Author Topic: Portfolio Distribution Percentages  (Read 3966 times)

Frugal Philosopher

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Portfolio Distribution Percentages
« on: April 15, 2013, 10:23:15 PM »
This has probably been asked before - but there are enough posts now that the search function is starting to be less useful...

Anyways - when you read MMM's guide to making money in the stock market he advocates buying the S&P500.

The more recent stock posting linking to jlcollinsnh suggests basically investing in the total market funds (though he provides links to the other options from Vanguard).

I am in the process of reading the Intelligent Asset Allocator and he emphasizes the need to choose several assets and their percentages and stick with them. Is this based more on long term investing and not early retirement?

Are these all just slightly different opinions that are going to get me to the same place? Currently I have assets split between the S&P500 and the total market fund.

I am not sure if I should add some bonds etc in to the mix (via Vanguard funds)? Or should I just keep throwing money into one or both of the funds I have?

What would be a good resource to help me decide? and what are some opinions on the differing methods?

Thanks!





JamesAt15

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Re: Portfolio Distribution Percentages
« Reply #1 on: April 15, 2013, 11:51:34 PM »
I checked the MMM article and he does recommend the Vanguard S&P 500 fund (VFINX), which surprised me a bit. I tend to favor the total market funds simply because they provide greater diversification with no extra effort. The S&P 500 is heavier on large-cap companies so won't cover small and mid-cap companies as much, I believe. If there's an advantage to sticking with just the S&P 500 then we'll probably hear about it shortly.

You may have already read it, but you may want to check out the Bogleheads Wiki, like their Investing Start-Up Kit. I think they do a good job at covering simply a lot of the items you should consider when making your investment and allocation plans.

At some point you may want to add some bonds in there. As you've been reading in the Intelligent Asset Allocator, adding even a small amount should decrease your volatility and boost your returns. If your planned retirement date is a long way off, though, it's no tragedy not to have any in your portfolio right this instant.

You might want to look at some of the Vanguard Target Funds and see how they manage their allocations, just for comparison. They'll have a pretty big chunk of Total Stock Market (60-70%), a smaller chunk of Total International (20-30%), and about 10% Total Bond Market for the first several decades, then they start increasing the amount of bonds as you get closer to your target retirement age.

I think most of the target funds tend to go too heavy on bonds towards the target date for early retirees, since you're presumably going to be retired for a longer period of time and want to have the better earning power of stocks still working for you. You will also presumably have more flexibility in choosing your retirement date, so you can choose to work another few years if stocks take a major dive right before your target date. So you won't be as afraid of volatility.

Mr Mark

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Re: Portfolio Distribution Percentages
« Reply #2 on: April 16, 2013, 08:07:33 AM »
're: SP500  vs total market.

Had a quick look on Vanguard.

500 admiral VFIAX    and  total US market admiral VTSAX. Fees are the same at a great 0.05%

Total market tends to outperform by about 0.5% per year compounded. Over 10 years, investing 10k, that makes a difference of about 2k in returns.

Kazimieras

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Re: Portfolio Distribution Percentages
« Reply #3 on: April 16, 2013, 09:39:29 AM »
I am in the process of reading the Intelligent Asset Allocator and he emphasizes the need to choose several assets and their percentages and stick with them. Is this based more on long term investing and not early retirement?

Both are technically long-term in nature, what differs is early retirement investing tends to rely on a more even cash output (to live off of) rather than just growth (which is what you can do if you're in it for the long haul). Rebalancing your portfolio regularly is important, as it keeps your risk profile the same and prevents you from being hit too hard when some shock comes to the system. But all investing is about risk. Remember that it is all paper and, while unlikely, it can be taken away as easily as it can be gained. The big thing is diversify and by that I mean take different investments that are not linked together. Owning lumber stocks and wood furnature stocks is not diversified. Owning lumber stocks and plastic would be better (though both are tied to consumer purchasing).

brewer12345

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Re: Portfolio Distribution Percentages
« Reply #4 on: April 16, 2013, 11:26:02 AM »
There are absurb amounts of scholarly ink spilled on these subjects and, as always, opinions differ.  Mainstream financial research has settled on something of a consensus over the years.  Basically, you want to be invested in a very broadly diversified portfolio which you have set up with target allocations and rebalance regularly to avoid drifting too far away from your chosen allocation (and this allocation is chosen to meet your return requirements and risk tolerance).  The more asset classes you can add without spending too much money, the better.

All that said, for an individual investor with less than half a million in assets who does not want to buy an all-in-one fund, I think this can be simplified without getting too nuts.  The main assets you would want are international equities (both emerging and developed), domestic equities (large through small cap), fixed income (cash through junk bonds) and perhaps a few optional vehicles (commodities, real estate, merger arbitrage).  A minimalist way to do this is a total international fund, a total domestic fund, and a bond index fund.  Or you could get more complicated.  I use a mix of individual stocks and ETFs for both international and domestice equities, and for bonds I mostly use CDs, cash and individual corporates.

More importantly, you need to figure out your asset allocation.  All the studies I have seen demonstrate that choosing the right allocation, sticking to it, and adjusting your targets as your situation changes are what makes you successful over time.  Spend some time reading and thinking about asset allocations.  Mine have changed over time.  When I was younger and accumulating more rapidly I was 80 to 90% total equities.  Now that I am looking at walking away from the day job for semi-retirement in a year, I am cruising around 60% equities.  Get the allocation right and you are 90% of the way there.

Frugal Philosopher

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Re: Portfolio Distribution Percentages
« Reply #5 on: April 19, 2013, 09:46:52 PM »
Thanks all!

I appreciate the input.

