Asset Allocation

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Asset Allocation

Postby lloydbraun » Thu Dec 20, 2012 8:28 pm

I've posed a similar question before but I just wanted to ask if others believe my new asset allocation is a good idea.

I am a 33 year old Prof. with a 403 (B) through TIAA-CREF but I have access to several Vanguard Funds (500 Index, Total Bond Market Index, Total Int'l Market Index, Extended Market Index). We have other fund options but none of them touch the Vanguard ERs. I have an 8% match if I put in 4% and I've been contributing since I became eligible about a year and a half ago.

Initially I had the following allocation:

25% Vanguard 500 (.04 ER)
25% Extended Market (.12 ER)
30% Total Int'l Stock Market (.13 ER)
20% Total Bond Market Index (.10 ER

After reading Bogle's updated Common Sense on Mutual Funds alongside my daily econ nerd readings (Financial Times, Economist, anything else I have time to look at!) I've decided to move out of both the Total Int'l Stock Market Index and the Total Bond Market Index and to just focus on mirroring the entire US Stock Market, at least within my 403 (B). So I've decided to switch to the following to stick with for the next 20 years or so:

75% Vanguard 500 (.04 ER)
25% Extended Market (.12)

My thought process here is that bond yields aren't great right now and coupled with the probability of interest rate increases sometime in the middle part of the decade, this isn't the best time for a person with a 40 year investment horizon to invest in a bond fund. If I were older I'd be for it but I just don't see the need right now when I should be focusing on building as much wealth as possible until middle age. With regard to the Int'l Stock Market, I agree with Bogle's recent comments that the US is a better bet than mature developed economies like those in the EU and Japan and that foreign exposure can be limited to the Emerging Market Index. Unfortunately my plan does not include any Emerging Market Index Funds so in a few years when I can save some additional money, I can invest in Vanguard's Emerging Market Index fund in a Roth IRA but until then I won't worry about it.

So, does my reasoning sound good?
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Re: Asset Allocation

Postby dbr » Thu Dec 20, 2012 8:40 pm

I would think that if 80/20 seemed right up to now that your estimate of current prospects for bonds would not change that.

I also suspect that Benjamin Graham, in recommending stock allocations stay between 25% and 75%, was probably a wise man.

I would also wonder what the reason would be for avoiding international diversification. One would think there would need to be an awfully strong specific argument that isn't on the horizon to justify that.
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Re: Asset Allocation

Postby livesoft » Thu Dec 20, 2012 8:40 pm

Nope, doesn't sound good to me.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Asset Allocation

Postby athrone » Thu Dec 20, 2012 8:43 pm

100% U.S. Stock Market? What could possibly go wrong.
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Improving a very good plan ?

Postby Taylor Larimore » Thu Dec 20, 2012 8:45 pm

Hi Lloyd:

I like your current portfolio very much.

The enemy of a good plan is the dream of a perfect plan. -- Jack Bogle


Best wishes.
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Re: Asset Allocation

Postby lloydbraun » Thu Dec 20, 2012 8:51 pm

My thought process with regard to avoiding int'l diversification is that mature economies will likely tend to underperform the US in the long run, not that returns are necessarily based on economic growth, and that mature markets will tend to duplicate the type of stocks/companies the US market indexes hold. I'm not against int'l diversification, I'm just hoping to eventually limit it to 10-15% of my allocation but as Emerging Market funds and through a Roth IRA. My bond issue is more that I'd like to just keep contributing to my 403 (B) and forget about it for the next 20 years so I'm not as concerned about having a bond fund to moderate my stock allocation until I'm in my 50s. I'm not trying to be combative here, just answering the question. I appreciate the feedback.
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Re: Asset Allocation

Postby athrone » Thu Dec 20, 2012 8:54 pm

lloydbraun wrote:My thought process with regard to avoiding int'l diversification is that mature economies will likely tend to underperform the US in the long run


Did you know that the US underperformed international markets in 3 out of the last 4 decades?
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Re: Asset Allocation

