Author Topic: Critique my target portfolio  (Read 4050 times)

somers515

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Critique my target portfolio
« on: August 03, 2016, 09:11:09 PM »
My wife and I are in our 40s and while we've always been savers more than spenders, I've definitely seen the light thanks to MMM.  I'm working on my wife still but she is definitely been meeting me at least half-way.  We are generally moderate conservative in our investments/savings.  This is my current target portfolio, the cash portion represents 6 months living expenses.  Anything jump out at you?  Any helpful advice?  Overall look decent?  Thanks for any feedback.

US Equity 50%
International Equity 17%
REIT 1%
US Bonds 20%
International Bonds 5%
TIPS 1%
Gold 1%
Cash 5%

Radagast

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Re: Critique my target portfolio
« Reply #1 on: August 03, 2016, 11:43:29 PM »
I don't think there is much benefit to all those little 1% slices. Cash beyond what you need to spend soon will generally not be productive.

arebelspy

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Re: Critique my target portfolio
« Reply #2 on: August 04, 2016, 12:53:36 AM »
I'd simplify, and get rid of the tiny allocations to stuff.

If you want 6 mo (or more) in cash, that's fine.  Dump the 1% REITs, TIPS, Gold.  I'd probably up the equity allocation a bit (67% in your 40s is between conservative and aggressive), but that depends on you and your risk profile, and how close to ER you are.  I'm guessing FIRE is a ways out, if the 5% cash is 6 mo. living expenses, then you have ~10 years living expenses total in investments, and need to get to 25x if you're doing the 4% rule.  Given that, I'd probably just slide the small allocations into extra equity and KISS.

That's pretty nitpicky though, it's a fine allocation.  I'd just go simpler, because you won't see much benefit to 1%, and you'll see a fair amount of hassle (rebalancing) and extra transaction costs (buying multiple things when contributing).
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kenaces

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Re: Critique my target portfolio
« Reply #3 on: August 04, 2016, 01:37:51 AM »
I agree having 1% slices are not really worth the effort/possible cost.  I also don't like the 50% US equity seems like too much home country bias in general and especially since foreign developed and EM are cheap on lots of value metrics at the moment.

One of my favorite recent reads was Meb Faber's Global Asset Allocation book.  He compares back test from a bunch of different allocations and his conclusion is they are all so close the critical factor is to keep cost low not which exact allocation you choose.  In general I like to keep things simple so I am basically using the Ivey5 - you can take a look at this site and compare some different allocation  -https://portfoliocharts.com/portfolios/

mathjak107

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Re: Critique my target portfolio
« Reply #4 on: August 04, 2016, 02:46:54 AM »
yep . under 5% is useless .    i rarely go below 10% in anything part of my portfolio . the only thing under 10% is my speculating fun money .  that is quick trading in and out of some issues which is more for fun then profit . but even though i play with just 10k it is running at over a 30% ytd return because i turned it over so many times at small profits .

basically i trade in and out of GLD ,TLT ,KMI AND AAPL   .

the portfolio is my serious money and that never is used to speculate anymore  now that we are retired.
« Last Edit: August 04, 2016, 02:49:09 AM by mathjak107 »

frugledoc

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Re: Critique my target portfolio
« Reply #5 on: August 04, 2016, 05:50:16 AM »
I agree having 1% slices are not really worth the effort/possible cost.  I also don't like the 50% US equity seems like too much home country bias in general and especially since foreign developed and EM are cheap on lots of value metrics at the moment.

One of my favorite recent reads was Meb Faber's Global Asset Allocation book.  He compares back test from a bunch of different allocations and his conclusion is they are all so close the critical factor is to keep cost low not which exact allocation you choose.  In general I like to keep things simple so I am basically using the Ivey5 - you can take a look at this site and compare some different allocation  -https://portfoliocharts.com/portfolios/

Actually 50% US is probable slightly underweight US given it makes up more of the all world index than that!

somers515

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Re: Critique my target portfolio
« Reply #6 on: August 04, 2016, 05:55:47 AM »
Interesting - thank you all for your feedback.  I thought having even small amounts of diversification might help to slightly smooth out the ride so to speak.  I rebalance by adjusting my investment allocation bi-monthly purchases so I think my additional transaction costs are negligible (just the time it takes to go into Vanguard and adjust where the money will be sent to next month).  I'm surprised no comments about my international bond fund - it's not something I see very much in other portfolios.  Again thank you all for your thoughts!

arebelspy

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Re: Critique my target portfolio
« Reply #7 on: August 04, 2016, 06:00:08 AM »
I rebalance by adjusting my investment allocation bi-monthly purchases so I think my additional transaction costs are negligible (just the time it takes to go into Vanguard and adjust where the money will be sent to next month). 

