Author Topic: Vanguard Allocations  (Read 11025 times)

kcore2000

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Vanguard Allocations
« on: May 27, 2015, 09:39:53 AM »
Hey all, I've been doing some research, but want some other opinions. How does this allocation look for a Roth IRA with Vanguard?

20% ARTIX
60% VTSMX
20% POSKX

nereo

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Re: Vanguard Allocations
« Reply #1 on: May 27, 2015, 09:58:40 AM »
Like most of these questions, I'd start by asking: What is your Asset Allocation?

Specific to your question: VTSMX, while correctly called a "total market index" is dominated by the SP500 (I believe they make up ~70% of VTSMX).  So adding the POSKX just shifts your allocation into holding a lot more large companies. You may or may not want ~75% of your portfolio to be in the largest SP500 companies.  Plus, I don't like POSKX's fees (0.63%) - there are far cheaper options that do the same thing. VFIAX for example (0.05%).

ARTIX - ::shrug::  I know nothing about it other than it has higher fees (1.17%) and apparently is an international fund.  Vanguard has cheaper options to invest in international funds as well - the VGSTX for example (0.22%)

forummm

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Re: Vanguard Allocations
« Reply #2 on: May 27, 2015, 10:01:41 AM »
Why the 1st and 3rd funds? Just get Vanguard funds and you'll be better off. VTSMX/VTSAX is perfect. If you want international, add VTIAX. If you want bonds, add Total Bond. Done.

Or get Target Retirement Fund for the year you turn 65. Does it for you.

forummm

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Re: Vanguard Allocations
« Reply #3 on: May 27, 2015, 10:02:56 AM »
The non-Vanguard funds are crazy expensive. This could cost you hundreds of thousands of dollars over your lifetime.

https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-cost
https://investor.vanguard.com/mutual-funds/low-cost

Scandium

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Re: Vanguard Allocations
« Reply #4 on: May 27, 2015, 10:19:25 AM »
Yikes. POSKX is 0.63% and ARTIX is an ungodly 1.17%! No, nonono. VTSMX and VTSAX will be much better.

nereo

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Re: Vanguard Allocations
« Reply #5 on: May 27, 2015, 11:59:49 AM »
So if I have the 10K minimum, I should just put it ALL in Total Stock Market Index Fund Admiral Shares (VTSAX)?
You should come up with an Asset Allocation plan first.  Then follow it.

arebelspy

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Re: Vanguard Allocations
« Reply #6 on: May 27, 2015, 12:04:15 PM »
So if I have the 10K minimum, I should just put it ALL in Total Stock Market Index Fund Admiral Shares (VTSAX)?
You should come up with an Asset Allocation plan first.  Then follow it.

+1.

Look into creating an IPS:
https://www.bogleheads.org/wiki/Investment_policy_statement
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forummm

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Re: Vanguard Allocations
« Reply #7 on: May 27, 2015, 12:09:16 PM »
So if I have the 10K minimum, I should just put it ALL in Total Stock Market Index Fund Admiral Shares (VTSAX)?
You should come up with an Asset Allocation plan first.  Then follow it.

+1.

Look into creating an IPS:
https://www.bogleheads.org/wiki/Investment_policy_statement

+2. VTSAX is a great fund.

nereo

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Re: Vanguard Allocations
« Reply #8 on: May 27, 2015, 12:16:53 PM »
If you are unfamiliar with the concept of creating your Asset Allocation, it is basically the blueprints for how you want to invest your money.

For example, it might look like this;

a) I want to have ___% of my investments in equities, and ___% in bonds/cash/savings accounts (should total 100%)

b) Out of my equities, I want
_____% in a domestic large-cap index fund
_____% in a domestic small-cap index fund
_____% in an international large-cap index fund
_____% in emerging markets/small cap
note: these should total 100%

c) out of my bonds/cash savings accounts, I want:
____% in short term bonds/CDs
____% in long-term bonds/CDs
____% in cash/savings accounts.
note: these should total 100%


The above is just an example.  You can add REITs, real-estate, gold, foreign currencies, beanie-babies, or exotic cars to your asset allocation.
You can also get much more complex breaking down savings into tax-advantaged (IRA, 401(k)) vs taxable accounts - but I think that's overboard.

