Author Topic: Judge our Asset Allocation (lazy ETF portfolio of VOO and VXF)  (Read 421 times)

extremedefense

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So what my wife and I agreed on for the 401k:
50% VIIIX - expense ratio: 0.02%
https://personal.vanguard.com/us/funds/snapshot?FundId=0854&FundIntExt=INT
(Seeks to track the performance of the Standard & Poor’s 500 Index, which measures the investment return of large-capitalization stocks)
50% VEMPX - expense ratio: 0.07%
(Vanguard Extended Market Index Fund seeks to track the performance of a benchmark index that measures the investment return of small- and mid-capitalization stocks.)
https://institutional.vanguard.com/VGApp/iip/site/institutional/investments/productoverview?fundId=1860

Our IRA / CMA (after tax investment account):
50% VOO - expense ratio: 0.05%
(ETF that tracks the S&P 500)
50% VXF - expense ratio: 0.09%
(ETF that tracks the extended market)

Our thought is that the S&P 500 tracks the 500 biggest companies, and the extended market tracks everything but the top 500 (so it's nothing but small and mid cap companies).

Then we can get 50% big companies, 50% small and medium companies, as opposed to just buying VTI which is basically 90% large cap and 10% small / medium cap.

We get 30 free ETF trades per month in our IRA and CMA, so only the 401k gets the mutual funds.

Since I am 22 and wife is 21, we're young enough to gamble on the small and medium companies doing better than the big companies. So what are your thoughts, are we okay in our thinking? What would you change?

L.A.S.

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Re: Judge our Asset Allocation (lazy ETF portfolio of VOO and VXF)
« Reply #1 on: March 15, 2017, 06:37:05 PM »
Well, I'll chime in.  I think it is a fantastic start.

It's not clear from your post since you only refer to AA; but make sure you have enough cash piled to cover a few months expenses.  Also, since you are all in stocks at this point, prepare mentally that you could watch the value of your investments drop 30-40% or more in a very short period of time.  However, if you keep investing through that on a regular basis you should come out fine.

Can either of you contribute to a Roth IRA?


Shade00

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Re: Judge our Asset Allocation (lazy ETF portfolio of VOO and VXF)
« Reply #2 on: March 15, 2017, 09:36:34 PM »
Two things. One is that you are 100% US stocks, which given your age may be acceptable risk to you. Two is that going 50/50 on those two funds is heavily tilting toward mid/small cap stocks, which is extra risk, especially given that small/mid cap are no more than 20-25% of the market. Going 82-18 of S&P 500/Extended Market roughly approximates the total market fund. Unless you have a compelling reason to favor mid/small cap stocks, I don't know why you would push higher than that. Just two cents from a random guy on the internet, though.

extremedefense

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Re: Judge our Asset Allocation (lazy ETF portfolio of VOO and VXF)
« Reply #3 on: March 15, 2017, 11:01:01 PM »
However, if you keep investing through that on a regular basis you should come out fine.

Can either of you contribute to a Roth IRA?

I'm not worried about it going down, in fact I'm excited / hoping it will drop 30-40% so we can buy more. We're planning on splitting 50% into savings / down payment / buy extra stocks if the market drops and 50% investing with our extra monies.

Why the Roth IRA? Our income is in the 15% bracket right now, but once my wife starts working, wouldn't traditional make sense if we plan on paying less taxes when we retire?

Going 50/50 on those two funds is heavily tilting toward mid/small cap stocks, which is extra risk... Unless you have a compelling reason to favor mid/small cap stocks, I don't know why you would push higher than that. Just two cents from a random guy on the internet, though.

We're okay with the 100% stock risk because gocurrycracker and jlcollinsnh wrote posts about how 100% stocks comes out ahead over bonds as long as you're okay with your portfolio going down. There are other small / mid cap indexes we're considering: VBR / VOE. Any thoughts on growth / value index funds over the plain large / medium / small cap funds?

L.A.S.

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Re: Judge our Asset Allocation (lazy ETF portfolio of VOO and VXF)
« Reply #4 on: March 16, 2017, 06:40:58 AM »
However, if you keep investing through that on a regular basis you should come out fine.

Can either of you contribute to a Roth IRA?

I'm not worried about it going down, in fact I'm excited / hoping it will drop 30-40% so we can buy more. We're planning on splitting 50% into savings / down payment / buy extra stocks if the market drops and 50% investing with our extra monies.

Why the Roth IRA? Our income is in the 15% bracket right now, but once my wife starts working, wouldn't traditional make sense if we plan on paying less taxes when we retire?


Please know, I think you are lightyears ahead of just about everyone else your age when it comes to investing and long range planning.  Heck, you're ahead of most non-mustachian 40 year olds I know.  So, here is some food for thought..

With respect to volatility: just keep in mind that it is easier said than done to keep investing in the market during a severe downturn.  You say you are excited for a drop.  So, you are at least partially basing your investing decision on your emotional state.  Emotions are not rational.  Emotions can change.  Keep that in mind.  From a practical standpoint stock market drops usually coincide with turmoil in the real economy.  If there is a chance you could loose your job during a recession, this could put your investing on pause, and if an economic downturn is severe enough it could cause you to have a cash need, where the only source available is selling your investments into a down market.  Job loss, or fear of job loss also has a very strong psychological effect which can make it tough to keep turning over cash to a dropping stock market.

