The Right Investment mix?

[Bbqmustache]

Right now, I own a fixed rate annuity that gives me a guaranteed 3%, so that's my cash portion of retirement.  The bulk of the remainder of my investments are in Vanguard.  25% each in Total Stock Market(VTSAX) , Mid Cap Index(VIMAX) and High Dividend Yield (VHDYX).  20% in small Cap Growth Index (VSGAX) and 5% in REIT index (VGSLX).  I am completely aware of risk, and I ride the lows and highs.  Rebalancing by hand quarterly.

  Is this mix a good mix for the next 15-20 years?

Thanks!

[FerrumB5]

Was about to ask the same question.
Part of my old 403(b) is in 3% guaranteed in TIAA-CREF, the rest is in Vanguard indices or Fidelity Spartan 500.

I was going to move guaranteed 3% to regular ETF, but it takes 5 (five) years as I just found 2 days ago. TIAA-CREF can only move 20% of that guaranteed fund to any other per year. Just FYI.

[matchewed]

Whatever mix makes it so you don't do something stupid, you can cover your expenses going forward in the future, and you have a success rate you're comfortable with is the mix you should use.

[Scandium]

In my opinion that's a bit of a weird mix. VTSAX already has mid cap, small cap, high dividend, and even some REITS. What's your reasoning for overweighting mid cap, small growth, large value (dividend) and REITS on top of what is already in total market? Do you believe these specific sectors will outperform?

If  you have compelling reasoning behind it sure go ahead, but I prefer something simpler so just do VTSAX.

Second issue; do you not have any international? Then your ignoring half the worlds stocks. I target 30-40% international for the diversification benefits. As that historically the efficient frontier.

[MDM]

  Is this mix a good mix for the next 15-20 years?

Probably, especially with your rebalancing.

Is it the best mix?  Almost certainly not - but one can say that about any mix, because nobody knows now the best strategy for the next 15-20 years (or any other time period).

See https://www.bogleheads.org/wiki/Callan_periodic_table_of_investment_returns if not already familiar with that concept.

[AZryan]

In my opinion that's a bit of a weird mix. VTSAX already has mid cap, small cap, high dividend, and even some REITS.

It isn't weird at all. VTSAX only has a very small amount of all those because of just how big the MegaCaps are -which is why the 500 Index is almost the same as the Total Market.

Like MDM wrote, it's probably a good mix because of rebalancing. I'd probably get rid of the High Dividend, though.

As for international, there are a lot of big names, including Warren Buffett, who say that just being in the U.S. is still a pretty safe bet. We continue to have the best/biggest economy with lots of global business.

Also, Scandium, I know everyone makes type-o's, skips words, ignores grammar, etc. but mixing up "your" and "you're" always looks like the person doesn't actually know the diff.
It just see this one SO often now that I have to point it out when I see it.

[Scandium]

In my opinion that's a bit of a weird mix. VTSAX already has mid cap, small cap, high dividend, and even some REITS.

It isn't weird at all. VTSAX only has a very small amount of all those because of just how big the MegaCaps are -which is why the 500 Index is almost the same as the Total Market.

Like MDM wrote, it's probably a good mix because of rebalancing. I'd probably get rid of the High Dividend, though.

As for international, there are a lot of big names, including Warren Buffett, who say that just being in the U.S. is still a pretty safe bet. We continue to have the best/biggest economy with lots of global business.

Also, Scandium, I know everyone makes type-o's, skips words, ignores grammar, etc. but mixing up "your" and "you're" always looks like the person doesn't actually know the diff.
It just see this one SO often now that I have to point it out when I see it.

Oh I'm sorry your highness. Didn't know UR gonna have such an issue..

So you're market timing and betting that some sector will perform better. Well then nobody can really tell you if the AA is good, since nobody knows. Warren buffet recommend against that as well by the way, as does Bogle.. But good luck

Sent from my Nexus 5X using Tapatalk

[MDM]

...because of rebalancing.

So you're market timing and betting that some sector will perform better.

Grammar items aside, rebalancing is not the same as market timing.

[Scandium]

...because of rebalancing.

So you're market timing and betting that some sector will perform better.

Grammar items aside, rebalancing is not the same as market timing.

Overweighting medium, small cap growth and US stocks is though.

Sent from my Nexus 5X using Tapatalk

[MDM]

... rebalancing is not the same as market timing.

Overweighting medium, small cap growth and US stocks is though.

Maybe it's a semantic issue, but timing <> overweighting.  See https://www.bogleheads.org/wiki/Slice_and_dice for more on this.

[Scandium]

... rebalancing is not the same as market timing.

Overweighting medium, small cap growth and US stocks is though.

Maybe it's a semantic issue, but timing <> overweighting.  See https://www.bogleheads.org/wiki/Slice_and_dice for more on this.

Perhaps not timing per say, but betting that you know better than the market which sector or country will do better rarely works out. We all tilt a little from total market, but especially such a high allocation to small growth, which often does poorly, seems a bit random to me.

The American exceptionalism I'm also sceptical of, especially at these valuation levels

[Bbqmustache]

Thanks to everyone for the input.  I am missing an international aspect, and may correct that soon.  Rebalancing on a quarterly calendar date makes selling high and buying low decisions for me; I don't put that in the market timing category.

I was not sure how much duplication I have from have the total stock market fund compared to the mid cap and small cap indexes.  I may rethink this.  But I am a STRONG believer in small business, that's why my account puts 20% there.

I get a 3.09% dividend rate on the Dividend Index.  Why bail on this one?

Thanks again!

