Thinking of switching from VG 2040 to this AA, Good idea?

[Yanksin2013]

I currently have all of my retirement funds in the 2040 vanguard target date fund, I was thinking of switching it to the following
VTSMX-20%
VIVAX-10%
VISVX-10%

VGSIX-10%
VBMFX-10%

VGTSX-20%
VTRIX-10%
VSS-10%

I'm 40 yeras old roughly 25-30 years until I plan to retire. I would adjust the Stock/bond allocation roughly in line with the target dated funds as I get older. I'm not that experienced an investor and this AA comes from several books I have read recently. My question is does this Mix give me better odds of higher return with the value tilt and the addition of the REIT? Does it substatially increase my risk? Does anyone have suggestions for improvement? Any comments would be greatly appreciated. Thank you

[linuxuser]

Many Bogleheads, myself included, follow the 3-fund "lazy" portfolio. http://www.bogleheads.org/wiki/Lazy_Portfolios

[Jay69]

Many Bogleheads, myself included, follow the 3-fund "lazy" portfolio. http://www.bogleheads.org/wiki/Lazy_Portfolios

+1

But.....I can see the other side of the fence to hold more REITS and tilt a little, I do not.

I'm in my 40's as well and if I could I would hold a single Life fund and call it a day, I have a number accounts I need to deal with that makes a single fund a no go. If you have taxable that would be another reason to break it up.

Edit: btw, I don't know what the tickers are!

[stilts1007]

Have been wrestling with the idea of more complex vs simpler portfolio too for a while. Lots of books seem to tout the slice-and-dice approach and weighting small-cap and value stocks a little heavier. There is a lot of pretty in-depth (read: above my head) info on threads here about the debate of "tilting" and how much actual value it offers vs. the additional risk. I would say if you like to tinker, occasionally rebalance, and be prepared to re-switch your portfolio when you read about a newer, better asset allocation, split it up. If you are happier keeping it simple, stick with the Target Date funds, they are some of the best lazy funds out there.

[Yanksin2013]

Thanks for the responses, I went ahead and pulled the trigger yesterday and added a reit US SV US LV emerging and International small value. No idea if it's going to work out better than a three fund approach I guess I'll get the answer in 30 years but I did it on a small enough scale that it hopefully won't cause any major damage

[grabiner]

Your portfolio is similar to mine (although I overweight emerging markets as well). You need to recognize that you are taking an extra risk by overweighting small-cap and value; you may be rewarded for that risk, but if you don't want to take the extra risk, you might use a slice-and-dice portfolio which is 80% stock to replace your total-market portfolio which is 90% stock.

Also, you listed VGSIX (REIT Index) next to VBMFX (Total Bond Market Index), as if they were in one asset class. As long as you recognize that REITs are as risky as other stocks, they are a good investment, but they should be counted as part of your stock allocation.

[nisiprius]

For those who haven't memorized the ticker symbols:
VTSMX-20%--Vanguard Total Stock Market Index Fund
VIVAX-10%--Vanguard Value Index Fund
VISVX-10%--Vanguard Small-Cap Value Index Fund

VGSIX-10%--Vanguard REIT Index Fund
VBMFX-10%--Vanguard Total Bond Index Fund

VGTSX-20%--Vanguard Total International Stock Index Fund
VTRIX-10%--Vanguard International Value Fund
VSS-10%--Vanguard FTSE All-World ex-US Small-Cap ETF

1) I don't understand why VSS, the ETF, rather than VFSVX, the Vanguard FTSE All-World ex-US Small-Cap mutual fund. Nothing wrong with it but since all your other components are mutual funds, why not this one, too?

2) I trust you are aware that the Vanguard International Value Fund is not an index fund. Vanguard's description says "This fund invests in non-U.S. companies from developed and emerging markets around the world that its advisors view as temporarily undervalued by the markets." Here, "value" does not mean "precision tool for capturing the Fama-French value factor," it means "value according to the 'value investing' philosophy of stock-picking." Morningstar classifies the fund as "large blend" rather than "large value" and presents this style map:



Compare it to their style map for Vanguard's (domestic) large-cap value index fund:


I don't think Vanguard has any index funds that are really intended for adding a value tilt to an international allocation

3) I don't know if it's really any better than a simple three-fund portfolio. But I don't think there's any great harm in it and I don't think you've added any risk to speak of. The real risk comes from having 90% stocks, regardless of what flavor they are. And don't kid yourself that you've reduced that risk much by "diversification." That's a small effect. I like grabiner's suggestion that you consider cutting back to 80% stocks.

If it makes you feel uneasy not to be tilting when "everyone" says you should be, then tilt. I'm not kidding about that. I don't like to stray too far away from the mainstream conventional wisdom, myself.

