Long Term Allocation High Risk Tolerance

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Pharmacist
Posts: 242
Joined: Thu Apr 14, 2016 5:28 pm

Long Term Allocation High Risk Tolerance

Post by Pharmacist » Thu Apr 14, 2016 11:47 pm

Hello. I am new to this forum and also new to investing. My age is in the low 20s and I am currently a pharmacy student. Though I currently have a very small amount invested and a small income that goes towards education costs, I will be graduating soon and am looking to save and invest aggressively once I begin working. My income upon graduation I estimate to be ~120k. I have been reading a lot about asset allocation and would be very interested in getting some feedback/suggestions on the approach that I have formulated.

Emergency funds: 0 (Will fix this upon graduation, I'm in part dependant on my parents aside from my cost of living which is on student loans)
Debt: Upon graduation I will have a debt of ~130k (~5.4% interest, will be looking to refinance to a lower rate)
Tax Filing Status: Single
Tax Rate: Upon graduation it will be 28% Federal, 4.8% State (Both marginal)
State of Residence: OH
Age: 24
Desired Asset allocation: 100% stocks / 0% bonds
Desired International allocation: 0% of stocks

Investment Accounts/Options:

Traditional 401k/Roth 401k:
Stable Value Fund http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIJ
US Bond Index http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIK
Diversified Bond http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIL
Inflation-Protected http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIM
Conservative Lifestyle http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIN
Moderate Lifestyle http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIO
Aggressive Lifestyle http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIP
Growth and Income http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIQ
Core Equity http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIR
Socially Responsible Fund http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05QT7
Large Cap Growth http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIS
Mid Cap Index http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIT
Global Equity http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIU
International Equity Index http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIV
International Equity http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIW
Small Cap Value http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIX
Small Cap Index http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIY
Small Cap Growth http://profile.morningstar.com/Profile/HTMLPage.asp?ClientCode=XRX&ID=SPUSA05AIZ

Roth IRA:
E*Trade Roth IRA

Taxable Investments:
E*Trade Brokerage

So currently I am contributing to my Roth 401k up to my employer match. Upon graduation I will switch to the Traditional 401k.

My priorities upon graduation will be:
1) Traditional 401k up to employer match
2) Everything else will go towards student loans

This is something I am still unsure about. Depending on what my interest rate is on my loans after I refinance I may reconsider this.

After my loans are paid off:
1) Max Yearly Traditional 401k Contribution
2) Max Roth IRA
3) Taxable Accounts

This I am fairly confident with.

Now what I am more unsure about is what my actual asset allocation should be. I understand that there are two types of allocation... diversity of asset classes and diversity within an asset class. I also understand that the purpose of diversification isn't necessarily to maximize the potential of returns but rather to minimize volatility and risk while sacrificing as little potential of returns as possible.

Seeing as my retirement is well over 30 years away, I am of the mindset that I can endure market volatility and would like to aim to maximize returns. Because of this I think it is logical to sacrifice diversity of asset classes and weight my portfolio heavily if not entirely in equities. I think it's pretty much an established fact that equities will outperform other asset classes in the long term so I feel pretty confident with this position.

Now in terms of diversity within this asset class, I am looking to diversify strongly. Rarely does anyone beat the market and I am certainly not an exception to this rule. I could continue justifying my logic behind diversification within equities but I don't think this is necessary.

So the bottom line is that I am looking to hold 100% equities with strong diversification (with the exception of international exposure) for at least the next 10 years, a majority within tax sheltered accounts.

My real question is which funds should I hold? What is a good Large/Mid/Small Cap balance? Should I even bother with international?

Jack Bogle himself said that international exposure isn't entirely necessary seeing as a significant amount of revenue for many domestic companies is derived from international markets anyways. I don't entirely agree with this statement but it further justifies my lack of desire to buy international. Domestic stock has traditionally outperformed international and I don't see this changing.

