Author Topic: Is my asset allocation reasonable?  (Read 3870 times)

bmwboarder

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Is my asset allocation reasonable?
« on: April 25, 2015, 01:49:40 AM »
Hi there,

This is my first post to MMM!  I've been learning a lot from the forums and the blog, so thank you to those of you who take the time to help each other out.

My wife has been putting into a 403b at her work for a few years, and we originally just stuck it all into Target retirement funds.  However, looking more closely, many of the funds that make up the Target Fund have high fees, very poor performance (such as PCRIX), and/or way too much in just cash/money markets.  There are a dozen or so options for choosing specific funds, some of which are Vanguard funds. 

For my own IRA, I only have Vanguard's Total Stock Market Index so far.  There is no such option in my wife's account.  Is the following mix reasonably diversified?  And, are the first three Vanguard funds combined similar in comparison to Vanguard's Total Stock Market fund?

Stocks:
Large Cap (Vanguard S&P500 index VFIAX)   40%
Mid Cap (Vanguard Mid Cap VMGRX)   15%
Small Cap (Vanguard Explorer VEXRX)   15%
Foreign Large Cap  (American Funds EuroPacific Growth RERGX)   10%
Vanguard Healthcare (VGHCX)   5%
   
Bonds:   
Global Bonds (MWTIX)   15%

We are still quite young, so I don't think we mind having a high stocks allocation.  Thank you for any advice!

matchewed

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Re: Is my asset allocation reasonable?
« Reply #1 on: April 25, 2015, 05:59:59 AM »
Reasonable is going to be defined by you and your household. Do you know why you chose that allocation? Do you understand and are comfortable with the associated risks? Do you have reasonable assumptions of returns for the purposes of calculations? Do you "sleep at night" with this allocation?

If yes then you're good, if no to any of these something has to change.

TomTX

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Re: Is my asset allocation reasonable?
« Reply #2 on: April 25, 2015, 06:56:18 AM »
Hi there,

This is my first post to MMM!  I've been learning a lot from the forums and the blog, so thank you to those of you who take the time to help each other out.

My wife has been putting into a 403b at her work for a few years, and we originally just stuck it all into Target retirement funds.  However, looking more closely, many of the funds that make up the Target Fund have high fees, very poor performance (such as PCRIX), and/or way too much in just cash/money markets.  There are a dozen or so options for choosing specific funds, some of which are Vanguard funds. 

For my own IRA, I only have Vanguard's Total Stock Market Index so far.  There is no such option in my wife's account.  Is the following mix reasonably diversified?  And, are the first three Vanguard funds combined similar in comparison to Vanguard's Total Stock Market fund?

Stocks:
Large Cap (Vanguard S&P500 index VFIAX)   40%
Mid Cap (Vanguard Mid Cap VMGRX)   15%
Small Cap (Vanguard Explorer VEXRX)   15%
Foreign Large Cap  (American Funds EuroPacific Growth RERGX)   10%
Vanguard Healthcare (VGHCX)   5%
   
Bonds:   
Global Bonds (MWTIX)   15%

We are still quite young, so I don't think we mind having a high stocks allocation.  Thank you for any advice!

The first three taken together are a fair approximation of the Total Stock Market, why split it up?

What's your total amount you are splitting up? If it's under $50k, just pick one fund. If it's $50-$250K, you might consider a second fund. Don't get bogged down in having too many funds.

Heckler

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Re: Is my asset allocation reasonable?
« Reply #3 on: April 25, 2015, 08:08:54 AM »
The 5% boost on volatility through healthcare doesn't make sense to me. Likely you already own most of these companies through the total market indices. Why add more of this one small sector and pay a higher fee to do so?

https://personal.vanguard.com/us/funds/snapshot?FundId=0052&FundIntExt=INT#tab=2

81% of these  89 companies are US,so are likely already in one of the first three funds.   0.35% vs 0.05% annual fees to double up.   

I realize it's probably a personal choice (your current industry?). At least you haven't focused on the one company you work for - good for you!  Diversify!


