Author Topic: Looking for some feedback on my target asset allocation  (Read 6075 times)

webguy

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Looking for some feedback on my target asset allocation
« on: February 04, 2013, 07:14:24 PM »
I'm pretty new to investing (a few months) and looking for some feedback from anyone who can spare a moment on my target asset allocation.  I'm currently not very diversified and am looking to spread out my "portfolio" a little by the end of 2013.

Here's what I'm thinking:

30% VTSAX (Total stock market fund)
30% VBR (Small cap ETF)
10% VHDYX (High dividend yield stock fund)
10% VGSIX (REIT)
10% VIPSX (TIPS)
5% IBM
5% Coca Cola

I'm 27 and my wife is 25.  We currently have about 21k (12.5k in VTSAX, 6k in IBM, 2.5k in Coca Cola), but I'm hoping we'll have about 60k in investments by the end of this year.

Our goal is to have approximately 250k in 5 years, which is when we'll start a family.  At that point I want my wife to have the choice of whether or not she wants to work or stay at home some or all of the time with our children.  I would continue to work part-time (I work in web design/development) either from home for myself or part-time for an employer.  The idea is that I would make enough money part-time to be able to cover all of our expenses (likely 30k with mortgage and health care) and then the 250k would sit and compound for 30 years and be our "old man and woman money".  I'd like to be able to spend time with our kids while they're young but I'm open to increasing my working hours again once they are all attending school.

As I'm not looking to withdraw anything from these investments for 30 years then I'm wondering whether this allocation is too conservative (not oriented enough towards growth) and whether I should just do 30% VTSAX, 50% VBR. 10% REITs, 10% other stocks.

If you have any advice/suggestions/opinions for me either about my target asset allocation or my situation in general then I'd love to hear them!

Hope everyone's having a great Monday!

KingCoin

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Re: Looking for some feedback on my target asset allocation
« Reply #1 on: February 04, 2013, 07:36:29 PM »
That porfolio is 80% equities, so I wouldn't say it's too conservative.

What jumps out at me is that you have no geographical diversification. You could make a strong argument that the dominant investment theme over the next 50 years will be a continued emerging market supercycle towards parity with developed nations. Certainly not a sure thing, but I think it's reasonable to allocate a minimum 10% to emerging markets.  I'd also allocate a minimum 10% to foreign developed markets. Big multinationals like Coke and IBM will naturally benefit from growth abroad, but I'd take a more of a direct approach.

webguy

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Re: Looking for some feedback on my target asset allocation
« Reply #2 on: February 04, 2013, 09:19:51 PM »
Hey KingCoin, thanks for the advice.  I think you make a very good point, and so I've included your suggestions in a revised allocation:

30% VTSAX
20% NAESX (small cap)
10% VHDYX (High dividend yield)
10% VEIEX (International emerging markets)
10% VDMIX (International developed markets)
5% IBM
5% Coca Cola

5% VGSIX (REIT)
5% VIPSX (TIPS)

I reduced my allocation in the REIT and TIPS, as I'm OK with a "wild ride" as my target withdrawal date is so far away.

icefr

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Re: Looking for some feedback on my target asset allocation
« Reply #3 on: February 04, 2013, 10:47:30 PM »
10% VEIEX (International emerging markets)
10% VDMIX (International developed markets)

What about 20% to VGTSX (or VTIAX the Admiral Shares version) Vanguard Total International Stock Market Index fund instead? It covers the entire non-US stock market in market weights. Link: https://personal.vanguard.com/us/funds/snapshot?FundId=0113&FundIntExt=INT

Its breakdown as of 12/31/2012 is as follows:
23.8% Emerging Markets
43.8% Europe
23.8% Pacific
8% North America (I'm guessing Canada)
~others
That makes for a 23.8% / 76.2% emerging/developed split or 4.76% / 15.24% of your overall portfolio.

