Asset Allocation

[s.graham.h]

I have these ten funds that I like at Vanguard and am reevaluating my asset allocations.  Any thoughts on these percentages?

50% - US Stock
30% - International
15% - Real Estate
5% - Bonds


VFIAX   Vanguard 500 Index Fund Admiral Shares                   10%
VIMAX   Vanguard Mid-Cap Index Fund Admiral Shares                10%
VSMAX   Vanguard Small-Cap Index Fund Admiral Shares                10%
VTSAX   Vanguard Total Stock Market Index Fund Admiral Shares          10%
VWUSX   Vanguard U.S. Growth Fund Investor Shares                5%
VVIAX   Vanguard Value Index Fund Admiral Shares                   5%
VWIGX   Vanguard International Growth Fund Investor Shares             20%
VTIAX   Vanguard Total International Stock Index Fund Admiral Shares            10%
VGSLX   Vanguard Real Estate Index Fund Admiral Shares                  15%
VBTLX   Vanguard Total Bond Market Index Fund Admiral Shares          5%

[Andy R]

So just for simpler way to read it

US (Excluding REITs) 50%
10 - TSM
10 - LC
10 - MC
10 - SC
5 - Growth
5 - Value

International 30%
10 - TISM
20 - Int. Growth

REITs 15%
15 - REITs

Bonds 5%
5 - bonds


1. No reason for both TSM and LC/MC/SC
I would choose one of these combos and you have reduced your total complexity by 2-3 funds.
• TSM (owning total market is what I do)
• TSM/SC (if you want to tilt towards small)

2. What is the purpose of growth and value. Are they not offsetting each other? I'd just get rid of both, it adds complexity for no gain.

3. What is the purpose of 20% in international growth. I believe growth has historically lagged value. In fact I have pretty much never seen anyone tilt towards this asset class.

4. 15% REIT's is borderline. Due to high leverage (and therefore higher risk - see what happend during the GFC with these highly leveraged products), many suggest max of 10%. Also note that your other funds already hold REIT,s so you are actually closer to 20% which is a LOT of REITs.

5. Bonds
Bonds are very low, but it is very individual. If you are already balancing 10 funds, I would make it 10% as I think the return difference is going to be insignificant but it will ahve a more noticable affect on the volatility.


My suggestion

Take a step back away from your funds and

1. Decide on an asset allocation of equities to bonds. I found this article useful, click on ability, willingness and need links.
2. Decide on an asset allocation of US to international equities. 20% up to market cap weighting of international seems most reasonable, and just go with market cap weighting if you have no opinion.
3. If you even want to, up to 10% of equity in REITs, but you can leave it out since REITs are already in there.
4. If you even want to, you can tilt to small and/or value, but if you have no opinion, you can ignore this as total market funds already have them too.

Then choosing the funds to fit your allocation should be a straightforward process taking only a few minutes.

It really should be that simple and boring if you are doing it right.

[FIREstache]

VTSAX is only about 6% small cap.  Bill Bengen and Wade Pfau have written about back-testing an AA using 18% small cap and were able to make the 4% rule the 4.5% rule.  However, that's based on a 30 year retirement.

https://retirementresearcher.com/bill-bengens-how-much-is-enough
https://www.fa-mag.com/news/how-much-is-enough-10496.html

Too bad b42 isn't around.  He would talk about how he's using REITs in lieu of bonds.

[nereo]

I have these ten funds that I like at Vanguard and am reevaluating my asset allocations.  Any thoughts on these percentages?

50% - US Stock
30% - International
15% - Real Estate
5% - Bonds


VFIAX   Vanguard 500 Index Fund Admiral Shares                   10%
VIMAX   Vanguard Mid-Cap Index Fund Admiral Shares                10%
VSMAX   Vanguard Small-Cap Index Fund Admiral Shares                10%
VTSAX   Vanguard Total Stock Market Index Fund Admiral Shares          10%
VWUSX   Vanguard U.S. Growth Fund Investor Shares                5%
VVIAX   Vanguard Value Index Fund Admiral Shares                   5%
VWIGX   Vanguard International Growth Fund Investor Shares             20%
VTIAX   Vanguard Total International Stock Index Fund Admiral Shares            10%
VGSLX   Vanguard Real Estate Index Fund Admiral Shares                  15%
VBTLX   Vanguard Total Bond Market Index Fund Admiral Shares          5%

Seems overly complicated to me (or to put it in financial terms, several of your proposed funds have significant overlap, thus giving you no better diversification).
By selecting VIFAX, VIMAX & VSMAX you will also own most of the components of the Grwoth and Value funds.  It's also unclear why you want VWIGX and VTIAX and whether owning both will give you better returns or lower volatility.

I'm also a bit concerned anytime someone suggests equal holdings of VIFAX and VSMAX (as it will result in a portfolio which is substantally influenced by small companies, which is not how the broader market works... but to each their own.

Sticking with your AA I'd suggest VIFAX, VIMAX & VSMAX for US holdings, plus VTIAX for international exposure, VGSLX for real estate and VBTLX for bonds.
That's six funds with roughly equivalent exposure to their respective holdings. 

[s.graham.h]

Thanks for the feedback.  All good thoughts.

Part of my thoughts on these funds is that it gives me more flexibility to change contributions into certain sectors overtime depending on market conditions. 