Postby livesoft » Thu Dec 20, 2012 8:56 pm

... and so far this year, the US underperformed Europe?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Asset Allocation

Postby lloydbraun » Thu Dec 20, 2012 8:58 pm

Which benchmarks are you comparing? Is that the case after fees? I'd love to read something on it so if you know where I can look would you please share? Thanks!
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Re: Asset Allocation

Postby livesoft » Thu Dec 20, 2012 9:00 pm

I don't compare benchmarks, but I do compare funds that anybody can purchase. I use www.morningstar.com for most comparisons.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Asset Allocation

Postby lloydbraun » Thu Dec 20, 2012 9:01 pm

I appreciate all of the feedback so far. I do want to note that I'm not trying to build the perfect portfolio, just the simplest that will let me sleep at night and not want to adjust anything. It may be impossible but my goal is to set up an allocation that I won't change but it's not set in stone and I am definitely open to keeping my current allocation. I just want the most opinions and information as possible. Thanks again. I should also note that like Bogle I'm pretty bullish on the US vs. the rest of the developed world, at least in the ways in which the Int'l Stock Index is weighted, so all things being equal I'm more comfortable in my low cost US funds.
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Re: Asset Allocation

Postby JW Nearly Retired » Thu Dec 20, 2012 9:03 pm

lloydbraun wrote: So, does my reasoning sound good?

Reasoning is futile. You are making a sector bet on US stocks based on some "thought process" as to what you believe is likely in the future, i.e. making some wild ass guess. Most of us have done that sort of thing before we went to indexing. Finally, one day we step back and admit we have no idea what we are doing.

Keep some international.
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International diversification ?

Postby Taylor Larimore » Thu Dec 20, 2012 9:22 pm

Hi again:

I suspect "A 39 year old Prof" would prefer reliable research to the personal opinion of an unknown internet dweller. Accordingly, I offer a link to this Vanguard study which concluded:

• International stocks should be included in a domestic portfolio.
• Empirical and practical issues suggest a starting allocation to international
stocks of 20%, with an upper limit based on the proportion of the global
market they represent.


International Equity: Considerations and Recommendations

Best wishes.
Taylor
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Re: Asset Allocation

Postby lloydbraun » Thu Dec 20, 2012 9:35 pm

Thanks Taylor! I'm actually only 33, even if I look closer to 39 when I gain weight around the holidays, but you're 100% correct about wanting concrete evidence (my job depends on citing professional evidence so you can say I have an obsession with it). I enjoyed the article you linked and it makes a solid argument for 20-40% int'l exposure. I'll stick with my int'l exposure as all of you are suggesting. I'm glad I posted this question, I received the extra info I was looking for.
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Re: Asset Allocation

Postby midareff » Fri Dec 21, 2012 4:39 pm

livesoft wrote:Nope, doesn't sound good to me.


+1 .. when (not if) the market tanks the next 35% or 40% or so you are going to want that solid bond allocation to use to rebalance (aka: sell high and buy low) your portfolio. Without it you are simply stuck down 35% or 40% or whatever the number turns out to be. Reaching for return, reaching for yield, throw out the risks and full speed ahead will not get you to the finish line faster than the tried and proven methods of a sensible equity/bond AA.
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Re: Improving a very good plan ?

Postby midareff » Fri Dec 21, 2012 4:40 pm

Taylor Larimore wrote:Hi Lloyd:

I like your current portfolio very much.

The enemy of a good plan is the dream of a perfect plan. -- Jack Bogle


Best wishes.
Taylor



Truer words were never spoken.
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Re: Asset Allocation

Postby ruralavalon » Fri Dec 21, 2012 4:50 pm

Your current allocation is better, in my opinion.

By the way look at all accounts together as a single unified portfolio, and not just at one account in isolation.
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Re: Asset Allocation

Postby lloydbraun » Fri Dec 21, 2012 5:23 pm

[quote="ruralavalon"]Your current allocation is better, in my opinion.

