Author Topic: Diversification question  (Read 5123 times)

Kilbim

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Diversification question
« on: May 18, 2016, 02:08:03 PM »
I have a very newbie question.
Is diversification through a fund which offer a combination of stocks and bonds,
the same as buying those same bonds and stocks but keeping them separated?

So, for example, vanguard lifestrategy fund has, let's say, 50% bonds 50% stocks. I can invest my money in the fund and it allocates it toward having 50% stocks and 50% bonds.
If I setup an account myself, let's say through a brokerage firm, and buy the same bonds and stocks that are in the vanguard fund, and have 50% of bonds and 50% of stocks, does this is the same diversification as the vanguard lifestrategy fund?

In other words, to diversify it's enough that my overall portfolio has diversified assets in them (although not connected, they could be lying in different brokerage accounts), or they need to be somehow connected?

Thanks

Heckler

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seattlecyclone

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Re: Diversification question
« Reply #2 on: May 18, 2016, 03:11:26 PM »
The two options are essentially equal at the start. When you buy separate funds per asset class you need to keep the 50/50 (or whatever) split in balance yourself by putting new money into whichever fund is below your desired allocation. With the LifeStrategy fund the rebalancing happens automatically.

steveo

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Re: Diversification question
« Reply #3 on: May 18, 2016, 05:02:48 PM »
I think it's easier in a single fund alal Vanguard. You don't have to do anything.

Radagast

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Re: Diversification question
« Reply #4 on: May 18, 2016, 06:56:21 PM »
Yes, it is just as diverse. The additonal layer of a fund of funds does add a slight additional risk of mismanagement or other problems by Vanguard, but this is probably much lower than the chance of you making a mistake yourself.

MustacheAndaHalf

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Re: Diversification question
« Reply #5 on: May 18, 2016, 10:32:11 PM »
You should make sure you get everything right besides this before considering a combined fund vs separate stock/bond allocations.  You can pick between those two based on personal preference.

Are you talking about a passive, low cost stock fund?  Something like VTSAX is very different from a stock fund costing 1% per year in fees.  Similarly, bond funds can be expensive, but Vanguard typically offers lower annual fees on it's Total Bond Market fund.  Making sure you have the full market of stocks and bonds is more important than mixing them in one fund or two.

It might make more sense to ask in the context of a portfolio.  For example, if everything goes in a 401(k), you don't have much flexibility for fund placement and it matters less than if you have both Roth IRA and Traditional IRA.

Jeremy E.

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Re: Diversification question
« Reply #6 on: May 18, 2016, 11:03:40 PM »
If you were to buy every stock offered by a Vanguard Lifestrategy Fund, you'd likely be spending a ton of money on trades. You also couldn't buy fractions of a stock, so you wouldn't be able to get it exact, it would take forever to initiate all of these trades as well. You would have to repeat this inefficient process everytime you add money as well, and if you ever attempt to rebalance, it'll be a nightmare. Bottom line is that it would be very dificult and inefficient.

On the other hand, if you want to replace 1 index fund that contains both stocks and bonds, with multiple index funds, that is okay. They can be in different accounts, say 1 in your 401k, 1 in your IRA, or 1 in your spouses 401k, one in your 401k, etc. Just realize you will probably want to rebalance yourself at least once per year to keep a set asset allocation, and this might require you to either shift money between the places where the funds are held, or to start adding more money into one of them than the other.

Kilbim

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Re: Diversification question
« Reply #7 on: May 19, 2016, 06:19:25 AM »
Thank you for all your replies.

The thing about having different accounts was only to illustrate the point.
My situation is that I am setting up an account with truewealth, a robo-advisor similar to betterment (so I have read; I don't know betterment that well though).

In my account at truewealth I can choose how to allocate my invesments, say 50% bonds and 50% equities. Then according to my setup, they buy shares of an ETF that reflects that allocation (so they buy 50% shares of 1 bond ETF and 50% shares of 1 equities ETF). I just wanted to check that this way my portfolio is actually diversified, and not that I need to have the 2 ETFs somehow connected to be actually diversified.

