Looking for slice an' dice portfolio feedback

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Looking for slice an' dice portfolio feedback

Postby Hastibe » Wed Feb 06, 2013 11:03 pm

Emergency funds: 12 months in online savings account
Debt: lots of school loans (we're in medical/graduate school, so we're not paying interest yet, and are thinking of pursuing Public Service Loan Forgiveness)
Tax Filing Status: Married Filing Jointly
Tax Rate: 10% (higher later on--my wife and I will have a medical and a graduate degree, respectively, come May 2014)
State of Residence: Ohio
Age: 25 & 26
Desired Asset Allocation: 90% stocks / 10% bonds
Desired International Allocation: 45% of stocks

Slicing and dicing appeals to me, though I understand the reasoning and strengths behind the three fund portfolio and simply approximating the market in one's holdings. After reining back the slicing and dicing from what I initially had, below is the asset allocation that I am looking for feedback on. I understand that this is probably more complicated and sliced/diced than what most people here would prefer, but what I'm most looking for is whether anyone thinks I would be making a serious mistake by pursuing this asset allocation.

Domestic - total: 45%
    20% U.S. Total Stock Market (Vanguard Total Stock Market ETF - VTI)
    10% U.S. Small Cap Value (Vanguard Small-Cap Value ETF - VBR)
    10% U.S. Mid Cap (Vanguard Mid-Cap ETF - VO)
    5% U.S. Real Estate (Vanguard REIT ETF - VNQ)
International - total: 45%
    20% Total International Stock Market (Vanguard Total International Stock ETF - VXUS)
    10% International Small Cap (Vanguard FTSE All Wld Ex USSml Cap ETF - VSS)
    10% Emerging Markets (Vanguard MSCI Emerging Markets ETF - VWO)
    5% International Real Estate (Vanguard International Equity Index Funds - VNQI)
Bonds - total: 10%
    10% Total Bond Market (Vanguard Total Bond Market ETF - BND)
What I am aiming for with this allocation is having an approximation of the world stock market as a base (thus the VTI and VXUS), with tilts that could favor a long (~35 years) investing horizon (thus the small caps/value and emerging markets) and tilts for diversification (thus also the real estate ETFs). The mid cap (VO) is a tilt that has also been favored here (and the research I saw made sense to me, so that's why it is there), and the bonds (BND, I suppose?) are there, because 10-20% bonds have been shown to reduce volatility, without meaningfully reducing growth (right and right?).
Last edited by Hastibe on Thu Feb 28, 2013 9:45 pm, edited 9 times in total.
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Re: Looking for slice an' dice portfolio feedback

Postby Hastibe » Wed Feb 06, 2013 11:03 pm

Also, as a separate question, given this asset allocation, do holding the ETFs in these accounts make sense, in terms of taxes?

Taxable account
    U.S. Total Stock Market (VTI)
    Total International Stock Market (VXUS)
    Emerging Markets (VWO)
    Total Bond Market (BND) (I've been told that when the investment horizon is +15 years, it makes more sense to hold bonds in taxable accounts, as gains from stocks will result in greater tax implications than the bonds will over +15 years.)
Either taxable or Roth IRA accounts (the later, preferably)
    International Small Cap (VSS)
Roth IRA accounts
    U.S. Mid Cap (VO)
    U.S. Small Cap Value (VBR)
    U.S. REIT (VNQ)
    International REIT (VNQI)
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Re: Looking for slice an' dice portfolio feedback

Postby grabiner » Wed Feb 06, 2013 11:31 pm

Hastibe wrote:Also, as a separate question, given this asset allocation, do holding the ETFs in these accounts make sense, in terms of taxes?

Taxable account
    U.S. Total Stock Market (VTI)
    Total International Stock Market (VXUS, corrected from VEU)
    Emerging Markets (VWO)

These three are all excellent in taxable.

Total Bond Market (BND) (I've been told that when the investment horizon is +15 years, it makes more sense to hold bonds in taxable accounts, as gains from stocks will result in greater tax implications than the bonds will over +15 years.)


The 15-year break-even is not normally correct; my own rule of thumb is that it is better to hold munis in a taxable account (rather than stock index funds) if muni yields are lower than stock yields, as they are right now. When bond yields are higher, the break-even may be more than 50 years, particularly since you probably won't pay capital-gains tax on some of your taxable stock (because you donate it to your heirs).

In the 10% or 15% tax bracket, you pay no tax on qualified dividends, so it's better to tax-shelter the bonds. Depending on yields when you move into a higher bracket, it may then make sense to hold either bonds in your IRA or munis in your taxable account.

