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Learning, Sharing, and Teaching => Investor Alley => Topic started by: NorCal on July 18, 2015, 11:15:36 AM

Title: My Asset Allocation
Post by: NorCal on July 18, 2015, 11:15:36 AM

I've recently given more thought to my asset allocation, and have been a bit more analytical about it than the past.  I figured I'd share it here for anyone that finds it interesting.  While feedback is welcome, I don't have specific questions for the group.

A couple points up-front:

1.  For my taxable accounts, I personally prefer Schwab to Vanguard.  Their fees are low, and they have a great selection of ETF's that cover a very broad range.  This isn't a knock against Vanguard, just my personal preference.
2.  My personal risk tolerance is conservative in terms of overall asset allocation (stocks, bonds, etc.), however, I am generally more aggressive than most within those allocations.  For example, my international allocation is weighted towards small-caps and emerging markets.
3.  While this wasn't my original intent, I ended up with an allocation that I think I could be comfortable with both pre-FIRE and post-FIRE.  I played around with both more conservative and more aggressive allocations, and I wasn't comfortable moving much in either direction.
4.  I believe in maximizing diversification and minimizing fees.  In that order.  My core funds are broad, low expense funds.  However, I didn't shy away from a few funds with higher expenses that captured corners of the market under-represented by the core funds.
5.  I apply the high level allocation to my individual accounts as best I can.  I don't worry about the alternatives in 401k's that don't  have good options there.  I am not currently trying to tax optimize these portfolio by weighting tax-efficient options in tax-deffered accounts.  I would like to, but my contribution rates to each portfolio vary enough that it gets complicated fast.

So here are my high level allocations:

Domestic	45%
International	20%
Fixed Income	25%
Alternatives	10%

My allocations to specific securities (taxable account only): are as follows:

Domestic:

SCHB	Schwab US Broad Market ETF	50%
SCHA	Schwab US Small-Cap ETF	50%

Rationale:  These are both broad based funds with low fees.  I don't particularly care for the large-cap weighting of SCHB, but it's an efficient fund, so I balanced it out with SCHA.

International

SCHF	Schwab International Equity ETF	25%
SCHC	Schwab International Small-Cap Eq ETF	25%
SCHE	Schwab Emerging Markets Equity ETF	25%
EWEM	Emerging Markets- Equal Country Weight ETF	10%
FRN	Frontier Markets ETF	15%

Rationale:  SCHF, SCHC, and SCHE provide good, broad, and cheap exposure to the core international markets.  However, they do underweight / leave out the smaller end of the Emerging Market and Frontier Market segments.  I rounded it out with FRN an EWEM (although they are costlier funds) for the added future growth opportunities here.

Fixed Income

SCHZ	US Aggregate Bond ETF	50%
PGX	Preferred Shares ETF	12.5%
CXA	CA Muni Bnd ETF	12.5%
TLO	Long Term Treasury ETF	12.5%
PHB	High Yield Corporate Bond ETF	12.5%

Rationale:  While SCHZ is a typical good, broad, and cheap bond ETF, the typical bond ETF sticks to shorter term and lower risk bonds.  I added TLO for exposure to long dated bonds (more interest rate risk, higher yield, and negatively correlated to stocks).  PHB was added, as the bond index excludes high yield issues.  CXA and PGX make sense from a tax efficiency standpoint, as they both yield higher than SCHZ, and have significant tax benefits over regular bonds.  However, it doesn't make sense to overweight either of these on those grounds alone.

Alternatives

SCHH	Schwab US REIT ETF	50%
DRW	Global ex-US Real Estate ETF	50%

Rationale:  It's good to have some alternative exposure, but not too much.  I split it between US and International for diversification, and International currently yields almost twice what domestic does.  I might add an MLP or other alternative at a later date. 

Title: Re: My Asset Allocation
Post by: forummm on July 18, 2015, 02:15:45 PM

So 14 funds in your taxable? I only have 3, so that seems like a lot to manage in just taxable. If you're going to keep them balanced it might take some extra effort. I didn't look up any of the ERs, but you say they are low.

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International currently yields almost twice what domestic does.  I might add an MLP or other alternative at a later date.

I don't know anything about international REITs, but I would guess that there's some reason for this. It's not that the international REITs would necessarily give you twice the risk-adjusted total returns. I wonder if the yields are thrown off by the substantial appreciation of the dollar.

Title: Re: My Asset Allocation
Post by: NorCal on July 18, 2015, 04:30:44 PM

ER's are low on the major Schwab funds.  They do get a little pricier on the more unique funds, but I priced them out and felt the trade-off was worth it.

You're right that 14 is a bit much to manage.  I built a spreadsheet to track how much I should contribute to each.  I'm contributing about 5% of the total portfolio value per month, so re-balancing is easily managed through new purchases.  If I had to sell shares for re-balancing, I would find a few options to pull out.  The size of the portfolio is also now large enough to justify more funds than I previously used (although this in itself isn't a justification).

I doubt the yield on the international REIT is due to the strong dollar.  Actually, that would work in the inverse, as distributions in other currencies are worth less in US dollars.  My hypothesis is that ex-US valuations are low right now compared to US valuations.  My International Equity ETF (mostly large cap developed) is currently yielding 2.8%, while the comparable US fund is only yielding 1.8%.  Heck, even the Emerging Market ETF is yielding 2.8% right now.

Title: Re: My Asset Allocation
Post by: forummm on July 18, 2015, 05:00:34 PM

I like being able to auto-invest with Vanguard. Then I'm always fully invested. But if you like the active buying and selling, your approach will be move fun.

I agree that ex-US valuations are lower. My idea was random speculation that in ttm, the number of dollars of yield was higher than now, but since the stock prices have fallen, the yield looks higher. I didn't look to see if that was true, or if the yields were calculated using the exchange rates at the time of distribution or what.

Title: Re: My Asset Allocation
Post by: NorCal on July 19, 2015, 07:45:54 AM

Thanks for the thoughts.  All interesting speculation on international.  I think we're both too lazy of investors to truly research it, as that's not important for a long term asset allocation plan.