The important thing is that you have a plan FIRST. Once you have a plan it's easy to figure out where to put your next slug of cash... (e.g. if you want to be 95% equities /5% bonds/cash and you are 90/10, then you put new investments into equities).

My AA is very simple:  I want to be 95/5. In terms of equities, I want 75% to be in my SP500 index fund, and 25% to be in my international index fund.  The 5% I hold in my savings account until rates go >2%.  It's a very simple but extremely effective AA.

Also - +1 to creating the bogleheads IPS.  I didn't go that route, but I didn't know about it at the time.

forummm

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Re: Vanguard Allocations
« Reply #9 on: May 27, 2015, 12:27:07 PM »
Nereo's explanation of AA is good. For just $10k invested, VTSAX is a fine way to go as well. When you have more money you may want to do something more balanced. A lot of people here, even with a million bucks, just have 3 funds: VTSAX, VTIAX, and a bond fund like Total Bond. Ratios between those vary.

You could also just put it in the Vanguard Target Retirement Fund that corresponds with the year you turn 65 and then Vanguard will handle the AA for you. You could do that with your $10k now if desired.

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Re: Vanguard Allocations
« Reply #10 on: May 29, 2015, 04:52:48 AM »
One question. I purchased a house last summer as well, so how does what I put down for a down payment factor in to my Asset Allocation?
Probably without realizing it you just opened another can of worms here - whether or not your home and mortgage should be considered an 'Asset,' and if so how.

My personal thinking is this:  Decide the maximum amount of your net worth you would like your home to be.  Also, decide whether at your specific interest rate you are more comfortable investing extra income or paying down your home faster.
(e.g. "I never want my home to exceed ____% of my net worth.  I will aggressively pay down any debt that has more than a ____% interest rate.")

For example, I've decided that I never want the equity in my home to be >30% of my net worth.  However, I have also decided that I will not pay down any debts that are less than 4% faster than I have to, and opt to invest all additional funds.  Since my mortgage is at 3.1%, I never pay more than the minimum. 

brooklynguy

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Re: Vanguard Allocations
« Reply #11 on: May 29, 2015, 09:14:46 AM »
For example, I've decided that I never want the equity in my home to be >30% of my net worth.  However, I have also decided that I will not pay down any debts that are less than 4% faster than I have to, and opt to invest all additional funds.

How strictly will you follow this rule?  Will you "rebalance" to stay below your desired home equity level just as readily as you will rebalance among your paper assets?  What will you do if your paper assets depreciate, or your house appreciates or your mortgage balance gets paid down at a time when prevailing mortgage rates are above 4%, enough to cause your home equity to cross the 30% threshold?  Will you then sell?  What if no suitable homes are available for purchase in your area that will bring you back below the 30% threshold, and renting is no cheaper than buying in your area - will you move somewhere else?  Following this approach means your balance sheet could end up dictating where you live (which may or may not be what you want).

arebelspy

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Re: Vanguard Allocations
« Reply #12 on: May 29, 2015, 09:23:15 AM »
For example, I've decided that I never want the equity in my home to be >30% of my net worth.  However, I have also decided that I will not pay down any debts that are less than 4% faster than I have to, and opt to invest all additional funds.

How strictly will you follow this rule?  Will you "rebalance" to stay below your desired home equity level just as readily as you will rebalance among your paper assets?  What will you do if your paper assets depreciate, or your house appreciates or your mortgage balance gets paid down at a time when prevailing mortgage rates are above 4%, enough to cause your home equity to cross the 30% threshold?  Will you then sell?  What if no suitable homes are available for purchase in your area that will bring you back below the 30% threshold, and renting is no cheaper than buying in your area - will you move somewhere else?  Following this approach means your balance sheet could end up dictating where you live (which may or may not be what you want).

