Review my new asset allocation please

[gt4715b]

I'm updating my asset allocation and I wanted to get some feedback just to make sure I'm not missing something.

Here is the plan:

1. Stock/bond allocation: 90% stocks, 10% bonds

2. Equity Allocation:
2a. REIT % of equity: 15%, equally split between US and International
2b. US/Int'l split: 60% US, 40% International

3. US Equity Allocation:
3a. Desired Factor loading: 0.35-0.5 HmL, 0.2-0.3 SmB

4. International Equity Allocation:
4a. Economic Development allocation: 2/3 Developed, 1/3 Emerging Markets
4b. Factor loading: Higher than US to reduce correlations with US markets.

5. Bond allocation:
5a. Default Risk: None
5b. Term Risk: Duration ~2yrs
5c. Nominal/Inflation-Protected Split: 100% Nominal


Here is the implementation:

Bonds
10% SCHO (Schwab Short-Term U.S. Treasury ETF); 0.08% ER

REITS
6.75% VNQ (Vanguard REIT ETF); 0.10% ER
6.75% VNQI (Vanguard Global ex-U.S. Real Estate ETF); 0.35% ER

US Equities
18.5% TILT (FLEXSHARES MORNINGSTAR U.S. MARKET FACTOR TILT ETF ); 0.27% ER
18.5% IWW (iShares Russell 3000 Value ETF); 0.25% ER
9% VTWV (Vanguard Russell 2000 Value ETF); 0.33% ER

This is set up like this because I want to get my loadings as evenly/broading as possible. The assumed loadings for the funds are:
TILT: 0.2 SmB, 0.2 HmL
IWW: -0.04 SmB, 0.4 HmL
VTWV: 0.8 SmB, 0.4 HmL

this gives me a overall loading of 0.22 SmB, 0.34 HmL. Unfortunately, it's hard to get a much higher value loading without buying more concentrated funds

International Equities
10.2% PXF (PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio ETF); 0.45% ER
10.2% VSS (Vanguard FTSE All-World ex-US Small-Cap ETF); 0.28% ER
10.2% EVAL (iShares MSCI Emerging Markets Value ETF); 0.49% ER

I'm using PXF instead of EFV because it has more stocks, seems to have less negative alpha and with the recent ER it's only 0.05% higher than EFV.

The overall expense ratio for this portfolio is 0.288%, which I think is quite reasonable (the Vanguard Target Retirement funds are at 0.19%)

Any thoughts?

[grap0013]

Personally, I would be too tempted to tweak those 3 significant digit percentages. Other than that "it looks fine" depends on what your previous allocation was. Care to share?

Here's an alternative version with similar expected returns:

Bonds
15% SCHO (Schwab Short-Term U.S. Treasury ETF); 0.08% ER

REITS
5% VNQ (Vanguard REIT ETF); 0.10% ER
5% VNQI (Vanguard Global ex-U.S. Real Estate ETF); 0.35% ER

US Equities
15% TILT (FLEXSHARES MORNINGSTAR U.S. MARKET FACTOR TILT ETF ); 0.27% ER
15% IWW (iShares Russell 3000 Value ETF); 0.25% ER
15% VTWV (Vanguard Russell 2000 Value ETF); 0.33% ER

10% PXF (PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio ETF); 0.45% ER
10% VSS (Vanguard FTSE All-World ex-US Small-Cap ETF); 0.28% ER
10% EVAL (iShares MSCI Emerging Markets Value ETF); 0.49% ER

[umfundi]

I'm updating my asset allocation and I wanted to get some feedback just to make sure I'm not missing something.

You tell us: With the time spent over-engineering your plan, what else could you be doing?

(Sorry, I had to say that. It looks much too complicated to me.

Keith

[Call_Me_Op]

Hope you don't mind a very wild ride.

[gt4715b]

Personally, I would be too tempted to tweak those 3 significant digit percentages. Other than that "it looks fine" depends on what your previous allocation was. Care to share?

Here's an alternative version with similar expected returns:

Bonds
15% SCHO (Schwab Short-Term U.S. Treasury ETF); 0.08% ER

REITS
5% VNQ (Vanguard REIT ETF); 0.10% ER
5% VNQI (Vanguard Global ex-U.S. Real Estate ETF); 0.35% ER

US Equities
15% TILT (FLEXSHARES MORNINGSTAR U.S. MARKET FACTOR TILT ETF ); 0.27% ER
15% IWW (iShares Russell 3000 Value ETF); 0.25% ER
15% VTWV (Vanguard Russell 2000 Value ETF); 0.33% ER

10% PXF (PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio ETF); 0.45% ER
10% VSS (Vanguard FTSE All-World ex-US Small-Cap ETF); 0.28% ER
10% EVAL (iShares MSCI Emerging Markets Value ETF); 0.49% ER

This portfolio is MUCH easier to present/share with other people. Thanks. But in terms of actual implementation using the round numbers aren't any easier than the exact numbers. I have a spreadsheet that computes the exact percentages based on the inputs I listed and gives me the exact amount to put into each fund.

