Wanting some feedback about Asset Allocation

[MrBig1]

I've got a small chunk of money that I absolutely do not need to touch for about 15 years. I was thinking that I could throw this into some Mutual Funds that have a 100% investment AA in large cap US stocks. As I get closer to the end of my 15 yr time frame start working it back to a more conservative AA. I know it's a gamble but as I see things my time span, 15 yrs, should be long enough to warrant the risk. Stocks have always had the best returns over a long haul. Thoughts and comment are welcome. I'm sure there are those here that are much more knowledgeable about investing than I am.

 

[pb4uski]

Makes sense to me but why just large caps and why just US?

 

[MrBig1]

Makes sense to me but why just large caps and why just US?

Well, my experience with investing has shown me that I have seen the largest returns in my portfolio from large cap mutual funds that invest in US stocks only. The usual 10yr returns for me have been slightly more than 10%. Other funds investing in international stocks have been on the 8% or lower range.
My normal AA over the past 5 years has been 30% bonds, 30% large cap, 20% small cap, 20% international. I have seen what I thought were good returns. The large cap US funds were always the best returns long term.

 

[cooch96]

Sounds like you’re most comfortable with large cap US. Comfort is a huge factor in keeping a steady hand on the tiller. So I think you’re on the right track.

But now I’m curious. What study, or what data have you compiled to reach your conclusion? In the few articles I’ve read, I recall small cap, value stocks are one of the most volatile, yet highest yielding, markets in which to invest long term.

 

[pb4uski]

You might want to look this over before deciding.

https://www.callan.com/wp-content/uploads/2017/01/Callan-PeriodicTbl_KeyInd_2017.pdf

 

[MrBig1]

Sounds like you’re most comfortable with large cap US. Comfort is a huge factor in keeping a steady hand on the tiller. So I think you’re on the right track.

But now I’m curious. What study, or what data have you compiled to reach your conclusion? In the few articles I’ve read, I recall small cap, value stocks are one of the most volatile, yet highest yielding, markets in which to invest long term.

cooch96,
I didn't read a study the only data I have is in my own portfolio. I have only been invested in Fidelity Funds that were available in my company 401k so my experience is truly limited. That is why I reached out to this community. My research is limited to looking into the 10yr returns and stats like "life of fund" returns. Small time I'm sure compared to many folks on this forum. I'm just looking for an edge and I know I'm comfortable with risk. I feel like the market is our only savior against inflation. If the market crashes I won't be the only investor in real trouble.

 

[Sunset]

OP - Can you find a MF that has lower cost than VTI ? (0.05%)
You haven't mentioned cost at all in your allocations so far.

 

[MrBig1]

OP - Can you find a MF that has lower cost than VTI ? (0.05%)
You haven't mentioned cost at all in your allocations so far.

Fidelity FOCPX will be one of my picks 0.81% expense ratio. Never knew that Vanguard had a MF with such low expenses. Thank you for the information. The reason I never mentioned expense was simply that I thought that was just a cost you had to pay in order to play.

 

[sengsational]

IMHO, You can't talk about a separate chunk of money in the same breath as "asset allocation". You need to talk about all of your investable assets and what the current allocation is, and what your target allocation should be.

This calculator has a 40 year old with 8.3% US Bond, 6.3% Emerging Bond, 31.6% US Equities, 35.8% Int'l Equities (1/3 of those are emerging markets), and 18% Hard Asset equities.

Not that you're 40 or that you agree with that calculator. The point is you define your asset allocation target. That calculator doesn't have a cash recommendation, so first you'd set aside whatever cash you needed to feel comfortable, then, with the rest of your assets, you'd figure out what you needed to do in order to hit your allocation target.

If you go to Morningstar or your fund prospectus, you can take any mutual fund or ETF and define roughly what percent falls in each of your defined asset classes. Some people go US-centric and have only two asset classes: US Equities and US Bonds, whereas that calculator has five or more. The point is, you need to find out where you are now in order to get to your asset allocation target.

 

[Scuba]

And if you go with ETFs rather than mutual funds, you'll likely save on fees & taxes.

 

[mathjak107]

etf's can have their own set of problems .

as holders of some popular etf's found out etf's and mutual funds are only similar until they are not .

etf's can have premiums and discounts to nav , more so with bond etf's .

etf's can be a lot more volatile since they can be sold short and have limit orders too .

but the worst thing about etf's is that when trading hits the fan the etf prices can get way out of wack and limit orders executed at prices you would not want .

we saw the popular etf DVY along with others get really out of whack when we had the flash crash . dvy plunged 35% while the assets were down only 5% as trading imbalances happened that disjointed the relationships .

etf's are good investment vehicles but when things go bump in the night there can be big differences sometimes .

 

[LOL!]

And if you go with ETFs rather than mutual funds, you'll likely save on fees & taxes.

This is not true nowadays. There are plenty of index mutual funds with low fees and that are tax-efficient.

Although VTI was mentioned, Fidelity has index funds, too, such as FSTVX which might be more suitable for someone already familiar with Fidelity. There is also ITOT (an ETF). Expense ratios for these two funds are 0.035% and 0.03%. Commissions would be zero at Fidelity.

 

[LOL!]

but the worst thing about etf's is that when trading hits the fan the etf prices can get way out of wack and limit orders executed at prices you would not want

What? Presumably you wouldn't set a limit price that you did not want.

ETFs can be great precisely when the market goes wonky because one can sometimes buy them with limit orders set well below yesterday's price because other people erroneously do stupid things like submit standing stop-loss orders. I've never seen it go the other way though: Sell at a higher wonky price.

