Author Topic: New Portfolio allocation- Is this a good idea?  (Read 2724 times)

BeanCounter

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New Portfolio allocation- Is this a good idea?
« on: July 05, 2016, 01:07:39 PM »
I really need the collective forum brain to help me sort out a better allocation for our portfolio. We currently have about $670k in investments. Mostly retirement accounts with about $125k in a taxable bucket for use if we need it. We are 39 and are anticipating that one or both of us will continue working for at least another 10 years.
 Over the years it's become pretty messy and I don't feel that it is performing well. Allocation is roughly 66% US stock market, 11% international, 21% Bond funds and 3% cash. I've been doing a lot of reading and using various modeling tools to do some back testing (both accumulation phase and drawdown) and I've come up with the following allocation that I like.

30% US Large Cap Value
30% US Small Cap Value
10% Total International Fund
10% REITs
10% Short Term Treasuries
10% Long Term Treasuries

The Large Cap Value and Small Cap value seem to perform better in the back testing than the total market index. I like the REITs because it gives us just a bit more diversification without hurting returns, and I don't think taxes will be an issue as I've got plenty of tax free accounts. I'm interested in moving to Gov treasuries and away from bond funds because they are not correlated with corp stocks but provide a little lower volatility to the portfolio.
Does this allocation seem reasonable or is there something obvious I'm not considering appropriately?
TIA! I appreciate any and all advice and suggestions!

seattlecyclone

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Re: New Portfolio allocation- Is this a good idea?
« Reply #1 on: July 05, 2016, 01:32:54 PM »
It seems a bit light on international investments for my taste, but otherwise seems reasonable enough.

BeanCounter

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Re: New Portfolio allocation- Is this a good idea?
« Reply #2 on: July 05, 2016, 01:41:22 PM »
It seems a bit light on international investments for my taste, but otherwise seems reasonable enough.
Well, that was one of my concerns too. But in the past 10 years our international allocation hasn't seemed to help us much (it was greater) and we've been pulling back on it.
I also haven't been happy with our bond funds. They haven't helped much at all. So that's why I was modeling the straight treasuries instead.

Tyler

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Re: New Portfolio allocation- Is this a good idea?
« Reply #3 on: July 05, 2016, 01:47:47 PM »
My first impression is that your proposal is well-diversified and clearly you've put a lot of thought into it.  Nice work!

I appreciate how you've accounted for short term treasuries, as I feel they're very underappreciated by many investors.  The value premium is generally a little stronger on the small cap side than on the large cap (large caps skew more growth in general) but I don't have any problem with either value choice.  I'd caution against making any decisions based solely on the past ten years -- always look at the big picture.  But in general I think you've done a nice job. 

From here, the most important thing is to find the lowest-cost funds for each asset and to stick with the plan.  Do that, and you'll be in great shape. 
« Last Edit: July 05, 2016, 01:58:41 PM by Tyler »

seattlecyclone

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Re: New Portfolio allocation- Is this a good idea?
« Reply #4 on: July 05, 2016, 01:49:15 PM »
Per the Callan Periodic Table of Investment Returns (below), developed market international stocks have outperformed the S&P 500 during four of the past ten years, and emerging market stocks have outperformed the S&P 500 in five of the past ten years. Sometimes the US does better, sometimes international does better. When you tilt your portfolio so heavily toward the US, you're making a bet that US-based companies will have better growth than other companies over the long term. I'm personally not comfortable making that bet. I'd rather own both in a more even ratio so that I'll get to benefit from economic growth wherever it may happen.


BeanCounter

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Re: New Portfolio allocation- Is this a good idea?
« Reply #5 on: July 06, 2016, 06:40:19 AM »
Thank you both for your responses. It is helpful to have people to discuss this with.
Seattlecyclone graphs and excel spreadsheets are my love language so thank you for that.
Looks like perhaps we weren't weighted enough in emerging markets in the past.
I've been using portfolio visualizer to back test (going back to 1972)  I see a 1-2% increase in returns, but a large increase in the standard deviation. That would indicate a higher volatility correct?
I realize that back testing is limited, but it is all that we have.
So I guess I need to decide if I think foreign exposure is a worthwhile risk for the future?
Couple other questions regarding foreign allocation-
 -20% of this portfolio would be weighted to US Large Cap value stocks, I was assuming that I would by proxy getting some foreign exposure there as well. Is that a good assumption?
-If you were to increase the foreign market allocation, what other area would you decrease and why?
-And would you use a total foreign market fund, or other funds with different weights and why?

Again, thank you all for the help. I really feel like I need non-biased parties to bounce this off of.

seattlecyclone

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Re: New Portfolio allocation- Is this a good idea?
« Reply #6 on: July 06, 2016, 08:14:10 AM »
I've been using portfolio visualizer to back test (going back to 1972)  I see a 1-2% increase in returns, but a large increase in the standard deviation. That would indicate a higher volatility correct?

Seems likely.

Quote
-20% of this portfolio would be weighted to US Large Cap value stocks, I was assuming that I would by proxy getting some foreign exposure there as well. Is that a good assumption?

