Diversification Versus Simplification

[TromboneAl]

When I rebalance, I'm considering consolidating some of our VG funds just to make things simpler.

For example, the Vanguard "Portfolio Watch" has nagged me into having two small-cap funds (Small-cap Growth, and Small-cap Value) with a total of about 5% of our net worth in them.

One option would be to eliminate those. The disadvantage is that we'd be less diversified (almost no small-cap). The advantage is that I'd have two less funds to track, download data from, enter tax data from, etc.

We currently have 14 VG funds, partly because we need to segregate funds in my IRA, Lena's IRA, my Roth, Lena's Roth, Taxable account and HSA.

Is it silly to give up the diversification just to save me a little effort?

 

[shasta]

Even tho this is my first year of consolidated retirement, I love the simplicity of dealing with only 4 funds.

 

[Alan]

Is it silly to give up the diversification just to save me a little effort?

Depends who you ask. If you ask me I would say I prefer simplification. Between our accounts at VG and FIDO we have 6 funds, plus IBonds with TreasuryDirect.

 

[Free To Canoe]

I am moving toward simplicity although I am in worse shape (more diversified) than you.
One motivation for me is will it be easy for DW if something happens to me? What are all of the moving parts and what do they mean?

I think small cap is a good place to start. Do you really get much portfolio diversity from a small cap index vs a general US market index? Not so much IMHO.

 

[REWahoo]

Al, 5% of your portfolio invested in a particular asset class isn't much diversification, therefore eliminating it wouldn't be significant in my opinion. I'm a simplification investor, with most of our assets in Wellington and Wellesley. All that slicing, dicing, and rebalancing stuff interferes with my daily nap.

 

[pb4uski]

When I rebalance, I'm considering consolidating some of our VG funds just to make things simpler.

For example, the Vanguard "Portfolio Watch" has nagged me into having two small-cap funds (Small-cap Growth, and Small-cap Value) with a total of about 5% of our net worth in them.

One option would be to eliminate those. The disadvantage is that we'd be less diversified (almost no small-cap). The advantage is that I'd have two less funds to track, download data from, enter tax data from, etc.

We currently have 14 VG funds, partly because we need to segregate funds in my IRA, Lena's IRA, my Roth, Lena's Roth, Taxable account and HSA.

Is it silly to give up the diversification just to save me a little effort?

I agree that less is more. Why not replace your small cap growth and value funds with VSMAX?

On the equity side my go to funds are Total Stock Market Index and Total International Stock Market.

 

[target2019]

Whenever I review my results, I usually question something I've implemented. For example, I decided recently to trim back some of our small/midcap which had grown to almost 20 percent overall. Before doing that, I looked up small cap tilt Bogleheads, and decided to continue with my original 15 percent.

We've been rewarded for the additional risk. I see it that way, as a tilt with additional risk, rather than as diversification, as this area is already covered by total stock market, which we also hold.

 

[Rich_by_the_Bay]

I recently posted about VSMGX.

It matched my AA priorities almost perfectly. That and a little cash for a rainy day suits me well. Maybe you can find a fund that does it for you. My rebalancing days are over for the foreseeable future.

 

[LOL!]

The advantage is that I'd have two less funds to track, download data from, enter tax data from, etc.

Keep the 2 funds, but stop tracking, downloading, and entering tax data. In fact, you can do that for all your funds.

All my brokers provide downloadable-into-TurboTax 1099 forms, so that I don't have to do what you are doing. I simply click-click and I have everything done for me.

 

[clifp]

Keep the 2 funds, but stop tracking, downloading, and entering tax data. In fact, you can do that for all your funds.

All my brokers provide downloadable-into-TurboTax 1099 forms, so that I don't have to do what you are doing. I simply click-click and I have everything done for me.

+1

IRRC you qualify for a subsidy under ACA. A big advantage having 2 similar but not identical funds is makes tax harvest or cap gains harvest in the 0% tax bracket significantly easier. Sell one fund and stick the funds in the other, than next year switch if need be. If benefits for keeping your income below certainly thresholds weren't so significant, and the hassle associated with record keeping having been reduce so much, I'd say ya simplify. However now I think I want the flexibility.

