considering more aggressive asset allocation

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considering more aggressive asset allocation

Postby the mind bogles » Wed Jun 26, 2013 5:30 pm

I've been following the Boglehead approach for some time and have been reading the forum recently, but this is my first post. Thanks for taking a look.

Here's a summary of my and my partner's information:
Emergency funds: We have an emergency fund.
Debt: We have a mortgage at 3.5%
Tax Filing Status: I file as head of household, my partner single.
Tax Rate: 25% Federal, 5% State
State of Residence: Colorado
Age: 40/35
Desired Asset allocation: currently 80% stocks / 20% bonds, this is up for discussion.
Desired International allocation: currently 40% of stocks, this is up for discussion.
Current retirement portfolio is around $400K, all in tax advantaged accounts (Roth IRAs and 401(k)s).

Current portfolio breakdown:
10% High quality/short term bonds (Vanguard short-term bond index)
5% High quality/longer term bonds (Vanguard total bond market index)
5% Low quality bonds (Vanguard high-yield corporate)
32% International stocks (Vanguard total international stock index)
24% Small-cap stocks (Vanguard small-cap stock index)
12% Mid-cap stocks (Vanguard mid-cap index)
12% Large-cap stocks (Vanguard 500 index)

Contributions
We are currently contributing about $35K per year including maxing out both Roth IRAs and 401(k) contributions including the employer match.

Available funds in the 401(k) plans include most Vanguard funds, including
Target Retirement funds
Vanguard GNMA Fund Investor Shares VFIIX
Vanguard High-Yield Corp Fund Inv VWEHX
Vanguard I-T Investment-Grade Inv VFICX
Vanguard Inflation-Protect Sec Inv VIPSX
Vanguard Inter-Term Bond Index Inv VBIIX
Vanguard Inter-Term Treasury Inv VFITX
Vanguard Long-Term Bond Index VBLTX
Vanguard Long-Term Invest-Gr Inv VWESX
Vanguard Long-Term Treasury Inv VUSTX
Vanguard S-T Investment-Grade Inv VFSTX
Vanguard Short-Term Bond Index Inv VBISX
Vanguard Short-Term Federal Inv VSGBX
Vanguard Short-Term Treasury Inv VFISX
Vanguard Total Bond Mkt Index Inv VBMFX
Vanguard Balanced Index Fund Inv VBINX
Vanguard Convertible Securities VCVSX
Vanguard LifeStrategy Consrv Grwth VSCGX
Vanguard LifeStrategy Growth Fund VASGX
Vanguard LifeStrategy Income Fund VASIX
Vanguard LifeStrategy Mod Growth VSMGX
Vanguard STAR Fund VGSTX
Vanguard Wellesley Income Fund Inv VWINX
Vanguard Wellington Fund Inv VWELX
Vanguard 500 Index Fund Inv VFINX
Vanguard Capital Opportunity Inv VHCOX
Vanguard Capital Value Fund VCVLX
Vanguard Dividend Growth Fund VDIGX
Vanguard Equity Income Fund Inv VEIPX
Vanguard Explorer Fund Investor VEXPX
Vanguard Extended Mkt Index Inv VEXMX
Vanguard FTSE Social Index Inv VFTSX
Vanguard Growth and Income Inv VQNPX
Vanguard Growth Equity Fund VGEQX
Vanguard Growth Index Fund Inv VIGRX
Vanguard High Dividend Yld Idx Inv VHDYX
Vanguard Mid-Cap Growth Fund VMGRX
Vanguard Mid-Cap Index Fund Inv VIMSX
Vanguard Morgan Growth Fund Inv VMRGX
Vanguard PRIMECAP Fund Investor VPMCX
Vanguard Selected Value Fund VASVX
Vanguard Small-Cap Growth Idx Inv VISGX
Vanguard Small-Cap Index Fund Inv NAESX
Vanguard Small-Cap Value Index VISVX
Vanguard Strategic Equity Fund VSEQX
Vanguard Total Stock Mkt Idx Inv VTSMX
Vanguard U.S. Growth Fund Investor VWUSX
Vanguard U.S. Value Fund VUVLX
Vanguard Value Index Fund Inv VIVAX
Vanguard Windsor Fund Investor VWNDX
Vanguard Windsor II Fund Inv VWNFX
Vanguard Developed Markets Idx Inv VDMIX
Vanguard Emerging Mkts Stk Idx Inv VEIEX
Vanguard European Stock Index Inv VEURX
Vanguard Global Equity Fund VHGEX
Vanguard International Growth Inv VWIGX
Vanguard International Value Fund VTRIX
Vanguard Internatl Explorer Fund VINEX
Vanguard Pacific Stock Index Inv VPACX
Vanguard Total Intl Stock Ix Inv VGTSX
Vanguard Energy Fund Investor VGENX
Vanguard Health Care Fund Inv VGHCX
Vanguard Precious Metals & Mining VGPMX
Vanguard REIT Index Fund Inv VGSIX

Questions:
1. 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. My main question is whether some tweaks to our asset allocation could provide us with a bit higher return and perhaps more diversification. 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?

