too much in international?

[linuxuser]

I will be 49 this year.

Ideally I want to hold about 45% in bonds.
As of today, that percentage is 42% (Vanguard Total Bond Market Index) in an TIRA.

I have 18.5% in VTIAX (Vanguard Total International Stock Index) and 5.5% in VFSVX (Vanguard FTSE All-World ex-US Small-Cap Index Fund).
The former is in a taxable account. The latter is in a ROTH IRA.

The remaining 35% is in Vanguard Total Stock Market Index.

Should I rebalance out of the international?
If so which?

[livesoft]

Can you summarize differently please? Like maybe on 4 lines that sums to 100%?

You do not have enough in international, nor in small-cap value, so sell some Total US Index. Buy low, sell high. What's high today?

[linuxuser]

Code: Select all

42% VBTLX (Vanguard Total Bond Market Index) - TIRA
18% VTIAX (Vanguard Total International Stock Index)
5% VFSVX (Vanguard FTSE All-World ex-US Small-Cap Index Fund) - ROTH
35% VTSAX Vanguard Total Stock Market Index


You are saying I don't have enough international and small-cap value?
But doesn't VTSAX cover the entire market including small-cap value?

[retiredjg]

It depends on how much of your stocks you want in international. And if you want an overweight of international small caps. At this point, you should have some kind of plan, even if it is now written down. What does your plan say?

Taxable
18.5% Total International

Roth IRA
5.5% International Small Cap

tIRA
42% Vanguard Total Bond Market Index

unknown locations
35% Vanguard Total Stock Market Index.

1) Right now, you have 41% of your stocks in international. Is that too high for you? Too low? Just right?

2) Do you want international small caps overweighted?

[livesoft]

Well, don't you want a small-cap and value-tilted slice-and-dice portfolio with half your equities in international funds and half of your equities in small-cap? That's a very common portfolio around here.

[linuxuser]

My goal is to keep it super simple with a three-fund portfolio. http://www.bogleheads.org/wiki/Three_fund_portfolio
However, I added a fourth fund the small-cap international to complement the Total International Stock Index.

[livesoft]

Whoops. My attempt at mind reading did not work, did it?

Nevertheless, a 3-fund portfolio can have different percentage breakdowns. What do YOU want? Why?

[linuxuser]

I want to be middle-of-the-road. Does that make sense?
It does look like my 41% of international equities isn't too far off Vanguard's suggestion of 40-60%.

[retiredjg]

I want to be middle-of-the-road. Does that make sense?
It does look like my 41% of international equities isn't too far off Vanguard's suggestion of 40-60%.

Vanguard's suggestion is 20% to 40% of stock, up to market weight for people who want to have market weight. Last I heard, that was about 58%, but I don't know what it is now. If you want middle of the road, I would suggest 30% of your stock be in international. That's how the target funds and the lifestrategy funds are set up.

I'm having trouble interpreting your desires. You say you want a basic 3 fund portfolio, but you have extra international small cap which is already included in the international index. So you overweighted the international small cap. There is nothing wrong with that, but it is not a basic portfolio and it is not a 3 fund portfolio. So I'm confused about what you want.

[nisiprius]

You hold:
Stocks:
--35% Total Stock (VTSMX)
--18% Total International Stock (VTIAX)
--5% FTSE All-World ex-US Small-Cap (VFSVX)
Bonds:
--42% bonds

Of your stock holdings:
--35/58 = 60% domestic
--23/58 = 40% international

It is my personal opinion that the big principles are "Time is your friend, impulse is your enemy," "Stay the course," and "The majesty of simplicity." Let me add my version of the first two: my wife's dad used to say, in a different context, "Don't fiddle, don't diddle."

So the question is: is there anything about this portfolio that means you need to do something?

1) You say "Ideally I want to hold about 45% in bonds." In my opinion, 42% *IS* "about 45% in bonds." So, no need to do anything there.

2) Your stocks are 40% international. Vanguard says "Although there is no right answer for all investors, empirical and practical considerations suggest a reasonable starting allocation to non-U.S. stocks of 20%, with an upper limit based on global market capitalization." Vanguard itself allocates about 30% in its all-in-one funds. In my opinion, 40% is close to 30%, and 40% is also close to "global market capitalization" (currently 50-55%). It is my personal opinion that 40% is indeed a "middle-of-the-road" allocation. (My own allocation is 20%; I'd call it "well within the beaten path, but not in the middle of the road.")

3) You want your portfolio to be simple. My personal opinion is that it IS simple.