This also means that if I want to have a "total market equities", I can buy ETFs covering europe, USA and emerging markets, I would have a "total equities market"?
I ask this because truewealth has main categories (e.g. equities, bonds, REIT, ecc) and sub-categories, which are basically countries (switzerland, UK, USA, europe, emerging markets). So if I mix a little bit of everything (say 25% switzerland, 15% uk, 25% usa, 25% europe, 10% emerging), meaning I have 1 ETF for each of the sub-categories, I do have a "total equiities market". [I might have  forgotten asia here, but it's just for the sake of understanding]

p.s. I know just setting up a vanguard fund would be much easier, but I want to invest a small initial sum applying DCA, and even after that I want to invest smaller sums each month (and still apply DCA).
p.p.s Why DCA? Because it's my first investment and I know I couldn't bear to invest and see it go straight down; I know that in the long term limp sum investing is better, but I don't know how long term it can be, and as I said it's a psychological thing.

Thaks
« Last Edit: May 19, 2016, 06:27:07 AM by Kilbim »

Heckler

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Re: Diversification question
« Reply #8 on: May 19, 2016, 07:15:00 AM »
http://www.truewealth.com/trueportfolios/fees/


This will cost you 1% of your savings per year in addition to fees charged buy the (likely) Vanguard ETF funds that TW will buy for you.   You're OK with that?  That's $10 every year for every $1000 you save.

Which ETFs does TW offer, or do they not disclose that?   Vanguard will allow low $ value DCA contributions to one of their funds.


Edit: OK, I see now you are Swiss and likely don't have access to Vanguard direct.   TW makes sense until you have enough saved to buy ETFs directly.
« Last Edit: May 19, 2016, 07:33:43 AM by Heckler »

Kilbim

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Re: Diversification question
« Reply #9 on: May 19, 2016, 07:43:03 AM »
http://www.truewealth.com/trueportfolios/fees/


This will cost you 1% of your savings per year in addition to fees charged buy the (likely) Vanguard ETF funds that TW will buy for you.   You're OK with that?  That's $10 every year for every $1000 you save.

Which ETFs does TW offer, or do they not disclose that?   Vanguard will allow low $ value DCA contributions to one of their funds.


Edit: OK, I see now you are Swiss and likely don't have access to Vanguard direct.   TW makes sense until you have enough saved to buy ETFs directly.

That's the wrong truewealth :D
I use www.truewealth.ch,  they charge 0.5% p.a, paid quarterly , and if I didn't misunderstood, this also covers the other fees (if I am over 0.5%, they bill me that on the next quarter).
Of all the options I have, given the low amount I can invest, this is the best (cheapest) one for me.

So, about diversifying?

Heckler

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Re: Diversification question
« Reply #10 on: May 19, 2016, 07:43:46 AM »
True diversification is dependant on the number of companies and their geographic location.  For example, a S&P500 fund has 500 US large cap (large companies), but a US total market fund has 3600 all-cap (small, medium and large companies).   Which is more diverse?

Heckler

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Re: Diversification question
« Reply #11 on: May 19, 2016, 07:47:11 AM »
Yearly fee: 0.50 % 
(per quarter: CHF 125 )
Product costs ( TER): 0.27%


0.77 p.a., but being from Canada I understand your limited options with Vanguard.

Heckler

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Re: Diversification question
« Reply #12 on: May 19, 2016, 07:51:31 AM »
I assume you have a sample account.  Under Holdings, how many companies are shown?

Kilbim

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Re: Diversification question
« Reply #13 on: May 19, 2016, 08:10:53 AM »
Yearly fee: 0.50 % 
(per quarter: CHF 125 )
Product costs ( TER): 0.27%


0.77 p.a., but being from Canada I understand your limited options with Vanguard.

I asked them about this, if I didn't understood something wrong, you still pay 0.5% p.a.
Here's their answers:

Quote
It could be possible that the trading commissions are higher than our management fee. For example:

Management fee (quarterly):    0.50 %
Trading commissions:              0.60 %

= no charges on your side

The remaining 0.10 % will be deducted on the next billing.
No, please note that you never pay "more" than our management fee of 0.50 % p. a. . You will not be charged with any trading commissions - True Wealth covers this costs.