Expense ratio on VGTSX is 0.22% (0.18% if you qualify for Admiral Shares). That's comparable to making the two yourself (slightly cheaper than making the two yourself) and makes your portfolio simpler. Some people like to call out Emerging markets though. Me? I like simple.

marty998

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Re: Looking for some feedback on my target asset allocation
« Reply #4 on: February 04, 2013, 11:38:15 PM »
Can't set and forget for 30 years. The world changes too fast and too often. You will need to continue to revisit the allocation annually.

Not advising you against it but the IBM and Coca Cola holdings look very odd up against a bunch of index funds. Why continue to hold those 2 only?

aclarridge

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Re: Looking for some feedback on my target asset allocation
« Reply #5 on: February 05, 2013, 07:53:53 AM »
Yeah you will want to rebalance, maybe at most semiannually if the weights are out-of-whack (or just slowly rebalance through your contributions?), and annually review the allocation.

Personally I'd put maybe 10% more in REITs...take it out of the 60% US equity exposure. You are really overweight the US stock market. The REITs are probably safer and are more correlated to inflation. By and large though, the allocation looks fine to me and good luck with it. Hard to see it suffering any catastrophic losses* over a reasonably long period of time.

*that aren't felt by everybody else too.

webguy

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Re: Looking for some feedback on my target asset allocation
« Reply #6 on: February 07, 2013, 07:11:19 AM »
Thanks guys, really appreciate the feedback and advice!  As you can probably tell, I'm still trying to learn about all of this.

@icefr, I took a look at the Total International fund but decided against it as I think I prefer weighting more towards Emerging Markets.  Being from Europe and knowing the kind of mess it's in I don't really want to invest much in developed Europe which it seems that the Total fund seems to do.  I like the idea of the cheaper expense ratio though and so will definitely consider it some more.  Thanks for your suggestion, very much appreciated!

@marty998, haha it is kind of strange that I hold just those 2 stocks and then the rest are funds.  To be honest, the reason I have those in there is that before I learned about index fund investing I had bought those 2 stocks with the plan being to hold them long term.  I think I likely won't add to them any more and just contribute to the funds, so as time goes by they will likely only be a couple of percent of my total portfolio.  I do kind of like them as long term stocks though, especially Coca Cola.  Plus now I have an excuse to buy Coke because every time I buy one I'm increasing stock value :P

@aclarridge, I am definitely heavily in the US stock market.  But after reading MMM and Jlcollinsnh blogs I see that they both advise the simplistic approach of just consistently adding to a Vanguard index fund such as VFINX or VTSAX, both of which are most (if not all) US stocks.  Is this not a smart strategy?  I understand the principles of diversification and so rather than being 100% in one of these funds I'm trying to spread it out a little.  I also understand that being heavily invested in the US market means being at the mercy of US stock market crashes/declines, but isn't the best growth opportunity in the US stock market?
I like the idea of putting some more into REITs, so maybe my goal should be to get rid of IBM and Coca Cola and put that 10% into REITs.

Thanks again for all of your replies!

aclarridge

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Re: Looking for some feedback on my target asset allocation
« Reply #7 on: February 07, 2013, 11:58:55 AM »
isn't the best growth opportunity in the US stock market?

I don't know how anybody could be sure of this. You can't predict the future.

My personal opinion: If you're investing for the long haul, I'd say the thing you worry about most is the big crashes at bad times. Like for example, let's say you have 1mm to invest at the beginning of your retirement. You go ahead and dump it all in the US market. There is a big crash, and you can't take advantage of the low market value because you're retired. The reason I think you're fine (for now) not being geographically diversified is that even if the US market crashes badly this year, you've got all your earning years ahead of you and you'll take advantage of the low prices. However, if we're talking about a long-term portfolio, to me diversification means across countries, asset classes, maybe even providers (i.e. not having it all with Vanguard), etc. All within reason of course, but theoretically the idea is to reduce the set of conceivable scenarios by which you would be screwed.