4) OK, what you've done with small-caps is inconsistent and a little irrational, but it's only 5% and I would just... leave it alone on the grand principles of "Time is your friend, impulse is your enemy," "stay the course," and "don't fiddle, don't diddle." The reason why it's inconsistent is this. The great divide in this forum is between "total market" investors and those who "tilt." "Total market" means trying to match the whole market by capitalization weight. In your domestic stocks, you are doing this, but in your international stocks, you have a small-cap tilt.

My personal guess is that you set up this portfolio in 2009 or 2010. By jove, Sherlock, how do you deduce these things? You know my methods, Watson: apply them. VFSVX was launched in 4/2/2009. At that time, VGTSX was a patchwork quilt of old indices, and was missing small-caps (and Canada). In that time frame, a purist might well have wanted VFSVX to repair the omission of small-caps. On 9/24/2010 Vanguard announced that VGTSX would now track the MSCI ACWI ex-US IMI which is a total market index including mid-caps and small-caps (and Canada). Oh, Holmes, I thought for a moment you had done something clever, but now I see it is absurdly simple.

Since the total market includes large-caps, mid-caps, and small-caps, a total market fund will include large-caps, mid-caps, and small-caps. Since large-caps in fact represent the bulk of the market, total market funds will be dominated by large-caps anyway. In Ye Old Days... prior to the discovery of the (disputed) "small-company effect" in 1980, nobody cared and the S&P 500 was thought of as essentially the total market.

Total market purists now want the true total market, and since Total Stock's expense ratio is only 0.01% higher than 500 Index, I don't think there are any low-cost purists who recommend 500 Index any more.

"Tilters" give a variety of reasons for departing from the total market portfolio. (I put it in the same category as acupuncture: there might well be something to it, yes seriously--but I don't personally tilt and I don't personally use acupuncture). The commonest tilt is to add extra small-caps, which you've done in international.

Anyway, you have a small-cap tilt in your international but not in your domestic. Well, let me add another grand principle to the others I've enumerated. "A foolish consistency is the hobgoblin of little minds."--Emerson.

[retiredjg]

I'm going to pick a nit here. I think the difference could be important to this poster.

Vanguard says "Although there is no right answer for all investors, empirical and practical considerations suggest a reasonable starting allocation to non-U.S. stocks of 20%, with an upper limit based on global market capitalization."

The above is an exact quote from the executive summary of Vanguard's paper. However, the conclusion at the end of the paper is a little more specific and I believe is a truer representation of what Vanguard actually means. The whole conclusion needs to be read to get the meaning, not just the blue part.

Conclusion
In light of quantitative analysis and qualitative considerations, we have demonstrated that domestic investors should consider allocating part of their portfolios to international securities and that a 20% allocation may be a reasonable starting point. While finance theory dictates that an upper limit should be based on the global market capitalization for inter- national equities (currently approximately 55%), we have demonstrated that international allocations exceeding 40% have not historically added significant additional diversification benefits, particularly as costs are accounted for. For many investors, an allocation that falls between 20% and 40% should be considered reasonable, given the historical benefits of diversi- fication. Allocations closer to 40% may be suitable for those investors seeking to be closer to a market- proportional weighting or for those who are seeking potentially greater diversification benefits and are less concerned with the potential risks and higher costs. On the other hand, allocations closer to 20% may be viewed as offering a greater balance among the benefits of diversification, the risks of currency volatility and higher correlations, investor preferences, and costs.

[linuxuser]

My personal guess is that you set up this portfolio in 2009 or 2010. By jove, Sherlock, how do you deduce these things? You know my methods, Watson: apply them. VFSVX was launched in 4/2/2009. At that time, VGTSX was a patchwork quilt of old indices, and was missing small-caps (and Canada). In that time frame, a purist might well have wanted VFSVX to repair the omission of small-caps. On 9/24/2010 Vanguard announced that VGTSX would now track the MSCI ACWI ex-US IMI which is a total market index including mid-caps and small-caps (and Canada). Oh, Holmes, I thought for a moment you had done something clever, but now I see it is absurdly simple.

You are right. I initially purchased VFSVX because VGTSX was missing small-caps and Canada.

So I am tilted towards international small caps and international in general. Hmmmm.

[livesoft]

No, you are underweight international with respect to world market weights. Also int'l has not done as well as US in the past year. Those facts suggest to me that you should sell US equities if you wish to rebalance. But there is no way to predict the future either.

[nisiprius]

I'm going to pick a nit here. I think the difference could be important to this poster....

Sorry, I don't understand your point (but hopefully the original poster does). What are you saying? The more detailed statement in the conclusion is better because it spells out the personal factors that factor into deciding where you want to be in that 20%-to-55% range?

[Kevin M]

Should I rebalance out of the international?
If so which?

What was your target AA with respect to US/International when you set up your portfolio? Is there some reason you want to change it? Inclusion of small caps in Total International since you established your AA could be a valid reason to eliminate your small-cap international position if you don't want to tilt to small-caps.