It's a global world. US companies have plenty of foreign employees and customers. That said, they're still based in the US. Index funds have made it possible to also own foreign companies for cheap. Why not do so?

Quote
-If you were to increase the foreign market allocation, what other area would you decrease and why?

I would trade US stocks for international stocks, US bonds for international bonds. You're only at 20% bonds so I'm not sure that there's a lot to gain from investing in international bonds in your case.

Quote
-And would you use a total foreign market fund, or other funds with different weights and why?

Foreign total market is easiest. I use it for that reason. I could try to split it up between developed market and emerging markets with different weights, but the split in the total international fund seems reasonable enough so I just go with that.

Tyler

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Re: New Portfolio allocation- Is this a good idea?
« Reply #7 on: July 06, 2016, 08:40:09 AM »
graphs and excel spreadsheets are my love language so thank you for that.

In that case, you'll probably also appreciate this: 



Not bad!  That compares quite well to many other popular options

FWIW, I'd recommend looking at what a few more bonds and a touch of gold would do for your portfolio.  The results may surprise you. 
« Last Edit: July 07, 2016, 09:47:02 AM by Tyler »

scrubbyfish

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Re: New Portfolio allocation- Is this a good idea?
« Reply #8 on: July 06, 2016, 09:54:44 AM »
I can't weigh in on allocations, because different ones are proposed per one's residency and I only study Canadian ones. You can see variations in one set of sample portfolios here: https://andrewhallam.com/permanent-portfolio-updates/     

But in my learning this stuff, I landed where seattlecyclone does:

Sometimes the US does better, sometimes international does better. When you tilt your portfolio so heavily toward the US, you're making a bet that US-based companies will have better growth than other companies over the long term. I'm personally not comfortable making that bet. I'd rather own both in a more even ratio so that I'll get to benefit from economic growth wherever it may happen.

For those of us jumping on board in the last few years, it has looked like the US equity is the place to put everything. But when I looked back over a 20 year period, sometimes it was Canada equity that was doing awesomely, and sometimes Canada bonds, and sometimes "rest of world"...  So now I have a much more even spread, allowing any one area to tank or grow at any given point, with no worry.

We truly cannot know what is going to happen where in the world and when.

scrubbyfish

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Re: New Portfolio allocation- Is this a good idea?
« Reply #9 on: July 06, 2016, 10:03:59 AM »
So now I have a much more even spread, allowing any one area to tank or grow at any given point, with no worry.

Though the apparently-smart people say to have more in your home country—and they give reasons for that—so you will be more in US than I will, and I will be heavier in Canada, even when were are both spreading somewhat evenly the world over.

Scandium

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Re: New Portfolio allocation- Is this a good idea?
« Reply #10 on: July 06, 2016, 10:54:11 AM »
It seems a bit light on international investments for my taste, but otherwise seems reasonable enough.
Well, that was one of my concerns too. But in the past 10 years our international allocation hasn't seemed to help us much (it was greater) and we've been pulling back on it.
I also haven't been happy with our bond funds. They haven't helped much at all. So that's why I was modeling the straight treasuries instead.

So when somethings goes down you sell, and when US stocks go up you buy? From this I assume the first line of your investor policy statement, in big, bold letters, is "buy high, sell low!"?
/s

BeanCounter

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Re: New Portfolio allocation- Is this a good idea?
« Reply #11 on: July 06, 2016, 11:07:54 AM »
It seems a bit light on international investments for my taste, but otherwise seems reasonable enough.
Well, that was one of my concerns too. But in the past 10 years our international allocation hasn't seemed to help us much (it was greater) and we've been pulling back on it.
I also haven't been happy with our bond funds. They haven't helped much at all. So that's why I was modeling the straight treasuries instead.

So when somethings goes down you sell, and when US stocks go up you buy? From this I assume the first line of your investor policy statement, in big, bold letters, is "buy high, sell low!"?
/s

Nope. We have been buy and hold- even through 2008 to now. When I say "pulling back" I mean we haven't invested new earnings as heavily into international which pulled our allocation down.

My IPS is simply to grow, grow, grow so that we can safely draw down in the future. I think what is currently in debate is how much growth we are willing to sacrifice to mitigate risk.

MustacheAndaHalf

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Re: New Portfolio allocation- Is this a good idea?
« Reply #12 on: July 06, 2016, 02:10:27 PM »
What happens to your retirement if stocks crash in 5-10 years?
Right now you have 20% bonds at age 40, which is aggressive.  If your retirement plans suggest retiring in 10-15 years, consider pushing your bond allocation higher to provide more stability to your portfolio.  You will earn lower returns (most likely), but will preserve more of your retirement dollars.

Are your funds at Vanguard?
Because if the answer is "yes" then there's no need to worry about expense ratios.  If those are not Vanguard funds, it would help to know expense ratios.

If you're comfortable with your tilt to small and value, you might read some authors who feel the same way.  There's many ways to invest, but the more historical data you absorb the less you're likely to switch investments during a crisis.

retiringearly

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Re: New Portfolio allocation- Is this a good idea?
« Reply #13 on: July 06, 2016, 02:32:13 PM »
Personally, I would want more international stocks, specifically some exposure to emerging markets.