2. Any suggestions for how to add asset classes like micro-cap stocks and foreign bonds through a Vanguard account?

3. Do you know of any good tools for this sort of portfolio tweaking? Ideally we would like to be able to put in portfolio percentages in different funds or asset classes and see how the portfolio return and standard deviation over a certain period change.
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Re: considering more aggressive asset allocation

Postby grabiner » Wed Jun 26, 2013 9:23 pm

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)

20% bonds:
10% Total Bond Market Index
10% Inflation-Protected Securities

Caution: 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.)
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Re: considering more aggressive asset allocation

Postby the mind bogles » Thu Jun 27, 2013 12:30 pm

Thanks so much for the suggestions. This is good food for thought.
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Re: considering more aggressive asset allocation

Postby grap0013 » Thu Jun 27, 2013 2:23 pm

I like round numbers and if you want the agnostic approach you could do something like this:

US:
20% total market
20% small cap value

Developed international:
10% total international
10% international small cap

Emerging markets:
10% total emerging
10% emerging small value

Bonds:
10% TIPS
10% 5 year treasuries

Small cap value already has quite a bit of REITs so you don't need more. Good geographic diversification with lean towards small and value.
If you can't explain it simply, you don't understand it well enough.
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Re: considering more aggressive asset allocation

Postby feh » Fri Jun 28, 2013 2:16 pm

One big advantage to using a small-value tilt - it tends to increase returns and decrease volatility.
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Re: considering more aggressive asset allocation

Postby the mind bogles » Fri Jun 28, 2013 3:55 pm

Thanks for the additional replies!

grap0013, is there a Vanguard fund that focuses on international small value? I wasn't aware of one, but perhaps I missed it.

feh, do you have any recommended sources for how small-value increases returns and decreases volatility? Or in general does anyone know of a tool that lets you play around with model portfolios and see what the return/standard deviation are for different time periods?
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Re: considering more aggressive asset allocation

Postby feh » Fri Jun 28, 2013 4:09 pm

the mind bogles wrote:feh, do you have any recommended sources for how small-value increases returns and decreases volatility? Or in general does anyone know of a tool that lets you play around with model portfolios and see what the return/standard deviation are for different time periods?


Here you go:

http://www.rickferri.com/blog/strategy/winning-with-small-value-stocks/

There are many SV tilters here. Do a search and you'll have hours of reading material.
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Re: considering more aggressive asset allocation

Postby feh » Fri Jun 28, 2013 4:15 pm

the mind bogles wrote:grap0013, is there a Vanguard fund that focuses on international small value? I wasn't aware of one, but perhaps I missed it.


I don't think there is one. The best approximation that I'm aware of is VSS, which many folks here use as a standin.

The only true ISV I know of is DISVX, but not everybody has access to it. SCZ is another option that isn't truly SV.
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Re: considering more aggressive asset allocation

Postby grap0013 » Sat Jun 29, 2013 8:13 am

the mind bogles wrote:grap0013, is there a Vanguard fund that focuses on international small value? I wasn't aware of one, but perhaps I missed it.


I like SFILX/PDN in tax deferred. If taxable, I'd just do VSS or SCZ.
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Re: considering more aggressive asset allocation

Postby Dandy » Sat Jun 29, 2013 9:33 am

What is the problem with your current allocation? It is too aggressive for me but it seems pretty good. I would avoid too much tinkering but I would think that adding some TIPS might be a good idea. Try to avoid excessive tinkering with the portfolio trying to make it perfect. Sometimes when you are interested in investing it is hard to just leave things alone - it is very tempting to get in the game and make some moves. If that strikes a cord then look for another hobby. Compounding growth is amazing but boring.
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Re: considering more aggressive asset allocation

Postby nisiprius » Sat Jun 29, 2013 10:18 am

I would be leery about the timing of "considering a more aggressive asset allocation" just after a nice, steady, four-year run-up in the stock market. A better time to assess things would be immediately after a decent-sized "correction."

I do not mean that just because it is up, it is a bubble or about to end or revert to the mean or anything like that, I'm talking about the psychology of assessing risk and risk tolerance. It is dangerous assessing one's own risk tolerance at a time where the risk hasn't been showing up.

Four years is long enough for us to start to forget how it really felt during 2008-2009. There have now been maybe four drops severe enough to make some people think that maybe it was the start of another crash, and they were all false alarms, no big deal. My left brain remembers history, but my right brain says "Oh, there's no real danger any more, just a steady ascent now with occasional little bumps." To assume that all stock market drops are relatively small, like the ones in 2010, 2011, and 2012--that those are "what stock market drops are like."

I have always been a fraidycat and have consistently had less in stocks than the conventional wisdom has tended to recommend, but I've managed to stay the course. 2003 to 2007 were a nice steady upward climb, and I honestly do remember saying to myself in 2007, "You know, maybe 'everyone' is right, maybe I have been too conservative, maybe I should to up my stock allocation just a bit." I am glad I didn't. In 2008-2009 I found that I'd gauged my risk tolerance pretty well.
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Re: considering more aggressive asset allocation

Postby tylerherman » Sun Jun 30, 2013 2:52 am

Agree with nisiprius, now might not be the best time to be fiddling with high risk funds when they're at this pretty steep peak. I'm sitting for now.

The one exception being buying some Precious Metals & Mining since it's so far down the toilet right now, should see a nice return from that in a few years.
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Re: considering more aggressive asset allocation

Postby the mind bogles » Wed Jul 10, 2013 3:08 pm

Thanks again for all the comments, I agree that we should think carefully about whether or not to make any changes.
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Re: considering more aggressive asset allocation

Postby DSInvestor » Wed Jul 10, 2013 3:29 pm

the mind bogles wrote:Current retirement portfolio is around $400K, all in tax advantaged accounts (Roth IRAs and 401(k)s).

Contributions
We are currently contributing about $35K per year including maxing out both Roth IRAs and 401(k) contributions including the employer match.

It sounds like you each have 401(k) and Roth IRA which suggest a max contribution of 46K without employer match. If self employed, the max contribution is much higher. What about increasing or maxing out retirement contributions instead of going with more aggressive AA? A higher savings rate will allow you to achieve your goals with less risk.
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