Monthly Asset Allocation

[WanderALot]

Hello,

I need some help with our monthly asset allocation. Here it is currently
(both in taxable and tax deferred accounts):

1. Vanguard Total Stock Market 35% [taxable] <-- with Vanguard
2. Vanguard Extended Market Index 18% [403(b)] <-- with Vanguard
3. Vanguard Total Bond Market Adm 13% [457]
4. DFA Small/Microcap 13% [457]
5. Vanguard MidCap Index 10% [401(k)]
6. Vanguard Total Stock Market 10% [401(k)]

My 401(k) has high cost options, so the best choices were the
TSM and the Midcap (number 5/6) and I decided to split the difference.
My wife's 403(b) is with Vanguard, so we have a slew of choices there.
My wife's 457 is with a provider that has a bunch of high cost funds
but it also has the Total Bond Admiral (3) and the excellent DFA microcap
so we split the difference there to get some smallcap/bond exposure.
Number 1 is our current after tax investment allocation.

Here are the problems I see with this portfolio:

1. No international exposure, I would be comfortable with about 15-20%.
2. I think there's probably a lot of overlap between the Midcap Index and the
Extended Market. And since we actually have a lot of choice with her 403(b),
I was thinking about switching out of that into Wellington/Wellesley in order to
reduce our risk a bit.
3. Too aggressive.

Please note that this is our monthly investment allocation. I realize that this
should be no different than our overall asset allocation, but I need to tackle the
monthly investment first for my own sanity!

My first pass at this was:

1. Vanguard Tax Managed International 20% [taxable] <-- with Vanguard
2. Vanguard Total Stock Market 15% [taxable] <-- with Vanguard
3. Vanguard Wellesley 18% [403(b)] <-- with Vanguard
4. Vanguard Total Bond Market Adm 13% [457]
5. DFA Small/Microcap 13% [457]
6. Vanguard MidCap Index 10% [401(k)]
7. Vanguard Total Stock Market 10% [401(k)]

As you can see, I've only changed the allocations for investments held with Vanguard
since the others are with fund families that I can't change because of lack of investment
choices (my 401(k) and my wife's 457). So my allocation percentages can be changed in
numbers 4 - 7, but I don't have any other fund choices (or rather, none that I like)

I don't want to have too many funds in my wife's 403(b) since Vanguard charges fees
for each fund, so I thought moving everything from Extended Market into Wellesley would
reduce my volatility while keep fees low.

What do you guys/gals think?

Thanks!

p.s. We are 31/30. Looking to throttle back my work hours in 5 years and RE in maybe 10-15.

 

[ats5g]

How about:

1. Vanguard Total Stock Market 15% [taxable] <-- with Vanguard
2. Vanguard TM Int'l 20% [taxable]<-- with Vanguard
3. Vanguard TBM 18% [403(b)] <-- with Vanguard
4. DFA Small/Microcap 26% [457]
5. Vanguard TSM 20% [401k]

or alternatively

1. Vanguard Total Stock Market 15% [taxable] <-- with Vanguard
2. Vanguard TM Int'l 20% [taxable]<-- with Vanguard
3. Vanguard SC value index 18% [403(b)] <-- with Vanguard
4. Vanguard TBM Adm 26% [457]
5. Vanguard TSM 20% [401k]

- Alec

 

[WanderALot]

Thanks for your suggestion ...

1. Vanguard Total Stock Market 15% [taxable] <-- with Vanguard
2. Vanguard TM Int'l 20% [taxable]<-- with Vanguard
3. Vanguard TBM 18% [403(b)] <-- with Vanguard
4. DFA Small/Microcap 26% [457]
5. Vanguard TSM 20% [401k]

Hmm. I guess using Vanguard TBM in the 403(b) would reduce volatility more than
switching to Wellesley and at the same time I would be able to maximize the DFA Micro
fund which I wouldn't have access to anywhere else. However, I feel that having access
to all the Vanguard funds and choosing the TBM (number 3) is a waste, especially since
I have access to the TBM Admiral in the 457 (number 4). I guess that's somewhat
irrational since if everything matches my requirements, who cares ...

With respect to your 2nd portfolio, is there a reason you prefer Vanguard SC Index to
the DFA fund?

Thanks.

 

[wildcat]

Eliminate the midcrap fund

 

[WanderALot]

Eliminate the midcrap fund

May I ask why you don't like the Midcap fund? Thanks.

 

[ats5g]

Thanks for your suggestion ...

Hmm. I guess using Vanguard TBM in the 403(b) would reduce volatility more than
switching to Wellesley and at the same time I would be able to maximize the DFA Micro
fund which I wouldn't have access to anywhere else. However, I feel that having access
to all the Vanguard funds and choosing the TBM (number 3) is a waste, especially since
I have access to the TBM Admiral in the 457 (number 4). I guess that's somewhat
irrational since if everything matches my requirements, who cares ...