I would think rebalance in that case would mean pulling out equity via refinancing or a HELOC.
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nereo

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Re: Vanguard Allocations
« Reply #13 on: May 29, 2015, 09:31:17 AM »
true, and a good thing for anyone who's setting up their AA to think about.  For me personally, it would be very unlikely that my current residence will exceed 30% - every year it becomes a slightly lower amount of my NW (which is what I want); I'm investing faster than I am paying down principle.
More to the point, it's a guide for me for future housing decisions.  If I suddenly want a $1MM residence and I calculate that it will 70% of my net worth, my AA will force me to say "hold on a minute, this doesn't fit what I want to do - I should rethink this purchase".

For others who may be buying a home that hits the maximum they want of their NW (e.g. 30%), they should realize that they should be adding more money to their investments and not to renovations or rapid debt repayment.

Ultimately, I also believe that your AA should be firm guidelines.  Follow them until the rules don't make any sense anymore, and then revise them, carefully and analytically.   
Everyone's AA will be different - if mine doesn't make sense for you, alter it or throw it out the window - I was just giving it as an example for what you can do.

brooklynguy

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Re: Vanguard Allocations
« Reply #14 on: May 29, 2015, 09:33:53 AM »
I would think rebalance in that case would mean pulling out equity via refinancing or a HELOC.

Yeah but that's why I included the condition that prevailing mortgage rates are above 4%.  What if you end up with 35% home equity at a time when mortgage/HELOC rates are 8%?

nereo

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Re: Vanguard Allocations
« Reply #15 on: May 29, 2015, 09:37:39 AM »
For example, I've decided that I never want the equity in my home to be >30% of my net worth.  However, I have also decided that I will not pay down any debts that are less than 4% faster than I have to, and opt to invest all additional funds.

How strictly will you follow this rule?  Will you "rebalance" to stay below your desired home equity level just as readily as you will rebalance among your paper assets?  What will you do if your paper assets depreciate, or your house appreciates or your mortgage balance gets paid down at a time when prevailing mortgage rates are above 4%, enough to cause your home equity to cross the 30% threshold?  Will you then sell?  What if no suitable homes are available for purchase in your area that will bring you back below the 30% threshold, and renting is no cheaper than buying in your area - will you move somewhere else?  Following this approach means your balance sheet could end up dictating where you live (which may or may not be what you want).

I would think rebalance in that case would mean pulling out equity via refinancing or a HELOC.
I would rebalance either by piling more money towards investments, or by refinancing, or via a HELOC... it depends on how far out of whack I had become.  if my home was suddenly worth 32% of my NW I would just make investment decisions to try to bring it back under 30% (spend less, save more, etc).  If I suddenly found that my home was 90% of my net worth (maybe I had an incredibly expensive emergency or the economy completely imploded) then yes, I'd even consider downsizing or completely refinancing.
those possibilities seem incredibly remote to me, since I set up the cap before I purchased my home, and I did so anticipating that I would keep contributing to my other investments. 

brooklynguy

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Re: Vanguard Allocations
« Reply #16 on: May 29, 2015, 09:44:14 AM »
those possibilities seem incredibly remote to me, since I set up the cap before I purchased my home, and I did so anticipating that I would keep contributing to my other investments.

But think about how the scenario will differ in FIRE, when you are no longer piling on to your investments but drawing down on them, and, depending on market performance and your home's appreciation rate, your "home equity to net worth ratio" may be increasing instead of decreasing.

nereo

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Re: Vanguard Allocations
« Reply #17 on: May 29, 2015, 09:49:30 AM »
those possibilities seem incredibly remote to me, since I set up the cap before I purchased my home, and I did so anticipating that I would keep contributing to my other investments.

