Author Topic: Balance large/mid/small - should I worry  (Read 5130 times)

Norwegian72

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Balance large/mid/small - should I worry
« on: February 09, 2015, 02:23:13 PM »
So, I believe I have a decent portfolio going forward that works for my family's needs. I've entered the weighted funds in Morningstar and it looks alright with a good spread across the world. I have quite a lot of limitations with just a few index funds being available here in Norway that are not too expensive, unless I turn to ETFs. Still I am reasonably pleased with the results. Total cost is at 0.34, which is higher than you will be used to in USA, but I don't think I can do much about it.

I am wondering about the allocation between large, medium and small:
Large: 80%
Medium: 16.5%
Small: 2.5%
Unclassified: 1%

Is this "normal"? Should I worry that the "small" is so small?
I would really appreciate some views on this, apologies if this has been discussed to death before.

Side note: I sleep soundly at night :)

Best Regards

Dodge

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Re: Balance large/mid/small - should I worry
« Reply #1 on: February 09, 2015, 02:46:18 PM »
Which funds are you in, and why the aversion to ETFs?

Vanguard's Total Stock Index Fund for the US is:

Large: 72%
Mid: 18%
Small: 9%

Vanguard's Total World Index Fund is almost the same:

Large: 75%
Mid: 18%
Small: 6%

And finally, Vanguard's Total International Index Fund (not US) fund is:

Large: 78%
Mid: 17%
Small: 4% Small

Using those as guidelines, I'd say yes, you're a bit low on your Small allocation, but it's unlikely to matter in the long run.
« Last Edit: February 09, 2015, 04:37:41 PM by Dodge »

Jack

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Re: Balance large/mid/small - should I worry
« Reply #2 on: February 09, 2015, 03:09:52 PM »
The "default" way to allocate a portfolio is by market capitalization ("cap-weighting"). Setting your portfolio's allocation different from the default cap-weighting (i.e., not the same 75% Large, 18% Mid and 6% Small as Dodge listed for the world total stock index), is called "tilting." Tilting your portfolio could be a good thing, but you should consciously decide why you want to tilt and do so on purpose, not by accident.

First you should decide on your asset allocation (i.e., asset classes and tilt within them), next you should write down your decisions in an Investment Policy Statement (IPS), and then you should go buy assets according to your IPS.

IMO, you should not be worried about the actual content of your portfolio (which sounds reasonable enough to me), but you should be worried about the fact that you don't know why you've structured your portfolio the way that you did.
« Last Edit: February 09, 2015, 03:11:38 PM by Jack »

Bicycle_B

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Re: Balance large/mid/small - should I worry
« Reply #3 on: February 09, 2015, 05:20:59 PM »
Worry?  Of course not!

Small cap stocks  rise on average a little more than large ones; they have more upside, more room to grow.  In any given year the trend may not be evident, but in the long term you should get a little bit better return if you increase your percentage of small-cap.  So you would probably benefit by increasing your small-cap percentage.

That said, the drawback of small caps is more volatility, including a greater risk that individual firms go bankrupt.  So perhaps too much small cap will disturb your sleep.

In the end, it's your decision.  Whatever percentage you choose, you will get a better result if you rebalance each year to maintain the percentage in each category, unless you have significant buy/sell costs.

Dodge

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Re: Balance large/mid/small - should I worry
« Reply #4 on: February 09, 2015, 06:08:01 PM »
Small cap stocks  rise on average a little more than large ones

This is true for the past.  No one knows what the future holds.

forummm

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Re: Balance large/mid/small - should I worry
« Reply #5 on: February 10, 2015, 07:54:03 AM »
Which funds are you in, and why the aversion to ETFs?

Vanguard's Total Stock Index Fund for the US is:

Large: 72%
Mid: 18%
Small: 9%

Vanguard's Total World Index Fund is almost the same:

Large: 75%
Mid: 18%
Small: 6%

And finally, Vanguard's Total International Index Fund (not US) fund is:

Large: 78%
Mid: 17%
Small: 4% Small

Using those as guidelines, I'd say yes, you're a bit low on your Small allocation, but it's unlikely to matter in the long run.

Can you tell me how to find info like this on Vanguard funds? I don't see it on the fund profile pages (e.g. VTSAX https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT#tab=0). Thanks!

Dodge

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Re: Balance large/mid/small - should I worry
« Reply #6 on: February 10, 2015, 09:01:14 AM »
Which funds are you in, and why the aversion to ETFs?