With respect to your 2nd portfolio, is there a reason you prefer Vanguard SC Index to
the DFA fund?

Thanks.

Nope. No real reason. I was just throwing out two different ideas. I think in an ideal world I'd want to use both the DFA fund and TBM admiral. However, if you want around 20% bonds, you may not be able to maximize the use of both. Is there no suitable bond option in the 401(k). It's hard to believe they'd includ those two index funds but no good bond option.

You could also do the following if you still wanted to include more of the mid caps:

1. Vanguard Total Stock Market 15% [taxable] <-- with Vanguard
2. Vanguard TM Int'l 20% [taxable]<-- with Vanguard
3. Vanguard TBM 18% [403(b)] <-- with Vanguard
4. DFA Small/Microcap 26% [457]
5. Vanguard Mid Cap 20% [401k]

[and since the 401(k) probably has no extra fees for having 2 funds like the 403(b), you could do whatever combo of TSM or mid cap index you want]

Though before I'd go choosing funds, I'd write down what %'s of each asset class I wanted. For example, a decision tree might look like:

1. % in stocks and % in bonds, then

2. % in US stocks and % in int'l stocks, then

3. % in US large and % in US small , then
a. % in LV and SV

4. % in int'l large + int'l small, then
a. % in LV and SV

Having a road map like this makes it much easier. You don't necessarily have to go into that deep [like 3a + 4a] until you've got enough $$ to avoid the fees, or make the extra account fees [Vanguard's $15 per 403(b) fund or the $10 index low balance fees] a small % of $$.

hth?

- Alec

 

[unclemick]

Dumb question

Where does everyone get their expected return data when selecting asset classes for percent weightings.

Back in 1988 - in my multi asset days - I got it from T. Rowe Price, a Phd guy at an AAII chapter meeting. Used SD numbers to fiddle with classes toward a target 10% overall expected growth and 11 SD.

Never used R squared or rolling correlation data back then - at least I didn't.

Did asset class percents by trial and error and used weighted calc's.

So now everyone uses Financial Engines or what for asset class selection and weight % in each class.

 

[wildcat]

May I ask why you don't like the Midcap fund? Thanks.

In terms of portfolio construction I believe there is little benefit in holding mids. Best to spilt domestic between large and small.

 

[Mr._johngalt]

Dumb question

Where does everyone get their expected return data when selecting asset classes for percent weightings.

Back in 1988 - in my multi asset days - I got it from T. Rowe Price, a Phd guy at an AAII chapter meeting. Used SD numbers to fiddle with classes toward a target 10% overall expected growth and 11 SD.

Never used R squared or rolling correlation data back then - at least I didn't.

Did asset class percents by trial and error and used weighted calc's.

So now everyone uses Financial Engines or what for asset class selection and weight % in each class.

I am still using the backs of old envelopes and cocktail napkins.
Historical data mostly comes out of my head. Sometimes I factor
in stuff I read or saw, but only if I found it accidentally. I seldom
actually look for stuff. Comes under the heading "If I don't know
it it's probably not worth knowing anyway." Hubris?

JG

 

[Ed_The_Gypsy]

I agree with Wildcat. Sorry, the data I used to make that decision isn't at hand but I think it came from Gummy.

Ed

 

[Bookm]

Midcaps are pretty much the unsung hero in our AA. Our MC index fund had a pretty darn good return last year - either the best or second best, can't remember away from data which is at home. I've seen it stated before that midcaps comprise stocks that are on their way down.

And the midcaps don't really have much more of an impact on the Russell 2500 completeness index, the Wilshire 4500 extended market index, and to a lesser extent on the Russell 2000 index, than the smaller of the small-cap stocks do. Since these indexes are all market-cap, or value weighted, the larger companies (the midcaps in this case) should have a greater influence on returns, righ?.

However, these indexes are more evenly weighted that say the S&P500. For example, the top ten stocks in the S&P500 make up over 20% of the index weighting. In comparison, the top ten stocks in the Wils. 4500 only make up just over 6% of the index.

Long-term historical returns were even respectable, and kept pace with other more popular segments of the market. Trying to compare apples to apples, if you look at the M* indexes you can see my point.

http://indexes.morningstar.com/Index/IndexReport.asp?Symbol=$MSCP
http://indexes.morningstar.com/Index/IndexReport.asp?Symbol=$MLCP
http://indexes.morningstar.com/Index/IndexReport.asp?Symbol=$MMCP

Since it's an often ignored portion of the market, I've kept a portion of my portfolio available for it for several years now, and haven't been disappointed.

Bookm

 

[cute fuzzy bunny]

I guess the good news is that some of the midcaps end up being large caps.

The bad news is that some of them end up small caps...

 

[ats5g]

See Bernstein's Of Markets and Barbells. There are a whole lot of small cap funds/indices that have a good slug of midcaps, so you're not really "missing" midcaps unless you go with a fund like BRSIX.

- Alec