Portfolio recommendation from Futureadvisor

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
dinesh0580
Posts: 40
Joined: Sat Oct 05, 2013 4:45 am

Portfolio recommendation from Futureadvisor

Post by dinesh0580 » Sat Oct 05, 2013 4:53 am

All,
I have been reading this forum for past few days and based on the recommendations, decided to try futureadvisor. I entered the basic info they were looking for:
Age: 33
Retirement age: 59
Funds to invest: $200K
Risk appetite: Aggressive

Portfolio recommendation I got was very strange. It was heavier on foreign stock than any portfolio recommendation I have seen. Here is what they recommended
Domestic Equity: 47%
Vanguard Total Stock Market ETF : 16%
Vanguard Value ETF : 16%
Vanguard Small Cap ETF : 8%
Vanguard REIT Index ETF: 7%

International: 45%
Vanguard FTSE Emerging Markets ETF : 16%
iShares MSCI EAFE Value: 9%
Vanguard FTSE Developed Markets ETF : 9%
Vanguard Global ex-US Real Estate ETF : 7%
Vanguard FTSE All-Wld ex-US SmCp Idx ETF : 4%

Fixed income: 8%
iShares Barclays TIPS Bond: 4%
Schwab US Aggregate Bond ETF : 4%

I am including REITs under equity but that might not be the right classification. I would love to get some help from this forum.

Thank you so much for your time

Alex Frakt
Founder
Posts: 10913
Joined: Fri Feb 23, 2007 1:06 pm
Location: Chicago
Contact:

Re: Portfolio recommendation from Futureadvisor

Post by Alex Frakt » Sat Oct 05, 2013 9:22 am

When I was reviewing your post for approval (we review all users' first posts as an anti-spam measure), I noticed your have an European IP address. Perhaps futureadvisor tailored your portfolio based on your current location?

JW-Retired
Posts: 7172
Joined: Sun Dec 16, 2007 12:25 pm

Re: Portfolio recommendation from Futureadvisor

Post by JW-Retired » Sat Oct 05, 2013 9:56 am

It isn't strange it's in the world market ratios. Vanguard's Total World Stock Index (VTWSX) AA has close to this same US/foreign ratio. In fact the VTSMX foreign is a couple of percentage points higher than US.
JW
Retired at Last

User avatar
matjen
Posts: 2130
Joined: Sun Nov 20, 2011 11:30 pm

Re: Portfolio recommendation from Futureadvisor

Post by matjen » Sat Oct 05, 2013 10:00 am

Looks like a pretty good portfolio to me...though I would probably bump bonds to 10% and take US equity down to 45% just to keep everything on "major" numbers.
A man is rich in proportion to the number of things he can afford to let alone.

livesoft
Posts: 70334
Joined: Thu Mar 01, 2007 8:00 pm

Re: Portfolio recommendation from Futureadvisor

Post by livesoft » Sat Oct 05, 2013 10:05 am

That set of funds is fine as far as an asset allocation goes, but it seems to be ignoring some human factors at play here. That is, it seems designed by a machine and not by a human that would have to use it. By this, I mean maybe it is perfectly optimized given a set of facts, but the facts have already changed.

Also suppose that allocation got spit out by an algorithm as the best, yet there are a thousand other allocations that are only 0.00001% worse or almost the best. Perhaps another criteria should be weighted higher to choose among those 1001 asset allocations. And the criteria would be different for every individual.

Finally, to some extent, TrevH's simplified 4-fund equity portfolio matches what you have presented. A 4-fund portfolio for equities (leaving fixed income out for now) might consist of just these: VTI, VBR, VXUS, VSS which are Total US Index, SmallCap Value Index, Total Int'l index, Small-cap foreign Index. Add in REITs if you like.

Bottom line: Portfolio construction is not just about an algorithm.
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
dinesh0580
Posts: 40
Joined: Sat Oct 05, 2013 4:45 am

Re: Portfolio recommendation from Futureadvisor

Post by dinesh0580 » Sat Oct 05, 2013 11:06 am

@lifesoft, thanks for your recommendation. One question regarding creating a similar but simpler portfolio using 4 funds. vxus is 85% developed, whereas futureadvisors recommend 16% of my overall portfolio to be developed. So if I put 20% of my portfolio into vxus, I would still have to put another 13% or so into an emerging market fund

Am I missing something?

Also I was reading interview of futureadvisor founder an he mentioned REITs are the only sector specific investment they include in their portfolios because they consider REITs to be almost like an asset class of its own, which has low correlation with equities.

livesoft
Posts: 70334
Joined: Thu Mar 01, 2007 8:00 pm

Re: Portfolio recommendation from Futureadvisor

Post by livesoft » Sat Oct 05, 2013 11:18 am

What fraction of world market equities are emerging markets?

What fraction of non-US market equities are emerging markets?

What fraction of emerging markets do you want and why?