[aj76er]

I get a 3.09% dividend rate on the Dividend Index.  Why bail on this one?

Thanks again!

Burton Malkiel (in a "Random Walk Down Wallstreet") recommends using dividend stocks as a bond substitute (i.e. as a portion of your bond allocation).  It is a bit controversial (esp. in the Bogle Heads Forums), but it could be a reasonable thing to do - especially in a taxable account.

Also, I think overweighting mid/small caps is fine, since they are underrepresented in VTSAX.  Historical evidence has shown small value to do especially well. When mixed with VTSAX, it actually improves your CAGR without increasing stddev (e.g. risk). Not sure if this trend will persist in the future, but it's not a bad bet, especially when rebalancing to smooth things out.  For a taxable account, I like VTMSX, which gives you the whole small-cap sector with low turnover.

Finally, if you're going to do international, you may consider overweighting the emerging market sector.  Good historical evidence suggest that is where the growth is - but it does increase stddev. 

Visit portfoliocharts.com, in which you can backtest different strategies.  Just be aware that historical performance is no guarantee of future results :)

[Bbqmustache]

Because In can put $250K in that 3% fixed annuity, I am not using Bond fund or equivalents.

New investment mix is now 25% each in Total Stock, Mid Cap and Small Cap funds  15% in REIT, a bit over $5% each in Developed Market and Emerging Market international funds (all Admiral Shares to get lower management fees)

I now have a quarterly calendar reminder to rebalance these funds to these ratios.  Thank you, thank you thank you!

[Case]

In my opinion that's a bit of a weird mix. VTSAX already has mid cap, small cap, high dividend, and even some REITS.

It isn't weird at all. VTSAX only has a very small amount of all those because of just how big the MegaCaps are -which is why the 500 Index is almost the same as the Total Market.

Like MDM wrote, it's probably a good mix because of rebalancing. I'd probably get rid of the High Dividend, though.

As for international, there are a lot of big names, including Warren Buffett, who say that just being in the U.S. is still a pretty safe bet. We continue to have the best/biggest economy with lots of global business.

Also, Scandium, I know everyone makes type-o's, skips words, ignores grammar, etc. but mixing up "your" and "you're" always looks like the person doesn't actually know the diff.
It just see this one SO often now that I have to point it out when I see it.

Oh I'm sorry your highness. Didn't know UR gonna have such an issue..

So you're market timing and betting that some sector will perform better. Well then nobody can really tell you if the AA is good, since nobody knows. Warren buffet recommend against that as well by the way, as does Bogle.. But good luck

Sent from my Nexus 5X using Tapatalk

Agreed!  Assclown comments on grammatical typos are just annoying, they are infuriating and waste everyone's time.

[Interest Compound]

People who substitute dividend stocks for bonds either:

1. Don't realize dividends are mathematically equivalent to selling stock.

2. Don't understand the main purpose for bonds in a portfolio is stability.

3. Both of the above

[mrpercentage]

People who substitute dividend stocks for bonds either:

1. Don't realize dividends are mathematically equivalent to selling stock.

2. Don't understand the main purpose for bonds in a portfolio is stability.

3. Both of the above

Wrong

In my opinion that's a bit of a weird mix. VTSAX already has mid cap, small cap, high dividend, and even some REITS. What's your reasoning for overweighting mid cap, small growth, large value (dividend) and REITS on top of what is already in total market? Do you believe these specific sectors will outperform?

If  you have compelling reasoning behind it sure go ahead, but I prefer something simpler so just do VTSAX.

Second issue; do you not have any international? Then your ignoring half the worlds stocks. I target 30-40% international for the diversification benefits. As that historically the efficient frontier.

Im not sure their exact reason but I will tell you what I see right with it. Small and Mid Cap grow faster than mega cap. Thats not timing-- its a fact. They have more room to grow. They are not as stable though. Apple can not grow as fast as it has, why? Because its @#$%^& huge!

I like the high yield. High yield is a sort of value play. High yield is usually undervalued. Also what better way to invest than to have the stocks buy themselves?

REITs are high yield so I like that too.

So its exposed to higher possible growth and reinforced with higher yield. I like it. I was doing some portfolio experiements a while ago trying to get S&P500 growth with a 4% yield using indexes. I failed. I managed to get a 500 growth rate with a little over 3% yield though. Thats not too shabby. All through backtesting. I have had troubles trying to backtest seasonal investing though. Not sure how or where to do it.

[Scandium]

Wrong

Yeah, dividend funds totally work the same as bond funds in a downturn




oh wait..

[mrpercentage]

You cash in bonds. You don't sell dividend stocks. Show me a bond that acts like ticker HCP

[Interest Compound]

Even with the 20:20 hindsight of picking a stock which outperformed in the past, HCP fits the narrative nicely. Looking at the total return chart (dividends included) from the 2008 crash till now, HCP (green) has been more volatile than 100% stocks (blue), and returned less than 100% bonds (orange). The worst of both worlds:

People who substitute dividend stocks for bonds either:

1. Don't realize dividends are mathematically equivalent to selling stock.

2. Don't understand the main purpose for bonds in a portfolio is stability.

3. Both of the above

For #1, HCP did not provide a higher/safer withdrawal rate for someone seeking income from their portfolio.

For #2, HCP did not provide the stability of bonds for someone seeking less volatility in their portfolio.

[mrpercentage]

Even with the 20:20 hindsight of picking a stock which outperformed in the past, HCP fits the narrative nicely. Looking at the total return chart (dividends included) from the 2008 crash till now, HCP (green) has been more volatile than 100% stocks (blue), and returned less than 100% bonds (orange). The worst of both worlds:

For #1, HCP did not provide a higher/safer withdrawal rate for someone seeking income from their portfolio.