If it was ever common knowledge that the best growth prospects were in US equities then their prices would rise accordingly until it wasn't common knowledge anymore. Therefore the prices you see now reflect people's thoughts about growth.

I'd say people probably pay a premium to own a US asset now because of the political stability and low levels of fraud/bribery in such a developed country, and you would hope that in the not-too-distant future, people will be less willing to pay that premium because other countries become more first-world and stable too. To me, a bet on the US is, in part, a bet on the rich get richer and the poor get poorer (or at least, they don't grow their wealth as much as the rich) which is sad but possibly true.

webguy

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Re: Looking for some feedback on my target asset allocation
« Reply #8 on: February 09, 2013, 11:54:35 AM »
Hey aclarridge, thanks for your reply.  You make a really good point.  I started writing out some questions in response but then after thinking more about what you said I ended up answering my own questions!

Here's what I'm thinking based on your and other's input:

US Stocks
25% VTSAX (Total stock market)
20% NAESX (Small cap)
10% VHDYX (High dividend yield)
5% Other stocks (Just IBM & Coca Cola at the moment)

International Stocks
10% VEIEX (International emerging markets)
10% VDMIX (International developed markets)

REITs/TIPS
15% VGSIX (REIT)
5% VIPSX (TIPS)

That ends up giving me a 60 / 20/ 20 distribution of US stocks, International stocks, and REITs/TIPS.

I'm feeling a lot better about this allocation than the first one I came up with!

KingCoin

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Re: Looking for some feedback on my target asset allocation
« Reply #9 on: February 10, 2013, 11:01:47 AM »
I like this allocation.

I might peel off 5% of the REIT allocation and put it in either precious metals or fixed coupon treasuries. I don't love either long term, but I like them as a hedge in a periodically rebalanced portfolio.

I'd be cautious about regarding REITs as lower risk than equities. They fell more than 70% during the crisis (underperforming equities).

keepingmobens

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Re: Looking for some feedback on my target asset allocation
« Reply #10 on: February 11, 2013, 09:08:50 PM »
Most people don't put that much into small cap stocks, you generally see 10% recommended as a max because they can be extremely volatile. The fact they they are small companies means they are statistically more likely to fail. You've also got a bunch into total stock market, which by nature includes small caps in it, since it's the "total" market. So you are, in effect, doubling up on small caps, even more than the 20%. Over the past decade, small caps have done better than large, but that probably makes it less likely that they will do it again over the next decade, but who knows? I'd probably keep small caps to 15%, and add the other 15% to total stock market or dividend yield, or split between both.

I've been studying VHDYX, and I think it is a great idea and plan on buying some soon.

Also, to address your comment: "Being from Europe and knowing the kind of mess it's in I don't really want to invest much in developed Europe." Remember, when things are a mess is EXACTLY when you want to invest in them. Assuming what you are investing in doesn't go out of business and disappear of course, which is highly unlikely to happen with Europe. It's still an Index, so you're still buying the whole market, more or less.

I personally don't like TIPS, because they are a conflict of interest. The Gov't publishes what they feel is the current inflation numbers, then they have to pay you more money or less money based on the numbers they themselves just published. If I was worried about inflation, I would buy gold instead. Gold will cover you during inflation, and it is priced based on a free, worldwide market.


aclarridge

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Re: Looking for some feedback on my target asset allocation
« Reply #11 on: February 12, 2013, 06:50:59 AM »
Hey aclarridge, thanks for your reply.  You make a really good point.  I started writing out some questions in response but then after thinking more about what you said I ended up answering my own questions!

Here's what I'm thinking based on your and other's input:

US Stocks
25% VTSAX (Total stock market)
20% NAESX (Small cap)
10% VHDYX (High dividend yield)
5% Other stocks (Just IBM & Coca Cola at the moment)

International Stocks
10% VEIEX (International emerging markets)
10% VDMIX (International developed markets)

REITs/TIPS
15% VGSIX (REIT)
5% VIPSX (TIPS)

That ends up giving me a 60 / 20/ 20 distribution of US stocks, International stocks, and REITs/TIPS.