I checked the MMM article and he does recommend the Vanguard S&P 500 fund (VFINX), which surprised me a bit. I tend to favor the total market funds simply because they provide greater diversification with no extra effort. The S&P 500 is heavier on large-cap companies so won't cover small and mid-cap companies as much, I believe. If there's an advantage to sticking with just the S&P 500 then we'll probably hear about it shortly.

You may have already read it, but you may want to check out the Bogleheads Wiki, like their Investing Start-Up Kit. I think they do a good job at covering simply a lot of the items you should consider when making your investment and allocation plans.

At some point you may want to add some bonds in there. As you've been reading in the Intelligent Asset Allocator, adding even a small amount should decrease your volatility and boost your returns. If your planned retirement date is a long way off, though, it's no tragedy not to have any in your portfolio right this instant.

You might want to look at some of the Vanguard Target Funds and see how they manage their allocations, just for comparison. They'll have a pretty big chunk of Total Stock Market (60-70%), a smaller chunk of Total International (20-30%), and about 10% Total Bond Market for the first several decades, then they start increasing the amount of bonds as you get closer to your target retirement age.

I think most of the target funds tend to go too heavy on bonds towards the target date for early retirees, since you're presumably going to be retired for a longer period of time and want to have the better earning power of stocks still working for you. You will also presumably have more flexibility in choosing your retirement date, so you can choose to work another few years if stocks take a major dive right before your target date. So you won't be as afraid of volatility.

I have looked at the Bogleheads Wiki in the past - but I could probably use a refresher course. I did end up adding 10% in bonds as of yesterday. I think your right though about early retirement requiring less bonds at the front end.


're: SP500  vs total market.

Had a quick look on Vanguard.

500 admiral VFIAX    and  total US market admiral VTSAX. Fees are the same at a great 0.05%

Total market tends to outperform by about 0.5% per year compounded. Over 10 years, investing 10k, that makes a difference of about 2k in returns.

Thanks for looking that up. That is at 10k per year? or 2k of returns on 100k of funds invested at 10k over 10 years? Or am I doing my math wrong...?


I am in the process of reading the Intelligent Asset Allocator and he emphasizes the need to choose several assets and their percentages and stick with them. Is this based more on long term investing and not early retirement?

Both are technically long-term in nature, what differs is early retirement investing tends to rely on a more even cash output (to live off of) rather than just growth (which is what you can do if you're in it for the long haul). Rebalancing your portfolio regularly is important, as it keeps your risk profile the same and prevents you from being hit too hard when some shock comes to the system. But all investing is about risk. Remember that it is all paper and, while unlikely, it can be taken away as easily as it can be gained. The big thing is diversify and by that I mean take different investments that are not linked together. Owning lumber stocks and wood furnature stocks is not diversified. Owning lumber stocks and plastic would be better (though both are tied to consumer purchasing).

Makes sense. You would suggest adding International funds to the mix to mitigate the risk of the US economy? I am still unsure on the International funds side of things - some say it helps - others say it does't have much of an impact - and MMM says that your essentially betting against the US remaining the most business friendly nation.

Thoughts?


There are absurb amounts of scholarly ink spilled on these subjects and, as always, opinions differ.  Mainstream financial research has settled on something of a consensus over the years.  Basically, you want to be invested in a very broadly diversified portfolio which you have set up with target allocations and rebalance regularly to avoid drifting too far away from your chosen allocation (and this allocation is chosen to meet your return requirements and risk tolerance).  The more asset classes you can add without spending too much money, the better.

All that said, for an individual investor with less than half a million in assets who does not want to buy an all-in-one fund, I think this can be simplified without getting too nuts.  The main assets you would want are international equities (both emerging and developed), domestic equities (large through small cap), fixed income (cash through junk bonds) and perhaps a few optional vehicles (commodities, real estate, merger arbitrage).  A minimalist way to do this is a total international fund, a total domestic fund, and a bond index fund.  Or you could get more complicated.  I use a mix of individual stocks and ETFs for both international and domestice equities, and for bonds I mostly use CDs, cash and individual corporates.

More importantly, you need to figure out your asset allocation.  All the studies I have seen demonstrate that choosing the right allocation, sticking to it, and adjusting your targets as your situation changes are what makes you successful over time.  Spend some time reading and thinking about asset allocations.  Mine have changed over time.  When I was younger and accumulating more rapidly I was 80 to 90% total equities.  Now that I am looking at walking away from the day job for semi-retirement in a year, I am cruising around 60% equities.  Get the allocation right and you are 90% of the way there.


Congrats on the up and coming semi-retirement.

All that ink is probably what makes it difficult. I suppose realistically I save the vast majority of my income and I am investing it in an "broad index of funds" so over the long run I should end up way ahead? The "exact mix" of the portfolio is more like fine tuning the returns and their timing?


Again thanks everyone.

Kazimieras

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Re: Portfolio Distribution Percentages
« Reply #6 on: May 23, 2013, 01:21:51 PM »

Makes sense. You would suggest adding International funds to the mix to mitigate the risk of the US economy? I am still unsure on the International funds side of things - some say it helps - others say it does't have much of an impact - and MMM says that your essentially betting against the US remaining the most business friendly nation.

Thoughts?


I have had great luck with my international equities, and they have outperformed any of the local Canadian or US funds I have owned. The US is a great country and still commands a massive amount of weight in the world but the EU's output is about the same as the US, and the BRICs (Brazil, Russia, India and China) are still growing at a breakneck pace. So with that in mind and the QE (see printing money) of the US Fed Reserve, I am betting against the US dollar, not against the country itself. I'm not suggesting putting a huge number of assets internationally, but a healthy percentage will help hedge against some risks. The only crappy part is that they tend to have a higher management fee, however so far it has proven worth it.