My 401k does not offer a total market fund and I am looking for a significant Small/Mid Cap tilt anyways. I have come up with the following:

Core Equity (VIIIX): 50%
Mid Cap Index (VMCPX): 20%
Small Cap Index (VSCPX): 30%

The expense ratios on these funds are the lowest of the funds offered which is also a bonus. The core equity is based on the S&P 500 and overlaps quite a bit with the Mid Cap Index which is why Mid Cap is only 20% while Small Cap is at 30%. This allocation is as follows:

Image

Am I tilted too strongly towards Small/Mid Cap? Do I need international exposure? Other asset classes considering my risk tolerance? Would you consider the growth or value funds offered in my 401k? Am I set up to maximize returns or is this allocation not good? Overall thoughts? Like I said before I do not have a significant amount of money currently invested but am trying to finalize a plan for the near future when I am in the position to save and invest. Thanks.
Last edited by Pharmacist on Fri Apr 15, 2016 12:55 am, edited 2 times in total.

User avatar
in_reality
Posts: 4320
Joined: Fri Jul 12, 2013 6:13 am

Re: Long Term Allocation High Risk Tolerance

Post by in_reality » Fri Apr 15, 2016 12:12 am

Pharmacist wrote:
Jack Bogle himself said that international exposure isn't entirely necessary seeing as a significant amount of revenue for many domestic companies is derived from international markets anyways. I don't entirely agree with this statement but it further justifies my lack of desire to buy international. Domestic stock has traditionally outperformed international and I don't see this changing.


I think the US and Intl should have equal returns. This is as the market will price stocks at a level where they are competitive with alternatives.

Sometimes the US will do better, and sometimes international. Currencies (that the stocks are based in) will too. So I prefer to hold international for the diversification.

I am not Jack Bogle though so ignore me. Have a look at this though. It's worth the time to read https://www.vanguard.com/pdf/ISGGEB.pdf

[As an aside, Jack also said no to ETFs. As an expat who can't use mutual funds, I am glad someone ignored Jack so that I can do low cost index investing!]

Pharmacist
Posts: 242
Joined: Thu Apr 14, 2016 5:28 pm

Re: Long Term Allocation High Risk Tolerance

Post by Pharmacist » Fri Apr 15, 2016 12:22 am

in_reality wrote:
Pharmacist wrote:
Jack Bogle himself said that international exposure isn't entirely necessary seeing as a significant amount of revenue for many domestic companies is derived from international markets anyways. I don't entirely agree with this statement but it further justifies my lack of desire to buy international. Domestic stock has traditionally outperformed international and I don't see this changing.


I think the US and Intl should have equal returns. This is as the market will price stocks at a level where they are competitive with alternatives.

Sometimes the US will do better, and sometimes international. Currencies (that the stocks are based in) will too. So I prefer to hold international for the diversification.

I am not Jack Bogle though so ignore me. Have a look at this though. It's worth the time to read https://www.vanguard.com/pdf/ISGGEB.pdf

[As an aside, Jack also said no to ETFs. As an expat who can't use mutual funds, I am glad someone ignored Jack so that I can do low cost index investing!]


Thank you. I skimmed through the link and will take the time to read it more thoroughly. It seems like the bottom line is that international is great for diversification and I will no doubt own some international in the future, but I am not convinced that it will outperform U.S. stocks let alone match them and am not sure that I should add them to my allocation until my risk tolerance drops to the point that I am also adding bonds.

User avatar
in_reality
Posts: 4320
Joined: Fri Jul 12, 2013 6:13 am

Re: Long Term Allocation High Risk Tolerance

Post by in_reality » Fri Apr 15, 2016 12:34 am

Pharmacist wrote:Thank you. I skimmed through the link and will take the time to read it more thoroughly. It seems like the bottom line is that international is great for diversification and I will no doubt own some international in the future, but I am not convinced that it will outperform U.S. stocks let alone match them and am not sure that I should add them to my allocation until my risk tolerance drops to the point that I am also adding bonds.