I'm feeling a lot better about this allocation than the first one I came up with!

Nice! I didn't have any big problems with your last allocation but I like this one better long-term. I guess the most important thing to do once you go in is to basically "stay the course" - don't try to time the market, stay diversified, don't be discouraged or fault the allocation just because times are bad, etc.

I think keepingmobens makes a good point about small caps but maybe you disagree and want to own them anyway - that's fair if that's your preference.  I like this point though:

I personally don't like TIPS, because they are a conflict of interest. The Gov't publishes what they feel is the current inflation numbers, then they have to pay you more money or less money based on the numbers they themselves just published. If I was worried about inflation, I would buy gold instead. Gold will cover you during inflation, and it is priced based on a free, worldwide market.

Some people argue the govt "manages" the reported CPI to show stable inflation numbers...I'm not sure how much of a factor this is in the developed world but it's true there's a conflict of interest, and that is probably best avoided. Given it's only 5% of your portfolio though, and that gold is a much more volatile hedge of inflation, this isn't a big issue, just something to think about.


One last thing I would be slightly concerned about for you: make sure you have enough capital to justify the trading costs for this portfolio. You have 8 holdings, so to contribute to all of them that's at least $80 at most discount brokers. Just be aware of the % loss each time you contribute, and balance the benefits of contributing frequently and paying high trading fees against the benefits of saving up cash for several months and doing a lump sum contribution for lower % commissions.

webguy

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Re: Looking for some feedback on my target asset allocation
« Reply #12 on: February 16, 2013, 09:42:09 PM »
Thanks for the opinions everyone. I'm actually thinking I might revise this again and simplify it a bit to include the vanguard total bond and total international funds. Seems like it would be a lot easier to rebalance that way and less maintenance in general.

I always thought that small cap were generally considered a higher risk but higher reward option, especially compared to large cap. I get the impression that isn't always the case? I'm looking for high growth and so was thinking of weighting towards small cap and international emerging markets. I'm going to do some more reading into both of these asset classes though so that I understand them a bit better.

Thanks again everyone, your advice/opinions are very much appreciated!

Onlyif

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Re: Looking for some feedback on my target asset allocation
« Reply #13 on: February 17, 2013, 08:03:07 AM »
My thoughts

- Spend a few months reading and researching.  You've changed your allocation a few times because of suggestions in this post alone, do the reading and research first, then settle on a simple allocation,  then worry about which exact funds/etf's you'll use.
- Once you've decided on your asset allocation, sit with the decision for a while,  make sure your comfortable with it and aren't going to second guess yourself and start switching it around every time you get a new idea or read something online.
- Decide on your risk tolerance,  it's easy to say your in it for the long term but can you watch your investments drop month after month for years and not panic?  Bonds help with this. 
- Don't get caught up in having too many asset categories, 3-5 is enough.  Simple is better.   How much extra return does a dedicated small cap category give you over holding a total stock market fund ( which includes small caps)?  Do the math, might be worth it, might not.  It's completely up to you but make an informed decision. 


There are lots of books recommendations on this site,  something like "The Millionaire Teacher" by Andrew Hallam is good when your trying to figure this stuff out. 






aclarridge

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Re: Looking for some feedback on my target asset allocation
« Reply #14 on: February 19, 2013, 08:05:46 AM »
- Spend a few months reading and researching.  You've changed your allocation a few times because of suggestions in this post alone, do the reading and research first, then settle on a simple allocation,  then worry about which exact funds/etf's you'll use.
- Once you've decided on your asset allocation, sit with the decision for a while,  make sure your comfortable with it and aren't going to second guess yourself and start switching it around every time you get a new idea or read something online.
- Decide on your risk tolerance,  it's easy to say your in it for the long term but can you watch your investments drop month after month for years and not panic?  Bonds help with this. 
- Don't get caught up in having too many asset categories, 3-5 is enough.  Simple is better.   How much extra return does a dedicated small cap category give you over holding a total stock market fund ( which includes small caps)?  Do the math, might be worth it, might not.  It's completely up to you but make an informed decision. 

