll definately be spending some time there.

[Ed_The_Gypsy]

Vertasophia,

I have neglected to send you this link :

http://www.retireearlyhomepage.com/

John P. Greany introduced many of us to the idea or ER and showed us how it was practical.

John figured out quickly at age 25 that he didn't want to work for the rest of his life. He learned investment and took some chances and retired at 38 (if I got the ages right).

Read his website from cover to cover. Read his story. He sells one or two reports for a pittance that are well worth buying.

It is best to start early, and you are thinking about it early. Good for you.

Cheers,

Ed The Gypsy