I would think sometime over the last year would have been a time to be rebalancing into international, since it has been down about 20% compared to US, and at this point still is over the last year. That's what I have done. My target for US/International is 60/40, and my last rebalancing move (from US to international) to restore my AA was in May.

It looks to me like the last time to be rebalancing from international to US was maybe Oct or Nov of 2009, and almost certainly sometime between the beginning of 2006 and mid-2008 (maybe more than once), since those were times when international was outperforming US.

Kevin

[Aptenodytes]

After reading your post and the back and forth with the responses, my answer to your original question, is "no," don't change your AA. Although it is possible that there's an AA better suited to your circumstances, you aren't ready yet to make that choice. Before changing you'd want to sort things out more carefully. I'd stick with what you have for now.

[blevine]

I am very close to your age, had have about 2/3 US and 1/3 Int
My Int will likely trend upwards given new equity money has been going to a
50/50 global REIT fund in my 401k. I believe minimal diversification would
have mimimal impact so prefer to be on the higher end of the 20-40 recommendation.

[retiredjg]

I'm going to pick a nit here. I think the difference could be important to this poster....

Sorry, I don't understand your point (but hopefully the original poster does). What are you saying? The more detailed statement in the conclusion is better because it spells out the personal factors that factor into deciding where you want to be in that 20%-to-55% range?

Perhaps it is in the reading.

The way I read the conclusion is that their recommendation is 20% to 40%, but that using market weight as an upper limit is reasonable for people who desire market weights and are willing to pay the higher costs (even though they found no historical benefit).

The part you quoted could be inferred by some that Vanguard's recommendation is 20% to market weight. My belief is that is not their recommendation, but a reasonable range.

So I guess the nit I'm picking is the difference between "recommendation" and "reasonable range". The numbers are not the same and I thought the original poster might be interested in that distinction.

Not matter how it is read, the recommendation is not what the original poster thought.

[YDNAL]

Code: Select all

42% VBTLX (Vanguard Total Bond Market Index) - TIRA
18% VTIAX (Vanguard Total International Stock Index)
5% VFSVX (Vanguard FTSE All-World ex-US Small-Cap Index Fund) - ROTH
35% VTSAX Vanguard Total Stock Market Index

My goal is to keep it super simple with a three-fund portfolio. http://www.bogleheads.org/wiki/Three_fund_portfolio
However, I added a fourth fund the small-cap international to complement the Total International Stock Index.

It does look like my 41% of international equities isn't too far off Vanguard's suggestion of 40-60%.

If it walks like a duck and quacks like a duck.. it must be a duck.

1. You don't have a written plan, do you?

2. Do you or don't you want a 3-fund portfolio? If that is your goal, then execute.


1. The first stated goal is 55/45 Equity/Fixed split. The second goal should be US Equity/Foreign Equity split.
   
   
2. After that, just rebalance based on a pre-determined process -- I use 5% Bands.

[retiredjg]

You are right. I initially purchased VFSVX because VGTSX was missing small-caps and Canada.

I get it now. There was never an intent to overweight the international small caps. It happened by accident when Vanguard changed the index and you just didn't get around to fixing it till now. So it appears to me that what you really want is just the basic 3 fund portfolio.

I see several reasonable things to do.

1) Nothing. The important thing is your stock to bond ratio and you are close enough to your target that no rebalancing is really needed at this time.

2) Fix it back to a basic 3 fund portfolio, using the middle of the road number of 30% of stocks in international.

Taxable
18.5% Total International

Roth IRA
5.5% International Small Cap Total Stock Market

tIRA
42% Vanguard Total Bond Market Index

unknown locations
35% Vanguard Total Stock Market Index

Just selling the International Small Cap brings it back to basic 3 fund and 32% of stock in international (instead of 41%). That's close enough in my book. (Note that the numbers add up to 101% since your original numbers added up to 101%.) This "fixes" the international but leaves the stock to bond ratio as it is right now.

3) Some other alternative like "fixing" the international and also selling stocks to buy bonds to achieve 55/45.

[linuxuser]

Thank you all for the suggestions.

I am relieved that I am not too far off the track.

I am going to give it some thought about where I want my US/international allocation to be.
I probably will re-balance to a bit more bonds.

[livesoft]

But you do understand there are few ways to rebalance. For example, one can use new contributions. Or one can sell the asset that has done well (US large caps) in order to buy the asset that you need more of (bonds).

[linuxuser]

But you do understand there are few ways to rebalance. For example, one can use new contributions. Or one can sell the asset that has done well (US large caps) in order to buy the asset that you need more of (bonds).

Yes, I definitely do understand that.
Thanks again.