Asset Allocation

[lloydbraun]

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?

[dbr]

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.

[livesoft]

Nope, doesn't sound good to me.

[athrone]

100% U.S. Stock Market? What could possibly go wrong.

[Taylor Larimore]

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

[lloydbraun]

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.

[athrone]

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?

[livesoft]

... and so far this year, the US underperformed Europe?

[lloydbraun]

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!

[livesoft]

I don't compare benchmarks, but I do compare funds that anybody can purchase. I use www.morningstar.com for most comparisons.

[lloydbraun]

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.

[JW Nearly Retired]

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.
JW

[Taylor Larimore]

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

[lloydbraun]

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.

[midareff]

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.

[midareff]

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.

[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.

[lloydbraun]

[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.

[ourbrooks]

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.

[Johm221122]

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.
john

[letsgobobby]

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.

[nedsaid]

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?

[CaliJim]

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.

[wesleymouch]

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

[Call_Me_Op]

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?

[STC]

The first portfolio you posted is superior. Especially if you rebalance.