Allocations? Still True?


Recycles dryer sheets
Mar 13, 2006
I've been working on finalizing my investments for the last year and I want to thank those that have given me advice and help. I am building a diversified portfolio with index funds from Vanguard. As I get ready to finalize my allocations and percentages I now find that I have a lot of questions about current portfolio models that I have looked at.

It appears that perhaps what was true may be changing to some degree.

Is it possible that Value and growth, for example, may not have a premium as more people are aware of the "tilt" and it becomes easier to invest in these areas?

Is International a continuing growth area or is it just "hot" as people look for ways to diversify?

REITs are very hot but again, is it mostly fueled by those looking for correlation advantage or just a bubble?

During the last year it has occured to me that the increase in passive (index) portfolios, and the accessibility of various segments of the market have made correlations bias less of a factor that in the past.

My question is - are you sticking with your previous allocation models or have you made modifications and if so in what way?
Mysto said:
My question is - are you sticking with your previous allocation models or have you made modifications and if so in what way?
The whole point of asset allocation is to give your portfolio the ability to exploit each of those areas without having to perpetually watch it (and trade it). Otherwise you'd also have to consider gold/silver ratios, oil economics, global warming, and the impacts of beaver-cheeze futures. The fact that you're slinging lingo like "correlation advantage" means you're more concerned about market timing than asset allocation.

Change is constant. (Unless it changes.) Study after study has shown that investors respond too late or, even worse, drive up their expenses by chasing the latest trends or by anticipating the next big thing. Asset allocation is supposed to avoid those costs and the theory is that you give up a little return (assuming your timing is perfect) to avoid a lot in losses. To mangle Bogle's quote, you're not doing something by just standing there.

So pick your allocations. If you can't decide whether one is more important than another, then pick equal amounts of each. If your 10% allocation of something becomes 15% or even 20% then it's probably time to think about rebalancing. If it becomes 5% then it's probably worth considering directing new savings in its direction to bring it back up to 10%.

The most important decision of all is being able to sleep well at night knowing that your portfolio will respond positively in some manner to each change.

A few months ago, a year after it "closed", we decided that Tweedy, Browne Global Value was bloated and expensive (1.38% annual expense). We sold it and invested in an international ETF at less than half the expense ratio. We've continued to make a profit in our chosen asset allocation but we've avoided even more in expenses (and NAV losses). You also can probably make more money (or keep more of your savings) by investing in low-cost funds of your chosen asset allocation than you can gain by trying to predict change.
Thanks for responding Nords. I can always count on you!!!

As usual I have explained myself poorly. No, I'm not trying to market time - (I'm building a fixed portfolio) but I have a feeling that some (much) past data that is used to build portfolios may now be in error. For example, history says that value & small cap have a better return but in the recent past it was impossible to "buy the index". Now that this data is well known and you can buy many index funds and etfs - is the advantage still the same?

When I mentioned correlations I was talking about the fact that many assets over the last year or so now seem to move together and this means (to me at least) that previous models may no longer have the same advantage because so many people are scrambling for diversified assets.

Thanks for expressing your view. I'm curious to see if that is a shared opinion or are there other views. So far it seems that nobody else is doing anything (or cares) or both (I can't seem to get the stupid smiley to work but I'm grinning just the same)
It is pretty well documented that just about everything has become more correlated over time. As you note, the more an asset class is available to and adopted by retail investors, the more correlated it has become. Worse, those correlations are higher still when they count the most, namely, when the siht hits the fan.

Having said that, correlations less than one indicate that there is still some diversification benefit available to investors. So we shouldn't toss everything out just because diversification isn't quite as good as it used to be. It also suggests that we should be on the lookout for viable new asset classes. I like non-USD bonds and commodities because they aren't part of the standard asset mix. But no doubt we will eventually see those start to move more in concert with everything else (already happening with commodities).
Target Retirement 2015 - a tad younger than my age(63) from Lifestrategy mod pre Katrina.

And And 15% of portfolio availible for that Monty Pythonesque quest for the Grail stock that gets me that villa in the Bahamas - before I get toooo old.

heh heh heh heh - still mostly Boglehead - with weaknesses here and there - ie - I can afford to putz with the 15%. I do have a gold mine and some timberland from the 70's and 80's I may build a vacation cabin on someday - or not.
I second what brewer said.
So if many correlations now have less "advantage" one may get less rebalancing premium, but that is still better than the alternative.  Nothing has changed about the advantage of diversification, other than the future is expected to have lower returns across the whole market so the expected return of a diversified portfolio is lower.  If the markets are not kind, few will retire early over the next decade.
The alternatives are all those other approaches that are riskier.  No one can control correlations or asset class returns or time the market.  The path is the broad diversification using low expense funds and patiently rebalancing over a lifetime.  Those three are all we can control.
I have adjusted my holdings (mutual funds, mostly Vanguard index funds) a little in the last years, but I am sticking with my basic plan. I have ~50/50 US/international, that includes some value, small cap, REIT index, energy index, health care.

The original breakdown was made with help from a program from gummy's site that used lots of historical data. I am confident that the this version of slice-and-dice will do well over the long run, so I am not dropping any categories.

I do expect that one or another slice will have negative return years from time to time, but in the long run, together they will do a lilttle better than the whole market.

I don't have some slices. gummy's program showed me that some don't perform well enough over time to bother including. I don't have much growth per se, for example.

It has been doubling about every five years (through the dot-com collapse and the Asian flu), which is much better than I ever expected, so it seems pretty robust. I will hold this hand for the time being. Wish I had got smart sooner.
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