Either taxable or Roth IRA accounts (the later, preferably)
    International Small Cap (VSS)


This is an unknown; it's probably reasonably tax-efficient, but unlike most ETFs, it has distributed capital gains. I would prefer to put this in an IRA if possible. (I hold it in my own taxable account.)

Roth IRA accounts
    U.S. Mid Cap (VO)
    U.S. Small Cap Value (VBR)


Mid-Cap Index is fine in taxable; it has a lower yield than Total Stock Market Index, 89% qualified last year, and as an ETF, it shouldn't distribute any capital gains. Small-Cap Value Index has 72% qualified dividends and a higher yield, so it should be your first general stock choice for the IRA.

    U.S. REIT (VNQ)
    International REIT (VNQI)


These two must be in the IRA. Thus, here's my order of preference (best in taxable at the top):

Total International
Mid-Cap Index
Total Stock Market
Municipal bond fund at 2% yield
Emerging Markets
International Small-Cap
Small-Cap Value Index
Municipal bond fund at 4% yield
(below this must be in IRA):
Global Real Estate
REIT Index

As for the portfolio as a whole, it's very similar to mine. But are you sure of your risk tolerance? Were you in the stock market in 2007-2009? If not, I would recommend starting with a bit less risk; this portfolio would have lost 60% of its value in the 2007-2009 crash. (Mine lost more than that, but that was my third bear market, so I knew my risk tolerance, and rebalanced back from 86% to 90% stock near the 2008 market bottom.)
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Re: Looking for slice an' dice portfolio feedback

Postby surlygent » Thu Feb 07, 2013 1:43 am

I have been somewhat in a similar situation, read lots about slice-n-dice and the three fund portfolio and was going back and forth.

I ended up here for simplicity:

20% VTI
20% VBR
20% VXUS
20% VSS
20% BND

Decided against VWO as both VXUS and VSS have ~20% emerging markets.

Decided against adding US mid-cap just for simplicity sake, less to rebalance.

Decided against REITs as they seem a bit expensive at the moment, and I am not convinced that adding them would really make much difference in the long run, so again, for simplicity sake, left them out.

Was a hard decision to go from a very slice-diced approach to this pretty simple, straightforward 'tilted' approach. But I am happy with it as the more I read about the simple 3-fund portfolio I really like the theory/simplicity of it, but still wanted a bit of the tilt.
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Re: Looking for slice an' dice portfolio feedback

Postby Hastibe » Thu Feb 07, 2013 6:22 pm

Thanks so much for your response, grabiner--it was very helpful! Really appreciate it--I also have a few questions about what you wrote, detailed below.

grabiner wrote:
Hastibe wrote:Total Bond Market (BND) (I've been told that when the investment horizon is +15 years, it makes more sense to hold bonds in taxable accounts, as gains from stocks will result in greater tax implications than the bonds will over +15 years.)

The 15-year break-even is not normally correct; my own rule of thumb is that it is better to hold munis in a taxable account (rather than stock index funds) if muni yields are lower than stock yields, as they are right now. When bond yields are higher, the break-even may be more than 50 years, particularly since you probably won't pay capital-gains tax on some of your taxable stock (because you donate it to your heirs).

Thanks for the heads-up that the 15-year break-even might not be correct--do you have any good articles/links/etc. that you could point me to about this? Also, I'll look into learning more about municipal bonds--I don't know much about them right now.

grabiner wrote:Mid-Cap Index is fine in taxable; it has a lower yield than Total Stock Market Index, 89% qualified last year, and as an ETF, it shouldn't distribute any capital gains. Small-Cap Value Index has 72% qualified dividends and a higher yield, so it should be your first general stock choice for the IRA.

Thanks for explaining this. I've been able to find most of this information on Morningstar, but where did you look to locate the percentage of qualified dividends for the ETFs?

grabiner wrote:As for the portfolio as a whole, it's very similar to mine. But are you sure of your risk tolerance? Were you in the stock market in 2007-2009? If not, I would recommend starting with a bit less risk; this portfolio would have lost 60% of its value in the 2007-2009 crash. (Mine lost more than that, but that was my third bear market, so I knew my risk tolerance, and rebalanced back from 86% to 90% stock near the 2008 market bottom.)