OK, say what you will but the asset class you are picking to overweight has lower expected returns than international stocks. Of course they are probably safer especially compared to emerging markets. No guarantees of course.

https://www.researchaffiliates.com/Asse ... ities.aspx

Anyway, pick an AA that is right for you and follow that plan. That is most important. All US is fine. Just don't sell US to buy international if international starts to do better.

Pharmacist
Posts: 242
Joined: Thu Apr 14, 2016 5:28 pm

Re: Long Term Allocation High Risk Tolerance

Post by Pharmacist » Fri Apr 15, 2016 12:47 am

in_reality wrote:
Pharmacist wrote:Thank you. I skimmed through the link and will take the time to read it more thoroughly. It seems like the bottom line is that international is great for diversification and I will no doubt own some international in the future, but I am not convinced that it will outperform U.S. stocks let alone match them and am not sure that I should add them to my allocation until my risk tolerance drops to the point that I am also adding bonds.


OK, say what you will but the asset class you are picking to overweight has lower expected returns than international stocks. Of course they are probably safer especially compared to emerging markets. No guarantees of course.

https://www.researchaffiliates.com/Asse ... ities.aspx

Anyway, pick an AA that is right for you and follow that plan. That is most important. All US is fine. Just don't sell US to buy international if international starts to do better.


This is something I will have to look into in more detail. The difference in expected return is huge (and terrible for U.S.) I appreciate your input and luckily I have a good amount of time to make a decision.

young-ish
Posts: 35
Joined: Fri Apr 15, 2016 12:10 am

Re: Long Term Allocation High Risk Tolerance

Post by young-ish » Fri Apr 15, 2016 12:51 am

Great job thinking about your asset allocation before you have a good deal of money to invest.

One thing to be aware of is that many people who are 30 years away from retirement think they can endure big losses in their portfolio because "stocks win in the long run". When equities tank and they see years worth of their hard earned money vanish in a week they often panic and sell out.

Since you didn't have the fortune to experience the two major stock market declines last decade you can't look back at how you reacted in real time during 2008 or Y2K. One way to test your endurance is to start your asset allocation less aggressively and then increase your stock allocation during the next major collapse in stock values.

User avatar
in_reality
Posts: 4320
Joined: Fri Jul 12, 2013 6:13 am

Re: Long Term Allocation High Risk Tolerance

Post by in_reality » Fri Apr 15, 2016 1:18 am

Pharmacist wrote:This is something I will have to look into in more detail. The difference in expected return is huge (and terrible for U.S.) I appreciate your input and luckily I have a good amount of time to make a decision.


Keep in mind that "expected returns" does not mean "guaranteed returns". International, especially emerging, is more risky** I believe for a variety of reasons. Also, some of that expected return is just currency fluctuation.

I do believe Bogle is right when he says you would be fine just investing in the US. You said "high risk tolerance" though so I just meant to point out international looks, and again "looks" does not mean "definitely will turn out to be", attractive.

If search, you can find threads of people being very disappointed in international returns in the recent past.

**risk I believe is the chance of not getting expected or even acceptable returns for the price you paid.

Pharmacist
Posts: 242
Joined: Thu Apr 14, 2016 5:28 pm

Re: Long Term Allocation High Risk Tolerance

Post by Pharmacist » Fri Apr 15, 2016 2:33 am

in_reality wrote:
Pharmacist wrote:This is something I will have to look into in more detail. The difference in expected return is huge (and terrible for U.S.) I appreciate your input and luckily I have a good amount of time to make a decision.


Keep in mind that "expected returns" does not mean "guaranteed returns". International, especially emerging, is more risky** I believe for a variety of reasons. Also, some of that expected return is just currency fluctuation.

I do believe Bogle is right when he says you would be fine just investing in the US. You said "high risk tolerance" though so I just meant to point out international looks, and again "looks" does not mean "definitely will turn out to be", attractive.