 

[LOL!]

FOCPX is a mega-cap growth fund nowadays. One can see that it holds the so-called FANG stocks which have done quite well lately. If one is going to do performance chasing, then this would be a good fund to do it with.

 

[mathjak107]

What? Presumably you wouldn't set a limit price that you did not want.

ETFs can be great precisely when the market goes wonky because one can sometimes buy them with limit orders set well below yesterday's price because other people erroneously do stupid things like submit standing stop-loss orders. I've never seen it go the other way though: Sell at a higher wonky price.

how about those stop loss orders executed when dvy opened 35% down or those who panicked . people forget that those orders unless specified can open way below and get executed . on the other hand the sell limit orders would not have executed on their own since it opened so far down . but those using these orders for downside protection are using them for a reason .

when investors saw down 35% many panicked and manually sold trying to restrict further carnage when their auto limit orders never got a chance to execute before going lower .

so etf's can provide a much wilder ride at times for the feint of heart

 

[LOL!]

I like to take advantage of people that submit stop-loss orders, so I have no sympathy, empathy, or whatever for such people and especially when they panic.

 

[mathjak107]

This is not true nowadays. There are plenty of index mutual funds with low fees and that are tax-efficient.

Although VTI was mentioned, Fidelity has index funds, too, such as FSTVX which might be more suitable for someone already familiar with Fidelity. There is also ITOT (an ETF). Expense ratios for these two funds are 0.035% and 0.03%. Commissions would be zero at Fidelity.

keep in mind index mutual funds are all over the map in tax efficiency .

some like spy which is a unit investment trust are pure index plays . others like IVV and a host of others do all kinds of other things like loan out securities or write calls , some trade in and out of the minor stocks and don't own everything in the index since they don't have to .

you can see the effective tax ratio on many s&p 500 funds is very high .

 

[mathjak107]

I like to take advantage of people that submit stop-loss orders, so I have no sympathy, empathy, or whatever for such people and especially when they panic.

neither do i , but that does not change the issue , which is there can be a pretty big difference at times between the etf 's and owning mutual funds.

when i pulled my money from vanguard i could not move my admiral shares so i converted my vanguard s&p 500 fund to voo then moved that and got the same expsense ratio .

 

[LOL!]

I am not sure where you got your Tax Cost Ratio, but if from Morningstar.com, the numbers are incorrect for many investors because the assumptions that morningstar.com makes do not apply to those investors.

But your point is well-taken: Some index funds are more tax-efficient than others even if they follow the exact same index.

For those that want a more detailed analysis for their own personal tax situation, please see: https://www.bogleheads.org/forum/viewtopic.php?t=208818

And some folks would rather use a Fidelity fund even if it cost them 0.05% more in taxes on the value of their holding.

 

[MrBig1]

I hope this doesn't sound incredibly stupid but I've always been of the opinion that investing in the stock market is like controlled gambling. You pick investments that have a proven track record, invest money you don't need atm and hang in there. It's been my experience that my attempts at timing the market end in failure. My choices have always been based on long term results.
This investment I'm talking about in my first post will be a long term goal. I simply want to maximize my chances for the greatest gains during the 15 year cooking period and then turn conservative for the next 5 years. This is money that will not be needed until then. I have fixed income from secure sources that meet all my spending needs.

 

[mathjak107]

the numbers change all the time , these are older numbers . but while the numbers change the point is this goes on in the funds and all index funds can be quite un-a like

 

[cooch96]

OP,
Expense ratios (fees) are a big factor in selecting funds. An index fund that charges 0.5% is 10x more expensive than one that charges 0.05%. This is galling and a terrible deal if they are following the same index. And with compounding interest, this makes quite a difference over 15 years.

 

[mathjak107]

I hope this doesn't sound incredibly stupid but I've always been of the opinion that investing in the stock market is like controlled gambling. You pick investments that have a proven track record, invest money you don't need atm and hang in there. It's been my experience that my attempts at timing the market end in failure. My choices have always been based on long term results.
This investment I'm talking about in my first post will be a long term goal. I simply want to maximize my chances for the greatest gains during the 15 year cooking period and then turn conservative for the next 5 years. This is money that will not be needed until then. I have fixed income from secure sources that meet all my spending needs.

investing is not like gambling . gambling always has a loser for every winner .

investing can have few or even no losers .everyone can win . i can sell a stock or fund at a profit . the next person sells it for a profit , and so on and so on .

in fact over typical accumulation stages which span decades we have only winners unless someone exhibited bad investor behavior on their own .

don't confuse risk with volatility .

broad markets are volatile but over these typical accumulation periods they are not risky . risk happens when you match long term investments with short term money usage or speculate . betting the ranch on individual stocks and introducing individual company risk in to the mix can make things riskier .

in retirement being at least 40% in equities and pulling 4% in flation adjusted has about a 95% success rate . trying to pull the same thing from fixed income can be very risky and has failed to make it through about half of all 30 year time frames .

just the opposite of what you thought .

 

[audreyh1]

I like to take advantage of people that submit stop-loss orders, so I have no sympathy, empathy, or whatever for such people and especially when they panic.

Stop loss orders and ETFs don’t mix. Flash crash fodder.

I don’t think they are a good idea for regular stocks either.

Better to have your brokerage text you when something hits a theoretical stop loss target and then assess the situation.

 

[audreyh1]

OP - Fidelity has many low cost index funds too.