Thanks for checking in about risk tolerance--I was invested (100% in stocks, haha) during the 2007-2009 crash, and I was A-OK--not that it was a pleasant experience, but I think having investments with such a long horizon helps to not get as phased about short-term volatility (as the long horizon helped make it obvious that a crash then wasn't relevant to where the market would be 30 years after that).
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Re: Looking for slice an' dice portfolio feedback

Postby grabiner » Thu Feb 07, 2013 11:03 pm

Hastibe wrote:Thanks for the heads-up that the 15-year break-even might not be correct--do you have any good articles/links/etc. that you could point me to about this? Also, I'll look into learning more about municipal bonds--I don't know much about them right now.


You can work out the numbers, say with a spreadsheet.

For this example, I will assume you have $1000 in an IRA and $1000 in taxable.

Consider a stock fund with an 8% return, 2% qualified dividends. In a tax-free account, this fund will grow at 8%. In a taxable account, this fund will grow at 7.7%, and 17/77 of the gain will be realized dividends; you will then lose 15% of the capital gain when you sell.

For example, in 30 years, $1000 grows to 1000*(1.08)^30=$10,063 tax-free, which would be $7549 if you pay 25% tax when you withdraw the stock fund from an IRA. It grows to 1000*(1.077)^30=$9257 taxable, with a basis of 1000+(8257*17/77)=$1823. Thus, if you sell the whole thing, you have a $7436 capital gain, and pay $1125 tax, ending up with $8142. The stock fund is thus worth more in a taxable account than in an IRA.

Now, consider a bond fund with a 5% return, either taxed at 25% every year or replaced with a municipal-bond fund witha 3.75% return in a taxable account. $1000 grows to $1000*(1.05)^30=$4322 tax-free, which would be $3241 if you withdraw it from an IRA. It grows to $1000*(1.0375)^30=$3017 in a taxable account. The bond fund is thus worth more in an IRA than in a taxable account.

Repeating the same calculation for 50 years, the stock fund grows to $46,902 tax-free, and $35,176 when withdrawn from an IRA. It grows to $40,812 in taxable with $4563 tax due on the gain, leaving you with $36,249 after tax. The bond fund grows to $11,467 tax-free, which is $8601 when withdrawn from the IRA, and $6301 in taxable. Thus, even in 50 years, the bond fund loses more to taxes than the stock fund.

You might conclude from this that you would be better off with bonds in taxable if the stocks are in a Roth IRA. However, you aren't really gaining by this; since the Roth IRA is tax-free, you are taking more risk with stocks in the Roth than with an equal dollar amount of stocks in taxable. If you count $750 in a Roth as equal to $1000 in taxable, which is a reasonable adjustment, then you get the same numbers as with $1000 in traditional and taxable.
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Re: Looking for slice an' dice portfolio feedback

Postby Hastibe » Fri Feb 08, 2013 11:58 am

surlygent wrote:I have been somewhat in a similar situation, read lots about slice-n-dice and the three fund portfolio and was going back and forth.

I ended up here for simplicity:

20% VTI
20% VBR
20% VXUS
20% VSS
20% BND

Was a hard decision to go from a very slice-diced approach to this pretty simple, straightforward 'tilted' approach. But I am happy with it as the more I read about the simple 3-fund portfolio I really like the theory/simplicity of it, but still wanted a bit of the tilt.

Thanks for sharing this, surlygent--I imagine that I eventually may end up with something just like what you have, too.
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Re: Looking for slice an' dice portfolio feedback

Postby retiredjg » Fri Feb 08, 2013 2:08 pm

In general, I think your idea is fine (not talking about asset location yet), but I have one nit to pick.

Domestic - total: 45%
    20% U.S. Total Stock Market (Vanguard Total Stock Market ETF - VTI)
    10% U.S. Small Cap Value (Vanguard Small-Cap Value ETF - VBR)
    10% U.S. Mid Cap (Vanguard Mid-Cap ETF - VO)
    5% U.S. Real Estate (Vanguard REIT ETF - VNQ)

For your domestic allocation, I think you've got too much icing (25%) and not enough cake (20%). More than half the allocation falls into the category of overweights. I just think this is going too far, especially if you're using an already highly aggressive stock to bond ratio of 90/10.

There's just a feeling (to me) of "let's see just how close to the edge I can get" or "lets see how far I can push this". Like a contest against some invisible foe. The potential misfortune of this approach is much worse than the potential benefit. What's the point?

Consider that there is a great deal of overlap between the REIT and the mid cap ETF and a fair amount between the REIT and the small cap value ETF. I think you should consider dialing it back a little in these 3 funds, perhaps to end up with at least 25% TSM and 20% in overweights.


I would not put BND in a taxable account either. It would be fine right now (while your tax bracket is low), but why not set things up in a way that doesn't require changes later?