For #2, HCP did not provide the stability of bonds for someone seeking less volatility in their portfolio.

1. Stability of what? If its the income you are receiving then it was very stable-- in fact, it was increasing.
2. Stability of equity isn't a problem for dividend investors. HCP has a 6% yield. If your withdrawal rate is 4% then you are still reinvesting some dividends and living off your investment. You are not selling even one single share.

Next you will say that you can't maintain a 6% yield have have diversity. Then I will say: BOOM!
CVX
COP
KMI
ETP
CTL
VZ
T
EGAS
SO
MO
PM
O
DOC
STAG
IRC
EPR
MAT
BX
NM
F
GM

[Interest Compound]

Even with the 20:20 hindsight of picking a stock which outperformed in the past, HCP fits the narrative nicely. Looking at the total return chart (dividends included) from the 2008 crash till now, HCP (green) has been more volatile than 100% stocks (blue), and returned less than 100% bonds (orange). The worst of both worlds:

For #1, HCP did not provide a higher/safer withdrawal rate for someone seeking income from their portfolio.

For #2, HCP did not provide the stability of bonds for someone seeking less volatility in their portfolio.

1. Stability of what? If its the income you are receiving then it was very stable-- in fact, it was increasing.
2. Stability of equity isn't a problem for dividend investors. HCP has a 6% yield. If your withdrawal rate is 4% then you are still reinvesting some dividends and living off your investment. You are not selling even one single share.

Next you will say that you can't maintain a 6% yield have have diversity. Then I will say: BOOM!
CVX
COP
KMI
ETP
CTL
VZ
T
EGAS
SO
MO
PM
O
DOC
STAG
IRC
EPR
MAT
BX
NM
F
GM

Even if you predicted correctly that HCP was a good pick in 2007, you'd have been safer (less downside), more stable (less volatility), and ended up with more money, by simply withdrawing 6% from VTSAX (100% stocks) or VBTLX (100% bonds) each year. These are the facts. Don't take my word for it, look at the data and see for yourself:





Let's not turn this into another mega dividend thread. We've both presented our side, no point going round and round about it. The OP has the information and can decide for themselves :)

[Telecaster]

In my opinion that's a bit of a weird mix. VTSAX already has mid cap, small cap, high dividend, and even some REITS. What's your reasoning for overweighting mid cap, small growth, large value (dividend) and REITS on top of what is already in total market? Do you believe these specific sectors will outperform?

If  you have compelling reasoning behind it sure go ahead, but I prefer something simpler so just do VTSAX.

VTSAX  is weighted by market cap.   The ten largest holdings are 15% of the entire fund.  So by default it is mostly a large cap fund.  You can make an argument that it is prudent to add a mid-cap/small-cap fund to balance your exposure. 

Interest Compound is correct.  Mathematically, there can't be (or at least shouldn't be) a difference between a dividend and selling stock.  In a practical sense there might be some small differences. 

Make no mistake, I'm not bagging on dividends!  But in recent years people have been placing (IMO) false hope in the power of dividends.   

[Interest Compound]

VTSAX  is weighted by market cap.   The ten largest holdings are 15% of the entire fund.  So by default it is mostly a large cap fund.  You can make an argument that it is prudent to add a mid-cap/small-cap fund to balance your exposure.

Yes, that argument can be made. Just be sure to understand the hubris behind such an argument. The top market-cap companies got there there because the market as a whole decided these companies are more valuable. The collective wisdom of the market, dominated by the top "genius" mathematicians and analysts of the country, no, the world, who do nothing but study companies all-day with access to information and speed-of-information that we can only dream of...all came to the conclusion that these mid/small-cap companies simply aren't as valuable.

By over-weighting mid/small-cap companies, you're not only saying they're all wrong, you're saying you know better than them. And you know what, maybe you do. It's certainly possible. But it's not a claim to be made lightly.

[mrpercentage]

Let's not turn this into another mega dividend thread. We've both presented our side, no point going round and round about it. The OP has the information and can decide for themselves :)

You have something against dividends? You keep talking about total return. Thats like saying my fish sucks because it can't climb trees like a monkey. Well duh.

You should know HCP was one of many examples and only used because it is the default display on dividendinvestor.com. If I wanted to be a butthead I would have said backtest O (reality income). Its not fair to point to something that would give you 10x the return though.

You need to recognize the difference between goals
1. be able to draw down at a rate that will keep my total above zero before I die
2. have an endless stream of dividends that will take care of not only me but my kids after my wife and I are gone

view 1 sees the investment as "my money" that goes up and down with a "crazy market"
view 2 sees ownership in businesses that will hopefully provide income for the rest of your life, kids life, and grand kids lives.

Finally, dividends are not "equivalent" to selling shares. They come from earnings that are not directly related to price. Im not pushing buying individual securities. I do however see a great benefit to a dividend based portfolio. If the biggest number in 20 years is the goal then Mid Cap Growth is where it is at. They have proven worth by growing to Mid and they have the room to grow to large. The success rate of going to Mega begins to diminish exponentially

Take this as an example. Here is are my returns for dividend index investing this year. (I compete) Im master intuit
Take note I played the dividend growth angle using the two factors you need for good DGI--- 1. a history of dividend growth 2. a high yield
I did it all with just two Vanguard tickers VIG and VYM. I think it illustrates the point well.

