The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: lostmonkey007 on January 31, 2018, 09:54:29 PM
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https://www.bloomberg.com/gadfly/articles/2018-01-30/wall-street-can-t-hold-back-vanguard-s-low-fee-ocean
Loved this article talking about the course Jack Bogle was able to put Vanguard on decades ago in order to now become the #2 money manager in the world (watch out BlackRock).
About a year ago, I went through a massive simplification such that all I now hold are:
+ VTSAX
+ FSTVX (Fidelity's VTSAX equivalent. I didn't want to sell my existing brokerage holdings at Fidelity and trigger capital gain taxes)
+ My company 401k's S&P 500 index fund
All have .04% or 0.05% expense ratios. I've truly bought into Bogle's mantra that “you get what you don’t pay for.”
That's a pretty high standard deviation you're accepting. I think Jack would say dial down the risk a bit.
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If you have considered the implications of being 100% stocks and are comfortable with riding them down when the market corrects without panicking, then I say more power to you. I am 36 and about 95% stocks. My plan is to eventually do a sort of reverse glide path at FIRE to help shield against sequence of returns risk when living off of my portfolio. Not sure when to implement that though. For now, stocks is where it’s at!
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And I agree with you that the article was good. I love what Vanguard is doing.
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Good read. I’ve wondered about reducing equity exposure now, but I think I need to read more and think more about it before doing anything. I want to make sure it isn’t influenced by the “The top is in!/ the market is overpriced” threads and venture into market timing.
The thing with a ten-year V-curve in the accumulation phase doesn’t seem to line up with a FIRE-ee who may only be in the accumulation phase for 15 years total. Doesn’t that seem too conservative? When are you thinking of bumping up the bonds? I’m curious what the rest of the community thinks as well. I expect we are 3-4 years our from FIRE if the market doesn’t go to hell in a handbasket in the interim.
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Good read. I’ve wondered about reducing equity exposure now, but I think I need to read more and think more about it before doing anything. I want to make sure it isn’t influenced by the “The top is in!/ the market is overpriced” threads and venture into market timing.
The thing with a ten-year V-curve in the accumulation phase doesn’t seem to line up with a FIRE-ee who may only be in the accumulation phase for 15 years total. Doesn’t that seem too conservative? When are you thinking of bumping up the bonds? I’m curious what the rest of the community thinks as well. I expect we are 3-4 years our from FIRE if the market doesn’t go to hell in a handbasket in the interim.
This is definitely more geared towards the Boglelheads crowd (work till my late 50s/early 60s?!?!?!). Definitely need to calibrate it to serve our FIRE purposes :-)
All of our circumstances are somewhat unique. Single, coupled or with kids. Ability to jump back into an income-earning capacity due to unforeseen circumstances. How one's FIRE funds are allocated (I'm 100% VTSAX at the moment at age 27) and how accessible they are in the immediate, medium and long terms (i.e. taxable brokerage vs. Roth IRA vs. tIRA vs. company 401k, etc.). Need to play with all of these elements and factor in the Retirement Date and Sequence of Returns risks discussed in above article.
Fun, fun stuff...
I would say two things about managing the risks... first, unless one knows the standard deviation of one's portfolio and how that impacts the range of outcomes, I'm not sure one truly understands the risks baked into a portfolio. We all think we understand... but I am pretty sure many don't have a quantitative grasp.
Second, I kinda think you want to know how your portfolio correlates with other risky as well as riskless asset classes. And then how a portfolio that attempts to employ MPT performs.
Even if you want to be all risky asset classes, it seems like one wants to look at slightly more sophisticated asset allocation models to dial down your risk without reducing your returns by collecting less correlated assets.
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Out of curiosity, @lostmonkey007, how many more years do you think it will take for you to reach FI? It is funny how we are both nominally in the same generation and in accumulation phase, and yet me being 10 years older seems to have potentially profound implications on how our AAs should be different. ;-)
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I certainly don't have the the grasp you're referring to. I also don't plan to touch these assets for quite some time. Which is my excuse for exposing myself to higher standard deviation than needed to achieve the same avg./expected return.
More risk for the same return is bad. Expected returns are also hypothetical. Stocks have returned 10% on average over the past 90ish years. However, there were whole decades they earned 0% or even had negative returns. Given current valuations stocks would be hard pressed to average 10% over the next decade. Better to have a diversified portfolio including other asset classes so you aren't reliant just on US markets.