The big issue is that you will only get the long-term returns of your multi-asset, rebalanced portfolio if you actually stick to it for the long term. Me, I happened to be holding a tiny amount of VGSIX in 2008, like 1.5% of my portfolio, and, bad as the stock plunge was, VGSIX's plunge was much, much worse. I quit rebalancing into it. (That is, I screwed up). Couldn't stomach the thought of throwing good money after bad. When things are going well you say "sure I'll rebalance if it drops, it's only a few percent we're talking about." When it really happens, you say "Am I going to toss a thousand dollars into the toilet today? Yet another thousand dollars?" A thousand dollars may not be a crippling loss to your retirement savings, but, gee, it's a thousand dollars. And you haven't told your wife about it, and you know darn well she's been eyeing a Terry bicycle that just happens to cost about a thousand dollars. Sorry, hon, forget the bicycle, we need that thousand dollars to replace the thousand dollars that VGSIX just lost. Again.

The point is, yes, it's a perfectly reasonable portfolio if you lock it in, decide that's your allocation, and stay the course. If you try it for a year-and-a-half, and something in it tanks and you say, "well, that's 'not working,' let's swap it out for something new that everyone's talking about about,"--that is, if you can't resist the urge to keep changing it--then it will not have been such a good portfolio.

[baw703916]

1) I don't understand why VSS, the ETF, rather than VFSVX, the Vanguard FTSE All-World ex-US Small-Cap mutual fund. Nothing wrong with it but since all your other components are mutual funds, why not this one, too?

"Small FTSE" has a higher E/R, no admiral shares, and a purchase/redemption fee for the mutual fund shares. It's one of the few cases where the ETF has a clear cost advantage.

[Yanksin2013]

For those who haven't memorized the ticker symbols:
VTSMX-20%--Vanguard Total Stock Market Index Fund
VIVAX-10%--Vanguard Value Index Fund
VISVX-10%--Vanguard Small-Cap Value Index Fund

VGSIX-10%--Vanguard REIT Index Fund
VBMFX-10%--Vanguard Total Bond Index Fund

VGTSX-20%--Vanguard Total International Stock Index Fund
VTRIX-10%--Vanguard International Value Fund
VSS-10%--Vanguard FTSE All-World ex-US Small-Cap ETF

1) I don't understand why VSS, the ETF, rather than VFSVX, the Vanguard FTSE All-World ex-US Small-Cap mutual fund. Nothing wrong with it but since all your other components are mutual funds, why not this one, too?

2) I trust you are aware that the Vanguard International Value Fund is not an index fund. Vanguard's description says "This fund invests in non-U.S. companies from developed and emerging markets around the world that its advisors view as temporarily undervalued by the markets." Here, "value" does not mean "precision tool for capturing the Fama-French value factor," it means "value according to the 'value investing' philosophy of stock-picking." Morningstar classifies the fund as "large blend" rather than "large value" and presents this style map:



Compare it to their style map for Vanguard's (domestic) large-cap value index fund:


I don't think Vanguard has any index funds that are really intended for adding a value tilt to an international allocation

3) I don't know if it's really any better than a simple three-fund portfolio. But I don't think there's any great harm in it and I don't think you've added any risk to speak of. The real risk comes from having 90% stocks, regardless of what flavor they are. And don't kid yourself that you've reduced that risk much by "diversification." That's a small effect. I like grabiner's suggestion that you consider cutting back to 80% stocks.

If it makes you feel uneasy not to be tilting when "everyone" says you should be, then tilt. I'm not kidding about that. I don't like to stray too far away from the mainstream conventional wisdom, myself.

The big issue is that you will only get the long-term returns of your multi-asset, rebalanced portfolio if you actually stick to it for the long term. Me, I happened to be holding a tiny amount of VGSIX in 2008, like 1.5% of my portfolio, and, bad as the stock plunge was, VGSIX's plunge was much, much worse. I quit rebalancing into it. (That is, I screwed up). Couldn't stomach the thought of throwing good money after bad. When things are going well you say "sure I'll rebalance if it drops, it's only a few percent we're talking about." When it really happens, you say "Am I going to toss a thousand dollars into the toilet today? Yet another thousand dollars?" A thousand dollars may not be a crippling loss to your retirement savings, but, gee, it's a thousand dollars. And you haven't told your wife about it, and you know darn well she's been eyeing a Terry bicycle that just happens to cost about a thousand dollars. Sorry, hon, forget the bicycle, we need that thousand dollars to replace the thousand dollars that VGSIX just lost. Again.

The point is, yes, it's a perfectly reasonable portfolio if you lock it in, decide that's your allocation, and stay the course. If you try it for a year-and-a-half, and something in it tanks and you say, "well, that's 'not working,' let's swap it out for something new that everyone's talking about about,"--that is, if you can't resist the urge to keep changing it--then it will not have been such a good portfolio.