Vanguard's Total Stock Index Fund for the US is:

Large: 72%
Mid: 18%
Small: 9%

Vanguard's Total World Index Fund is almost the same:

Large: 75%
Mid: 18%
Small: 6%

And finally, Vanguard's Total International Index Fund (not US) fund is:

Large: 78%
Mid: 17%
Small: 4% Small

Using those as guidelines, I'd say yes, you're a bit low on your Small allocation, but it's unlikely to matter in the long run.

Can you tell me how to find info like this on Vanguard funds? I don't see it on the fund profile pages (e.g. VTSAX https://personal.vanguard.com/us/funds/snapshot?FundId=0585&FundIntExt=INT#tab=0). Thanks!

It's on the Morningstar portfolio page:

http://portfolios.morningstar.com/fund/summary?t=VTSAX&region=usa&culture=en-US


Norwegian72

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Re: Balance large/mid/small - should I worry
« Reply #7 on: February 10, 2015, 10:10:59 AM »
The "default" way to allocate a portfolio is by market capitalization ("cap-weighting"). Setting your portfolio's allocation different from the default cap-weighting (i.e., not the same 75% Large, 18% Mid and 6% Small as Dodge listed for the world total stock index), is called "tilting." Tilting your portfolio could be a good thing, but you should consciously decide why you want to tilt and do so on purpose, not by accident.

First you should decide on your asset allocation (i.e., asset classes and tilt within them), next you should write down your decisions in an Investment Policy Statement (IPS), and then you should go buy assets according to your IPS.

IMO, you should not be worried about the actual content of your portfolio (which sounds reasonable enough to me), but you should be worried about the fact that you don't know why you've structured your portfolio the way that you did.

As regards asset classes, our long term plan is to get allocation of cash down to about 30%, we have a plan of purchasing additional real estate within 3 years so I need cash for that. The rest is allocated to the stock market, 90% stocks, 10% bonds. Bonds are currently at 8.7% and I will probably let it rest there. I am averaging into the market and I rebalance as I transfer. These are all in taxable accounts.

We have very limited control of the pension allocation, personally I've gone 100% in a global index fund (Nordea) whereas my wife has no option to choose.

All investments in taxable accounts are directed towards 6 index funds, 1 managed fund (biotech) at 4.4% and 1 bond fund. The balance is 37% Europe 37% America and 26% Asia. I have a tilt towards Norway and Scandinavia.

Critique is probably in order, I do the best I can with the knowledge I have going forward :)

Norwegian72

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Re: Balance large/mid/small - should I worry
« Reply #8 on: February 10, 2015, 10:23:58 AM »
Which funds are you in, and why the aversion to ETFs?

Vanguard's Total Stock Index Fund for the US is:

Large: 72%
Mid: 18%
Small: 9%

Vanguard's Total World Index Fund is almost the same:

Large: 75%
Mid: 18%
Small: 6%

And finally, Vanguard's Total International Index Fund (not US) fund is:

Large: 78%
Mid: 17%
Small: 4% Small

Using those as guidelines, I'd say yes, you're a bit low on your Small allocation, but it's unlikely to matter in the long run.

Aversion to ETFs: unsure if I can purchase Vanguard ETFs in Norway and I don't fully understand them. I will check with Nordnet.
Plus it's so convenient to purchase index funds directly in the bank instead of having to transfer to Nordnet, then purchasing.

Funds:
DNB Global Indeks (21.7%)
http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F00000JORS

DNB Norge Indeks (6.5%)
http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F00000JORR

KLP Aksje Verden Indeks (13%)
http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F00000MKD8

KLP AksjeFremvoksende Markeder Indeks II (25%)
http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F00000MKDH

KLP AksjeGlobal LavBeta I (8.7%)
http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F00000RW2R

KLP AksjeNorden Indeks (12%)
http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F0GBR04HHA

KLP Obligasjon 5 Śr (8.7%)
http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F0GBR04NJU

SEB Concept Biotechnology D (4.4%)
http://www.morningstar.no/no/funds/snapshot/snapshot.aspx?id=F0GBR04DFM

Scandium

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Re: Balance large/mid/small - should I worry
« Reply #9 on: February 10, 2015, 10:50:06 AM »
I'm not sure there's much reason to hold the low beta fund (#5 on your list). Couldn't that just be put into the global index? Is currency risk the reason for the home tilt? That might be perfectly reasonable, I'm just curious.

You might be able to find a global small cap fund, but it will likely be expensive. I'm not sure I would bother, but that's just my personal opinion. An ETF would be cheaper so that might be an option.

I looked at the portfolio of Global index and KLP verden, and they have almost no small cap? Are your small caps also concentrated in the Nordic? I guess that might be an issue.