Huh?  Do you have free transactions or something?

Because otherwise purchasing 7 things, not counting cash obviously (US Equity 50% International Equity 17% REIT 1% US Bonds 20% International Bonds 5% TIPS 1% Gold 1% Cash 5%) is still more expensive than purchasing 3-4.  It may be a small cost, but that extra unnecessary monthly cost does add up.  Probably to more than you'll save/make by the diversification.
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somers515

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Re: Critique my target portfolio
« Reply #8 on: August 04, 2016, 07:06:24 AM »
"Huh?  Do you have free transactions or something?

Because otherwise purchasing 7 things, not counting cash obviously (US Equity 50% International Equity 17% REIT 1% US Bonds 20% International Bonds 5% TIPS 1% Gold 1% Cash 5%) is still more expensive than purchasing 3-4.  It may be a small cost, but that extra unnecessary monthly cost does add up.  Probably to more than you'll save/make by the diversification."

If use Vanguard and I invest $3000 every month and buy into 3 funds for $1,000 each or I buy 6 funds for $500 each and assuming they all have the same expense ratio and all the funds I'm investing in are above the Vanguard minimum, then yes I don't think the transaction costs change.  Am I incorrect?

Radagast

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Re: Critique my target portfolio
« Reply #9 on: August 04, 2016, 08:24:22 AM »
Not necessarily, because at the least it will take longer to get the 10k for Admiral shares. Also, Vanguard does not have a gold fund. If you mean their precious metal miners stock fund, then 1% may be the right amount because that thing can make 60% swings in a few months.

NP

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Re: Critique my target portfolio
« Reply #10 on: August 04, 2016, 08:47:22 AM »
Your asset allocation looks decent. The biggest issue I see is that your international equity allocation is way too low at roughly 25% of equities. I'd increase that in order to be better diversified under any circumstances, but especially now when U.S. markets seem significantly more expensive than international markets. If you're unsure or uneasy about this, consider 50%, as in 50% U.S. and 50% total international, or 50% U.S. and 40% foreign developed and 10% emerging markets (percentages given as a portion of equities, not of the entire portfolio).

Having some international bonds is a good idea and not unusual. Most Vanguard balanced funds have been including them for years, for example. Most people would agree that (unlike with stocks) you're better off owning currency hedged foreign bonds. There's really only one good investment vehicle currently available to U.S. investors for this asset class: the Vanguard Total International Bond Index.

Including REITs and TIPS and even a small amount of gold is also a good idea in my opinion. Tiny 1% allocations will do absolutely no harm but probably not much good either. In this category of assets that could provide some protection against inflation, I'd consider something like 5-15% REITs, 5-10% TIPS, and, if you're able to stomach the volatility, 5% energy stocks and 3-5% gold miner stocks or gold.

If you decide not to allocate a sizable chunk to the assets mentioned in the previous paragraph, you might as well go with a balanced fund (plus some cash as an emergency reserve) and save yourself the trouble of having to manage a portfolio. That's because your asset allocation would be extremely similar to an aggressive balanced fund. The Vanguard LifeStrategy Growth mutual fund would be a good choice, or if you want to use a brokerage, the iShares Core Aggressive Allocation ETF. I wouldn't go with target retirement funds as they decrease the stock allocation way too much as you get older.

Having a few months' worth of expenses in cash or something very similar is a good idea in my opinion. If you can store it safely, I'd even suggest keeping one month's worth of expenses in physical cash, just in case your financial accounts get hacked or banks run into temporary issues with their infrastructure. However, I would calculate the required cash position solely based on my expenses and I would let it become a smaller and smaller percentage of my net worth as my savings grow. In other words, don't consider your emergency reserve part of your asset allocation. If you feel you really need the stability that cash provides in a portfolio (as opposed to the cash functioning as an emergency reserve only), then consider high quality short-term bonds.

kenaces

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Re: Critique my target portfolio
« Reply #11 on: August 04, 2016, 11:51:33 AM »
I agree having 1% slices are not really worth the effort/possible cost.  I also don't like the 50% US equity seems like too much home country bias in general and especially since foreign developed and EM are cheap on lots of value metrics at the moment.