+1. Great points.

About small caps - yeah as an asset class, based on past performance one would expect US small cap stocks to perform well over the long term. Of course, past performance is no guarantee, and you need to understand what you're buying. You're buying smaller companies with more potential for rapid growth, but also less stable earnings, potentially more vulnerable to recessions, and certainly more vulnerable to failing completely.

And on the point about sitting with the decision a while - I actually apply this to all big decisions I make, whenever possible. If you make a choice, then think about it for a few weeks and all that time, you haven't found a better choice, then you can be reasonably sure you'll be happy with your choice on a longer term.

Left

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Re: Looking for some feedback on my target asset allocation
« Reply #15 on: February 19, 2013, 11:04:00 AM »
sorry not trying to derail the thread, but not sure it deserves a thread of its own...

Why is vangaurd so recommended around here? I mean yes they have a very good track record, but there are other index funds as well but I don't see them recommended nearly as much around here, or at all even. I mean, did vanguard give any incentives around here for all of the advertizement? I'm not serious about that, but it does seem like an unusual bias towards them that I can't figure out. It keeps coming up to have a diverse portfolio but then in every portfolio there's vanguard lol,  I guess everyone can either go with the ship or sink together? I know vanguard is recommended a lot, everywhere I could find online but the recommendations include another company as well, but not here.

Just a bit of an oddity that I've noticed around here.

edit: yes I realize vanguard isn't one fund, but it is odd to me.

markstache

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Re: Looking for some feedback on my target asset allocation
« Reply #16 on: February 19, 2013, 03:33:16 PM »
The reasons to recommend Vanguard are simple: compared with other brokerages the expenses tend to be lower. Compare the expense ratios of Vanguard with any other fund family and you'll notice that Vanguard beats or closely trails ETFs of similar index/style. While they don't offer as many slice-n-dice choices as some fund families, Vanguard covers the basics very well, and I think there is a case to be made that if Vanguard doesn't have a fund or ETF for your needs, you might want to re-evaluate your choice.

There are also good options at Fidelity, Schwab, and others, but Vanguard has been pushing the envelope of low cost for years and has rightly earned respect for offering investors core holdings at minimal expense.

I suggest you read some of Vanguard founder Jack Bogle's books to see if the philosophy at Vanguard fits with your investing styles and goals. Then go run the numbers on expenses and see if Vanguard can offer you the lowest expense ratios. No one would fault you if ended up preferring another brokerage if you could invest more cheaply there.

Kriegsspiel

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Re: Looking for some feedback on my target asset allocation
« Reply #17 on: February 19, 2013, 03:46:44 PM »
sorry not trying to derail the thread, but not sure it deserves a thread of its own...

Why is vangaurd so recommended around here? I mean yes they have a very good track record, but there are other index funds as well but I don't see them recommended nearly as much around here, or at all even. I mean, did vanguard give any incentives around here for all of the advertizement? I'm not serious about that, but it does seem like an unusual bias towards them that I can't figure out. It keeps coming up to have a diverse portfolio but then in every portfolio there's vanguard lol,  I guess everyone can either go with the ship or sink together? I know vanguard is recommended a lot, everywhere I could find online but the recommendations include another company as well, but not here.

Just a bit of an oddity that I've noticed around here.

edit: yes I realize vanguard isn't one fund, but it is odd to me.

They have the lowest expense ratios that I've seen.

Vanguard has hit the holy grail of advertising: their clients advertise for them.  Just like Apple maniacs.  To the best of my knowledge, popular mass movements lke that generally don't happen with shitty companies or products.