 

[target2019]

I ran two backtests with EZBacktest. Of course this is backtest, and not forward test!

With 50/50 bond/stock split, and 45/5 TSM/SM VAL split, you would have picked up an additional .3% annualized return (15 years).

 

[donheff]

Well you can still get a lot of diversity with 12 funds so why not.

 

[galeno]

Diversification or just a lot of overlap?

 

[W2R]

When I rebalance, I'm considering consolidating some of our VG funds just to make things simpler.

For example, the Vanguard "Portfolio Watch" has nagged me into having two small-cap funds (Small-cap Growth, and Small-cap Value) with a total of about 5% of our net worth in them.

One option would be to eliminate those. The disadvantage is that we'd be less diversified (almost no small-cap). The advantage is that I'd have two less funds to track, download data from, enter tax data from, etc.

We currently have 14 VG funds, partly because we need to segregate funds in my IRA, Lena's IRA, my Roth, Lena's Roth, Taxable account and HSA.

Is it silly to give up the diversification just to save me a little effort?

I dunno. I am not much of a slice-n-dicer, but some people prefer that. What appeals to you personally, Al?

I have three index funds plus Wellesley and money market at Vanguard, and then the TSP G Fund. So, the total is 6 funds. But then, you might prefer something different.

I am happy with my investments and I sympathize with the rebalancing issue - - it must be awfully hard to rebalance with a dozen or more funds. I have never done that.

 

[audreyh1]

If you are good at spreadsheets it's no big deal. But still, it's definitely more work.

 

[bUU]

It's funny: Depending on how I asked the question I got different answers. I have a fund that is substantially overlap with a better fund I chose later. But when I ask whether I should sell the older fund and reinvest the proceeds into the newer fund, the answer is pretty much 'no': The comments I received when I asked was consistently that the tax cost on the gains isn't worth the marginal improvement of fund quality from older to newer. This actually has happened twice, now, related to the same investment objective, so the result is that we now have three funds for one investment objective. There's an ideal that's clear, but the road to getting to that ideal isn't clear, and the reality is that the best choice may not be mindlessly imposing the ideal.

 

[Huston55]

When I rebalance, I'm considering consolidating some of our VG funds just to make things simpler.

For example, the Vanguard "Portfolio Watch" has nagged me into having two small-cap funds (Small-cap Growth, and Small-cap Value) with a total of about 5% of our net worth in them.

One option would be to eliminate those. The disadvantage is that we'd be less diversified (almost no small-cap). The advantage is that I'd have two less funds to track, download data from, enter tax data from, etc.

We currently have 14 VG funds, partly because we need to segregate funds in my IRA, Lena's IRA, my Roth, Lena's Roth, Taxable account and HSA.

Is it silly to give up the diversification just to save me a little effort?

It's funny: Depending on how I asked the question I got different answers. I have a fund that is substantially overlap with a better fund I chose later. But when I ask whether I should sell the older fund and reinvest the proceeds into the newer fund, the answer is pretty much 'no': The comments I received when I asked was consistently that the tax cost on the gains isn't worth the marginal improvement of fund quality from older to newer. This actually has happened twice, now, related to the same investment objective, so the result is that we now have three funds for one investment objective. There's an ideal that's clear, but the road to getting to that ideal isn't clear, and the reality is that the best choice may not be mindlessly imposing the ideal.

We are moving toward 'simple', which means either the 3-Fund portfolio (Fido style) or, all in Wellington plus some International. However, we will keep some of the positions we currently have in the taxable account (those with large gains) and count them in their appropriate AA bucket; waiting until after FIRE and lower taxable income to convert them.

 

[Lsbcal]

When I rebalance, I'm considering consolidating some of our VG funds just to make things simpler.

For example, the Vanguard "Portfolio Watch" has nagged me into having two small-cap funds (Small-cap Growth, and Small-cap Value) with a total of about 5% of our net worth in them.

One option would be to eliminate those. The disadvantage is that we'd be less diversified (almost no small-cap). The advantage is that I'd have two less funds to track, download data from, enter tax data from, etc.

We currently have 14 VG funds, partly because we need to segregate funds in my IRA, Lena's IRA, my Roth, Lena's Roth, Taxable account and HSA.

