Thinking of adding Small-Value and REIT

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Topic Author
lifebeckonss
Posts: 194
Joined: Thu Feb 16, 2012 3:53 pm

Thinking of adding Small-Value and REIT

Post by lifebeckonss »

Hi All,
  • Age : 39, single
  • State: CA
  • Tax Rate: 28% federal, 9.3% CA
  • Debt: None
  • Emergency Fund: $15K in a money market account
  • Portfolio: 70/30
  • Annual savings: (~60K)
    • 401k: 21.5K
    • Roth IRA: 5.5K
    • iBonds: 10K
    • Taxable: 23K
Here is my overall portfolio:
Image

And here is the current breakdown in detail:
Image

Questions:
1. I recently started investing in a taxable and Roth, and would like to add Small-Value and REIT to my portfolio. Any suggestions.

2. Here is a possible portfolio. What do you guys think? Am I adding too much complexity?
Image
livesoft
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Re: Thinking of adding Small-Value and REIT

Post by livesoft »

I own some REIT and lots of small-cap value, so I have to say, Go ahead.

However, I would not own REIT in a taxable account and would prefer to put small-cap value in a tax-advantaged account although the bulkd of my SCV is in a taxable account. OTOH, I would suggest that you purchase small-cap foreign before you purchase small-cap value. And put that small-cap foreign in a tax-advantaged account.

I see that you can exchange your extended market in tax-advantaged accounts into REIT and SCV or small-cap foreign. And you can buy more extended market in taxable to replace the extended market shares that you exchanged out of in your other accounts..
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Randomize
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Re: Thinking of adding Small-Value and REIT

Post by Randomize »

Why don't you think the small caps and REITs already present in your Total Market funds are enough?

If you can't answer that question, it's probably not the right move :)
kerplunk
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Re: Thinking of adding Small-Value and REIT

Post by kerplunk »

A little off topic: I don't see a reason to own Vanguard Extended Market Index in taxable when you could adjust the Spartan 500 Index and Spartan Extended Market Index allocations in your 401(k) to complement each other. (80% 500 Index / 20% Extended Market)

That would help simplify things.

As far as REITs and SCV... I don't think REITs are necessary as a separate asset class. Small-cap index funds on the other hand... might be worthwhile. Also, small-cap should have a higher percentage of REITs (close to 11% or something along those lines, I believe).
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sunnywindy
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Re: Thinking of adding Small-Value and REIT

Post by sunnywindy »

Correlation: Small cap value (VBR) and Extended Market (VXF) have a 98% correlation. While correlations are fluid, I would not expect this to change much. REIT (VNQ) and Total US Market have a 80% correlation.

Performance: Small cap value and REIT has outperformed Total US market on a long term basis, but not in all environments (large caps did well in the 90's).

You will be fine if you do this or not. So, if it makes you happy, go for it!

http://quote.morningstar.com/fund/chart ... %2C0%22%7D
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Topic Author
lifebeckonss
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Re: Thinking of adding Small-Value and REIT

Post by lifebeckonss »

livesoft wrote:However, I would not own REIT in a taxable account and would prefer to put small-cap value in a tax-advantaged account although the bulkd of my SCV is in a taxable account. OTOH, I would suggest that you purchase small-cap foreign before you purchase small-cap value. And put that small-cap foreign in a tax-advantaged account.
I see that you can exchange your extended market in tax-advantaged accounts into REIT and SCV or small-cap foreign. And you can buy more extended market in taxable to replace the extended market shares that you exchanged out of in your other accounts..
Thank you livesoft!
  • I do not have SCV or REIT funds available in my 401k. The only other available tax-advantaged option is my Roth which currently has 26K and makes up 4% of my portfolio. So I will need to use taxable for a portion of my REIT and SCV allocation.
  • For international small-cap in Vanguard, would you suggest FTSE All-World ex-US Small-Cap Index (VFSVX): ER:0.40% and Purchase Fee: 0.25%?
Randomize wrote:Why don't you think the small caps and REITs already present in your Total Market funds are enough?
If you can't answer that question, it's probably not the right move :)
Randomize, I am aware that VTSAX has about 3.4% in REIT and 9% in small-cap (out of which SV is about 3%). But am thinking of tilting a bit more than that.
livesoft
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Re: Thinking of adding Small-Value and REIT