[beltim]

VTSAX  is weighted by market cap.   The ten largest holdings are 15% of the entire fund.  So by default it is mostly a large cap fund.  You can make an argument that it is prudent to add a mid-cap/small-cap fund to balance your exposure.

Yes, that argument can be made. Just be sure to understand the hubris behind such an argument. The top market-cap companies got there there because the market as a whole decided these companies are more valuable. The collective wisdom of the market, dominated by the top "genius" mathematicians and analysts of the country, no, the world, who do nothing but study companies all-day with access to information and speed-of-information that we can only dream of...all came to the conclusion that these mid/small-cap companies simply aren't as valuable.

Yes, because large-cap companies are.. larger.  This doesn't reveal anything.

By over-weighting mid/small-cap companies, you're not only saying they're all wrong, you're saying you know better than them. And you know what, maybe you do. It's certainly possible. But it's not a claim to be made lightly.

No.  If you believe in the efficient market hypothesis, then companies of all capitalizations should have equal risk-adjusted returns.  Changing the allocation to different capitalizations does not affect your expected risk-adjusted returns at all, and does not go against the collective wisdom at all.

[Interest Compound]

VTSAX  is weighted by market cap.   The ten largest holdings are 15% of the entire fund.  So by default it is mostly a large cap fund.  You can make an argument that it is prudent to add a mid-cap/small-cap fund to balance your exposure.

Yes, that argument can be made. Just be sure to understand the hubris behind such an argument. The top market-cap companies got there there because the market as a whole decided these companies are more valuable. The collective wisdom of the market, dominated by the top "genius" mathematicians and analysts of the country, no, the world, who do nothing but study companies all-day with access to information and speed-of-information that we can only dream of...all came to the conclusion that these mid/small-cap companies simply aren't as valuable.

Yes, because large-cap companies are.. larger.  This doesn't reveal anything.

By over-weighting mid/small-cap companies, you're not only saying they're all wrong, you're saying you know better than them. And you know what, maybe you do. It's certainly possible. But it's not a claim to be made lightly.

No.  If you believe in the efficient market hypothesis, then companies of all capitalizations should have equal risk-adjusted returns.  Changing the allocation to different capitalizations does not affect your expected risk-adjusted returns at all, and does not go against the collective wisdom at all.

The majority of invested money that deviates from the market, underperforms the market. Sometimes for multiple decades. If you want to try and predict what will outperform during your personal investment horizon, the multiple decades when you'll need the money, I'd recommend following Rick Ferri's advice:

"Behavior is another issue. A tilted portfolio can underperform for many years (see Expect Years of Pain before Market Gain for details). A prolonged underperformance period makes tilting risky from a behavioral perspective. Some people are impatient and will jump out of a strategy after a few bad years. This is exactly what investors should not do because it locks in a lower long-term return. The strategy has to be diligently maintained in order for it to be successful. Tilting is a life-long investment ideal."

"Tilting is for investors who are knowledgeable, understanding, willing to accept higher risk and pay higher fees, and most important, are extremely disciplined in implementation and maintenance. If this is you, choose your funds wisely and keep your costs as low as you can. This will give you the highest probability for long-term success."

http://www.rickferri.com/blog/investments/to-tilt-or-not-to-tilt/

Good luck!

[beltim]

VTSAX  is weighted by market cap.   The ten largest holdings are 15% of the entire fund.  So by default it is mostly a large cap fund.  You can make an argument that it is prudent to add a mid-cap/small-cap fund to balance your exposure.

Yes, that argument can be made. Just be sure to understand the hubris behind such an argument. The top market-cap companies got there there because the market as a whole decided these companies are more valuable. The collective wisdom of the market, dominated by the top "genius" mathematicians and analysts of the country, no, the world, who do nothing but study companies all-day with access to information and speed-of-information that we can only dream of...all came to the conclusion that these mid/small-cap companies simply aren't as valuable.

Yes, because large-cap companies are.. larger.  This doesn't reveal anything.

By over-weighting mid/small-cap companies, you're not only saying they're all wrong, you're saying you know better than them. And you know what, maybe you do. It's certainly possible. But it's not a claim to be made lightly.

No.  If you believe in the efficient market hypothesis, then companies of all capitalizations should have equal risk-adjusted returns.  Changing the allocation to different capitalizations does not affect your expected risk-adjusted returns at all, and does not go against the collective wisdom at all.

The majority of invested money that deviates from the market, underperforms the market. Sometimes for multiple decades. If you want to try and predict what will outperform during your personal investment horizon, the multiple decades when you'll need the money, I'd recommend following Rick Ferri's advice:

"Behavior is another issue. A tilted portfolio can underperform for many years (see Expect Years of Pain before Market Gain for details). A prolonged underperformance period makes tilting risky from a behavioral perspective. Some people are impatient and will jump out of a strategy after a few bad years. This is exactly what investors should not do because it locks in a lower long-term return. The strategy has to be diligently maintained in order for it to be successful. Tilting is a life-long investment ideal."

"Tilting is for investors who are knowledgeable, understanding, willing to accept higher risk and pay higher fees, and most important, are extremely disciplined in implementation and maintenance. If this is you, choose your funds wisely and keep your costs as low as you can. This will give you the highest probability for long-term success."

http://www.rickferri.com/blog/investments/to-tilt-or-not-to-tilt/

Good luck!

That's all fine but it's completely unrelated to what you said earlier.  I have no quibble with this, unlike your earlier statement which was factually inaccurate.