But think about how the scenario will differ in FIRE, when you are no longer piling on to your investments but drawing down on them, and, depending on market performance and your home's appreciation rate, your "home equity to net worth ratio" may be increasing instead of decreasing.
I have no intention of  having the same AA when I am fully retired.  My current AA is just for the wealth accumulation phase.  I'll draft up another one if/when I retire (or at least have expenses > salary).
Is this not what other people do?  It seems natural to me...

FWIW, my HELOC rate was locked in at 3.6% when I got my mortgage, and the limit is up to 80% of the equity of my home.  It makes utilizing it fairly straightforward (although I haven't yet).

brooklynguy

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Re: Vanguard Allocations
« Reply #18 on: May 29, 2015, 10:44:06 AM »
I have no intention of  having the same AA when I am fully retired.  My current AA is just for the wealth accumulation phase.  I'll draft up another one if/when I retire (or at least have expenses > salary).
Is this not what other people do?  It seems natural to me...

That is what many people seem to do, but personally I think it makes more sense to follow the same investment strategy both before and after retirement.  In both cases, the investment time horizon is the rest of your life, so why shift gears upon retirement?  Most of us are planning for multi-, multi-decade retirements, so I think the better approach is to pick an appropriately aggressive allocation with that (plus your personal risk tolerance) in mind, and stick with it forever.

The only exceptions would be if you've accumulated so much that you've already "won the game" and you decide to dial back the risk to a more conservative allocation (though my personal preference would be to follow the opposite path and continue to let it ride, especially given that knowing when you've won the game is easier said than done), or if you're going to use some type of cash/bond buffer system in retirement (which historically has been suboptimal but, depending on the individual, may provide psychological benefits that end up preventing you from self-sabotaging a nominally more optimal aggressive strategy).

nereo

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Re: Vanguard Allocations
« Reply #19 on: May 29, 2015, 10:57:06 AM »
I have no intention of  having the same AA when I am fully retired.  My current AA is just for the wealth accumulation phase.  I'll draft up another one if/when I retire (or at least have expenses > salary).
Is this not what other people do?  It seems natural to me...

That is what many people seem to do, but personally I think it makes more sense to follow the same investment strategy both before and after retirement.  In both cases, the investment time horizon is the rest of your life, so why shift gears upon retirement?  Most of us are planning for multi-, multi-decade retirements, so I think the better approach is to pick an appropriately aggressive allocation with that (plus your personal risk tolerance) in mind, and stick with it forever.

Well, you've given me some interesting food for thought.  Maybe my AA won't change later on - I make a point of asking myself every few years if my strategy still fits with my life goals, and I'm not opposed to updating my AA later on (although I am mindful not to do it just to chase whatever the 'hot market' may be).

A few reasons we may alter our plan slightly post ER is that we've considered either giving up our permanent residence entirely or renting it out while traveling/renting for very long stretches.  That could alter the amount held in real-estate.  Also, I've liked the idea of having an extra year or two's worth of bonds/cash - admitting fully that it's purely for psychological comfort and would be slightly sub-optimal over the long term.  Given that we may be living in at least two countries (probably 3) we may shift some of our assets to various currencies so that we don't have to spend as much time thinking about the conversion rate.  I still need to think that through though (but it's several years away at the earliest).

By and large though, I anticipate my AA in retirement to be fairly similar - overwhelmingly equities, with a sprinkling of bonds for mental security.  Maybe real-estate (we will see how we like land-lording when we move from our current location in 2-3 years (and rent it out) - maybe we will love it and double-down on rental properties, maybe we will hate it and decide just to sell it and put all the money into our index fund).  I don't have all the answers.

arebelspy

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Re: Vanguard Allocations
« Reply #20 on: May 29, 2015, 12:19:04 PM »
I would think rebalance in that case would mean pulling out equity via refinancing or a HELOC.

Yeah but that's why I included the condition that prevailing mortgage rates are above 4%.  What if you end up with 35% home equity at a time when mortgage/HELOC rates are 8%?

This is why I wouldn't have home equity as percent of portfolio in my AA.