One last question - you talk about getting through the last crash at 100% stock without a great deal of difficulty. Considering that was a few years ago and considering your ages, and considering you've both been heavily involved in education for those years....I suspect you are referring to your experience and not your joint experience. Before you go headlong into this very aggressive portfolio (unnecessarily so in my opinion), I wonder if you should give more consideration to what your wife feels about all this. Perhaps she has abdicated this all to you so you think she won't care very much. But how do you think she will actually feel when your portfolio drops from $100k to $40k? Is that something you want to live with for 5 years?
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Re: Looking for slice an' dice portfolio feedback

Postby ResNullius » Fri Feb 08, 2013 2:22 pm

I think slicing and dicing is one truly dumb way to manage your portfolio, but that's just my opinion. Good luck.
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Re: Looking for slice an' dice portfolio feedback

Postby Hastibe » Fri Feb 08, 2013 4:14 pm

grabiner wrote:You can work out the numbers, say with a spreadsheet.

Okay, wow--thanks for pointing that out and taking the time to provide an example!

grabiner wrote:For example, in 30 years, $1000 grows to 1000*(1.08)^30=$10,063 tax-free, which would be $7549 if you pay 25% tax when you withdraw the stock fund from an IRA.

I'm more familiar with Roth IRAs than Traditional IRAs, so maybe this is where my confusion lies, but why would I pay a 25% tax when I withdrew the stock from the IRA? Wouldn't I fall into a 15% capital gains tax rate (see this chart)?

grabiner wrote:You might conclude from this that you would be better off with bonds in taxable if the stocks are in a Roth IRA. However, you aren't really gaining by this; since the Roth IRA is tax-free, you are taking more risk with stocks in the Roth than with an equal dollar amount of stocks in taxable. If you count $750 in a Roth as equal to $1000 in taxable, which is a reasonable adjustment, then you get the same numbers as with $1000 in traditional and taxable.

That's actually what I was concluding. I don't quite understand what you mean by taking more risk with stocks, since the Roth IRA is tax-free, though--could you explain that?
Last edited by Hastibe on Fri Feb 08, 2013 5:58 pm, edited 3 times in total.
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Re: Looking for slice an' dice portfolio feedback

Postby Hastibe » Fri Feb 08, 2013 4:43 pm

retiredjg wrote:For your domestic allocation, I think you've got too much icing (25%) and not enough cake (20%). More than half the allocation falls into the category of overweights. I just think this is going too far, especially if you're using an already highly aggressive stock to bond ratio of 90/10.

Hi retiredjg--thanks for the feedback, I appreciate it, and have some questions, too!

First, considering the international allocation follows the same format as the domestic allocation (20% market-weight, 25% tilt), why is it that you only feel that the domestic allocation should be less tilted? Is it because you see the international tilts as being more worthwhile for diversification purposes?

Also, about my stock to bond ratio being highly aggressive--I believe it is generally recommended to have your age in bonds or your age in bonds -10 or -20 (thus, giving my recommended range of bonds as between 5% and 25% of my portfolio), so I thought my stock to bond ratio for my age is considered within recommended ranges (and not overly aggressive)--let me know if you disagree with this.

retiredjg wrote:There's just a feeling (to me) of "let's see just how close to the edge I can get" or "lets see how far I can push this". Like a contest against some invisible foe. The potential misfortune of this approach is much worse than the potential benefit. What's the point?

Diversification and possible long-term investment benefits. Also, the markets seem so correlated with each other already, do you really think a U.S. mid cap or small cap index tilt would diverge (either way) humongously from the total U.S. market? Of course, the reason that I'm tilting is because I think those tilts may outperform the total U.S. market, but I understand they may underperform; I haven't thought there was much of a risk that they would do horribly compared to the total U.S. market, though. Maybe this is really naive--definitely let me know what you think.

retiredjg wrote:Consider that there is a great deal of overlap between the REIT and the mid cap ETF and a fair amount between the REIT and the small cap value ETF.

I'm curious about how you figured that there's a great deal of overlap between the U.S. REIT (VNQ) and the mid cap (VO) and between the U.S. REIT and the small cap value (VBR). Real estate holdings are only 7% for VO and 16% for VBR--is that enough to consider it a great deal of overlap, or were you looking at something else?

retiredjg wrote:...I suspect you are referring to your experience and not your joint experience. Before you go headlong into this very aggressive portfolio (unnecessarily so in my opinion), I wonder if you should give more consideration to what your wife feels about all this. Perhaps she has abdicated this all to you so you think she won't care very much. But how do you think she will actually feel when your portfolio drops from $100k to $40k? Is that something you want to live with for 5 years?