[mrpercentage]

Also your withdrawal model is wrong. You would not withdraw from HCP. You would select no on display income. I think its a broken feature on portfolio visualizer. It always displays dividends reinvested. You would probably need to view the yahoo chart for HCP

[Interest Compound]

Let's not turn this into another mega dividend thread. We've both presented our side, no point going round and round about it. The OP has the information and can decide for themselves :)

You have something against dividends? You keep talking about total return. Thats like saying my fish sucks because it can't climb trees like a monkey. Well duh.

You should know HCP was one of many examples and only used because it is the default display on dividendinvestor.com. If I wanted to be a butthead I would have said backtest O (reality income). Its not fair to point to something that would give you 10x the return though.

You need to recognize the difference between goals
1. be able to draw down at a rate that will keep my total above zero before I die
2. have an endless stream of dividends that will take care of not only me but my kids after my wife and I are gone

view 1 sees the investment as "my money" that goes up and down with a "crazy market"
view 2 sees ownership in businesses that will hopefully provide income for the rest of your life, kids life, and grand kids lives.

Finally, dividends are not "equivalent" to selling shares. They come from earnings that are not directly related to price. Im not pushing buying individual securities. I do however see a great benefit to a dividend based portfolio. If the biggest number in 20 years is the goal then Mid Cap Growth is where it is at. They have proven worth by growing to Mid and they have the room to grow to large. The success rate of going to Mega begins to diminish exponentially

Take this as an example. Here is are my returns for dividend index investing this year. (I compete) Im master intuit
Take note I played the dividend growth angle using the two factors you need for good DGI--- 1. a history of dividend growth 2. a high yield
I did it all with just two Vanguard tickers VIG and VYM. I think it illustrates the point well.

That's great, I wish you luck! If you'd like to discuss the merits of dividends further:

http://forum.mrmoneymustache.com/investor-alley/anyone-else-only-buying-dividend-stocks/
http://forum.mrmoneymustache.com/investor-alley/dividend-stocks-versus-index-investing

...etc.

[Interest Compound]

VTSAX  is weighted by market cap.   The ten largest holdings are 15% of the entire fund.  So by default it is mostly a large cap fund.  You can make an argument that it is prudent to add a mid-cap/small-cap fund to balance your exposure.

Yes, that argument can be made. Just be sure to understand the hubris behind such an argument. The top market-cap companies got there there because the market as a whole decided these companies are more valuable. The collective wisdom of the market, dominated by the top "genius" mathematicians and analysts of the country, no, the world, who do nothing but study companies all-day with access to information and speed-of-information that we can only dream of...all came to the conclusion that these mid/small-cap companies simply aren't as valuable.

Yes, because large-cap companies are.. larger.  This doesn't reveal anything.

By over-weighting mid/small-cap companies, you're not only saying they're all wrong, you're saying you know better than them. And you know what, maybe you do. It's certainly possible. But it's not a claim to be made lightly.

No.  If you believe in the efficient market hypothesis, then companies of all capitalizations should have equal risk-adjusted returns.  Changing the allocation to different capitalizations does not affect your expected risk-adjusted returns at all, and does not go against the collective wisdom at all.

The majority of invested money that deviates from the market, underperforms the market. Sometimes for multiple decades. If you want to try and predict what will outperform during your personal investment horizon, the multiple decades when you'll need the money, I'd recommend following Rick Ferri's advice:

"Behavior is another issue. A tilted portfolio can underperform for many years (see Expect Years of Pain before Market Gain for details). A prolonged underperformance period makes tilting risky from a behavioral perspective. Some people are impatient and will jump out of a strategy after a few bad years. This is exactly what investors should not do because it locks in a lower long-term return. The strategy has to be diligently maintained in order for it to be successful. Tilting is a life-long investment ideal."

"Tilting is for investors who are knowledgeable, understanding, willing to accept higher risk and pay higher fees, and most important, are extremely disciplined in implementation and maintenance. If this is you, choose your funds wisely and keep your costs as low as you can. This will give you the highest probability for long-term success."

http://www.rickferri.com/blog/investments/to-tilt-or-not-to-tilt/

Good luck!

That's all fine but it's completely unrelated to what you said earlier.  I have no quibble with this, unlike your earlier statement which was factually inaccurate.

Sure. My post was factually inaccurate.

It is a fact that deviating from the market is not the same as saying you know better than the market. You win :)

[mrpercentage]

That's great, I wish you luck! If you'd like to discuss the merits of dividends further:

http://forum.mrmoneymustache.com/investor-alley/anyone-else-only-buying-dividend-stocks/
http://forum.mrmoneymustache.com/investor-alley/dividend-stocks-versus-index-investing

...etc.

I thought we were talking about his portfolio- of which- dividends obviously play a role by his selections. Is every thread a VTI thread? VTI or else!!

[Telecaster]

VTSAX  is weighted by market cap.   The ten largest holdings are 15% of the entire fund.  So by default it is mostly a large cap fund.  You can make an argument that it is prudent to add a mid-cap/small-cap fund to balance your exposure.

Yes, that argument can be made. Just be sure to understand the hubris behind such an argument. The top market-cap companies got there there because the market as a whole decided these companies are more valuable. The collective wisdom of the market, dominated by the top "genius" mathematicians and analysts of the country, no, the world, who do nothing but study companies all-day with access to information and speed-of-information that we can only dream of...all came to the conclusion that these mid/small-cap companies simply aren't as valuable.

By over-weighting mid/small-cap companies, you're not only saying they're all wrong, you're saying you know better than them. And you know what, maybe you do. It's certainly possible. But it's not a claim to be made lightly.