Quote
Industry concentration risk: The chance that there will be overall problems affecting a particular industry. Because the fund normally invests at least 80% of its assets in one industry, the fund’s performance largely depends—for better or for worse—on the overall condition of this industry.
« Last Edit: April 25, 2015, 08:14:33 AM by Heckler »

bmwboarder

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Re: Is my asset allocation reasonable?
« Reply #4 on: April 25, 2015, 09:44:51 AM »
Reasonable is going to be defined by you and your household. Do you know why you chose that allocation? Do you understand and are comfortable with the associated risks? Do you have reasonable assumptions of returns for the purposes of calculations? Do you "sleep at night" with this allocation?

If yes then you're good, if no to any of these something has to change.

Thanks for the reply matchewed!  Good questions.  I recently read A Random Walk Down Wall Street, so based on that I do want to be well diversified and use index funds for the bulk of my portfolio.  I do understand that the Mid-cap and Small cap are more risky, but I'm not positive I have a great grasp on how much more risky.  I was mostly trying to approximate a total with those three Vanguard funds that is equal to the Total Stock market index fund.  I think I could sleep quite well at night with this mix, but that could just be my naivety?  I hope not..  My wife is not even 30 yet though, so we have at least 30 years before we can access this portfolio anyways.  I'm sure the stock market will do all sorts of crazy things before then..



The first three taken together are a fair approximation of the Total Stock Market, why split it up?

What's your total amount you are splitting up? If it's under $50k, just pick one fund. If it's $50-$250K, you might consider a second fund. Don't get bogged down in having too many funds.
 

Thanks TomTx.  Unfortunately we don't have the option of the Total Stock Market fund in my wife's 403b, otherwise I would definitely just put more in that one fund.


The 5% boost on volatility through healthcare doesn't make sense to me. Likely you already own most of these companies through the total market indices. Why add more of this one small sector and pay a higher fee to do so?

https://personal.vanguard.com/us/funds/snapshot?FundId=0052&FundIntExt=INT#tab=2

81% of these  89 companies are US,so are likely already in one of the first three funds.   0.35% vs 0.05% annual fees to double up.   

I realize it's probably a personal choice (your current industry?). At least you haven't focused on the one company you work for - good for you!  Diversify!


That is great to note the overlap of funds, and the higher expense to do so.  I will reduce or eliminate this portion. 


Overall I am happy with that stock/bond ratio.  From what I read, small and Medium caps outperform Large caps in the very long term.  Given our 30 years til fund access, would it make any sense to increase the portion of Mid cap and Small caps?  I'm not sure I would do that, but just looking to understand the risk element of those funds better.  Thanks!


These forums are great! 

matchewed

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Re: Is my asset allocation reasonable?
« Reply #5 on: April 25, 2015, 10:18:58 AM »
Reasonable is going to be defined by you and your household. Do you know why you chose that allocation? Do you understand and are comfortable with the associated risks? Do you have reasonable assumptions of returns for the purposes of calculations? Do you "sleep at night" with this allocation?

If yes then you're good, if no to any of these something has to change.

Thanks for the reply matchewed!  Good questions.  I recently read A Random Walk Down Wall Street, so based on that I do want to be well diversified and use index funds for the bulk of my portfolio.  I do understand that the Mid-cap and Small cap are more risky, but I'm not positive I have a great grasp on how much more risky.  I was mostly trying to approximate a total with those three Vanguard funds that is equal to the Total Stock market index fund.  I think I could sleep quite well at night with this mix, but that could just be my naivety?  I hope not..  My wife is not even 30 yet though, so we have at least 30 years before we can access this portfolio anyways.  I'm sure the stock market will do all sorts of crazy things before then..



The first three taken together are a fair approximation of the Total Stock Market, why split it up?

What's your total amount you are splitting up? If it's under $50k, just pick one fund. If it's $50-$250K, you might consider a second fund. Don't get bogged down in having too many funds.
 

Thanks TomTx.  Unfortunately we don't have the option of the Total Stock Market fund in my wife's 403b, otherwise I would definitely just put more in that one fund.