Norwegian72

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Re: Balance large/mid/small - should I worry
« Reply #10 on: February 10, 2015, 11:06:21 AM »
I'm not sure there's much reason to hold the low beta fund (#5 on your list). Couldn't that just be put into the global index? Is currency risk the reason for the home tilt? That might be perfectly reasonable, I'm just curious.

You might be able to find a global small cap fund, but it will likely be expensive. I'm not sure I would bother, but that's just my personal opinion. An ETF would be cheaper so that might be an option.

I looked at the portfolio of Global index and KLP verden, and they have almost no small cap? Are your small caps also concentrated in the Nordic? I guess that might be an issue.

The reason for the low beta fund is to get additional diversification, it has 11% in Canada for instance. I don't mind an extra fund. I record everything in a small program and it calculates what I need to rebalance (or move towards better balance). I do this 6 times a month, it takes maybe 10 minutes.

The tilt to Norway is due to its low correlation with the other funds as well as a belief that both Norway and Scandinavia are well developed countries that will do reasonably going forward. Scandinavia tilt is also for the same reason, although correlation seems to be a lot higher.

Small cap exposure is my main worry :) If I can find an ETF that covers that I might add that to the mix.

Scandium

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Re: Balance large/mid/small - should I worry
« Reply #11 on: February 10, 2015, 11:21:32 AM »
I'm not sure there's much reason to hold the low beta fund (#5 on your list). Couldn't that just be put into the global index? Is currency risk the reason for the home tilt? That might be perfectly reasonable, I'm just curious.

You might be able to find a global small cap fund, but it will likely be expensive. I'm not sure I would bother, but that's just my personal opinion. An ETF would be cheaper so that might be an option.

I looked at the portfolio of Global index and KLP verden, and they have almost no small cap? Are your small caps also concentrated in the Nordic? I guess that might be an issue.

The reason for the low beta fund is to get additional diversification, it has 11% in Canada for instance. I don't mind an extra fund. I record everything in a small program and it calculates what I need to rebalance (or move towards better balance). I do this 6 times a month, it takes maybe 10 minutes.

The tilt to Norway is due to its low correlation with the other funds as well as a belief that both Norway and Scandinavia are well developed countries that will do reasonably going forward. Scandinavia tilt is also for the same reason, although correlation seems to be a lot higher.

Small cap exposure is my main worry :) If I can find an ETF that covers that I might add that to the mix.

Yes you're right, the "global" fund isn't really all that global, since it has no emerging market for instance. Filling it out with others seems reasonable.

Just be careful with your "geographic market timing". Especially if you invest in real estate at home as well, since you already have 20% of your stocks tied to the economies in the Nordic region, which I think are highly correlated with the EU as well.

Norwegian72

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Re: Balance large/mid/small - should I worry
« Reply #12 on: February 10, 2015, 11:34:18 AM »
I'm not sure there's much reason to hold the low beta fund (#5 on your list). Couldn't that just be put into the global index? Is currency risk the reason for the home tilt? That might be perfectly reasonable, I'm just curious.

You might be able to find a global small cap fund, but it will likely be expensive. I'm not sure I would bother, but that's just my personal opinion. An ETF would be cheaper so that might be an option.

I looked at the portfolio of Global index and KLP verden, and they have almost no small cap? Are your small caps also concentrated in the Nordic? I guess that might be an issue.

The reason for the low beta fund is to get additional diversification, it has 11% in Canada for instance. I don't mind an extra fund. I record everything in a small program and it calculates what I need to rebalance (or move towards better balance). I do this 6 times a month, it takes maybe 10 minutes.

The tilt to Norway is due to its low correlation with the other funds as well as a belief that both Norway and Scandinavia are well developed countries that will do reasonably going forward. Scandinavia tilt is also for the same reason, although correlation seems to be a lot higher.

Small cap exposure is my main worry :) If I can find an ETF that covers that I might add that to the mix.

Yes you're right, the "global" fund isn't really all that global, since it has no emerging market for instance. Filling it out with others seems reasonable.

Just be careful with your "geographic market timing". Especially if you invest in real estate at home as well, since you already have 20% of your stocks tied to the economies in the Nordic region, which I think are highly correlated with the EU as well.

Real estate is a bit of a headache. I believe we're in a big bubble fueled by tax advantages on real estate over many years. No politicians want to be remembered for "fixing" this as the cure is probably more taxation in real estate and less other places. Economists have suggested changes, but no one wants to touch it with a bargepole. Guess where the most voters are.

We paid down the house 2 years ago, but I almost wish we didn't. It currently represents about 80% of our assets.
I try not to market time anything and we have a long investment horizon. We are averaging into the market very conservatively.