One of my favorite recent reads was Meb Faber's Global Asset Allocation book.  He compares back test from a bunch of different allocations and his conclusion is they are all so close the critical factor is to keep cost low not which exact allocation you choose.  In general I like to keep things simple so I am basically using the Ivey5 - you can take a look at this site and compare some different allocation  -https://portfoliocharts.com/portfolios/

Actually 50% US is probable slightly underweight US given it makes up more of the all world index than that!

If OP has 67% of his money in equities and 50/67 is in US equities he is definitely overweight in US equities compared to international equities - right?

frugledoc

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Re: Critique my target portfolio
« Reply #12 on: August 04, 2016, 01:25:43 PM »
No, because 50% of the world equity market is US so if you own less than that in your equity allocation you are underweight

kenaces

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Re: Critique my target portfolio
« Reply #13 on: August 04, 2016, 01:57:12 PM »
No, because 50% of the world equity market is US so if you own less than that in your equity allocation you are underweight

Yes if you want to be 100% in equites one would put ~50% in US

In this case OP choose 67% in equities and put 50/67 or 75% of his equity exposure in US equities

frugledoc

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Re: Critique my target portfolio
« Reply #14 on: August 04, 2016, 02:06:30 PM »
No, because 50% of the world equity market is US so if you own less than that in your equity allocation you are underweight

Yes if you want to be 100% in equites one would put ~50% in US

In this case OP choose 67% in equities and put 50/67 or 75% of his equity exposure in US equities

ah I see. Yes.

mskyle

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Re: Critique my target portfolio
« Reply #15 on: August 04, 2016, 02:18:47 PM »
I would get rid of all the 1% slices too. If it makes you feel better, a lot of the big index funds include small percentages of REITs. So even though my portfolio is all in equity funds and bond funds, it's actually still a little over 2% real estate.

And I would not bother with international bonds until you can meet the Admiral class (or equivalent) level, maybe not even then; it's not clear whether the diversification is worth the expense and the currency risk.

somers515

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Re: Critique my target portfolio
« Reply #16 on: August 05, 2016, 07:54:18 PM »
If use Vanguard and I invest $3000 every month and buy into 3 funds for $1,000 each or I buy 6 funds for $500 each and assuming they all have the same expense ratio and all the funds I'm investing in are above the Vanguard minimum, then yes I don't think the transaction costs change.  Am I incorrect?

Ok quoting myself here to answer my own question.  I called and confirmed that I am correct.  There is no transaction fee, so whether I invest in 3 funds or 6 funds makes no cost difference.  However that's assuming the same expense ratios and as others have pointed out by not being in Vanguard's Admiral class for the 1% slices, those cost slightly more - although still really low because hey it's Vanguard!  I think I said already, but if I didn't, I should point out I didn't diversify to try to make more money but instead to slightly smooth out the ride so to speak.

Anyway thank you again for all the advice.  After hearing what people had to say I think I'll very slightly decrease US equity and increase International equity in my target allocation.  I'll keep checking back in case anyone else chimes in.  I like to tinker and make minor adjustments to my portfolio as I wait for it to grow to the FI number - so fun to watch it grow!

somers515

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Re: Critique my target portfolio
« Reply #17 on: March 22, 2017, 05:47:15 PM »
Just updating this thread . . . I gave a lot of thought to the comments here and other things I've read and adjusted my target asset allocation.  Thank you again to those that chimed in.

US Equity 50%
International Equity 24%
REIT 1%
US Bonds 15%
International Bonds 4%
TIPS 1%
Gold 1%
Cash 4%

Heckler

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Re: Critique my target portfolio
« Reply #18 on: March 22, 2017, 10:36:25 PM »
Oh... Stop tinkering.

somers515

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Re: Critique my target portfolio
« Reply #19 on: March 23, 2017, 05:03:42 AM »
Oh... Stop tinkering.

No thanks I enjoy tinkering.  If you had actual portfolio advice though I'd be interested.

Car Jack

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Re: Critique my target portfolio
« Reply #20 on: March 23, 2017, 06:37:29 AM »

US Equity 50%
International Equity 24%
REIT 1%  comment:  mouse nuts.  waste of time and effort
US Bonds 15%
International Bonds 4%
TIPS 1%  comment:  mouse nuts.  waste of time and effort
Gold 1%  comment:  mouse nuts.  waste of time and effort
Cash 4%  comment: 7% in a Redneck Megamoney 1.25% account up to $35,000

I don't personally do international bonds (and Jack Bogle says not to do international at all since almost all US companies are international.  Do you think Coke or Exxon/mobil sell anything overseas?  Yah).  But the above is a pretty common Vanguard type target date fund allocation.  I put all the mouse nuts in cash because they will do zero for your portfolio however they go.

mathjak107

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Re: Critique my target portfolio
« Reply #21 on: March 24, 2017, 05:03:28 AM »
other assets like gold can generate nice gains but they are more timing the market than time in the markets .

since i added gold after the election , gold is my biggest gainer  i am up 9% vs 6% for the s&p 500 and down 3% on small cap value . sold 1/2 the position this week .

matchewed

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Re: Critique my target portfolio
« Reply #22 on: March 24, 2017, 05:48:50 AM »
Oh... Stop tinkering.