The attached Vanguard study seems to suggest adding bonds wouldn't compromise return all that much longer term while substantially reducing volatility. And I can't even begin speaking to diversification through risk-free assets, commodities and real estate.
Then get more diversified. Something else to add would be international. Vanguard's research suggests international stocks could likely(no guarantee) outperform domestic stocks over the next decade.
https://personal.vanguard.com/pdf/ISGVEMO.pdf Pages 22-24.
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I know you didn’t ask me, but I’ll answer anyway. Our target is 90% stocks, 10% bonds. Of that 40% international, 60% domestic. That ratio was the recommendation of a vanguard advisor I spoke to. It is more or less in line with the weighted market cap of the US stock market versus global . Personally it gives me a warm fuzzy to be diversified globally; we’ll see how correlated or not they are over time.
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I certainly don't have the the grasp you're referring to. I also don't plan to touch these assets for quite some time. Which is my excuse for exposing myself to higher standard deviation than needed to achieve the same avg./expected return.
See if this helps you grab hold of this subject more tightly. Use Portfolio Visualizer backtest portfolio (https://www.portfoliovisualizer.com/backtest-asset-class-allocation) tool to model three portfolios at same time.
100% total stock market (your choice) which returns 9.58% over last 23 years (longest time frame you can model)
100% REITs which returns 9.54% over last 23 years (longest time frame you can model)
The two 100% portfolios show standard deviations of roughly 15% and 19%... so clearly 100% US stocks seems better. because you ge a wee bit better return but with lower standard deviation so noticeably lower risk.
But a 50% total stock market and 50% REITs portfolio returns 9.99% over same time frame with 15% standard deviation. Same same risk as your portfolio with higher return.
BTW, I'm not saying this shows we ought to split 50-50 US stocks - REITS but that combining asset classes that don't correlate does good stuff to your portfolio.
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What's your personal asset allocation? What was your underlying diversification methodology? It's easy to sort of qualitatively understand the benefits of diversification. But implementation becomes a challenge when you consider that all asset classes have over time have shown increased correlation to one another.
And, on the note of international, you don't believe the large conglomerates embedded in the S&P 500 already have sufficient foreign exposure?
85% stocks and 15% bonds right now. 50/50 split between US and international, which use to be a 60/40 split. The 60/40 split is based on Vanguard research looking at the international allocation that will best reduce volatility. Based on their research anything between 70/30 and 50/50 will reduce volatility, but 60/40 is the ideal point. The reason I shifted to 50/50 is that you still get most of the same benefit at 50/50, but I think there is a greater than 50% chance international will outperform domestic over the next 10 years so I wanted to be a little heavier on international.
Diversification, well I own VTSAX(~3600 US companies) and VTIAX(~6000 foreign companies). VTSAX also includes REITs. Those 2 funds give me almost 10,000 stocks worldwide. For bonds I have some in VBTLX(thousands of US bonds), and the rest is in a stable value fund in my 401k which pays about the same as VBTLX. I think I'm diversified.
Sure the large conglomerates in the S&P 500 have international exposure. Switch that logic around though, don't the large international conglomerates have plenty of domestic exposure? Some of the top international companies: Nestle, Toyota, Samsung, HSBC bank, Shell. It takes a few clicks of a button to add VTIAX to your portfolio and when combined with VTSAX you get almost every stock in the world. Plus, based on the research, holding the two in a 70/30 up to 50/50 allocation lowers the volatility of the portfolio so it's less risk than owning VTSAX by itself.
EDIT: I also own VFIAX and VEXAX, and/or their ETF counterparts. Combined they are the same thing as VTSAX. I like to separate the two for tax efficiency benefits between pre-tax and Roth. That is a whole new conversation, and we can't begin to tackle it until we agree on diversification.
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To save time I'm copying my reply to another similar post.
For ideal tax efficiency. Follow these steps in order.
1. Put bonds in pre-tax accounts(IRAs, 401ks, 403b, etc.) first, Roth second, taxable last. (If you put bonds in taxable consider taxable VS tax free bonds.)
2. Put domestic stock index funds in taxable first, Roth second, Pre-tax last.
3. Put most aggressive index funds(normally international and/or small caps) in Roth 1st, taxable second, pre-tax last.
4. For active mutual funds, don't use them. If you do, try to put in pre-tax if it's a more conservative investment or Roth if it's more aggressive. Never put active funds in a taxable account. If the taxable account is the only space available then you should use index funds instead.
These steps do overlap, but if you follow them in order you will end up with your bonds and domestic stock index funds in their most tax efficient locations and then using left over investments to fill in the gaps.
