Evaluate my portfolio

[soupcxan]

Situation: I'm a 25 year old fairly conservative investor. Single, decent salary, I have a cash emergency fund but no other investments than those listed here (i.e. no residential real estate). What are your thoughts on this asset allocation? Have I missed anything critical?

14% Vanguard US Bond Index (VMBFX)
18% US I-bonds (CPI+3%)
11% Int'l Unhedged Bond (BEGBX)

20% Vanguard US Dividend/equity income (VEIPX)
4% Vanguard US Small Cap Index (NAESX)
4% Vanguard REIT Index (VGSIX)
11% Commodities (DJP)
18% Vanguard Int'l Tax-managed Equity (VTMGX)

Concerns:
1) Am I too tilted towards large-cap value? I know the real measure is total return, but I prefer dividend paying stocks. Do I need to balance VEIPX out with something like the total stock market index (VTSMX) to get a little more growth and mid-cap exposure? I don't mind taking a little less return from a value tilt if it means less volatility.

2) My international equity fund doesn't hold any emerging markets. Do I really need to add some? Or is it just going to add more volatility (when EM blows up, it seems to really explode, and seems to be fairly correlated with the rest of the global equity markets)?

Please, no advice about reducing my bond exposure because of my age...I am reducing it to from 55/45 to 75/25 over time but am never going to hold 100% equities. Also, these funds are allocated across my 401k, Roth, etc. for reasonable tax efficiency.

 

[JustCurious]

So let me get this straight.... you want people to give you advice about your asset allocation, but you instruct people "not to give you any advice about your bond exposure"

Guess what is the single, number one, numero uno most important decision when figuring out the best asset allocation?.... drum roll please......it is your equity to fixed income ratio! If people are not allowed to give advice about the number one most important factor in your asset allocation, then the advice you get will be worthless.

By the way, can you give me some advice about losing weight... but please don't talk about exercising or eating less...it's not gonna happen. :

 

[crazy connie]

By the way, can you give me some advice about losing weight... but please don't talk about exercising or eating less...it's not gonna happen. :
[/quote]

TOUCHE JC!!!

 

[soupcxan]

I think you misunderstood...I would appreciate comments on my equity selections, comments on my bond selections, and the percentages within each category. However, if you are just going to say "you should have more equity exposure because you are young" then I was trying to save you the effort, because I've already heard it and am working on adjusting it. I was looking for new ideas that I haven't considered. But hey, if you want to make a case for me to hold 100% beev3r czheeze futures, I'm all ears.

 

[brewer12345]

Looks OK to me. I would think about swapping the REITs for some mid caps, but its a minor issue.

When the junk bond market blows up again (and it will if you wait long enough), I would seriously consider adding some junk exposure via VG's junk fund.

 

[milmoose]

I love that asset allocation. Perfectly appropriate for a conservative investor.

My only two thoughts on improvement:
1. Since you have a long time horizon to retirement, consider increasing the allocation to small cap value. Take a bit from the foriegn bonds or US Large Cap Value.
2. Consider dropping DJP in favor of a "managed futures" approach to commodities. PCRIX is my preferred holding.

By the way, if you have a conservative posture, you may want to add Commerical Real Estate to the mix sometime in the future. When you reach $1M in net worth, spend some time evaluating Commercial RE as an option.

- M

 

[brewer12345]

2. Consider dropping DJP in favor of a "managed futures" approach to commodities. PCRIX is my preferred holding.

By the way, if you have a conservative posture, you may want to add Commerical Real Estate to the mix sometime in the future. When you reach $1M in net worth, spend some time evaluating Commercial RE as an option.

- M

Uh, DJP is a carbon copy of PCRIX, but it is m ore tax efficient.

How much cash would you expect an ntial commercial RE investment to require? $250k?

 

[OkieTexan]

I think you are off to a great start. Considering your expertise as a financial analyst, you might as well use some of it for your own benefit. One of the lessons I learned as I got older is about risk. I was a conservative investor in my twenties because I was afraid of losing what little I had. I wish I had taken more risks earlier in the game while I had time to recover from folly. We didn't have as many choices back in the 1980s when I started my employer IRA. If I had been exposed to the choices available today, I would have taken more risk.