Quote
No, please note that you never pay "more" than our management fee of 0.50 % p. a. . You will not be charged with any trading commissions - True Wealth covers this costs.

Quote
Management fee = 0.50 %
Custody-/Transactionfees = 0.20 %

= effectiv management fee 0.30 %

That's all. In the other case when the transaction costs are higher than 0.50 % you don't need to pay anything.
The part above the management fee (like 0.10 %) will be credited on the next billing. But effectively you will not be charged

Quote
I can confirm, that you do not pay more than 0.50 % p. a. for our asset management services.
There are no additional costs from our side - we cover all transactions/custody costs and FX-Markups.

Kilbim

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Re: Diversification question
« Reply #14 on: May 19, 2016, 08:11:52 AM »
True diversification is dependant on the number of companies and their geographic location.  For example, a S&P500 fund has 500 US large cap (large companies), but a US total market fund has 3600 all-cap (small, medium and large companies).   Which is more diverse?

I understand your point, but my question is different.
Basically, is just mixing 2 ETFs the same, for diversification as buying a fund which includes those 2 etfs?

Heckler

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Re: Diversification question
« Reply #15 on: May 19, 2016, 08:12:55 AM »
Ok, you are well versed in the fees you'll be paying.  That's good news!  Now, about diversification...  🤓

Kilbim

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Re: Diversification question
« Reply #16 on: May 19, 2016, 08:13:43 AM »
I assume you have a sample account.  Under Holdings, how many companies are shown?

My sample account is closed, as I am in the process of getting a real one..

Basically 1 ETF for each sub-category within the main categories.

So if I chose 50% equities and 50% bonds
with subcategories for equitoes: 50% swiss and 50% usa,
and for bonds 100% usa,
I will have 3 ETFs in total.

Kilbim

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Re: Diversification question
« Reply #17 on: May 19, 2016, 08:14:30 AM »
Ok, you are well versed in the fees you'll be paying.  That's good news!  Now, about diversification...  🤓

I hope I am, but usually there are always technicalities hidden everywhere :(

Heckler

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Re: Diversification question
« Reply #18 on: May 19, 2016, 08:21:59 AM »

Basically, is just mixing 2 ETFs the same, for diversification as buying a fund which includes those 2 etfs?

Yes. 

Until the relative percentages of your ETFs change due to performance differences or contributions. 

Buying into a fund that holds 40% bond ETF and 60% equity ETF will stay balanced at 40/60 as time passes.  The fund manages that for you.

Buying individual ETFs, you may start with 40% bond ETF and 60% equity ETF. In a year, you may end up with 35% of bonds and 65% equity and need to rebalance. 

Heckler

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Re: Diversification question
« Reply #19 on: May 19, 2016, 08:24:28 AM »


So if I chose 50% equities and 50% bonds
with subcategories for equitoes: 50% swiss and 50% usa,
and for bonds 100% usa,
I will have 3 ETFs in total.

This is not globally diversified.  You are relying on the performance of only two countries, one very small market and one very large market. 
« Last Edit: May 19, 2016, 08:26:18 AM by Heckler »

Kilbim

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Re: Diversification question
« Reply #20 on: May 19, 2016, 10:56:27 AM »

Basically, is just mixing 2 ETFs the same, for diversification as buying a fund which includes those 2 etfs?

Yes. 

Until the relative percentages of your ETFs change due to performance differences or contributions. 

Buying into a fund that holds 40% bond ETF and 60% equity ETF will stay balanced at 40/60 as time passes.  The fund manages that for you.

Buying individual ETFs, you may start with 40% bond ETF and 60% equity ETF. In a year, you may end up with 35% of bonds and 65% equity and need to rebalance.

Thank you.
truewealth also automatically rebalances for you, so this is a plus

Kilbim

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Re: Diversification question
« Reply #21 on: May 19, 2016, 10:57:00 AM »


So if I chose 50% equities and 50% bonds
with subcategories for equitoes: 50% swiss and 50% usa,
and for bonds 100% usa,
I will have 3 ETFs in total.

This is not globally diversified.  You are relying on the performance of only two countries, one very small market and one very large market.

Yes, it was only to make an example.
Thanks for the great help anyway!