No thanks I enjoy tinkering.  If you had actual portfolio advice though I'd be interested.

That actually is advice. :)

There is positive benefits to choosing an investment plan and sticking to it.

Car Jack

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Re: Critique my target portfolio
« Reply #23 on: March 24, 2017, 06:22:29 AM »
Jack Bogle's quote about tinkering?

Don't do something.....just stand there.

And the Fidelity research paper that found the the people in their 401k plans were those people who were......dead.

If you want lower returns, keep tinkering.  Think of it like this.  Every time you screw around with your account, you lose $100.

somers515

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Re: Critique my target portfolio
« Reply #24 on: March 24, 2017, 06:51:18 AM »
Oh... Stop tinkering.

No thanks I enjoy tinkering.  If you had actual portfolio advice though I'd be interested.

That actually is advice. :)

There is positive benefits to choosing an investment plan and sticking to it.

Ahh ok I misread the message/tone of your original post then.  : )

I'm tinkering with my target asset portfolio not my actual asset portfolio if that makes any sense.  I appreciate all the thoughts of the MMM community on what the percentages should be as we approach FIRE.  Then the plan is to gradually nudge our actual portfolio toward the target asset portfolio.

Two things I want to give more thought to is the percentage of international equity vs US equity.  I hear and read some say all US companies have international exposure so you don't need any international equity and some say to be properly world balanced that international equity and US equity should be 50/50.

The second thing I want to give more thought to is the 1% slices I have in there.  The MMM consensus seems to be to get rid of them as not worth the effort.  Personally I don't mind the effort and I like the idea of the slight smoothing of the ride so to speak that those slices may give us.  However, whenever the consensus is opposite of what my inclination is I want to be give it extra thought.

Thank you for all those who chime in - you've given me things to mull over.  I welcome any additional thoughts as I will continue to check back on this thread.

matchewed

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Re: Critique my target portfolio
« Reply #25 on: March 24, 2017, 07:40:53 AM »
How much "smoothing" do you think you will get from such a slice?

farfromfire

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Re: Critique my target portfolio
« Reply #26 on: March 24, 2017, 08:44:13 AM »
Oh... Stop tinkering.

No thanks I enjoy tinkering.  If you had actual portfolio advice though I'd be interested.

That actually is advice. :)

There is positive benefits to choosing an investment plan and sticking to it.

Ahh ok I misread the message/tone of your original post then.  : )

I'm tinkering with my target asset portfolio not my actual asset portfolio if that makes any sense.  I appreciate all the thoughts of the MMM community on what the percentages should be as we approach FIRE.  Then the plan is to gradually nudge our actual portfolio toward the target asset portfolio.

Two things I want to give more thought to is the percentage of international equity vs US equity.  I hear and read some say all US companies have international exposure so you don't need any international equity and some say to be properly world balanced that international equity and US equity should be 50/50.

The second thing I want to give more thought to is the 1% slices I have in there.  The MMM consensus seems to be to get rid of them as not worth the effort.  Personally I don't mind the effort and I like the idea of the slight smoothing of the ride so to speak that those slices may give us.  However, whenever the consensus is opposite of what my inclination is I want to be give it extra thought.

Thank you for all those who chime in - you've given me things to mull over.  I welcome any additional thoughts as I will continue to check back on this thread.
Using https://portfoliocharts.com/portfolio/annual-returns/ , I compared your results (minus the TIPS, which the author does not include for good reasons), to the following portfolio (which I don't personally recommend, it's just a simplified version of yours):

TSM 55
Total Int Equity 20
Total Bond 20
Gold 5

Yours returned 6.0% with a standard deviation of 13.0%, the one I wrote up returned 6.3% with stdev 12.9%. Slightly less deviation, with better results.

PPDNPFR*, but neither does some random portfolio you made up.

For an example of a portfolio designed to smooth returns, with avg 6.1 and stdev 7.6, see portfoliocharts' Golden Butterfly. It is not exposed to int. equity, but there are other examples on that site that are.


*Past performance does not predict future results