Asset Allocation and Location Resources

[RePatriot]

I've been hearing a lot of reputable voices discussing incremental steps beyond the 100% VTSAX approach to (i) reduce volatility and (ii) potentially enhance returns. Paul Merriman has been hitting the podcast circuit discussing a small cap tilt for increased returns, risk parity has been a recent topic on a few podcasts I listen to, and I've generally been feeling undereducated on asset allocation and asset location beyond the simplest (but potentially not optimal) approach.

Currently, we're invested 100% in VTSAX or its equivalents, and I'm not likely to make broad changes on a whim. I'm also not concerned about introducing too much complexity, as I enjoy personal financial management, generally. However, I'm wondering what resources I can consult to learn a bit more about asset allocation and location that aren't sales-pitchy or gimmicky. Any recommendations?

[Heckler]

https://www.bogleheads.org/wiki/Asset_allocation

Assuming you are in the US.

[MustacheAndaHalf]

The first academic breakthrough related to small caps was the Fama-French Three Factor Model.  Stock performance is better explained by adding factors for small market cap, and value (vs growth).  Smaller companies are riskier, so in theory you should be rewarded with higher performance for higher risk (over long time periods).

The largest stocks in the U.S. are big tech, which outgrew the market over the past 20 years, leading them to land at the top of the S&P 500.  Over those 20 years, you might find small stocks lagged these stocks.  What we don't know is what happens next.

Another author espousing a small cap tilt is Larry Swedroe, who specifically favors small/value stocks.  I liked his 1998 book "The Only Guide to A Winning Investment Strategy You'll Ever Need", which steps through adding performance and reducing volatility, in steps.  Personally, I seized on a later book of his about factor investing, where momentum is the strongest factor in the group.

[Radagast]

It seems like asset allocation has gone a little bit out of style, after being quite popular from around 1990-2015. So lots of my references aren't that up to date.

PortfolioCharts is a good reference, and most of the portfolios are from asset allocations in books or other sources which are linked, and can be a good reference for many different takes on it. https://portfoliocharts.com/

My favorite investing / allocation author is William Bernstein, who is a self described asset class junkie who could hardly do with less than 20 or 30 slices and wrote the following:
The Intelligent Asset Allocator - originally published online when the internet was young so it's a bit disorganized and unedited, and pretty out of date, but still a good introduction
The Four Pillars of Investing - my favorite investing book, and I imagine the updated version is even better but have not read it
Deep Risk / Skating Where the Puck Was / The ages of the Investor / Rational Expectations are part of a kind of series and should be read later

I have my own take here, where I basically show that any type of broad diversification has historically worked, rather than a particular asset allocation, and you could hardly do with less than 6 slices:
https://forum.mrmoneymustache.com/investor-alley/portfolio-design-idiots-v-gurus/

[ChpBstrd]

Most AA advice is one part probability math and one part performance-chasing. There's also an aspect where the advice changes based on the opportunities (e.g. solid real yields on bonds, cultural trends) and fears (e.g. extreme valuations, wars) present at any given time. This is all rational because the math is useful, momentum is real, and environmental changes should affect our AA decisions.

You won't find much advice to adopt a 100% stock AA after a lost decade or financial crisis. Likewise, people were mocking the 60/40 portfolio in the era of near-zero bond yields. As noted in investing books since at least the 1930s, the public tends to go heavily into stocks after a period of solid gains, and also thinks of stocks as no better than gambling after a big bear market. Understand that the advice the internet presents to you is heavily influenced by the last 3-4 years of experience.

I spent the last few years exploring ways out of the mindset of fashionable AAs and of using cash or bonds as a proxy for risk control. I wanted to get ahead of the curve instead of behind it, and address SORR proactively. If you want to see what I'm doing (it is relatively complex, but also involves mathematical certainty) check out this thread.