Over the years, it has paid off to take risk. My tech stock choices would have 2 lousy quarters and I would set my finger on the sell button! Then BOOM! It would have a 40% run up. That account doubled in a little over 3 years.

Other choices that were left in more conservative accounts made money; but when I tallied up the 5-7% returns over many years, I was disappointed. There is always this tug of war between greed and fear.

I have learned to invest where I can accept a certain level of risk without worrying too much about it. Diversification helps; but too much DIV can dilute a portfolio.

My message: At 25 you have lots of time on your side to take some risks. When you get to be 55 (like me) it won't be as easy.

 

[soupcxan]

Should I consider exchanging both the Small-Cap index and the REIT index (which are both held in a Roth, so I have limited flexibility) for the Vanguard Extended Market Index Fund Investor Shares (VEXMX)? This would give me more of a balance between mid-cap and small-cap.

Why don't you like REITs? Is it just because they've had a huge run and you think they're going to come back to earth?

Looks OK to me. I would think about swapping the REITs for some mid caps, but its a minor issue.

When the junk bond market blows up again (and it will if you wait long enough), I would seriously consider adding some junk exposure via VG's junk fund.

 

[brewer12345]

Should I consider exchanging both the Small-Cap index and the REIT index (which are both held in a Roth, so I have limited flexibility) for the Vanguard Extended Market Index Fund Investor Shares (VEXMX)? This would give me more of a balance between mid-cap and small-cap.

Why don't you like REITs? Is it just because they've had a huge run and you think they're going to come back to earth?

If you wanted to add mid caps, I would do so with a mid cap fund, preferably at VG. I'd skip the VEXMX trade.

I think REITs are becoming dangerously overpriced. I sold all mne and in December I tossed half of the modest allocation out of the two in-law portfolios I manage. I am thinking of dumping all of the remainder.

 

[saluki9]

Soup

Depends on whether you view your portfolio as a strategic or tactical allocation? Assuming strategic I would make the following changes.

1. I would lower DJP to 5%

2. I think you are too value oriented and should consider adding a total market fund as more of a core holding. There is nothing wrong with a value tilt, but it shouldn't be your only domestic large cap holding.

3. The verdict is still out on EM, that being said they have shown some tremendous return potential and I include 4-5% in all but the most conservative portfolios. Don't worry about the liquidity issue because we all know that liquidity is a joke and isn't there when you want it.

BTW: Brewer, I have been able to get into some quality commercial RE deals for as little as $25K, but you have to shop around, know what you're looking at, and be willing to walk away.

 

[brewer12345]

BTW: Brewer, I have been able to get into some quality commercial RE deals for as little as $25K, but you have to shop around, know what you're looking at, and be willing to walk away.

With partners, I assume? Who manages the property?

 

[saluki9]

With partners, I assume? Who manages the property?

You bet! I have ZERO interest in being a landlord. I found a good partner who is a full time property manager for 5 buildings we have invested in. Each building has about 8-12 investors who put up the cash and the general takes a mgmt fee for managing the buildings

So far it was worked out very well for us.

 

[milmoose]

Uh, DJP is a carbon copy of PCRIX, but it is m ore tax efficient.

My mistake. I assumed DJP was linked to the underlying commodity (like GLD), not a futures return.

How much cash would you expect an ntial commercial RE investment to require? $250k?

Decent industrial/light commercial properties can be had for $600-800K. 20% of that would be about $120K - $160K.

Having a manager is another layer of fees, but it is a way to access the market with much lower invested capital.

- M

 

[cute fuzzy bunny]

When the junk bond market blows up again (and it will if you wait long enough), I would seriously consider adding some junk exposure via VG's junk fund.

What about VWEHX makes you think it'll have a problem...looks like they improved the credit quality (at the expense of yield) to the point where there isnt that much risk in it, at least compared to other high quality junk funds.

Agree on the reits. Stupidly valued before the past years run up. Lousy dividends. They're due for a fall. This isnt market timing, this is some wild eyed guy offering you 25k for the rusting pinto thats been sitting in the corner of your front yard for 15 years.

No problems with the heavy value tilt, I have the same.

 

[brewer12345]

What about VWEHX makes you think it'll have a problem...looks like they improved the credit quality (at the expense of yield) to the point where there isnt that much risk in it, at least compared to other high quality junk funds.