By the way look at all accounts together as a single unified portfolio, and not just at one account in isolation.[/quote]

Good advice. I do look at the accounts as one unified portfolio but I also include social security in that portfolio (this site rightly bars discussions of politics related to discussing the future of social security but let's just say that I'm not in the panic group about it). So in the future I would view my portfolio as a combination of my 403(B), Roth IRA (when I start investing in it in 2-3 years), and Social Security. I'm not sure if I would include a house in that group as I don't currently own one and when I do I plan to view it more as a place to live (at best perhaps as a store of value) rather than as an investment.
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Re: Asset Allocation

Postby ourbrooks » Fri Dec 21, 2012 7:05 pm

midareff wrote:
livesoft wrote:Nope, doesn't sound good to me.


+1 .. when (not if) the market tanks the next 35% or 40% or so you are going to want that solid bond allocation to use to rebalance (aka: sell high and buy low) your portfolio. Without it you are simply stuck down 35% or 40% or whatever the number turns out to be. Reaching for return, reaching for yield, throw out the risks and full speed ahead will not get you to the finish line faster than the tried and proven methods of a sensible equity/bond AA.


Actually, the expected long term yield of a portfolio with 40% bonds is less than the expected value of a portfolio which is 80% or better in stocks. Bonds yield less than stocks and rebalancing doesn't make up for it. Think of all of the times when the market is up 40%, but you're up only 20% because your bonds are holding you back; worse still, if you rebalance, you might end up selling stocks which are still going up further. Reblancing is a two edged sword; it can end up losing you money as much as it gains you money.

The best that can be said for a portfolio with a large bond holding is that it is less volatile than one which is all stocks. The price you pay, invariably, for lower volatility is a lower expected returns. If you're concerned about needing to take money out of the portfolio on short notice, then the reduction in volatility risk may worth it. The real reason for rebalancing is to keep the percentage of bonds as high as you want it to be; without rebalancing, over time, your portfolio would gradually gain more stocks, since stocks have a higher returns than bonds.
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Re: Asset Allocation

Postby Johm221122 » Fri Dec 21, 2012 10:44 pm

lloydbraun wrote:I've posed a similar question before but I just wanted to ask if others believe my new asset allocation is a good idea.

I am a 33 year old Prof. with a 403 (B) through TIAA-CREF but I have access to several Vanguard Funds (500 Index, Total Bond Market Index, Total Int'l Market Index, Extended Market Index). We have other fund options but none of them touch the Vanguard ERs. I have an 8% match if I put in 4% and I've been contributing since I became eligible about a year and a half ago.

Initially I had the following allocation:

25% Vanguard 500 (.04 ER)
25% Extended Market (.12 ER)
30% Total Int'l Stock Market (.13 ER)
20% Total Bond Market Index (.10 ER

After reading Bogle's updated Common Sense on Mutual Funds alongside my daily econ nerd readings (Financial Times, Economist, anything else I have time to look at!) I've decided to move out of both the Total Int'l Stock Market Index and the Total Bond Market Index and to just focus on mirroring the entire US Stock Market, at least within my 403 (B). So I've decided to switch to the following to stick with for the next 20 years or so:

75% Vanguard 500 (.04 ER)
25% Extended Market (.12)

My thought process here is that bond yields aren't great right now and coupled with the probability of interest rate increases sometime in the middle part of the decade, this isn't the best time for a person with a 40 year investment horizon to invest in a bond fund. If I were older I'd be for it but I just don't see the need right now when I should be focusing on building as much wealth as possible until middle age. With regard to the Int'l Stock Market, I agree with Bogle's recent comments that the US is a better bet than mature developed economies like those in the EU and Japan and that foreign exposure can be limited to the Emerging Market Index. Unfortunately my plan does not include any Emerging Market Index Funds so in a few years when I can save some additional money, I can invest in Vanguard's Emerging Market Index fund in a Roth IRA but until then I won't worry about it.