I agree with you that this is really important, and my wife and I have spent time going over things together and making sure that we are on the same page with what we are doing (and -in this case- may do) financially. I definitely don't want to go headlong into anything, let alone without one of us fully understanding what it could mean!
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Re: Looking for slice an' dice portfolio feedback

Postby retiredjg » Fri Feb 08, 2013 6:20 pm

Hastibe wrote:First, considering the international allocation follows the same format as the domestic allocation (20% market-weight, 25% tilt), why is it that you only feel that the domestic allocation should be less tilted? Is it because you see the international tilts as being more worthwhile for diversification purposes?

Thank you for pointing this out. I do believe your international is too much icing and not enough cake. I just saw the numbers wrong when I first looked at it. :D I don't have any problem with what you are doing, but yes, I do believe you are carrying it too far. It's fine if you want your donkey to carry some bags, but don't let the baggage be so much that you can't even see the donkey underneath!


Also, about my stock to bond ratio being highly aggressive--I believe it is generally recommended to have your age in bonds or your age in bonds -10 or -20 (thus, giving my recommended range of bonds as between 5% and 25% of my portfolio), so I thought my stock to bond ratio for my age is considered within recommended ranges (and not overly aggressive)--let me know if you disagree with this.

These three "rules of thumb" are often suggested around here as a place to start your decision of how risky you want to be. But investing great Ben Graham believed and suggested that a portfolio should never have less than 25% stocks or less than 25% bonds. Before I knew this, I had already decided that I thought a portfolio needs at least 20% bonds because (from the charts I had seen) you get less gain for risk (bang for the buck) as you move from 20% bonds to 10% bonds to 0% bonds. So I just stuck with "my number" of 20% bonds even though 25% bonds might be a better answer for many.


Diversification and possible long-term investment benefits. Also, the markets seem so correlated with each other already, do you really think a U.S. mid cap or small cap index tilt would diverge (either way) humongously from the total U.S. market? Of course, the reason that I'm tilting is because I think those tilts may outperform the total U.S. market, but I understand they may underperform; I haven't thought there was much of a risk that they would do horribly compared to the total U.S. market, though. Maybe this is really naive--definitely let me know what you think.

All of the funds you are using to overweight carry more risk than the market as a whole. They are more volatile. The ups may be greater and I'd say the troughs will definitely be greater.

Consider what it takes to be a successful investor. Aside from refraining from doing stupid stuff, the most important thing is how much you save. The next is what your stock to bond ratio is. The next is probably how much you put into international. Also included in there are things like low expenses, asset location to keep your taxes as low as you can, and probably a few other things.

Also to be considered are the possible premiums you might get by overweighting to value stocks, small cap stocks, and emerging market stocks. This is not magic. It comes as the result of higher risk.

You two are going to be making a lot of money. You have no need to take a great deal of risk, so why do it? The possible benefit is not going to make your retirement any nicer, is it? But the possible consequences are ugly. Does that make good sense to you? It seems to me that your retirement will be good because you save enough, not because you run the most aggressive portfolio on the planet and happen to get lucky enough to get out at the right time.


I'm curious about how you figured that there's a great deal of overlap between the U.S. REIT (VNQ) and the mid cap (VO) and between the U.S. REIT and the small cap value (VBR). Real estate holdings are only 7% for VO and 16% for VBR--is that enough to consider it a great deal of overlap, or were you looking at something else?

I was not really meaning stock for stock. If you look at the 9 style box for Vanguard's REIT fund, you'll see that a great deal of it falls into the mid cap and small cap range. If you use mid cap and small cap value you don't necessarily need more REIT. Or if you use REIT you don't necessarily need as much more SCV and mid cap. And remember that Total Stock Market already contains REIT so your REIT stocks will be a total from total stock market, mid cap, small cap value and the REIT fund. That seems like a lot to me. I'm not saying don't do it, I'm suggesting you consider doing it a little less. (I overweight both SCV and REIT myself, in case you are wondering.)


...let alone without one of us fully understanding what it could mean!

I notice you didn't say anything about her having previous experience with a crash. In the case of a stock market crash, "fully understanding" is something that happens in your gut and you just don't "get it" until you experience it. If she has not yet had this experience, I would not assume that she will react the same way you did....even if she thinks she will.