Trust me when I tell you this: the entire junk maket is priced to perfection right now. The deeper you go into the "crap" end of the spectrum, the more absurd the prices are. This is NOT the time to make a big bet on junk. But its not a knock on the VG fund.

 

[cute fuzzy bunny]

I agree with you completely. I bought a little of the vanguard fund a few months back when it was hitting the bottom of the trough. Seemed to me on evaluating the holdings that they actually may have gone a little too far into the quality end of the pool and it was costing them a little yield.

I still like to see around 4-5% between cash and quality junk...and we're at around 1-2% right now. Not that appealing.

 

[soupcxan]

I got rid of VWEHX last year, ultimately I decided that it didn't fit in my allocation, too highly correlated with stocks and not enough expected return to justify it.

As for REITS, I've been thinking/hearing that they were overpriced since 2005, yet they continue the climb. It is mind boggling. I finally decided that a small allocation wouldn't hurt, and if prices drop, I'll just continue to rebalance to get back to my target %.

 

[brewer12345]

As for REITS, I've been thinking/hearing that they were overpriced since 2005, yet they continue the climb. It is mind boggling. I finally decided that a small allocation wouldn't hurt, and if prices drop, I'll just continue to rebalance to get back to my target %.

That's kind of where I end up, although I am not all that happy about it.

 

[JohnEyles]

Trust me when I tell you this: the entire junk maket is priced to perfection right now. The deeper you go into the "crap" end of the spectrum, the more absurd the prices are. This is NOT the time to make a big bet on junk. But its not a knock on the VG fund.

Would high-yield muni binds be considered "junk" ? I bought some of Vanguard's
VWAHX last year; seemed like a pretty fabulous yield (4+%) for tax-exempt.

 

[brewer12345]

Would high-yield muni binds be considered "junk" ? I bought some of Vanguard's
VWAHX last year; seemed like a pretty fabulous yield (4+%) for tax-exempt.

High yield munis have been chased up also, but not quite as much. Just don't go overboard.

 

[clifp]

I got rid of my Vanguard junk bond fund last year also. The spread between junk and treasury especially GNMA just isn't enough to justify the higher risk. Ditto on REITs except for I got out of most of them in 2004 and 2005 and missed a lot of gains. (Except for Realty Income O which I plan on holding forever...)

As for the asset allocation. I think you are missing a core holding, e.g. Total stock market, S&P 500, or total international market. If you can get the total $ in that fund to the 100K level, you can qualify for Admiral fund level and save yourself .1 to 2.% a year in expense which at your age will really add up.

Yes, your bond allocation is to high, but you already knew that.

 

[wstu32]

none related.............

Brewer... WOW

you are the ma..1.5+- billion posts!!!!!!

 

[soupcxan]

So the concensus seems to be...add some mid-cap US exposure. The problem is, what % should be mid-cap relative to the 4% in small-cap? According to the morningstar x-ray, the VG small-cap index fund (NAESX) holds 40% of mid-cap stocks already. The small-cap fund is held in my Roth, so I have limited flexibility to rebalance, and the mid-cap would have to be held in a taxable account.

I am thinking that if the small-cap index is 4% of my portfolio, I should add another 2% of the mid-cap, so that in total it will be roughly 50/50 split between the two (since the small cap holds some mid-cap). Is this reasonable?

However, I hate to add a specific mid-cap index fund because I'll get hit with the <$10k balance fees from Vanguard, but that seems like the only way to do it...any other ideas? I could go to the VG extended market index in a taxable account (putting me over the $10k balance) but then I'd have to find something to replace the small-cap that's currently held in my Roth. And it doesn't look like it should be replaced with REITs, that's for sure.

 

[Spanky]

I got rid of VWEHX last year, ultimately I decided that it didn't fit in my allocation, too highly correlated with stocks and not enough expected return to justify it.

As for REITS, I've been thinking/hearing that they were overpriced since 2005, yet they continue the climb. It is mind boggling. I finally decided that a small allocation wouldn't hurt, and if prices drop, I'll just continue to rebalance to get back to my target %.

I still have about 5% in REITs and amazed that it is still climbing endlessly. REIT is up almost 8% - wow.