If you say, I want what futureadvisor wants, then I can still ask why?
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
dinesh0580
Posts: 40
Joined: Sat Oct 05, 2013 4:45 am

Re: Portfolio recommendation from Futureadvisor

Post by dinesh0580 » Sat Oct 05, 2013 11:30 am

well here is what futureadvisor recommended

Domestic large cap equities: 32%
Domestic small cap: 7%
Foreign developed large cap: 18%
Foreign developed small: 4%
Emerging: 16%
Domestic REIT: 7%
Foreign REIT: 7%
Fixed income: 8%

I am not asserting I need 16% emerging. I was simply clarifying how could one create futureadvisor portfolio using 4 funds, which is what I inferred reading your original post.

As for what I want, or more like what allocation I want to go ahead with, that's exactly what I am trying to research right now

livesoft
Posts: 70334
Joined: Thu Mar 01, 2007 8:00 pm

Re: Portfolio recommendation from Futureadvisor

Post by livesoft » Sat Oct 05, 2013 12:03 pm

Sorry, I did not mean to imply that the 4-fund portfolio I suggested matched the futureadvisor portfolio in all respects. That's why I used the term "to some extent", but I see that was not a strong enough qualifier.

I would also like to write that portfolio construction is a process or journey. I think a starting point would be world market weights with say just VTI and VXUS for equities, then tilt away based on what you have learned and your personality for risk. The tilt could be severe: lots of small-cap value or lots of REIT or lots of emerging markets, or the tilt could be minor or no tilt at all. Since we don't know the future we can only guess.

And if one does tilt, the timing can be crucial. For example, if someone decided to tilt to emerging markets in October 2007 or in April 2011, they might not like the result, but if they did so in March 2009 or early October 2011, they would be singing a different tune.
dinesh0580 wrote:... he mentioned REITs are the only sector specific investment they include in their portfolios because they consider REITs to be almost like an asset class of its own, which has low correlation with equities.
I do not believe everything I read. What is the correlation of the REIT index fund (VNQ/VGSIX) with "equities" (VTI, for instance)? Would you write that that correlation was "low"? Is the correlation higher than the correlation between a bond fund and an equity fund?

FWIW, our equities are about 50:50 US:foreign. Vanguard says the market weight for emerging markets is 22% of foreign. We have 26.4% of foreign equities in emerging markets, so we are overweighted in emerging markets. We are also overweighted in small-cap value with about half our US equities in VBR and half our foreign equities in VSS, SCZ, EWX and DGS. And we own REITs in the form of VNQ and TREA, too.

BTW, a belated welcome to the forum.
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
dinesh0580
Posts: 40
Joined: Sat Oct 05, 2013 4:45 am

Re: Portfolio recommendation from Futureadvisor

Post by dinesh0580 » Sun Oct 06, 2013 3:40 am

Thank you. And thank you for all the advice.

I was wondering if I could get some help fine tuning the portfolio and picking securities. Also have a question regarding brokerage account - while I have an account with td america, I am thinking about going for an account with vanguard because of their automatic investment features. That does mean I have to find corresponding admiral shares for these ETFs so that I can keep fees low while going for automatic investment option

High level portfolio:
Domestic Equity: 40%
International equity: 35%
REITs: 15%
Fixed income: 10%
For some reason REITs feel high

Tilt within the high level portfolio
Domestic equity: Futureadvisor recommends 40% being broken into 16% large value, 16% large total stock market and 8% small business blend. Any thought on that
international equity (total 35%) - emerging 15%, developed large 15%, developed small 5%

Any suggestions for a good fixed income fund? Should we bother splitting this 10% between TIPS and other fixed income?

REITs: Is it too high? Should we bother splitting between domestic and foreign?

livesoft
Posts: 70334
Joined: Thu Mar 01, 2007 8:00 pm

Re: Portfolio recommendation from Futureadvisor

Post by livesoft » Sun Oct 06, 2013 7:39 am

dinesh0580 wrote:Also have a question regarding brokerage account - while I have an account with td america, I am thinking about going for an account with vanguard because of their automatic investment features. That does mean I have to find corresponding admiral shares for these ETFs so that I can keep fees low while going for automatic investment option
Almost every (but not all) Vanguard ETF has an equivalent mutual fund, so finding the corresponding admiral shares for these ETFs is as simple as looking up the fund name on the Vanguard web site. One exception is that VSS does not have a corresponding admiral share-class fund, but it does have an investor share class.