If search, you can find threads of people being very disappointed in international returns in the recent past.

**risk I believe is the chance of not getting expected or even acceptable returns for the price you paid.


I may consider just buying into some select indices such as S. Korea, Japan, China, and India in my Roth and weight them against each other based on total world market capitalization for a total equities allocation of 10-20% as opposed to buying a total international index. Or maybe just buy an emerging market index. This is just an instinct and I'd have to follow up with further research but it would take a lot to convince me that Europe is going anywhere. Maybe this goes against the grain of my strategy of broad equities diversification and the resistance to choose individual stocks or sectors or time the market but at the same time I'd still be buying an index of an entire country.

User avatar
in_reality
Posts: 4320
Joined: Fri Jul 12, 2013 6:13 am

Re: Long Term Allocation High Risk Tolerance

Post by in_reality » Fri Apr 15, 2016 4:38 am

Pharmacist wrote:I may consider just buying into some select indices such as S. Korea, Japan, China, and India in my Roth and weight them against each other based on total world market capitalization for a total equities allocation of 10-20% as opposed to buying a total international index. Or maybe just buy an emerging market index. This is just an instinct and I'd have to follow up with further research but it would take a lot to convince me that Europe is going anywhere. Maybe this goes against the grain of my strategy of broad equities diversification and the resistance to choose individual stocks or sectors or time the market but at the same time I'd still be buying an index of an entire country.


The theory is that the market and it's participants all know European companies' prospects and this is baked into their price.

I underweight developed international because I want to overweight the US (home currency) and emerging (it has less correlation to the US than developed international does).

Keep in mind that "European companies" will have revenue from the US and emerging markets as well. Maybe the general economy in Europe isn't going to be growing by leaps and bounds, but that doesn't mean European companies can't get revenue and profit anywhere.

Anyway, I just encourage you to look at if and how you want to hold international, and not dismiss it entirely because a very great person in a different generation didn't see the use for it. Costs to do so have come down!

How much you are able to contribute will make a far, far greater impact at this point than allocation will so really and truly don't worry about it all that much. It makes sense to consider international though as it's half the market and merits some planning. Even just adding an emerging fund would be better than US only I think.

Ari
Posts: 452
Joined: Sat May 23, 2015 6:59 am

Re: Long Term Allocation High Risk Tolerance

Post by Ari » Fri Apr 15, 2016 4:47 am

Pharmacist wrote:This is just an instinct and I'd have to follow up with further research but it would take a lot to convince me that Europe is going anywhere.

Why is that relevant for investing in it? If Europe is going badly, its stocks will have already fallen until (risk-adjusted) expected return per share is as high as in the US. If you know better than the market and think Europe is overvalued, then it's a good strategy to wait until the market realizes that you were right and the market was wrong and then buy into it, but that's short term. And if you're that smart, you shouldn't be on the Bogleheads forum, because here most advice is centered on the belief that we don't know better than the markets (and the high-paid full-time experts with huge research teams).

Whether or not you think Europe "is going anywhere" shouldn't be relevant in whether or not you want to invest in it. That's not how markets work. Just like it doesn't make sense to only invest in Apple because you don't see other companies being as profitable.
All in, all the time.

User avatar
sunnywindy
Posts: 282
Joined: Sat Jan 18, 2014 4:42 pm
Location: Wilmington, NC

Re: Long Term Allocation High Risk Tolerance

Post by sunnywindy » Fri Apr 15, 2016 6:45 am

1. Your small/mid cap tilt is fine. Just be aware that these parts of the markets can and will underperform for long stretches, but overall should greatly outperform the large caps over your long time horizon.

2. There isn't really any reason to add bonds, but if you did, I wouldn't go over 10% at your age. Right now the Agg/total bond market type bond funds are yielding around 2%, which means in inflation adjusted or 'real return' statistics, it is a 0% gain (inflation is around 2%).