It isn't hubris, it is observation.   By buying VTSAX you are placing an oversize bet on the largest companies by market cap. That is a true statement and there is no secret claim beyond that.    Nothing wrong with that--as long as you want to bet on large cap companies. 

However, lots of people including genius mathematical types have demonstrated that historically (last 90 years or so) small caps have outperformed large caps. If you overweighted in large caps, you left money on the table.   Of course, these same genius mathematical types are careful to point out that large caps might grow faster than small caps for periods of time, like decades and vice versa. 

And these same genius mathematical types has  shown mathematically that owning a balanced portfolio can improve returns and reduce volatility over time.  Those are surely good things.   That's the argument I was talking about.   Therefore, it is reasonable that people consider a mid-cap or a small-cap fund to balance a cap-weighted index fund.  In fact, that's exactly what most of the genius mathematical types recommend.   

And to be clear, you are making a mistake by claiming the cap weight of the index is determined by the market.  That was actually determined by the people who chose to construct the index in that manner.   It could have just as easily been an equal weight index.  The index is a measurement tool.  Using different tools isn't hubris, it is just using different tools.   Using the right tool for the right job is surely a good thing as well. 

I can't find the link easily, but I recently read a study that showed an equal-weight S&P index would have outperformed the S&P index (which is cap-weighted) since the 1930s by a couple percent.  That's not nothing.  Calculate for yourself what a couple extra percent performance does over say, 20 or 30 years. 

[Interest Compound]

VTSAX  is weighted by market cap.   The ten largest holdings are 15% of the entire fund.  So by default it is mostly a large cap fund.  You can make an argument that it is prudent to add a mid-cap/small-cap fund to balance your exposure.

Yes, that argument can be made. Just be sure to understand the hubris behind such an argument. The top market-cap companies got there there because the market as a whole decided these companies are more valuable. The collective wisdom of the market, dominated by the top "genius" mathematicians and analysts of the country, no, the world, who do nothing but study companies all-day with access to information and speed-of-information that we can only dream of...all came to the conclusion that these mid/small-cap companies simply aren't as valuable.

By over-weighting mid/small-cap companies, you're not only saying they're all wrong, you're saying you know better than them. And you know what, maybe you do. It's certainly possible. But it's not a claim to be made lightly.

It isn't hubris, it is observation.   By buying VTSAX you are placing an oversize bet on the largest companies by market cap. That is a true statement and there is no secret claim beyond that.    Nothing wrong with that--as long as you want to bet on large cap companies. 

However, lots of people including genius mathematical types have demonstrated that historically (last 90 years or so) small caps have outperformed large caps. If you overweighted in large caps, you left money on the table.   Of course, these same genius mathematical types are careful to point out that large caps might grow faster than small caps for periods of time, like decades and vice versa. 

And these same genius mathematical types has  shown mathematically that owning a balanced portfolio can improve returns and reduce volatility over time.  Those are surely good things.   That's the argument I was talking about.   Therefore, it is reasonable that people consider a mid-cap or a small-cap fund to balance a cap-weighted index fund.  In fact, that's exactly what most of the genius mathematical types recommend.   

And to be clear, you are making a mistake by claiming the cap weight of the index is determined by the market.  That was actually determined by the people who chose to construct the index in that manner.   It could have just as easily been an equal weight index.  The index is a measurement tool.  Using different tools isn't hubris, it is just using different tools.   Using the right tool for the right job is surely a good thing as well. 

I can't find the link easily, but I recently read a study that showed an equal-weight S&P index would have outperformed the S&P index (which is cap-weighted) since the 1930s by a couple percent.  That's not nothing.  Calculate for yourself what a couple extra percent performance does over say, 20 or 30 years.

There must be a miscommunication here. Let me explain. Apple is at the top of VTSAX, not because it has more employees (it doesn't), not because it has more revenue (it doesn't), and not because more people choose to invest in it.

Apple is at the top of VTSAX, because investors have voted with their wallets. They bid up the company's stock price higher, and higher, and higher, until it reached number one. More money is now invested in Apple stock than anywhere else. If you look at that and say:

"Well, I'd rather not have so much of my money in Apple. I don't think it's worth that much. I'm not comfortable with that. I'll tilt my portfolio so more of my money is in X"

There is hubris in that statement, because you think you know better than everyone else about how much of your money should be in Apple. By buying VTSAX, it's not that you're placing an oversize bet. You're simply placing the same bet everyone else is. And by definition, the companies which have the most bets on them, will be large cap.

[mrpercentage]

There is hubris in that statement, because you think you know better than everyone else about how much of your money should be in Apple. By buying VTSAX, it's not that you're placing an oversize bet. You're simply placing the same bet everyone else is. And by definition, the companies which have the most bets on them, will be large cap.

The problem with this statement is that the big-money hedge fund managers are focused on short term results to appease no brain shareholders. They push the market. If you are thinking long term you will vote differently with your wallet. I invest in things that have the ability to grow a lot or pay me a lot. i.e.--- small cap index and mid cap growth with a side of high yield dividend growth stocks. Only time will tell but I am completely confident that my money is better invested in these than nothing at all. The most important part of investing is investing. This is followed by capital preservation. Given that most of my money is in index and mutual funds I would say Im diversified (protected). I don't like investing in debt--especially 0% debt. Bonds are out for me. I would consider tax exempt municipal bonds if they yielded closer to 5%. I think Vanguards are more like 2.5% right now.

[faramund]

If you believe the strong version of the market efficiency theory, none of these matters, just throw same darts at a list of companies. But I don't believe it, according to studies: companies with high (but not the biggest) dividends, those with low PE ratios and those with high return to equity; seem to outperform in comparison to average.