Your other questions are basically asking for opinions. My opinion is that once you've gotten this far, lots of things will work, but you won't know what works best until its over. Maybe it is time to read some books to help influence your decision? OTOH, maybe futureadvisor is for folks who are trusting and don't want to read books?
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
dinesh0580
Posts: 40
Joined: Sat Oct 05, 2013 4:45 am

Re: Portfolio recommendation from Futureadvisor

Post by dinesh0580 » Sun Oct 06, 2013 12:56 pm

After trying futureadvisor I decided to give it a shot to Wealthfront and Betterment as well and I thought I would post the results from 3 different websites here as there are some similarities and some differences
Domestic equity: Both futureadvisor and wealthfront recommend about 40% in domestic equity but betterment recommends almost 60%
Foreign: Futureadvisor - 40%, wealthfront - 50%, betterment - 30%. Emerging part of foreign: Futureadvisor - 15%, wealthfront - 28%, betterment - 10%
Fixed: Futureadvisor - 5%, wealthfront - 5%, betterment - 10%
Alternative: Futureadvisor - 15%, wealthfront - 5%, betterment - 0%

So wealthfront is really big on foreign and more than 50% of foreign is in emerging and betterment allocates the smallest amount to foreign. However all of these 3 are allocating more to foreign than my financial advisor recommended

conversely betterment is allocating almost 60% to domestic vs 40% by futureadvisor and wealthfront

Futureadvisor is really big into REITs

livesoft
Posts: 70334
Joined: Thu Mar 01, 2007 8:00 pm

Re: Portfolio recommendation from Futureadvisor

Post by livesoft » Sun Oct 06, 2013 1:46 pm

If you haven't already, you should take a look at this thread started by Trev H: http://www.bogleheads.org/forum/viewtopic.php?t=38374
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
dinesh0580
Posts: 40
Joined: Sat Oct 05, 2013 4:45 am

Re: Portfolio recommendation from Futureadvisor

Post by dinesh0580 » Sun Oct 06, 2013 4:06 pm

livesoft - thanks for sharing that. that was incredibly helpful

also it seems futureadvisor recommendation comes closest to ultimate buy and hold portfolio. it now also makes sense as to why they tilt towards value.

however it also seems considering high distribution yield, i might not want to add reits to my taxable portfolio at least.

inbox788
Posts: 6811
Joined: Thu Mar 15, 2012 5:24 pm

Re: Portfolio recommendation from Futureadvisor

Post by inbox788 » Fri Jan 24, 2014 4:47 pm

I'll chime in with my experience for the last 3 months:

My portfolio consisted of 100% VTSMX Vanguard Total Stock Market Index Fund

Their suggestion (45 yo, 55 retirement, 10 years to retirement, moderate risk tolerance):

Domestic Total 11%
Domestic Small Cap 5%
Domestic Value 11%
Foreign Total 6%
Foreign Small Cap 3%
Foreign Value 6%
Emerging Markets 11%
Domestic REITs 5%
Intl. Real Estate 5%
TIPS 19%
Bonds 19%

SCHZ Schwab US Aggregate Bond ETF 19.0%
TIP iShares TIPS Bond ETF 19.0%
VTV Vanguard Value Index Fund 10.6%
VTI Vanguard Total Stock Market Index Fund 10.6%
VWO Vanguard Emerging Markets Stock Index Fund 10.4%
EFV iShares MSCI EAFE Value ETF 6.1%
VEA Vanguard Tax-Managed International Fund 5.8%
VB Vanguard Small-Cap Index Fund 5.3%
VNQ Vanguard REIT Index Fund 4.6%
VNQI Vanguard Global ex-US Real Estate Index Fund 4.6%
VSS Vanguard FTSE All-World ex-US Small-Cap Index Fund 3.8%

Backtesting

Annualized Backtest Returns
3% YOUR PORTFOLIO
5% BENCHMARK
2% PERCENTAGE UNDER-PERFORMED

As they say, Past performance is no guarantee of future results.

Actual Portfolio Performance (10/13 - 1/14)
5.1% YOUR PORTFOLIO
2.5% BENCHMARK



Projected Performance of Your Target Portfolio
Average market conditions: 6.9%
Poor market conditions: 3.2%

User avatar
grabiner
Advisory Board
Posts: 26152
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Portfolio recommendation from Futureadvisor

Post by grabiner » Fri Jan 24, 2014 6:16 pm

The portfolio futureadvisor recommended for you is similar to what I hold; I am also half foreign, overweight small-cap, value, and emerging markets, and have very little in bonds. (Currently, I am 100% stock, but that is because I count my mortgage as a negative bond; my bond holding is equal to my mortgage balance.)

And that is why I don't recommend it. I have one of the most aggressive portfolios on the Bogleheads, and I never recommend anyone match it. If my portfolio is right for you, then you know enough to ignore my advice.

Your portfolio would have lost 60% from the 2007 market peak to the 2009 bottom (and mine did the same). How much did you actually lose in that bear market (as a percentage of your portfolio), and what did you do? If you had 80% stock in 2007, losing 45% of your portfolio, and rebalanced to 80% stock at the 2007-2009 market bottom, then you may have the risk tolerance for even more.
Wiki David Grabiner

Post Reply