3. You really should add a minimum of 20% international to the portfolio. You could even go up to a 50/50 split and that would be ok. Vanguard has recommended 20% to 40% international. The main reason is diversification.

If you look at the chart, you can see years where the US beats international and some years that international beats the US. You will have (potentially) a smoother ride up with more diverse asset classes in the portfolio than with just the US alone. I was happy that I had emerging markets exposure in the mid 2000's as it did very well. However, the past three years emerging markets have done very poorly, but the US has done ok, so it all sort of balances out. As nobody can predict the world, I would rather own it all. Good luck!
Image
Powered by chocolate!

User avatar
TomP10
Posts: 133
Joined: Tue Mar 18, 2014 4:13 am

Re: Long Term Allocation High Risk Tolerance

Post by TomP10 » Fri Apr 15, 2016 7:53 am

It should be emphasized that the first thing to determine is your equity-bond split. Before worrying about equity allocation you need to get a handle on how much risk you need to take and how much risk you can emotionally handle.

You suggest you are willing to go 100% equity. That's fine --- as long as you really have thought out the consequences. I, for one, have been heavily influenced by Bill Bernstein's writings. Reading his work has made me more conservative -- not only in the % of bonds I hold but also more heavily relying on government securities. I think it is a rare bird that can handle being 100% in equities. I think 10% bond would be the minimum I would recommend. Have you read Bill Bernstein's books?

Second, you need to decide on your domestic-foreign split. It sounds like you are thinking all US. Again, influenced by Bernstein I think some allocation toward international equities makes sense. Obviously Jack Bogle has a different view and it is hard to say you are wrong if you follow his lead. However, there are many great foreign companies you are missing out on if you only hold US firms. Vanguard's target funds are now 40% foreign equities, 60% US. That makes sense to me.

Third, many people tilt small and/or value. If you are going to do so, it looks like you have access to a Small Value DFA fund. I would use that instead of the Vanguard Small Cap fund.


Tom
"It is remarkable how much long term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." -- Charlie Munger

User avatar
nisiprius
Advisory Board
Posts: 34341
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Long Term Allocation High Risk Tolerance

Post by nisiprius » Fri Apr 15, 2016 7:59 am

Pharmacist, what is the procedure you've used for determining that you have a "high risk tolerance?'

People often expect young people to have, or even feel that young people "should" have a high risk tolerance... especially people whose livelihood comes from selling relatively risky investments. But you are not in this world to live up to their expectations.

Physical courage isn't the same as financial courage.
Samuel Butler wrote:A man can stand being told that he must submit to a severe surgical operation, or that he has some disease which will shortly kill him, or that he will be a cripple or blind for the rest of his life; dreadful as such tidings must be, we do not find that they unnerve the greater number of mankind; most men, indeed, go coolly enough even to be hanged, but the strongest quail before financial ruin, and the better men they are, the more complete, as a general rule, is their prostration. Suicide is a common consequence of money losses; it is rarely sought as a means of escape from bodily suffering.
If you are in your "low 20s" then it is unlikely that had serious money in the stock market in 2008-2009--money that was the result of diligently saving for years and years and years. Did you even have a serious part of your life savings in the stock market around the end of 2011?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Pharmacist
Posts: 242
Joined: Thu Apr 14, 2016 5:28 pm

Re: Long Term Allocation High Risk Tolerance

Post by Pharmacist » Fri Apr 15, 2016 2:35 pm

nisiprius wrote:Pharmacist, what is the procedure you've used for determining that you have a "high risk tolerance?'

People often expect young people to have, or even feel that young people "should" have a high risk tolerance... especially people whose livelihood comes from selling relatively risky investments. But you are not in this world to live up to their expectations.