So buying an index fund, is fine, that seems to outperform the average funds manager, but its not hard to do better - if you follow the above principles.

A couple of years ago, I read about the superior performance of index funds, so I bought a couple (a standard, and a high dividend version of them), so I could compare with how I'm doing, and over the years I have held them, I have outperformed them (which was really a surprise, I expected to be beaten, and consequently I was just going to buy index funds)

So, I think the morale of this story, is that if you don't want to analyse companies, just buy index funds, but if you don't, and you can avoid 'hype', you can do better.

[Scandium]

It isn't hubris, it is observation.   By buying VTSAX you are placing an oversize bet on the largest companies by market cap. That is a true statement and there is no secret claim beyond that.    Nothing wrong with that--as long as you want to bet on large cap companies. 

However, lots of people including genius mathematical types have demonstrated that historically (last 90 years or so) small caps have outperformed large caps. If you overweighted in large caps, you left money on the table.   Of course, these same genius mathematical types are careful to point out that large caps might grow faster than small caps for periods of time, like decades and vice versa. 

You keep saying overweight, but compared to what? You're the one saying to tilt your investments differently that the entire market, that's overweighting. Placing my money in the same manner as the market overall is the opposite. It ensure I will get the market return.

As for your other points, this article/talk from Bogle addresses it nicely.
http://www.vanguard.com/bogle_site/sp20020626.html

Yes you might have gotten higher returns using small cap over the last 100 years, but you would also have 10, or even 20! years of underperformance to large cap. Are you prepared to do that? As Bogle points out the majority of the small cap advantage occurs in the first 18 years, in the 1930s! The largest bull market in history, the 80s-90s, was mainly large companies. Would you have been comfortable sticking with a small cap overweighting during that period while you underperformed all these fools with their cap weighted index, for over a decade?

"just tilt to small for 1-2% extra per year" is appealing, and believe me I've looked into it and several times been close to putting 10% into a SCV ETF. But when I look at the record I just can't bring myself to do it. I'm not sure I'd stick to it, I'm not sure the advantage will continue, if there even is one, it seems too good to be true, and I like the beautiful simplicity of a single total market fund (well two, counting international)

[Telecaster]

"Well, I'd rather not have so much of my money in Apple. I don't think it's worth that much. I'm not comfortable with that. I'll tilt my portfolio so more of my money is in X"

There is hubris in that statement, because you think you know better than everyone else about how much of your money should be in Apple. By buying VTSAX, it's not that you're placing an oversize bet. You're simply placing the same bet everyone else is.

I'm not sure how you distilled that out of my posts.  Here's what I'm saying, and I'll be clear as possible:  First, remember the question was why own a mid-cap fund when you already own those stocks in VTSAX?  As it turns out, there are valid, smart reasons for doing so.   There is zero hubris in saying "I'd like to own VTSAX and some other fund in order to balance my portfolio."   

Because of the way the fund managers choose to set up VTSAX, it is weighted towards large cap stocks.   Nothing wrong with that.   However, the giants of portfolio theory like Fama and French (helpfully mentioned in the article you linked to), and others have shown that over long periods of time, small cap stocks perform better than large caps.  Quick refresher here:

https://www.bogleheads.org/wiki/Fama_and_French_three-factor_model

You can see that on the flip side, large caps tend to have less volatility.   A quote from the great William Bernstein is in order (emphasis his):   "...Asset allocation should be the major focus of your investment strategy, because it is the only factor affecting your investment risk and return that you can control." 

It is perfectly reasonable to conclude that VTSAX by itself is not an ideal assett allocation. 








Therefore,

[Interest Compound]

"Well, I'd rather not have so much of my money in Apple. I don't think it's worth that much. I'm not comfortable with that. I'll tilt my portfolio so more of my money is in X"

There is hubris in that statement, because you think you know better than everyone else about how much of your money should be in Apple. By buying VTSAX, it's not that you're placing an oversize bet. You're simply placing the same bet everyone else is.

I'm not sure how you distilled that out of my posts.  Here's what I'm saying, and I'll be clear as possible:  First, remember the question was why own a mid-cap fund when you already own those stocks in VTSAX?  As it turns out, there are valid, smart reasons for doing so.   There is zero hubris in saying "I'd like to own VTSAX and some other fund in order to balance my portfolio."   

Because of the way the fund managers choose to set up VTSAX, it is weighted towards large cap stocks.   Nothing wrong with that.   However, the giants of portfolio theory like Fama and French (helpfully mentioned in the article you linked to), and others have shown that over long periods of time, small cap stocks perform better than large caps.  Quick refresher here:

https://www.bogleheads.org/wiki/Fama_and_French_three-factor_model

You can see that on the flip side, large caps tend to have less volatility.   A quote from the great William Bernstein is in order (emphasis his):   "...Asset allocation should be the major focus of your investment strategy, because it is the only factor affecting your investment risk and return that you can control." 

It is perfectly reasonable to conclude that VTSAX by itself is not an ideal assett allocation. 








Therefore,

If you don't think there's hubris in that statement, that's ok. We don't have to agree :)

[Telecaster]

You keep saying overweight, but compared to what? You're the one saying to tilt your investments differently that the entire market, that's overweighting. Placing my money in the same manner as the market overall is the opposite. It ensure I will get the market return.

I hope I hit most of your points in my prior response, but I'll drill down on a couple.  I never said you should tilt your investments differently.  I'm saying there are valid reasons for doing so, and I did so in response to a question. 