The 5% boost on volatility through healthcare doesn't make sense to me. Likely you already own most of these companies through the total market indices. Why add more of this one small sector and pay a higher fee to do so?

https://personal.vanguard.com/us/funds/snapshot?FundId=0052&FundIntExt=INT#tab=2

81% of these  89 companies are US,so are likely already in one of the first three funds.   0.35% vs 0.05% annual fees to double up.   

I realize it's probably a personal choice (your current industry?). At least you haven't focused on the one company you work for - good for you!  Diversify!


That is great to note the overlap of funds, and the higher expense to do so.  I will reduce or eliminate this portion. 


Overall I am happy with that stock/bond ratio.  From what I read, small and Medium caps outperform Large caps in the very long term.  Given our 30 years til fund access, would it make any sense to increase the portion of Mid cap and Small caps?  I'm not sure I would do that, but just looking to understand the risk element of those funds better.  Thanks!


These forums are great!

Generally you can associate the higher returns with greater risk (risk can also be known as higher volatility, greater swings up and down). Similar to what I said before will be my response. I'd modify it by having you envision a 50% loss of your portfolio, how would you react? What if your portfolio was 300k? 500k? 1mil? Would you act the same? The small and midcaps will have bigger and more frequent swings associated with the higher overall returns. Can you deal with that without doing some emotionally driven decision (like selling low)?

bmwboarder

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Re: Is my asset allocation reasonable?
« Reply #6 on: April 25, 2015, 09:59:29 PM »

Generally you can associate the higher returns with greater risk (risk can also be known as higher volatility, greater swings up and down). Similar to what I said before will be my response. I'd modify it by having you envision a 50% loss of your portfolio, how would you react? What if your portfolio was 300k? 500k? 1mil? Would you act the same? The small and midcaps will have bigger and more frequent swings associated with the higher overall returns. Can you deal with that without doing some emotionally driven decision (like selling low)?

Matchewed, thanks for helping me learn about the risks of the smaller and mid caps, that seems like a concise way to think about it.  I think I will keep those funds to a more minimal part of my portfolio :)  Thanks for the quick replies!

Indexer

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Re: Is my asset allocation reasonable?
« Reply #7 on: April 25, 2015, 10:55:57 PM »
If it is a long term goal and you are comfortable with a potential 40-50% drop in a crisis then the stock allocation is fine.   

I think having the large/mid/small in proportion to the actual market makes sense.  Yes over very very long time periods small caps have outperformed large cap, BUT there are also periods where large cap outperforms small.  Sometimes growth outperforms value, sometimes large outperforms small, sometimes domestic outperforms international.... and the opposite of all of that.  Best bet... own all of it.  So I support the large/mid/small breakdowns you started with ;).

One thing I would do is look at the entire portfolio as one thing.  It might make more sense to put the international exposure in your IRA rather than her 403b.  It looks like her 403b has VG funds on the domestic side but american funds on the international.  The Vanguard total international stock index is a whole lot cheaper than RERGX.

matchewed

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Re: Is my asset allocation reasonable?
« Reply #8 on: April 26, 2015, 07:53:17 AM »

Generally you can associate the higher returns with greater risk (risk can also be known as higher volatility, greater swings up and down). Similar to what I said before will be my response. I'd modify it by having you envision a 50% loss of your portfolio, how would you react? What if your portfolio was 300k? 500k? 1mil? Would you act the same? The small and midcaps will have bigger and more frequent swings associated with the higher overall returns. Can you deal with that without doing some emotionally driven decision (like selling low)?

Matchewed, thanks for helping me learn about the risks of the smaller and mid caps, that seems like a concise way to think about it.  I think I will keep those funds to a more minimal part of my portfolio :)  Thanks for the quick replies!

Np :), just keep in mind that there are other flipsides to it. Staying with large cap means that you will get large cap risk and performance (kinda obvious really). It's mostly about you learning what those things mean (risk and performance) and what the large cap is comprised of. Once you understand your investments, have a clear mind about the risks, and conservative estimation of performance then if you are comfortable with investing in that investment do so.