Post by livesoft »

lifebeckonss wrote:
  • I do not have SCV or REIT funds available in my 401k. The only other available tax-advantaged option is my Roth which currently has 26K and makes up 4% of my portfolio. So I will need to use taxable for a portion of my REIT and SCV allocation.
  • For international small-cap in Vanguard, would you suggest FTSE All-World ex-US Small-Cap Index (VFSVX): ER:0.40% and Purchase Fee: 0.25%?
You could make your Roth IRA have 100% REIT or 100% small-cap foreign. Do NOT use REIT in taxable. SCV or small-cap foreign could go in taxable.

I would suggest VSS for int'l small-cap since it has a lower ER and no purchase fee.
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Topic Author
lifebeckonss
Posts: 194
Joined: Thu Feb 16, 2012 3:53 pm

Re: Thinking of adding Small-Value and REIT

Post by lifebeckonss »

Livesoft,

So here's a possible portfolio for me. I took out REIT and added SV as well as Intl Small. What do you think?

Still keeps my overall 70/30 allocation (with 20% International).

Also kerplunk, to your point I moved all Extended Market to 401k.

Overall:
Image

Details:
Image
kerplunk
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Re: Thinking of adding Small-Value and REIT

Post by kerplunk »

Looks good.
Mountain Man
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Re: Thinking of adding Small-Value and REIT

Post by Mountain Man »

How come nobody wants to tilt to long-term treasuries these days?
kerplunk
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Re: Thinking of adding Small-Value and REIT

Post by kerplunk »

Mountain Man wrote:How come nobody wants to tilt to long-term treasuries these days?
http://www.youtube.com/watch?v=Gr1p4KtgOXc
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LH
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Re: Thinking of adding Small-Value and REIT

Post by LH »

I would say add them both.

1) REITS get their value from ownership and rent of terra firm, a unique asset.

Rent and Land ownership have represented diversification for 1000s of years.

good correlation, and good return are both there, and expectantly will continue to be there.

fits well with MPT

2) SCV is a new diversifier, if "factor math" stands the test of time, then it should work out. It depends on a "risk story" and/or human behavoiralism. Then it depends on the market not obliterating the effect via efficiency.
It reminds me of the stock/bond yield ratio circa 1959. The risk story then went: stocks are more risky than bonds, therefore, the yield on bonds will be less than the yield on stocks. Which, was predictably true on average for tens of years, until, suddenly, it was not for the next 50 years, up until here we are today...... Great story, just did not work out.

So the factor math is nice and all, and the story is nice, just as nice as the stock/bond yield story certainly.

Will be interesting to see how its all pans out. I always imagine the freshman in econ 101 class of 2054 looking back, and the professor teaching, and the student going, oh wow, they used to think THAT? that that would persist, lol. Kinda like the actions of the financial experts in the 33 depression (primitive morons of course!), and the stock/bond yield wisdom of the 40s and 50s with its neat risk story.


To me, if I were to bet on what diversification will stand the test of time, it would be land ownership, business stock, and renting money. SCV, certainly fashionable, and I do it, but we will see : )



If you do them, stay with them long term.

They will both have some nice volatility.

SCV almost certaintly will fall out of fashion at some point, you WILL read its no longer true in the next 20 years, it will likely even be fashionable on bogleheads 2030 to say so. In fact, I get the sense its already happened to some extent with either the small or the value.... if so, did not last very long did it????

Anyway, SCV is nice split, its different than large cap blend and should have some good correlation, and may well even pan out as its supposed to.

My bet 50/50 by 2050 econ 101, French Fama SCV may just be a footnote like the 59 stock/bond yield ratio risk story.
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