Maybe you should put my comments in front of your wife at the dinner table and see what happens. :happy You and she might find that some of my comments resonate with her, even if she was not aware of it before. Then again, I could be completely out in the weeds, but you asked for feedback and that is what I have given you. :wink:
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Re: Looking for slice an' dice portfolio feedback

Postby grabiner » Fri Feb 08, 2013 8:07 pm

Hastibe wrote:
grabiner wrote:For example, in 30 years, $1000 grows to 1000*(1.08)^30=$10,063 tax-free, which would be $7549 if you pay 25% tax when you withdraw the stock fund from an IRA.

I'm more familiar with Roth IRAs than Traditional IRAs, so maybe this is where my confusion lies, but why would I pay a 25% tax when I withdrew the stock from the IRA? Wouldn't I fall into a 15% capital gains tax rate (see this chart)?


When you withdraw from an IRA, you pay tax at your full rate, regardless of how the income was generated in the IRA. (As compensation, you don't pay any tax on income generated within the IRA until you withdraw.)

grabiner wrote:You might conclude from this that you would be better off with bonds in taxable if the stocks are in a Roth IRA. However, you aren't really gaining by this; since the Roth IRA is tax-free, you are taking more risk with stocks in the Roth than with an equal dollar amount of stocks in taxable. If you count $750 in a Roth as equal to $1000 in taxable, which is a reasonable adjustment, then you get the same numbers as with $1000 in traditional and taxable.

That's actually what I was concluding. I don't quite understand what you mean by taking more risk with stocks, since the Roth IRA is tax-free, though--could you explain that?


Wiki article link: Tax-Adjusted Asset Allocation

If you have $750 in stocks in a Roth IRA, and the market drops 20%, you lose $150. If you have $1000 in stocks in a Traditional IRA, and the market drops 20%, you lose $200 in account value, but only $150 in after-tax value because you would have paid $50 in tax on that $200. Therefore, the risk of $750 in stocks in a Roth IRA is equivalent to the risk of $1000 in stocks in a traditional IRA.

If you have $1000 in stocks in a taxable account, and the market drops 20%, you will also lose about $150 in after-tax value, not $200, because you will pay less in future dividend tax on your smaller balance, and you will pay less in capital-gains tax when you sell the stock. Therefore, the risk of $1000 in stocks in a taxable account is close to the risk of $1000 in stocks in a traditional IRA.

If you have $1000 in stocks in a Roth IRA and $1000 in bonds in a taxable account or traditional IRA, you may have higher expected returns than the other way around, but that is because you are taking more risk in the amount of money you can spend; this portfolio has the risk of 57% stock.
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Re: Looking for slice an' dice portfolio feedback

Postby Hastibe » Sat Feb 09, 2013 1:03 am

retiredjg wrote:Thank you for pointing this out. I do believe your international is too much icing and not enough cake. I just saw the numbers wrong when I first looked at it. :D I don't have any problem with what you are doing, but yes, I do believe you are carrying it too far. It's fine if you want your donkey to carry some bags, but don't let the baggage be so much that you can't even see the donkey underneath!

Haha, okay, really good points throughout your post, retiredjg. So, I looked at things again, and (using the Morningstar X-Ray tool) I calculated the effective emerging markets and effective real estate proportions of my hypothetical portfolio, and this is what I discovered:

    Market weight (using the Vanguard Total World Stock ETF, VT) for emerging markets = 14%
    My effective emerging markets weighting (including VXUS and VSS, in addition to VWO) = 17%

    Market weight (using the Vanguard Total World Stock ETF, VT) for real estate = 3.5%
    My effective real estate weighting (including all the ETFs in my porfolio) = 16%
...So, this was revealing--the explicit 10% emerging market (VWO) tilt is one that I'm fine with, seeing that -overall- it results in only 3% more than market weight for emerging markets. The effective tilt for real estate is more than I was expecting, though, and I could actually eliminate the 10% explicit real estate tilt (from VNQ and VNQI) and still be overweight in real estate. So, with your posts in mind, retiredjg, I think that's what I'm going to do! Eliminate the 5% VNQ and 5% VNQI, and add it to VTI and VXUS (to make them 25% and 25%), respectively, as you were suggesting.

More to the point, though, I realized that the reason I was interested in REITs are for diversification (REITs being seen as less correlated with the market than other sectors)--thus, I was reasoning that if I need to sell some stock in a downturn, REITs might be an exception, being less correlated with the larger market, and as a result, it would be good to hold REITs as separate ETFs. But if I hold my REITs in an IRA for tax purposes (as I should, right?), then I wouldn't be able to sell any REITs (until I'm about 60), negating the advantage that I thought they would provide (at least over the next 35 years).