With respect to the the Roth: It seems like you've crunched the numbers for your own situation and are satisfied with your plan.  I can't argue with that.  However, a few things to keep in mind with a Roth is that it offers tax diversification, and there will never be RMDs (for you) from it.  There is a possibility that the ordinary income tax system in the U.S. could change, and your withdrawals from your traditional accounts will be treated as ordinary income and subject to whatever the income tax at the time you withdraw.  And at some point, RMDs will force income out of the traditional accounts, which is then subject tax.  A Roth will avoid all tax on distributions in retirement, so you can use it to meet a large expenses or obligations without having it affect your AGI or realizing gains in a taxable account.  And you can withdraw your previous contributions at any time tax and penalty free.


extremedefense

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Re: Judge our Asset Allocation (lazy ETF portfolio of VOO and VXF)
« Reply #5 on: March 16, 2017, 08:57:23 AM »
Wow, you're too kind! I think you're spot on with the emotional aspect, and I'll keep that in mind and come back and read your post in down markets to remind me to distance emotions from logic.

On the Roth situation, I didn't know about all those benefits, and when we file taxes next year I'll consider funding a Roth if the numbers aren't too bad. There is also the possibility that ordinary income taxes are lower in the future.

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MustacheAndaHalf

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Re: Judge our Asset Allocation (lazy ETF portfolio of VOO and VXF)
« Reply #6 on: March 16, 2017, 10:01:46 AM »
Historically 15% is a very low tax bracket.  I'd second the recommendation for a Roth IRA, especially when you're in such a low tax bracket.  Keep in mind social security could raise your tax bracket in retirement, and any Traditional IRAs will have mandatory withdrawal amounts.  You might have more income than you need, without any way to prevent it.  And tax rates could go up between now and retirement - easily over 15%.

Any reason you have 0% international?  There's developed and emerging markets, both of which may move differently than the U.S. market.  Most people are happy with 20-40% international, maybe starting at 20% and raising it if you like later.  Vanguard also has a "small cap international" fund if you want to continue your small-cap tilt into international.

extremedefense

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Re: Judge our Asset Allocation (lazy ETF portfolio of VOO and VXF)
« Reply #7 on: March 16, 2017, 12:29:12 PM »
I read that most of the S&P 500 companies operate internationally so even though i don't specifically have international, it is still covered by the big US companies.

That and I know that past results don't predict future results, but historically the international funds have done worse than domestic.

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L.A.S.

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Re: Judge our Asset Allocation (lazy ETF portfolio of VOO and VXF)
« Reply #8 on: March 16, 2017, 01:24:01 PM »
I read that most of the S&P 500 companies operate internationally so even though i don't specifically have international, it is still covered by the big US companies.

This is true.  But international companies also invest and do business in the U.S.  Also, you cannot tell how good an investment will be based on the quality of the business alone.  You have to take account of the price that is paid to buy in.  An investment in the best business, or best group of businesses, in the world can end up be a crummy investment if an investor pays to much for it. And an investment in a crummy business can end up being a good investment if it is priced attractively enough.  I think right now, valuations are slightly lower on international stocks.  What this means for the future and their relative returns versus the S&P is anyone's guess.

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That and I know that past results don't predict future results, but historically the international funds have done worse than domestic.



I think over the past 10 years or so, you are right that developed and emerging international funds have not done well versus the S & P.  Some would say that this all the more reason to buy in.  Over the long term as an investor you are compensated for one thing: bearing risk.  If you are buying the same thing as everyone else because there is consensus is that it is a good idea and safe then there is a chance you are overpaying, since the buy-in price is being bid up.  However, if you walk up to the stink-burger no one else will touch and buy it for a very, very attractive price relative to value... we'll thats how fortunes end up getting made.

I think over the long term the developed international and S&P will trade places and cycle back and forth for who is on top.  I think over the long term emerging markets have the power to outperform both the S&P and the EAFE and their volatility provides lots of "sales." Here are some charts, please draw your own conclusions:

https://www.msci.com/documents/10199/4753a237-7f5a-4ef6-9f2b-9f46245402e6

https://www.msci.com/documents/10199/c0db0a48-01f2-4ba9-ad01-226fd5678111



AZryan

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Re: Judge our Asset Allocation (lazy ETF portfolio of VOO and VXF)
« Reply #9 on: March 16, 2017, 04:23:55 PM »
Two things. One is that you are 100% US stocks, which given your age may be acceptable risk to you. Two is that going 50/50 on those two funds is heavily tilting toward mid/small cap stocks, which is extra risk, especially given that small/mid cap are no more than 20-25% of the market. Going 82-18 of S&P 500/Extended Market roughly approximates the total market fund. Unless you have a compelling reason to favor mid/small cap stocks, I don't know why you would push higher than that.

It's really 'volatility' in question more than 'risk'. I say, if you can handle it, be 100% in stocks. As for Mid/SmallCaps, I HIGHLY favor tilting into these. In fact, my main fund is VIMAX (MidCap Index). Slightly more volatile than Total Market, and historically much better returns. A Goldilocks of billion dollar companies and brands we all know.
While I'm all-US, a good chunk of Int. is not unwise, IMO. Especially at current valuations in Europe, it's a nice time to start in on it. And that's not market timing. It's just recognizing that Europe's gone 'on sale' in recent years.