The claim was the only reason to have different asset allocation than market-cap weights is hubris.  That claim is simply nonsense.   There are lots of good reasons to do so, including increased returns and reduced volatility.   Both of those are valuable things.   And those are not theoretical, that really is what happened in the past over very long periods of time. 

And by the way, lots of people here have real estate investments.  That is also a different asset allocation than market cap weight.  Intelligent diversification is a good thing to do.  I don't know why there is any controversy on this point.   

Yes you might have gotten higher returns using small cap over the last 100 years, but you would also have 10, or even 20! years of underperformance to large cap. Are you prepared to do that? As Bogle points out the majority of the small cap advantage occurs in the first 18 years, in the 1930s! The largest bull market in history, the 80s-90s, was mainly large companies. Would you have been comfortable sticking with a small cap overweighting during that period while you underperformed all these fools with their cap weighted index, for over a decade?

First, I never called anyone a fool for using a cap weighted index.   In the part of my post that you quoted I said "there's nothing wrong with that."  A couple times on this board noobs have asked for advice where to put their money, and I've said put it it VTSAX and everything will be fine.  You and Interest Compound seem to think I'm talking in code or something.  Nope.  When I say "there is nothing wrong with that" I really do mean "there is nothing wrong with that."   

Secondly,  while I appreciate your warning about underperformance,  in previous a post in this thread I noted trends can last for decades.  In fact, you quoted me where I said just that.  I'm glad we're in agreement on that point, even though you don't seem to think so.   

[beltim]

You keep saying overweight, but compared to what? You're the one saying to tilt your investments differently that the entire market, that's overweighting. Placing my money in the same manner as the market overall is the opposite. It ensure I will get the market return.

I hope I hit most of your points in my prior response, but I'll drill down on a couple.  I never said you should tilt your investments differently.  I'm saying there are valid reasons for doing so, and I did so in response to a question. 

The claim was the only reason to have different asset allocation than market-cap weights is hubris.  That claim is simply nonsense.   There are lots of good reasons to do so, including increased returns and reduced volatility.   Both of those are valuable things.   And those are not theoretical, that really is what happened in the past over very long periods of time. 

And by the way, lots of people here have real estate investments.  That is also a different asset allocation than market cap weight.  Intelligent diversification is a good thing to do.  I don't know why there is any controversy on this point.   

I completely agree with you.  I would also add that almost no one decides their bond allocation by the total outstanding bond issuance compared with total market capitalization of stocks.  Deciding that an investors stock:bonds allocation should be different than that is not hubris - indeed, it would be simply nonsense to use that to determine a proper allocation.

[Interest Compound]

It isn't hubris, it is observation.   By buying VTSAX you are placing an oversize bet on the largest companies by market cap. That is a true statement and there is no secret claim beyond that.    Nothing wrong with that--as long as you want to bet on large cap companies. 

However, lots of people including genius mathematical types have demonstrated that historically (last 90 years or so) small caps have outperformed large caps. If you overweighted in large caps, you left money on the table.   Of course, these same genius mathematical types are careful to point out that large caps might grow faster than small caps for periods of time, like decades and vice versa. 

You keep saying overweight, but compared to what? You're the one saying to tilt your investments differently that the entire market, that's overweighting. Placing my money in the same manner as the market overall is the opposite. It ensure I will get the market return.

As for your other points, this article/talk from Bogle addresses it nicely.
http://www.vanguard.com/bogle_site/sp20020626.html

Yes you might have gotten higher returns using small cap over the last 100 years, but you would also have 10, or even 20! years of underperformance to large cap. Are you prepared to do that? As Bogle points out the majority of the small cap advantage occurs in the first 18 years, in the 1930s! The largest bull market in history, the 80s-90s, was mainly large companies. Would you have been comfortable sticking with a small cap overweighting during that period while you underperformed all these fools with their cap weighted index, for over a decade?

Great article. It can last much longer than a decade. And due to Reversion To The Mean, jumping in at the top is the worst thing to do. Here's the relevant piece:

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Virtually the entire small-cap advantage took place during the first 18 years. Then large-cap (14.2% per year) dominates small-cap (11.7%) from 1945 through 1964; small-cap through 1968 (32.0% vs. 11.0%); large-cap through 1973 (2.5% vs. -10.8%). Then small-cap through 1983, large through 1990, and so on. On balance, these to-and-fro reversions have cancelled each other out, and since 1945 the returns of large-cap stocks and small-cap stocks have been virtually identical (12.7% vs. 13.3%). So ask yourself whether the evidence to justify the claim of small-cap superiority isn't too fragile a foundation on which to base a long-term strategy.

Then, ask yourself too if the data are accurate. Reconstructing past returns of market segments is no mean task, especially among small-cap stocks. Ask yourself whether transaction costs are accurately imputed (or even imputed at all), and whether survivor bias is present. Together, these issues raise questions about the validity of even the most responsibly-conducted of academic studies. And then, even if they're valid, ask yourself whether the game is worth the 40% increase in investment risk.

----------------------------------------------------------------------------

According to Morningstar, small caps have underperformed since 1956, and are still behind (ignore the blue line):

[Telecaster]

Then, ask yourself too if the data are accurate. Reconstructing past returns of market segments is no mean task, especially among small-cap stocks. Ask yourself whether transaction costs are accurately imputed (or even imputed at all), and whether survivor bias is present. Together, these issues raise questions about the validity of even the most responsibly-conducted of academic studies. And then, even if they're valid, ask yourself whether the game is worth the 40% increase in investment risk.

Question:  Do you always use strawmen, or just most of the time?