I'm updating my asset allocation and I wanted to get some feedback just to make sure I'm not missing something.

You tell us: With the time spent over-engineering your plan, what else could you be doing?

(Sorry, I had to say that. It looks much too complicated to me.

Keith

It looks way more complicated than it is. I probably spent about 30 hours this year researching this update. This is something that I plan on doing only once every 4-5 years or sooner if a great new ETF comes on the market, e.g, a Total Int'l Value ETF. Digging into the details isn't for everyone but I actually enjoy it and gives me the ability to say exactly why I'm doing what I'm doing. Otherwise you really should just do a 3 fund portfolio.

[FillorKill]

If you turned this into a poll, I'm voting for this:

Here's an alternative version with similar expected returns:

Bonds
15% SCHO (Schwab Short-Term U.S. Treasury ETF); 0.08% ER

REITS
5% VNQ (Vanguard REIT ETF); 0.10% ER
5% VNQI (Vanguard Global ex-U.S. Real Estate ETF); 0.35% ER

US Equities
15% TILT (FLEXSHARES MORNINGSTAR U.S. MARKET FACTOR TILT ETF ); 0.27% ER
15% IWW (iShares Russell 3000 Value ETF); 0.25% ER
15% VTWV (Vanguard Russell 2000 Value ETF); 0.33% ER

10% PXF (PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio ETF); 0.45% ER
10% VSS (Vanguard FTSE All-World ex-US Small-Cap ETF); 0.28% ER
10% EVAL (iShares MSCI Emerging Markets Value ETF); 0.49% ER

And then I'm going to use that new 'like' button to like this:

You tell us: With the time spent over-engineering your plan, what else could you be doing?

But seriously, how do you plan to rebalance when you are taking the precision of the AA to such great heights?

That .75 business will last about ten seconds into trading day number one and then what?

If I was reconstructing my AA I would not have anything at less than 10% Too much work, it just becomes a hassle.

I like your general idea [factor tilting, etc] as long as you will stick with it but you will likely tire of trying to keep those extremely precise allocations balanced.

But hey maybe you want to keep that close of an eye on things, different strokes and all.

[gt4715b]

But seriously, how do you plan to rebalance when you are taking the precision of the AA to such great heights?

That .75 business will last about ten seconds into trading day number one and then what?

If I was reconstructing my AA I would not have anything at less than 10% Too much work, it just becomes a hassle.

I like your general idea [factor tilting, etc] as long as you will stick with it but you will likely tire of trying to keep those extremely precise allocations balanced.

But hey maybe you want to keep that close of an eye on things, different strokes and all.

I don't know how you rebalance but it's really not that difficult.

At the day of rebalancing, call your total portfolio value V. For any given asset class, call the target allocation A, where A is a number between 0 and 1 (0-100%). Assume that you currently have D dollars invested in the asset class. Assume the purchase price on that day for the asset class is P.

Then, the amount you need to buy or sell is equal to (V*A)-D and the number of shares you need to buy/sell is ((V*A)-D)/P.

Again, it takes 30 minutes to set up a spreadsheet to calculate this for you. The only possible advantage to having a round number for the asset allocation is that you could do the (V*A) calculation in your head but who cares? It literally takes no more time to rebalance to 12.23% versus 10%.

A valid point however is that you may want to wait until your account is sufficiently large before adding more than 4-5 funds, since depending on the situation you may not have access to Admiral funds for example, but for most investors in 401ks this isn't an issue.

[pradador]

It looks way more complicated than it is. I probably spent about 30 hours this year researching this update. This is something that I plan on doing only once every 4-5 years or sooner if a great new ETF comes on the market, e.g, a Total Int'l Value ETF. Digging into the details isn't for everyone but I actually enjoy it and gives me the ability to say exactly why I'm doing what I'm doing. Otherwise you really should just do a 3 fund portfolio.

I just found this thread while searching for information about the FlexShares TILT ETF. I got a similar response (over-engineered, why waste your time, etc.) from the board when I posted a slice-and-diced portfolio back when I started so I wanted to reply that it's nice to see I'm not the only one. Anyway, I just ran the U.S. section of your portfolio through my 3F regression tool and wanted to post results for anyone interested:

Portfolio Loadings from 2011-11 to 2013-10

Code: Select all

Symbol  %                             Name                            Rm-Rf  SMB   HML   Alpha    R2 
TILT    40  FlexShares Morningstar U.S. Market Factor Tilt Index ETF   1.05  0.24  0.10  -1.48%  0.984
IWW     40  iShares Russell 3000 Value Index                           0.87  0.20  0.34  -1.90%  0.842
VTWV    20  Vanguard Russell 2000 Value ETF                            0.96  0.92  0.43  -5.72%  0.836
                                                            Loadings   0.96  0.36  0.26


Also, now that TLTD and TLTE have been out for over a year from the same FlexShares family, I'm curious if you ended up implementing TLTE for your Emerging Markets allocation.