Critique my investment allocation, please?

[cheddarpie]

Hello Mustachians! After deliberately ignoring my investment portfolio for the last few years, I'm reassessing my allocation. I have a few different accounts and I know I have not optimized my taxable vs. pre-tax vs. non-tax options. I've also learned more since setting this up - I recently read Larry Swedroe's Guide to a Successful and Secure Retirement (great!), and I'm sure there are some better ways to do this.

I am curious what you advice you all would give. I'm early 40s and content in a stable job so I don't need to retire any time soon, but am on track to have the option to if I need to. I've got FU money if things go really south, but want to stay in the accumulation phase for a while longer.

What's good here, and what would you differently? (I've deliberately excluded real estate from this.)

63% - U.S. Large Cap Equity, mix of VTSMX and VFINX (20% of this is in my taxable brokerage account and the rest split between Roth IRA, HSA, and 401k)
10% - U.S. Dividends (mostly SCHD, 65% in taxable brokerage account and the rest in Roth/HSA)
10% - International Equity (mix of VGTSX and SFENX, 30% of this is in my Roth IRA and the rest in 401k)
8% - U.S. Small Cap Equity (mix of SWSSC and JSCVX, 21% in my taxable brokerage account and the rest in 401k)
7% - Bonds (mostly VBMFX, 10% of this is in my taxable brokerage account, the rest is in 401k)
2% - Individual stocks just for fun (66% in my Roth IRA and the rest in my taxable brokerage account)

Thank you!

[MDM]

One could try to outguess your current overall allocation, but what you have is defensible.

Some things to consider, along with whatever tax hit you might have to take to implement them:
- move all bonds and high dividend payers out of taxable
- move all international into taxable

See Tax-efficient fund placement - Bogleheads for more details and discussion.

[TomTX]

It's reasonable. Overly complicated to my view. I'm 50% ESGV, 50% VSGX.

I originally moved to ESG funds because I want to divest from fossil fuel companies. In doing research for an earlier discussion, I discovered that ethical investing (with Vanguard) has beaten the equivalent standard index on the 1, 3, 5 and 10 year timeframes, typically about 1% per year better. (note: the ETFs above aren't old enough for that - I chose the ETF variant for portability. You need to compare the ESG mutual fund)

[cheddarpie]

Thank you, @MDM and @TomTX ! I will check out the Bogleheads article and the ESG funds. I agree my allocation is overly complicated ... I would like to get to a more simple place, but I've got an assortment of different accounts from different employers that don't make sense to consolidate right now so I'm trying to figure out the most efficient way to streamline.

Thanks for the feedback!

[NWOutlier]

You can consider asking Vanguard to swap VTSMX for VTSAX, same investment (VTSAX are admiral shares)... the expense ratio will drop from 0.14 to 0.04.  From Vanguard site "You can now buy or convert to Admiral Shares of this fund at a $3,000 minimum."  The swap should not be a sell then buy (triggering a taxable event) it should just be a swap, ask them when you speak with them to make sure the swap is not a taxable event.

https://investor.vanguard.com/mutual-funds/profile/VTSMX

https://investor.vanguard.com/mutual-funds/profile/overview/vtsax

[Buffaloski Boris]

Given your age, not a bad allocation. Key data point was missing, though. How much longer till retirement?

Only critique I would offer is to consider kicking up the international percentage of the portfolio. There are index ETFs out there that go country by country. And maybe simplify things by holding one US large cap index.  (Full disclosure: I’m not a fan of the cap weighted, US large cap indexes. But if you’ve already decided to go down that path, might as well keep it simple.)

[cheddarpie]

@NWOutlier - thanks; great tip!!

@Buffalo Chip - thanks! Can you explain more why you're not a fan of the U.S. large cap indexes? What do you use instead?

I don't have a set retirement timeframe. I am content in my job and expect to be there at least another 5 years, but after that who knows. I have enough FU money and real estate cash flow that if I upped my frugal game I could comfortably be unemployed for a few years if need be.

[MustacheAndaHalf]

For equities, it looks like you've allocated:
81% U.S.
10% international

Vanguard has a white paper that analyzed at what percentage do you get the most benefit from diversifying to international.  The main thing I took away is that people scared of international should still allocate 1/5th of their equities to it, as it will smooth out the ups/downs of a portfolio.  There's still benefits past that, but the certainty of reduced volatility drops.
https://www.vanguard.com/pdf/ISGGEB.pdf
Based on that, I'd suggest 16% international and 75% U.S.

You should take a guess at when you'll retire, so you can at least know when you start easing into a higher bond percentage.  When you retire, keeping your nest egg becomes more important.

[Buffaloski Boris]

@Buffalo Chip - thanks! Can you explain more why you're not a fan of the U.S. large cap indexes? What do you use instead?

I don't have a set retirement timeframe. I am content in my job and expect to be there at least another 5 years, but after that who knows. I have enough FU money and real estate cash flow that if I upped my frugal game I could comfortably be unemployed for a few years if need be.

Well, why I don’t like US large caps is a long tale. And it’s very contrary to the views of most in the FI community.  I’ll try to keep it succinct.

1. Generally speaking I believe that the US stock market is relatively expensive in both historic terms and global terms. You can check out comparable PE and CAPE ratios for US and other countries on the Star Capital website. If you’re a buy and hold investor what you’re usually trying to do is buy low and sell high. When valuations overall are high, it doesn’t seem to me that there’s much opportunity for making money on the market as a whole.

2. US Large cap stocks relative to small and medium caps have not done as well over long time periods.  Although for the last 5 years they seem to have done better than small or medium caps. I expect that to change back to the historical norm. I could be wrong.

3. The large cap indexes are mostly cap weighted. Or said another way, when you buy the popular large cap indexes, most of your money is going to the largest stocks by market capitalization. If you buy a top 500 index, you’ll find that about half of what you’re actually getting is the top 50 stocks, so maybe it should be better thought of as a top 50 index with an insignificant allocation to 450 other stocks.  That sort of index is fine if you like the 50 or 100 largest stocks. I’m not a fan.

As of now, I’m light on stocks, almost zero bonds. A lot of that is because of limited choices in my 401k. I’m just not that interested in throwing money at cap weighted US stock indexes. I do invest in international indexes and will put more towards those in the near future. I also do individual stocks, but those are more of a hobby. Individual stocks are tough and the deals I see are in hated industries. Sometimes those industries are hated for good reason. 😳

Longer term, I anticipate buying a lot more stocks and crafting my own sort of personal index. With zero fee trades that’ll be a trend in the future I think.

[talltexan]

More small cap.

More Bonds.