Age 26, AA with small cap and EM tilt breakdown

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Topic Author
ploldo
Posts: 29
Joined: Sun Oct 30, 2011 1:23 pm

Age 26, AA with small cap and EM tilt breakdown

Post by ploldo »

The matrix of this portfolio is this, with a 60/40 international split:

12/13/12
15/13/9
10/8/8

for comparison, the US total market:
25/24/23
6/7/7
3/3/3

VEA 10% - All world xUS tax-managed
VSS 30% - all world xUS small cap (includes 25% EM small cap)
VWO 20% - emerging markets (0% small cap)
VMVAX 13% - US midcap value
VTMSX 15% - US small cap tax managed
VTSAX 12% - US total market

I put a lot of research into EFT or index, tax managed or not, rankings of tax efficiency, and the AA. Its not perfect, but given what vanguard had and how I could reduce expense ratios and taxes it is pretty close to what I want. I would appreciate any feedback.
Last edited by ploldo on Fri Jan 20, 2012 7:04 pm, edited 1 time in total.
Topic Author
ploldo
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Joined: Sun Oct 30, 2011 1:23 pm

Re: Age 26, AA with small cap and EM tilt breakdown

Post by ploldo »

One question I forgot to add:

Can I buy the ETFs on Vanguard or do I need a broker account for this? If I need a broker account, how to I transfer funds from an IRA on vanguard to a different company?
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Liquid
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Re: Age 26, AA with small cap and EM tilt breakdown

Post by Liquid »

You can get a brokerage account to purchase ETFs... within your vanguard IRA if need be.
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Liquid
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Re: Age 26, AA with small cap and EM tilt breakdown

Post by Liquid »

BTW, EM stocks are at historically high prices.

Best,
Liquid
livesoft
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Re: Age 26, AA with small cap and EM tilt breakdown

Post by livesoft »

You can probably achieve the same M* style grid by using just 4 funds: VTI, VBR, VXUS, and VSS. Add bonds and you are good to go.

VEA is NOT all-world ex-US. It is an EAFE index fund of developed markets.

You can buy the ETFs or the mutual funds at just about any broker, but the cheapest places to do so would be Vanguard itself where you will need a Vanguard Brokerage Services account at VBS or at WellsFargo where you will need a PMA package and WellsTrade brokerage account. I have both of these accounts and the WF/WT setup is better for me. Search the forum for reasons why.

Folks around here like the Vanguard Mutual fund company, but you cannot buy ETFs with them and they like VBS (probably due to the halo effect) but you cannot buy Vanguard mutual funds with them. No such problems at WF.
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Noobvestor
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Re: Age 26, AA with small cap and EM tilt breakdown

Post by Noobvestor »

Liquid wrote:BTW, EM stocks are at historically high prices.

Best,
Liquid
Er, no more so than non-EM stocks - EM, US, pretty much everything is down just slightly from its 07 peak. So I assume you don't mean a total-value metric. And if not, what metric are you using? Ten years of relative performance? That might work, but that's an artificial period if that's what you're picking. P/E? If so, source? Other?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
Default User BR
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Re: Age 26, AA with small cap and EM tilt breakdown

Post by Default User BR »

Liquid wrote:BTW, EM stocks are at historically high prices.
What? VEIEX peaked out at over $36 in 2007, and was as high as $32 earlier this year. It's currently at about $26.


Brian
Topic Author
ploldo
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Re: Age 26, AA with small cap and EM tilt breakdown

Post by ploldo »

Thanks for all the great replies. I am looking into everything mentioned.

I have been having trouble finding the tax costs of these funds. Is table 1 near the bottom of this site the best estimate? http://www.bogleheads.org/wiki/Principl ... _Placement

If thats true my funds from highest tax cost to lowest are: (assuming 25% rate)
VMVAX
VTSAX
VWO
VTMSX
VEA
VSS

I find it surprising that xUS small cap (VSS) is the most tax efficient. I suspect this is due to foreign tax credit and being an ETF though?