I'm still actively working and investing and the idea around rebalancing by selling doesn't sit well with me logically when an individual is still actively investing the amounts I am.  My take is that instead of selling, which would trigger a taxable event, that you increase the percentage into the lower performing funds with new contributions. 

But maybe analytically there are better ways to do it, but I haven't seen a mathematical approach that validates this yet.


@nereo - Regarding the international funds, I was in the Vanguard total international for over 6 years - but doing a review of performance, I found it to be lackluster based on the growth over the past decade.  What it appears to me is the Vanguard International Growth has done much better - 6.62% vs 2.77% of the total international over a 5 year period.  Or 10.43% since inception of the growth (circa 1981).  The total loss over the past year  has been -2.95% for growth and -5.23% for total international. 

[h82goslw]

Part of my thoughts on these funds is that it gives me more flexibility to change contributions into certain sectors overtime depending on market conditions. 

So by saying "depending on market conditions" you really mean market timing?  That rarely, if ever, works.  Pick an AA and stick with it based on your comfort level and your age/FIRE dates

[nereo]

Part of my thoughts on these funds is that it gives me more flexibility to change contributions into certain sectors overtime depending on market conditions. 

So by saying "depending on market conditions" you really mean market timing?  That rarely, if ever, works.  Pick an AA and stick with it based on your comfort level and your age/FIRE dates

^This.  When you are considering putting money into one particular asset based on market conditions and past performance you are trying to time the market, which is exactly what setting up an AA is supposed to prevent.

Examining how one class of funds has outpaced another over the previous five years is not sufficient reason to change your AA.  If there is something inherently more appealing to you about International Growth vs Total International that's different.

[SeattleCPA]

Part of my thoughts on these funds is that it gives me more flexibility to change contributions into certain sectors overtime depending on market conditions. 

So by saying "depending on market conditions" you really mean market timing?  That rarely, if ever, works.  Pick an AA and stick with it based on your comfort level and your age/FIRE dates

^This.  When you are considering putting money into one particular asset based on market conditions and past performance you are trying to time the market, which is exactly what setting up an AA is supposed to prevent.

Examining how one class of funds has outpaced another over the previous five years is not sufficient reason to change your AA.  If there is something inherently more appealing to you about International Growth vs Total International that's different.

+1 to the above and to nereo's earlier comment too...

[Buffaloski Boris]

I am much more conservative than most here and admittedly crazy, foolish, etc. and have a much lower allocation in equities. Although I am slowly changing that based on some of the crowdsourced advice I saw here. So do not listen to me!

Two things struck me here. First, the equities exposure is complicated. Are your returns that much better than a KISS strategy?

With regards to bonds. I just pulled some data on another topic and the conclusion was that the bond fund in question was yielding a whole 0.72% higher than the Vanguard sweep fund. Why take bond risks for not much more than cash returns?

[s.graham.h]

Part of my thoughts on these funds is that it gives me more flexibility to change contributions into certain sectors overtime depending on market conditions. 

So by saying "depending on market conditions" you really mean market timing?  That rarely, if ever, works.  Pick an AA and stick with it based on your comfort level and your age/FIRE dates

^This.  When you are considering putting money into one particular asset based on market conditions and past performance you are trying to time the market, which is exactly what setting up an AA is supposed to prevent.

Examining how one class of funds has outpaced another over the previous five years is not sufficient reason to change your AA.  If there is something inherently more appealing to you about International Growth vs Total International that's different.

I don't think my point came across the way I wanted it to. 

What I was trying to articulate was: Let's say that my AA listed in the first post is what I use.  What I'm trying to state is that by having a few more funds that are more specific (mid vs small cap), when the AA changes, I can put it into those to rebalance to the original AA. In essence what is described here:

https://www.mrmoneymustache.com/2012/02/17/book-review-the-intelligent-asset-allocator/

But without actually selling stuff that has inflated.  Rather putting more % of future contributions into those that are 'on sale.'

[nereo]

Part of my thoughts on these funds is that it gives me more flexibility to change contributions into certain sectors overtime depending on market conditions. 

So by saying "depending on market conditions" you really mean market timing?  That rarely, if ever, works.  Pick an AA and stick with it based on your comfort level and your age/FIRE dates

^This.  When you are considering putting money into one particular asset based on market conditions and past performance you are trying to time the market, which is exactly what setting up an AA is supposed to prevent.

Examining how one class of funds has outpaced another over the previous five years is not sufficient reason to change your AA.  If there is something inherently more appealing to you about International Growth vs Total International that's different.

I don't think my point came across the way I wanted it to. 

What I was trying to articulate was: Let's say that my AA listed in the first post is what I use.  What I'm trying to state is that by having a few more funds that are more specific (mid vs small cap), when the AA changes, I can put it into those to rebalance to the original AA. In essence what is described here:

https://www.mrmoneymustache.com/2012/02/17/book-review-the-intelligent-asset-allocator/

But without actually selling stuff that has inflated.  Rather putting more % of future contributions into those that are 'on sale.'

Ok, that's helpful.  You are proposing to rebalance through predetermined, periodic contributions.  There's nothing wrong with that.

My main criticism is that you don't need 10 funds in order to do this - that same strategy works if you hold a 3 or 4 fund portfolio.  In your case, some of the funds have such overlap that you aren't substantially increasing your diversification.  But you aren't losing anything - you've just made things more complicated without getting any real benefit from that increase in complexity.