...This makes me think that I might be misunderstanding the reason that many people tilt REIT, so, if not for the reason I stated above, why do people tilt toward REITs?

EDIT: okay, did some research, looking up old threads on this topic (e.g. To REIT or not to REIT and this thread, and this thread, and it seems that the reason that many people tilt REIT is because they feel the diversification benefit will translate into increased returns over the long run. Let me know if you think I got this wrong. So, though I still think I will either eliminate REITs from my portfolio (as mentioned above), or halve the percentage from 10% total REIT to 5% total REIT (meaning that my effective real estate weighting would be about 10%) and add the remaining 5% between VTI and VXUS.
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Re: Looking for slice an' dice portfolio feedback

Postby dbr » Sat Feb 09, 2013 10:31 am

Hastibe wrote:
More to the point, though, I realized that the reason I was interested in REITs are for diversification (REITs being seen as less correlated with the market than other sectors)--thus, I was reasoning that if I need to sell some stock in a downturn, REITs might be an exception, being less correlated with the larger market, and as a result, it would be good to hold REITs as separate ETFs. But if I hold my REITs in an IRA for tax purposes (as I should, right?), then I wouldn't be able to sell any REITs (until I'm about 60), negating the advantage that I thought they would provide (at least over the next 35 years).

This is NOT why one adds less correlated assets. Stock correlations tend to go the wrong way all at the same time when the market goes south. Also, non-correlation is far from anti-correlation.

...This makes me think that I might be misunderstanding the reason that many people tilt REIT, so, if not for the reason I stated above, why do people tilt toward REITs?

EDIT: okay, did some research, looking up old threads on this topic (e.g. To REIT or not to REIT and this thread, and this thread, and it seems that the reason that many people tilt REIT is because they feel the diversification benefit will translate into increased returns over the long run. Let me know if you think I got this wrong. So, though I still think I will either eliminate REITs from my portfolio (as mentioned above), or halve the percentage from 10% total REIT to 5% total REIT (meaning that my effective real estate weighting would be about 10%) and add the remaining 5% between VTI and VXUS.

It isn't useful to merely get higher returns. Anyone can do that by holding more stock and less in bonds, etc. The game that is being played here is higher returns at the same risk or lower risk at the same return. Proving that this optimization will really happen is far more difficult than having some confidence that expected return will be higher. This is a point usually missed by naive slice and dice/tilters.

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Re: Looking for slice an' dice portfolio feedback

Postby livesoft » Sat Feb 09, 2013 10:57 am

For folks who are building slice-and-dice portfolios, I think it is very worthwhile to plug in their designs into the Morningstar X-ray tool. They may be surprised at how a complicated portfolio is very similar to the portfolio surlygent has shown.
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: Looking for slice an' dice portfolio feedback

Postby retiredjg » Sat Feb 09, 2013 11:50 am

Hastibe wrote:More to the point, though, I realized that the reason I was interested in REITs are for diversification (REITs being seen as less correlated with the market than other sectors)--thus, I was reasoning that if I need to sell some stock in a downturn, REITs might be an exception, being less correlated with the larger market, and as a result, it would be good to hold REITs as separate ETFs.

I think you are mixing something up here. Lots of people believe that REIT stock acts as a diversifier. So far, so good. But you would not pick your REIT to sell in a stock downturn. Instead you would sell bonds in a downturn (assuming you had to have money over and above your emergency fund).

In a downturn during which REIT is doing well, you should keep the REIT because that is the stock that is doing well and is therefore more precious at that time. Also, you would not want to sell the REIT because that would just lower your already falling stock percentage. If you needed money in a downturn, you would sell bonds, not stocks, because it is the selling of bonds that would bring you closer to your desired stock to bond ratio. The selling of stocks would take you in the wrong direction, not the right direction.

You are looking at your chess players (asset classes) as independent pieces. They are not. Look at the chess board instead. Even though they have different abilities, the individual pieces are expendable, even the queen. Money is fungible. The money in your left pocket is not different from the money in your right pocket. You're probably thinking I'm nuts right now, but eventually, this will sink in and you'll see your investments differently. :happy


But if I hold my REITs in an IRA for tax purposes (as I should, right?), then I wouldn't be able to sell any REITs (until I'm about 60), negating the advantage that I thought they would provide (at least over the next 35 years).