Is it silly to give up the diversification just to save me a little effort?

I would not eliminate my small cap holdings to make this stuff easy. One might take SG and SV and put them into the one small cap fund (VIMSX). Generally SG is thought to have been a poor performer over the long term.

Also do you have midcaps? Midcap value has outperformed small value over the last 20 years.

I personally set a diversified portfolio and then basically duplicate that over the 3 account types we have at VG. My spreadsheet helps me to rebalance this stuff occasionally.

 

[Badger]

Just like folks who want to retire early so they can enjoy life I find that simplification of my investments also allows me time to do the same. Frequent playing with my investments is not something that gives me as much pleasure as those pasttimes that are the reason for retiring.

Cheers!

 

[kgtest]

I would not eliminate my small cap holdings to make this stuff easy. One might take SG and SV and put them into the one small cap fund (VIMSX). Generally SG is thought to have been a poor performer over the long term.

Also do you have midcaps? Midcap value has outperformed small value over the last 20 years.

I personally set a diversified portfolio and then basically duplicate that over the 3 account types we have at VG. My spreadsheet helps me to rebalance this stuff occasionally.

After deep-diving into the wife and I's 13 funds, trying to target an AA since we got married, I have come to realize the benefit of a spreadsheet in terms of targeting and achieving your AA. I'm sure there are other programs or META services that could assist. It's really not that much to manage once you have your forumalas in place to calculate overall percentages.

I asked this same question a while back and got some mixed responses... my advice would be to stick to your plan and target AA. The folks on this forum are certainly helpful and have assisted me in fine-tuning my strategy. Keep in mind some folks on this forum are already ER, and some are not, so the strategies may differ depending on how far you are from ER.

I did find the comment about MidCap's outperforming smallCap's in the long-run interesting. I have never heard that statement but I am new to investing so that will give me something to research over the holidays.

Here is my AA, and with that mid-cap comment if it turns out to be true, I may shift my SmallCap down to 15% and target some MidCap until the third quarter of this year when I will bump up my SmallCap for the January Effect.

If you do end up "consolidating" it's also a good opportunity to look at the fees and expenses to save yourself fee money but you know that as well.

LargeCap 46.5713206470754
MidCap 14.7819405900212
SmallCap 20.022284904221
Sector-HealthCare 18.6244327914634

 

[Lsbcal]

Some CAGR data for MSCI indexes + Vanguard index funds for period June 1992 to present:

SV 11.7%
SG 10.7%
MV 12.3%
MG 9.3%
LV 9.7%
LG 8.6%

No guarantees that this holds going forward.

 

[galeno]

My idea of a GREAT simple and diversified port = X% VT + Y% BND + Z% MMF.

 

[friar1610]

I cleaned up my portfolio a few years ago. Got rid of a small cap fund and an S&P 500 fund (both with VG) and put it all in VG's total stock index fund. I sorta enjoy keeping track of funds but my main objective was to make things simpler for my wife if she becomes my widow as she is not into this stuff at all. Also, as I get older and presumably driftier than I am now, I'll probably be better off with simplicity. So now we only have one domestic stock fund, one international stock, 2 bond funds (both indexes; one short-term and one medium-term), some CDs and I-Bonds.

 

[TromboneAl]

I am not much of a slice-n-dicer, but some people prefer that. What appeals to you personally, Al?

I would actually prefer to have one single fund -- but that wouldn't meet my objectives.

I realized that some of this "complexity" that I don't like is related to doing the taxes. The two small cap funds I have are in the taxable account. I think I'll combine them into one small-cap fund in an IRA. That will reduce the 1099 info I receive by about half.

Also, as I get older and presumably driftier than I am now, I'll probably be better off with simplicity.

Every time I have trouble getting my Moneydance total to match the total on the Vanguard site I think "I'm getting too old for this."

 

[foxfirev5]

Simplification is little tough since DW and I have 6 separate 401k, IRA and Roth accts. We each hold our own AA of 3-5 funds in each acct. At this point I'm going for the best balance of low cost funds with enough flexiblity to rebalance at will. Not too overwhelming yet.