Given High PE10, How about this AA?

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fulltilt
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Given High PE10, How about this AA?

Post by fulltilt » Fri Jan 10, 2014 10:10 am

Given the current market conditions, what do you guys think about this asset allocation for someone who is going to accumulate for the next 20 years and try to retire in 2035-2040?
  • 50% Total Stock Market Index (Or 25% S&P, 25% small; OR slice and dice as you see fit)
    25% Total Developed International Market Index
    25% Emerging Markets
Dilute with fixed income as appropriate to your level of risk.

I am not really considering it, i am just thinking out loud about what might be appropriate given the current valuations.

allsop
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Re: Given High PE10, How about this AA?

Post by allsop » Fri Jan 10, 2014 10:17 am

For the equity portion it is quite reasonable.
Last edited by allsop on Fri Jan 10, 2014 10:19 am, edited 1 time in total.

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kenyan
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Re: Given High PE10, How about this AA?

Post by kenyan » Fri Jan 10, 2014 10:18 am

50/50 Domestic/International is what I use, and it is perfectly reasonable. Technically speaking, it's a tilt toward US equities from a world capitalization standpoint. Most on this board will not disagree strongly with any international allocation between 20-60%.

Basically, you have a strong tilt toward Emerging Markets. It's ok - risky, but ok - as long as you have the stomach for it. Last year was particularly brutal for EM, losing close to 10% while TSM was up 30+%. If that kept happening, would you want to stick with it?

Usually, we start to get a number of "I want to invest 100% in EM" posts when they're doing well - at least you're looking to buy when they're not.
Retirement investing is a marathon.

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Taylor Larimore
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Stay the course.

Post by Taylor Larimore » Fri Jan 10, 2014 10:22 am

i am just thinking out loud about what might be appropriate given the current valuations.
Changing allocations based on "valuations" is market-timing.

Bogleheads do not market-time. They structure an asset-allocation based on their goals, time-frame, risk-tolerance and personal financial situation--then stay-the-course unless their personal situation changes.

The Bogleheads Philosophy

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

allsop
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Re: Given High PE10, How about this AA?

Post by allsop » Fri Jan 10, 2014 10:24 am

Kenyan: The US tilt is relatively small, though, about 2%.

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kenyan
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Re: Given High PE10, How about this AA?

Post by kenyan » Fri Jan 10, 2014 10:27 am

allsop wrote:Kenyan: The US tilt is relatively small, though, about 2%.
Indeed it is.
Retirement investing is a marathon.

MnD
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Re: Given High PE10, How about this AA?

Post by MnD » Fri Jan 10, 2014 10:29 am

Your US/international split is very close to what the world is on a market cap weighted basis so I don't think you have to drag "CAPE Fear" into the equation for it to make sense.
Emerging economies are underrepresented on a market cap basis so you could make the case that you are trying to get more of a GDP weighting on the international side.
I'm 53/47 international/US and sleep very well at night. I and most other US citizens have a huge stake in the US outside of equities (social security, real estate, human capital) so not tilting US on equities does not present any concerns to me.

fulltilt
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Re: Given High PE10, How about this AA?

Post by fulltilt » Fri Jan 10, 2014 10:46 am

kenyan wrote:50/50 Domestic/International is what I use, and it is perfectly reasonable. Technically speaking, it's a tilt toward US equities from a world capitalization standpoint. Most on this board will not disagree strongly with any international allocation between 20-60%.

Basically, you have a strong tilt toward Emerging Markets. It's ok - risky, but ok - as long as you have the stomach for it. Last year was particularly brutal for EM, losing close to 10% while TSM was up 30+%. If that kept happening, would you want to stick with it?

Usually, we start to get a number of "I want to invest 100% in EM" posts when they're doing well - at least you're looking to buy when they're not.
Would you really say it is a strong tilt? It doesn't seem strong to me. if i were 50% total international, then that would be 50% TSM, 37.5% developed and 12.5% emerging markets, right?

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kenyan
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Re: Given High PE10, How about this AA?

Post by kenyan » Fri Jan 10, 2014 10:57 am

1:1 Developed to EM rather than 3:1 Developed to EM seems strong to me. All up to interpretation, though. 100% EM is certainly much stronger, but we don't hear from those people anymore.
Retirement investing is a marathon.

steve_14
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Re: Given High PE10, How about this AA?

Post by steve_14 » Fri Jan 10, 2014 11:24 am

fulltilt wrote:Given the current market conditions...
What about current bond market conditions? Shouldn't we be overweighting stocks now, given the high ratio of bond price to interest?

fulltilt
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Re: Given High PE10, How about this AA?

Post by fulltilt » Fri Jan 10, 2014 12:02 pm

steve_14 wrote:
fulltilt wrote:Given the current market conditions...
What about current bond market conditions? Shouldn't we be overweighting stocks now, given the high ratio of bond price to interest?
I think that depends on what you think the role of fixed income is in your portfolio.

Bungo
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Re: Given High PE10, How about this AA?

Post by Bungo » Fri Jan 10, 2014 12:15 pm

fulltilt wrote:
  • 50% Total Stock Market Index (Or 25% S&P, 25% small; OR slice and dice as you see fit)
    25% Total Developed International Market Index
    25% Emerging Markets
I use the same allocation for my equity holdings. Note that this allocation somewhat overweights emerging markets relative to developed markets. I justify this (to myself, at least) by viewing developed and emerging as two major equity categories which are only somewhat correlated, and placing equal bets on each. Holding them at market weights would in effect cause my international holdings to be dominated by developed markets, and I want more diversity than that. I compensate for the additional risk (higher volatility) of emerging markets by holding a larger bond allocation (age minus 5) than I might otherwise choose.

Be aware that your performance will often be quite different from a portfolio dominated by the S&P 500! Last year, emerging markets were significantly down, while US stocks increased by 30+%. If you aren't prepared to rebalance into emerging markets when this happens, in order to maintain your asset allocation, then it probably isn't the right asset allocation for you.

MindBogler
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Re: Given High PE10, How about this AA?

Post by MindBogler » Fri Jan 10, 2014 12:18 pm

My equities are allocated almost exactly in this manner with a 75/25 equity/FI split. I don't think it is out of line all. Emerging market valuations are quite low and tilting to them isn't any crazier than being overweight in SCV all else being equal. They are both taking on more potential equity risk and volatility than market weight. However, their valuations are diametrically opposed...

QBoy
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Re: Given High PE10, How about this AA?

Post by QBoy » Sat Jan 11, 2014 5:11 am

According to Morningstar, the total world equity portfolio is now about 7 to 8 percent emerging markets. So your 25 percent is about three times the market weight.

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