Yes, REIT should be in a tax-advantaged account. That does not mean you cannot sell it. You can sell and buy within your IRA all you want. I'm not recommending that, but you can do it with no tax consequences. And there will be times when you want to do this. Again, you are thinking of your REIT as a certain particle of money. It's all money, no matter what it is invested in.


...This makes me think that I might be misunderstanding the reason that many people tilt REIT, so, if not for the reason I stated above, why do people tilt toward REITs?

Because REIT is a little bit different and can act a little bit differently. Sometimes it may jag when other stocks jog. People call this "diversification". I'm not sure that's the right word, but I know what they mean.


...and it seems that the reason that many people tilt REIT is because they feel the diversification benefit will translate into increased returns over the long run. Let me know if you think I got this wrong.

Yes, that is why many people overweight REIT. Whether their reasoning proves accurate or not, nobody knows yet.

I think you should give livesoft's last post some thought. Surlygent's idea has 5 moving parts. Your idea has 9 moving parts. I have not done it, but the 9 style box for surlygent's idea may not be so different from your own. If so, you should go for simpler rather than more complex.
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Re: Looking for slice an' dice portfolio feedback

Postby Hastibe » Sun Feb 10, 2013 12:38 am

dbr wrote:It isn't useful to merely get higher returns. Anyone can do that by holding more stock and less in bonds, etc. The game that is being played here is higher returns at the same risk or lower risk at the same return. Proving that this optimization will really happen is far more difficult than having some confidence that expected return will be higher. This is a point usually missed by naive slice and dice/tilters.

Thanks for explaining this, dbr.

livesoft wrote:For folks who are building slice-and-dice portfolios, I think it is very worthwhile to plug in their designs into the Morningstar X-ray tool. They may be surprised at how a complicated portfolio is very similar to the portfolio surlygent has shown.

Thanks for the suggestion, livesoft--I will check that out.

retiredjg wrote:In a downturn during which REIT is doing well, you should keep the REIT because that is the stock that is doing well and is therefore more precious at that time. Also, you would not want to sell the REIT because that would just lower your already falling stock percentage. If you needed money in a downturn, you would sell bonds, not stocks, because it is the selling of bonds that would bring you closer to your desired stock to bond ratio. The selling of stocks would take you in the wrong direction, not the right direction.

Okay, I see--thanks for elaborating on this, retiredjg.

retiredjg wrote:I think you should give livesoft's last post some thought. Surlygent's idea has 5 moving parts. Your idea has 9 moving parts. I have not done it, but the 9 style box for surlygent's idea may not be so different from your own. If so, you should go for simpler rather than more complex.

Yeah, I will--surlygent's porfolio does appeal to me, too--thanks again for all the feedback!
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Re: Looking for slice an' dice portfolio feedback

Postby Hastibe » Sun Feb 10, 2013 12:41 am

grabiner wrote:Wiki article link: Tax-Adjusted Asset Allocation

If you have $750 in stocks in a Roth IRA, and the market drops 20%, you lose $150. If you have $1000 in stocks in a Traditional IRA, and the market drops 20%, you lose $200 in account value, but only $150 in after-tax value because you would have paid $50 in tax on that $200. Therefore, the risk of $750 in stocks in a Roth IRA is equivalent to the risk of $1000 in stocks in a traditional IRA.

If you have $1000 in stocks in a taxable account, and the market drops 20%, you will also lose about $150 in after-tax value, not $200, because you will pay less in future dividend tax on your smaller balance, and you will pay less in capital-gains tax when you sell the stock. Therefore, the risk of $1000 in stocks in a taxable account is close to the risk of $1000 in stocks in a traditional IRA.

If you have $1000 in stocks in a Roth IRA and $1000 in bonds in a taxable account or traditional IRA, you may have higher expected returns than the other way around, but that is because you are taking more risk in the amount of money you can spend; this portfolio has the risk of 57% stock.

Thanks for elaborating on this, grabiner--this kind of makes my head hurt, but between your example here and the link to the wiki that you provided, I do think I get it now. :oops:

EDIT: also, I have a follow-up question about whether I am calculating the tax liabilities for ETFs correctly, which I posted as a question in a separate thread (Determining what to put in taxable/Roth IRA accounts--am I doing it right?), since I thought it might get lost down here--your double-checking my calculations would definitely be appreciated, though!
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Re: Looking for slice an' dice portfolio feedback

Postby pascalwager » Sun Feb 10, 2013 4:03 am

The int'l looks good.

For domestic, I'd eliminate the midcap and go something like 27/13 TSM/SV. Midcap blend has a higher correlation with large than does small, so the multi-factor diversification effect is not optimal.
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