Welcome to the forum!
the mind bogles wrote:We are comfortable with a high level of risk and are good at sticking to a long-term plan. The asset allocation and fund choices above are ones we have followed for the past 13 years. Through the stock market declines in 2000 and 2008 we kept up our regular contributions and rebalancing 1-2 times per year
This is the key criterion: you know that you can handle an aggressive allocation, because you had one almost this aggressive, lost 45% of your portfolio in 2007-2009, and were comfortable with the rebalancing.
Things we're considering are (1) more exposure to emerging markets, (2) adding REITs, (3) increasing our value weighting, (4) adding micro-caps, and (5) adding TIPs. Can you comment on these suggestions, or would you make other recommendations that we should consider?
REITs have the risk of stocks but a diversification benefit; replacing 10% of your stock with REITS probably won't increase the portfolio risk much. TIPs aren't a way of increasing risk, but using them for half your bond allocation is a popular strategy, and may also have a diversification benefit. Vanguard does now have a foreign bond fund, but I don't know whether it is a 401(k) option, and I don't see it as particularly worthwhile when you have a lot of foreign stock.
Overweighting value, small-cap, and emerging markets are common slice-and-dice strategies; all are ways to take more risk without increasing your stock percentage, and may give you better returns. Micro-cap is less popular because it is expensive; you would have to use non-Vanguard ETFs in your Roth IRA.
If you want to be a serious slice-and-dicer at 80% stock, here's how I would do it. I am preserving your current allocations of 80% stock (now including REITs), with 40% in the US.
10% real estate:
5% REIT Index
5% Global Real Estate
42% US stock as 6% LG, 15% LV, 6% SG, 15% SV:
15% Total Stock Market Index (which is 40% LG)
9% Value Index
5% Small-Cap Index
13% Small-Cap Value Index
28% international stock as half emerging:
18% Total International (which is 75% developed)
10% Emerging Markets Index
(If you want to overweight small-caps here, add VSS, FTSE All-World Ex-US Small-Cap Index, and optionally add EWX, SPDR International Small-Cap to get your emerging weight)
10% Total Bond Market Index
10% Inflation-Protected SecuritiesCaution:
This portfolio would have lost more than half its value in 2007-2009. For the same reason that I don't recommend over 80% stock, I don't recommend a portfolio like this to anyone who hasn't already been 80% stock in a severe bear market. (My own portfolio has been similar to this but with 90% stock since 2004, after I went through the 2000-2002 bear market with 80% stock.)