It's absolutely counted in net worth, but not in investable portfolio.  I would, however, have triggers based on interest rates to take out mortgages or pay off mortgages depending on the current rate.
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forummm

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Re: Vanguard Allocations
« Reply #21 on: May 29, 2015, 12:32:10 PM »
Personally, home equity as part of an AA doesn't make sense to me. Among other issues, there is too much transaction cost. Getting an appraisal, taking out a higher interest loan (HELOC > primary), paying any loan fees, etc. It could be $1000. This seems like a pretty big expense. And then you're increasing your leverage at the same time, when it may not even make sense from a market price perspective. Also, generally people do rebalancing by selling some of their portfolio that grows too much. You just can't sell 10% of your house. I get that you're compensating for that by taking on leveraged assets. But this seems to increase your risk--generally the opposite goal with traditional AA rebalancing.

What I care about is return-yielding assets. A primary home is generally a 0% real return asset. It's a way to make my living expenses cheaper. I don't include it in my NW.

brooklynguy

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Re: Vanguard Allocations
« Reply #22 on: May 29, 2015, 12:40:28 PM »
This is why I wouldn't have home equity as percent of portfolio in my AA.

It's absolutely counted in net worth, but not in investable portfolio.  I would, however, have triggers based on interest rates to take out mortgages or pay off mortgages depending on the current rate.

Yeah, I take the same approach, except whether or not I include home equity in net worth would depend on the purpose of calculating net worth - because I have no intention on ever selling my home, there's normally not really any reason to determine my net worth including home equity (or to determine my net worth at all, for that matter).

In my view, your personal residence should not be treated as an investment and therefore should not be counted when determining your investment asset allocation.

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Re: Vanguard Allocations
« Reply #23 on: May 29, 2015, 01:11:42 PM »
Personally, home equity as part of an AA doesn't make sense to me. Among other issues, there is too much transaction cost. Getting an appraisal, taking out a higher interest loan (HELOC > primary), paying any loan fees, etc. It could be $1000. This seems like a pretty big expense. And then you're increasing your leverage at the same time, when it may not even make sense from a market price perspective. Also, generally people do rebalancing by selling some of their portfolio that grows too much. You just can't sell 10% of your house. I get that you're compensating for that by taking on leveraged assets. But this seems to increase your risk--generally the opposite goal with traditional AA rebalancing.

What I care about is return-yielding assets. A primary home is generally a 0% real return asset. It's a way to make my living expenses cheaper. I don't include it in my NW.
I thought part of the reason to consider home equity is so that you don't have too many of your assets in one market sector at one time.  For instance, if 20% of my Net Worth is tied up in real estate (primary and investment properties), I don't want to ALSO invest in REITs.  Isn't it so that you can diversify? 

forummm

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Re: Vanguard Allocations
« Reply #24 on: May 29, 2015, 01:26:04 PM »
Personally, home equity as part of an AA doesn't make sense to me. Among other issues, there is too much transaction cost. Getting an appraisal, taking out a higher interest loan (HELOC > primary), paying any loan fees, etc. It could be $1000. This seems like a pretty big expense. And then you're increasing your leverage at the same time, when it may not even make sense from a market price perspective. Also, generally people do rebalancing by selling some of their portfolio that grows too much. You just can't sell 10% of your house. I get that you're compensating for that by taking on leveraged assets. But this seems to increase your risk--generally the opposite goal with traditional AA rebalancing.

What I care about is return-yielding assets. A primary home is generally a 0% real return asset. It's a way to make my living expenses cheaper. I don't include it in my NW.
I thought part of the reason to consider home equity is so that you don't have too many of your assets in one market sector at one time.  For instance, if 20% of my Net Worth is tied up in real estate (primary and investment properties), I don't want to ALSO invest in REITs.  Isn't it so that you can diversify? 