Thanks and sorry for the late response, I'm new to the site and thought the comments had ended. I chose VSS because it was cheaper, the mutual fund has more fees. I think a half a percent where the ETF did not. I understand that it's more risky adding value and small and you are right, I did it because I read it multiple times in several books and the argument seemed very convincing. The allocation comes from what I swapped out of which is the 2040 lifestyle fund. That is currently 90/10. My plan was to follow it throughout my investing career(the stock bond split). I somewhat followed the 80-20 suggestion on my own before reading the comments. I decided to follow 2035 which is probably closer to my retirement date any way, 14% bonds. Your last comment about VGSIX has me thinking. The one great thing about the lifestyle funds is that if you don't follow the market regularly(which I don't) you have no idea what sector is really tanking in a down market, if emerging is drops 60% and the rest of the market 30 you still buy low with a lifestyle fund or total stock market fund without having the unpleasant experience of buying a fund that looks like it's going to zero. In 2008-2009 I didn't find it hard to keep contributing to the lifestyle fund but I don't know for certain how I would respond if an individual fund performed really poorly. I would hope that I stick to my AA but I couldn't answer that for sure until I experienced it first hand. Again thanks for your insight; I never looked at it that way before

[Yanksin2013]

Your portfolio is similar to mine (although I overweight emerging markets as well). You need to recognize that you are taking an extra risk by overweighting small-cap and value; you may be rewarded for that risk, but if you don't want to take the extra risk, you might use a slice-and-dice portfolio which is 80% stock to replace your total-market portfolio which is 90% stock.

Also, you listed VGSIX (REIT Index) next to VBMFX (Total Bond Market Index), as if they were in one asset class. As long as you recognize that REITs are as risky as other stocks, they are a good investment, but they should be counted as part of your stock allocation.

Thanks for responding, Not quite 80 but 86%. I'm following the Vanguard 2035 Stock/Bond AA. I consider the REIT as part of the equity portion of my portfolio

[nimo956]

I think you can simplify by starting with the Total Stock Market and overweighting small and value. In other words, forget about the large value tilt. Instead, do something like this:

VTSMX-20%--Vanguard Total Stock Market Index Fund
VISVX-20%--Vanguard Small-Cap Value Index Fund

VGSIX-10%--Vanguard REIT Index Fund
VBMFX-10%--Vanguard Total Bond Index Fund

VGTSX-20%--Vanguard Total International Stock Index Fund
VSS-20%--Vanguard FTSE All-World ex-US Small-Cap ETF

This is 50/50 large/small, 50/50 blend/value, and 50/50 domestic/intl on the equity side (if you exclude the REITs).

[Kevin M]

Somewhat moot since you've already pulled the trigger, but here is my attempt to summarize the debate regarding the total market approach vs. the slice and dice approach: Lumpers vs. Splitters.

Kevin

[Yanksin2013]

I think you can simplify by starting with the Total Stock Market and overweighting small and value. In other words, forget about the large value tilt. Instead, do something like this:

VTSMX-20%--Vanguard Total Stock Market Index Fund
VISVX-20%--Vanguard Small-Cap Value Index Fund

VGSIX-10%--Vanguard REIT Index Fund
VBMFX-10%--Vanguard Total Bond Index Fund

VGTSX-20%--Vanguard Total International Stock Index Fund
VSS-20%--Vanguard FTSE All-World ex-US Small-Cap ETF

This is 50/50 large/small, 50/50 blend/value, and 50/50 domestic/intl on the equity side (if you exclude the REITs).

Well that looks a lot cleaner than what I did. I didn't have the courage to evenly weight TSM both US and intl with a small/value tilt. I tried to do roughly two parts TSM 1 part tilt spread out over these five funds. Here is the final product
Vtsmx Total Stock Market 33.54%
VTSMX Total International Stock 22.3%
VBMFX Total Bond Market 14%
VGSIX REIT Index 8.6
VUVLX U.S. Value 4.3%
VISVX Small-Cap Value 4.3%
VEIEX Emerging Markets 4.3%
VTRIX International Value 4.3%
VSS International small cap 4.3%
I use to be in Vanguard 2040 and I broke it up because I was maxing out my SEP and Regular IRA and needed a taxable account and didn't want Bonds in there. I thought well while I'm at it why not try to come up with a better AA. In your opinion, given the fact that I'm not fully committed to small and value enough to weight them evenly between TSM and Small/value is this even worth doing at this percentage. Maybe keep 10% in a REIT and go back to three funds and call it a day

[Yanksin2013]

Somewhat moot since you've already pulled the trigger, but here is my attempt to summarize the debate regarding the total market approach vs. the slice and dice approach: Lumpers vs. Splitters.

Kevin

Yup the splitter argument is what caused the change.

[Kevin M]

Regarding your particular choices, on the one hand it might appear that you are fairly heavily tilted, on the other hand, it has been pointed out here that the small and value factor loadings for the Vanguard funds aren't very large, relative to say DFA funds and some ETFs from different companies.

Kevin