Example 1. 50/50 portfolio, 100k pretax, 50k taxable. Pre-tax= 75k in bond funds, 25k in international stock index funds. Taxable = 45k in domestic stock index fund, 5k in international stock index fund.
Example 2. 50/50 portfolio, 100k pretax, 50k taxable, 50k Roth. Pre-tax = 100k in bond funds. Taxable = 50k in domestic stock index funds. Roth = 10k in domestic stock index funds, 40k in international stock index fund.
Disclaimer for other readers, the following information is assuming someone wanted to be 100% stocks.
Easy path for you: Keep taxable efficient and roth aggressive. Taxable = VTSAX. Roth= VTIAX. Pre-tax= fill in the gaps.
Complicated if you wanted slightly better tax efficiency: It's hard to know for sure without knowing how big the different accounts are, I'll assume pre-tax is largest for now. This is taking apart VTSAX and VTIAX and splitting out their most aggressive components to put in the Roth.
Taxable(tax efficient) = VTSAX
Roth(aggressive) = VEXAX (extended market index, the companies too small to go in the 500 index.) and VEMAX(emerging markets) depending on space.
Pre-tax= VFIAX(500 to offset extended, a 70% 500/30% extended relationship is what I use), VTMGX(developed markets to offset VEMAX, 80% developed, 20% emerging), then VTSAX and VTIAX to fill in the gaps.
If you can't get developed markets in the 401k or HSA then just stick with VTIAX, and don't bother with VEMAX and VTMGX.
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... based on the research, holding the two in a 70/30 up to 50/50 allocation lowers the volatility of the portfolio so it's less risk than owning VTSAX by itself.
In recent years, international stock returns correlate pretty closely with US stocks. E.g., over last decade, a 70/30 portfolio of US and International stocks shows .99 correlation with US stocks. (Source Portfolio Visualizer's Backtest Portfolio Asset Allocation tool.)
BTW, I share this comment not to say we shouldn't diversify... we should. But it seems to be getting tougher. And international stocks don't seem to help as much as one would hope.
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I describe making some simplifying assumptions as some of my investments (i.e. Taxable Brokerage ones) are stuck as I don't want to trigger capital gains. Also, I can only buy a total international equities index fund. Therefore, I assume it breaks down into 80% developed and 20% emerging.
Then stick with Taxable = VTSAX. Roth= VTIAX. Pre-tax= fill in the gaps.
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... based on the research, holding the two in a 70/30 up to 50/50 allocation lowers the volatility of the portfolio so it's less risk than owning VTSAX by itself.
In recent years, international stock returns correlate pretty closely with US stocks. E.g., over last decade, a 70/30 portfolio of US and International stocks shows .99 correlation with US stocks. (Source Portfolio Visualizer's Backtest Portfolio Asset Allocation tool.)
BTW, I share this comment not to say we shouldn't diversify... we should. But it seems to be getting tougher. And international stocks don't seem to help as much as one would hope.
SeattleCPA, then, how would you propose diversifying outside of International Equities (other than Bonds)?
I started to write up a good answer to this question... and soon found my "answer" totaling 700 words. So I'm going to make it a little more thorough and in a few weeks post at my blog...
But two half baked answers... first, if you have choice, a cheap target index fund would be my choice were I doing this all over again. (These didn't exist during my accumulation phase. But these should always give you a pretty textbook asset allocation if you're working with some big well-known investment firm: Vanguard, Fidelity, etc.)
Second, regarding bonds, I earlier noted that Portfolio Visualizer says a 100% US stock market portfolio earned roughly 9.5% over last quarter century while causing investors to bear risk of a 15%-ish standard deviation.
I then pointed out that by splitting your money evenly between US stocks and the REIT index, you got a 10% return and still only needed to bear a 15%-standard deviation... and this, oddly, even though both US stocks and the REIT index returned roughly 9.5% annually.
But here's another thing to ponder. If you say you're okay with a 9.5%-ish return that US stocks returned over the last quarter century, you could have put 30% of your money into long-term treasuries... and then split that remaining 70% into even shares with half going into the US stocks bucket and half going into the REIT bucket... and here's the shocker: Had you done this, you would have gotten a 9.5% return (so same return as from 100% US stocks) but with a 10%-ish standard deviation.
FYI, I am not saying someone should use the above asset allocation or that one can predict future from past... only that you can very possibly dial up return and dial down risk by diversifying across uncorrelated asset classes... including riskless bonds.