So, does my reasoning sound good?

I would stick with first portfolio
But when I created my investment plan,I set my change in AA buy size in portfolio (200k 400k 800k and retirement) not buy years or date.You can't control what markets will do 19 years from now,so to me I don't want to Change AA by date but milestones. After all is your goal not to reach your number.
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Re: Asset Allocation

Postby letsgobobby » Fri Dec 21, 2012 11:09 pm

A 33 yo tenured professor eligible for SS can afford to take a lot of risk. I still think 100% stocks is highly irrational. I would focus more on your savings rate and less on taking inordinate investment risk.
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Re: Asset Allocation

Postby nedsaid » Sat Dec 22, 2012 8:59 pm

I like your first portfolio a whole lot. Why did you change what was a great portfolio?

100% stock portfolio and a stock portfolio at 100% USA is a foolish bet in my opinion. Imagine if you were a 33 year old professor in Japan in the late 1980s and decided on a 100% Japanese stock portfolio. You would have regretted that decision. The Japanese version of John Bogle would have assured you that you already had international diversification because many of the big Japanese companies were multi-national.

It is a terrible idea to have all your investments in one country, even if it is the good old USA.

What you had in the first place was terrific. Why change what was so great?
A fool and his money are good for business.
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Re: Asset Allocation

Postby CaliJim » Sat Dec 22, 2012 9:12 pm

Benjamin Graham wrote that most investors should stay between 75/25 and 25/75, and your current AA is pretty close to this. I think always having a decent chunk in bonds is a good idea. It gives you the ability to rebalance when stocks go on sale, and they occasionally do.
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Re: Asset Allocation

Postby wesleymouch » Sun Dec 23, 2012 8:19 am

Developed world exUS stock markets are among the cheapest including Japan and Europe. They are in fact cheaper than Emerging markets. Make sure to include them in your allocation. Many emerging markets including Colombia, Malaysia are quite overvalued
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Re: Asset Allocation

Postby Call_Me_Op » Sun Dec 23, 2012 9:23 am

lloydbraun wrote:My thought process with regard to avoiding int'l diversification is that mature economies will likely tend to underperform the US in the long run, not that returns are necessarily based on economic growth, and that mature markets will tend to duplicate the type of stocks/companies the US market indexes hold.


The best economists in the world cannot make accurate predictions, and yet you are basing your asset allocation on your own economic predictions?
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Re: Asset Allocation

Postby STC » Sun Dec 23, 2012 9:49 am

The first portfolio you posted is superior. Especially if you rebalance.
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Re: Asset Allocation

Postby lloydbraun » Tue Sep 17, 2013 12:24 pm

Just an update. I actually did go 100% in the stock market for 9 months but in re-reading books and looking more at the solid advice provided here I have decided to just go 25% in the Vanguard 500, 25% in the Vanguard Extended Market, 25% in the Vanguard Total Int'l Stock, and 25% in Total Bond Fund. It's an allocation with which I am comfortable and should be for the next 5-10 years. I'm coming up on the 2 year anniversary of contributing and getting the match and have gone from zero to almost 16K, which isn't a lot but for two years of contributions that will hopefully be the first of 40 years of contributions I feel great about it. I am aware that I've been EXTREMELY fortunate that the market has gone way up, which is why I rebalanced to 75% stocks and 25% bonds and have just set my account on autopilot to rebalance once a year. I've been good at not tinkering with the account, except for the recent rebalance. Thanks again for last year's advice even if I implemented it a year late. By the way, my total expense ratio is .095. Thank you Vanguard!
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Re: Asset Allocation

Postby Bogle101 » Tue Sep 17, 2013 1:39 pm

lloydbraun wrote:Initially I had the following allocation:

25% Vanguard 500 (.04 ER)
25% Extended Market (.12 ER)
30% Total Int'l Stock Market (.13 ER)
20% Total Bond Market Index (.10 ER