I can see the scenario you mention being of some use. But in general, I'm not sure it's that big of a factor. By owning a house, you have full risk to its value, regardless of how much the loan balance is. So if you have an expensive house, you are more vulnerable to short term fluctuations in your local real estate market in the event you want to sell, regardless of your loan balance. An REIT index fund is nationally representative so you would only be subject to broad market conditions like interest rates and national trends in real estate. REITs are more concerned with the rental market (more the price to use, and less the price to purchase) and have a high percent of non-residential properties (whether renting storage space, office space, retail space, etc). So there's some correlation, but it's not the same as what houses on your block in your city in your state are being purchased for.

In general I think having the market cap of REITs (it's something like 4% of VTSAX) is a good approach. If you want to bump it up, that's OK too, but I wouldn't go beyond 10% personally, regardless of whether I owned or rented my residence.

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Re: Vanguard Allocations
« Reply #25 on: May 29, 2015, 02:30:34 PM »
I thought part of the reason to consider home equity is so that you don't have too many of your assets in one market sector at one time.  For instance, if 20% of my Net Worth is tied up in real estate (primary and investment properties), I don't want to ALSO invest in REITs.  Isn't it so that you can diversify?

Taking this approach is treating your residence as one of your investments, which is fine if that's what you want to do.  But if you're not treating your residence as part of your investable portfolio, then it's not one of the "eggs" that needs to be diversified into a different "basket."

Personally, I view my home equity as something akin to cash that's been locked up in a safe to which I do not have the key (which isn't a perfect analogy, because I can (and will) "access" the equity by borrowing against it if prevailing mortgage/HELOC rates are low enough, but we can ignore that detail for this purpose).  Because I can't access that locked up cash, it does me no good, so I don't count it towards my net worth, and certainly don't count it for purposes of determining my investment portfolio asset allocation.  Of course, in reality I can break open that safe (sell the house), and I view that as an option of last resort if the shit really hits the fan (but in that case my home equity may very well have also shrunk or disappeared).  So I totally write off my home equity, except to mentally categorize it as part of my unitemized safety margin.

If you intend to sell your house and put the proceeds to productive use, that's a different story.

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Re: Vanguard Allocations
« Reply #26 on: May 30, 2015, 10:18:24 AM »
I don't have a problem with the 20% allocation to PRIMECAP. They're a solid firm and have a good track record. Not familiar with the Artisan fund, but the ER seems quite high.

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Re: Vanguard Allocations
« Reply #27 on: June 01, 2015, 06:58:53 AM »
Subbing

apples2apples

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Re: Vanguard Allocations
« Reply #28 on: June 02, 2015, 08:18:27 AM »
I don't have a problem with the 20% allocation to PRIMECAP. They're a solid firm and have a good track record. Not familiar with the Artisan fund, but the ER seems quite high.

I second the Primecap fund (Although POGRX has outperformed the stock fund).  They are top notch, and there is a reason all their Vanguard funds they manage have been closed for the majority of their existence.

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Re: Vanguard Allocations
« Reply #29 on: June 15, 2015, 02:18:35 PM »

I can see the scenario you mention being of some use. But in general, I'm not sure it's that big of a factor. By owning a house, you have full risk to its value, regardless of how much the loan balance is. So if you have an expensive house, you are more vulnerable to short term fluctuations in your local real estate market in the event you want to sell, regardless of your loan balance. An REIT index fund is nationally representative so you would only be subject to broad market conditions like interest rates and national trends in real estate. REITs are more concerned with the rental market (more the price to use, and less the price to purchase) and have a high percent of non-residential properties (whether renting storage space, office space, retail space, etc). So there's some correlation, but it's not the same as what houses on your block in your city in your state are being purchased for.

In general I think having the market cap of REITs (it's something like 4% of VTSAX) is a good approach. If you want to bump it up, that's OK too, but I wouldn't go beyond 10% personally, regardless of whether I owned or rented my residence.
Forummm, thanks for this.  I didn't know much of the info on the REIT, so I appreciate the schooling.  :)