One thing I realized is that I looked at expense ratios of ETF vs index funds before looking at tax costs of each. Is this the correct way to go about this? In an IRA I would think so since the expense ratio is taken out every year regardless whereas taxes only upon withdrawal, but for my taxable accounts should one get priority?
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grabiner
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Re: Age 26, AA with small cap and EM tilt breakdown

Post by grabiner »

The first question I would ask is whether you are sure you are prepared to handle this much risk. Your portfolio would have lost about 65% of its value in 2007-2009; did you actually have an aggressive allocation at that time, and did you stick to it? If not, then I would suggest starting out a bit more conservative; if you start with 80% stocks and have the discipline to rebalance through a bear market, then you can decide whether you want 100% stocks.

Also, do you have some reason for 60% international, which is higher than the world market cap weight? I would guess that using this much international is adding an additional risk, probably for no expected benefit. (And half my own stock is international.)
ploldo wrote:VEA 10% - All world xUS tax-managed
VSS 30% - all world xUS small cap (includes 25% EM small cap)
VWO 20% - emerging markets (0% small cap)
The breakdown is 10% developed large, 20% emerging large, 22% developed small, 8% emerging small. Is your goal to get an even split across the four categories? You can meet that goal by using the non-Vanguard EM small-cap indexes EEMS or EWX, but they are significantly more expensive; if you are trying to avoid them, then what you did here is reasonable, as you are half small-cap and half emerging.

My own strategy is that I would take an even split across the four categories if cost were not an issue, but because EEMS is so expensive and VEA is less expensive both in expense ratio and taxes, my actual target is 15% developed large, 10% emerging large, 10% developed small, 5% emerging small.
VMVAX 13% - US midcap value
VTMSX 15% - US small cap tax managed
VTSAX 12% - US total market
How much of your portfolio is tax-deferred? All of your international holdings are fine for a taxable account. Mid-Cap Value Index should be tax-deferred; if you do want to hold value in a taxable account, you need less Small-Cap Value Index to get the same diversification benefit. And if you have more tax-deferred room, you don't need Tax-Managed Small-Cap; the Vanguard ETF VIOO tracks the same index at a lower cost, or you could use Small-Cap Index if you prefer not to use ETFs.
Can I buy the ETFs on Vanguard or do I need a broker account for this? If I need a broker account, how to I transfer funds from an IRA on vanguard to a different company?
You can open a brokerage account at Vanguard, with your money-market fund, and then buy ETFs there. Trades of Vanguard ETFs at Vanguard are commission-free.

You should also be familiar with how ETF trading works.

Wiki article link: Orders

In particular, VSS trades at a large spread, so you may need use limit orders to get a good price, and be patient, If you place a market order to buy $60,000 of VSS all at once, you may accept several small orders to sell at different prices and pay several hundred dollars more than the market price.
Wiki David Grabiner
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grabiner
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Re: Age 26, AA with small cap and EM tilt breakdown

Post by grabiner »

ploldo wrote:I have been having trouble finding the tax costs of these funds. Is table 1 near the bottom of this site the best estimate? http://www.bogleheads.org/wiki/Principl ... _Placement

If thats true my funds from highest tax cost to lowest are: (assuming 25% rate)
VMVAX
VTSAX
VWO
VTMSX
VEA
VSS

I find it surprising that xUS small cap (VSS) is the most tax efficient. I suspect this is due to foreign tax credit and being an ETF though?
This is the Bogleheads' best estimate, but you put VEA (Tax-Managed International) in the wrong category. It is probably more tax-efficient than VSS, because it has 100% qualified dividends and is unlikely to distribute capital gains. (VSS distributed capital gains in 2009 and 2010, and was on track to distribute gains in 2011 before the market erased the gains in October.)

The differences between the funds (except Mid-Cap Value Index) are very small; all of them should be fine in a taxable account. I hold four of your chosen five in my own taxable account; I would be willing to hold Tax-Managed Small-Cap but don't need it because I have small-cap options in my retirement accounts.
Wiki David Grabiner
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