That is almost identical to my current holdings in my 401(k) at work. Except I have 15% in Total Bond, 30% in Extended Market and instead of Vanguard 500 I am offered Vanguand Institutional Index. I wouldn't change your holdings to mirror just the US market.
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Re: Asset Allocation

Postby lloydbraun » Tue Sep 17, 2013 3:20 pm

Thanks for the note. I actually am offered the Vanguard Institutional Index as well at the .04 expense ratio. Instead of trying to mirror the market I just figured I would put 25% in the Vanguard Institutional and 25% in the Extended Market and just be happy with the results. I thought about doing 30-20 or 35-15 but I don't feel like trying to constantly re-create the total stock market and I think it's better to just choose an allocation, stick with it, and focus my attention on work and family.
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Re: Asset Allocation

Postby NOLA » Tue Sep 17, 2013 4:13 pm

Thanks for updating. Always good to see what happens in "real life".
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Re: Asset Allocation

Postby redhounds » Tue Sep 17, 2013 9:20 pm

lloydbraun wrote:I think it's better to just choose an allocation, stick with it, and focus my attention on work and family.


Words to live by. :sharebeer
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Re: Asset Allocation

Postby Dandy » Wed Sep 18, 2013 7:49 am

I'm not in favor of having 100% equities. I feel even 80% is much too high for almost anyone. Equities have been on a roll the last few years and bonds are pretty scary now. Fixed income provides some portfolio stability and some dry powder to rebalance when equities plunge. I like your former allocation better than the one proposed.

I would caution you not to change planned allocations. You will find many articles and "new" ideas about how to invest and they will often make a lot of sense. If you start acting on these you will never have a real plan only one that mirrors the latest good idea you have heard.

There was nothing wrong with your original plan if it fits your age and risk tolerance. If you are overly concerned about bonds/funds look to other fixed income alternatives for some of that allocation e.g. CDs, Ibonds, EE bonds, etc. But, it is probably best just to follow your original plan given the many years to retirement.
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Re: Asset Allocation

Postby staythecourse » Wed Sep 18, 2013 10:08 am

Do as you want as it is your money, but do agree with others that I see some glaring weakness in your plan. Unlike others a difference of 80/20 vs. 100/0 is not much of a difference after 20+ yrs. IF you stay the course. So the big IF is purely behavioral. The big iF then is an answer only you can answer.

The problem with your plan is NOT the 100/0 plan, but the fact it is 100% bet on one country. Ask your mirrored self if your were in Japan just 20 yrs. ago and came up with the same idea how it would have worked? Taking one too much single company risk or country risk is a leading cause of "what was your biggest financial mistake" when asked to experienced investors. The saddest thing is that is the EASIEST of all risk to eliminate.

My advice is to diversify among countries. Anywhere between 50/50- 80/20 would seem reasonable of U.S/ ex U.S.

BTW, I agree I like your current allocation better.

Good luck.
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Re: Asset Allocation

Postby lloydbraun » Wed Sep 18, 2013 11:38 am

Sorry, I was unclear in my update. Over the past 9 months I didn't go 100% in the U.S. market. I was at 40% Vanguard Institutional, 30% Vanguard Extended Market, and 30% Vanguard Total International Stock. Although I had gotten rid of my bond mix I had taken the advice to diversify internationally. Now I've just decided that rather than have no exposure to the bond market, I'm more comfortable moving forward with a permanent standard 4 fund, including Vanguard's TBM, retirement portfolio with a 75%/25% stock/bond allocation and, within my 75% stocks, a 2/1 national/international allocation. My only quasi loose end as I now see it is that my U.S. stock allocation, which is 50% of my retirement portfolio, is divided equally between the Institutional index and the extended market index meaning that I am overweighting small and mid caps. I don't see that as that much of a problem but that is probably the only area where I would consider a change in my allocation in coming years if I am convinced that it's best to try to create a replica of the total stock market using these two funds. I really am committed to now just staying the course and keeping a 75%/25% stock/bond allocation into my early 40s, at which point I'll probably move to 70/30.
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