Physical courage isn't the same as financial courage.
Samuel Butler wrote:A man can stand being told that he must submit to a severe surgical operation, or that he has some disease which will shortly kill him, or that he will be a cripple or blind for the rest of his life; dreadful as such tidings must be, we do not find that they unnerve the greater number of mankind; most men, indeed, go coolly enough even to be hanged, but the strongest quail before financial ruin, and the better men they are, the more complete, as a general rule, is their prostration. Suicide is a common consequence of money losses; it is rarely sought as a means of escape from bodily suffering.
If you are in your "low 20s" then it is unlikely that had serious money in the stock market in 2008-2009--money that was the result of diligently saving for years and years and years. Did you even have a serious part of your life savings in the stock market around the end of 2011?


My mindset is simply that I can and will stay invested for 30+ years and can ride out any volatility, even a crash such as that in 2008. Of course as I age I will revisit my allocation and add asset class diversity (bonds, etc.) eventually to the point of a very conservative portfolio as I near retirement. I was not in the market at all prior to 2014 and only have a small amount invested in my 401k and under 1k sitting in cash in my Roth IRA (honestly not even worth the transaction fee to invest until I contribute more).

Pharmacist
Posts: 242
Joined: Thu Apr 14, 2016 5:28 pm

Re: Long Term Allocation High Risk Tolerance

Post by Pharmacist » Fri Apr 15, 2016 2:47 pm

TomP10 wrote:It should be emphasized that the first thing to determine is your equity-bond split. Before worrying about equity allocation you need to get a handle on how much risk you need to take and how much risk you can emotionally handle.

You suggest you are willing to go 100% equity. That's fine --- as long as you really have thought out the consequences. I, for one, have been heavily influenced by Bill Bernstein's writings. Reading his work has made me more conservative -- not only in the % of bonds I hold but also more heavily relying on government securities. I think it is a rare bird that can handle being 100% in equities. I think 10% bond would be the minimum I would recommend. Have you read Bill Bernstein's books?

Second, you need to decide on your domestic-foreign split. It sounds like you are thinking all US. Again, influenced by Bernstein I think some allocation toward international equities makes sense. Obviously Jack Bogle has a different view and it is hard to say you are wrong if you follow his lead. However, there are many great foreign companies you are missing out on if you only hold US firms. Vanguard's target funds are now 40% foreign equities, 60% US. That makes sense to me.

Third, many people tilt small and/or value. If you are going to do so, it looks like you have access to a Small Value DFA fund. I would use that instead of the Vanguard Small Cap fund.


Tom


I should have made it more clear in my origional post but as I age I plan to incrementally move my portfolio to a more conservative position in terms of asset class. The allocation that I am currently formulating, however, I do plan to stick with for at least 10 years.

While I am fairly confident that Small/Mid Cap will outperform Large Cap in the long term, I am not as much convinced that there is as significant of a difference in returns when it comes to Value vs Blend vs Growth. In addition, the expense ratio is significantly higher in the Small Cap Value fund offered. I could always find a cheaper fund in my Roth IRA but I am still hesitant to move away from Blend. This is something that I will further consider.

Pharmacist
Posts: 242
Joined: Thu Apr 14, 2016 5:28 pm

Re: Long Term Allocation High Risk Tolerance

Post by Pharmacist » Fri Apr 15, 2016 2:53 pm

sunnywindy wrote:1. Your small/mid cap tilt is fine. Just be aware that these parts of the markets can and will underperform for long stretches, but overall should greatly outperform the large caps over your long time horizon.

2. There isn't really any reason to add bonds, but if you did, I wouldn't go over 10% at your age. Right now the Agg/total bond market type bond funds are yielding around 2%, which means in inflation adjusted or 'real return' statistics, it is a 0% gain (inflation is around 2%).

3. You really should add a minimum of 20% international to the portfolio. You could even go up to a 50/50 split and that would be ok. Vanguard has recommended 20% to 40% international. The main reason is diversification.

If you look at the chart, you can see years where the US beats international and some years that international beats the US. You will have (potentially) a smoother ride up with more diverse asset classes in the portfolio than with just the US alone. I was happy that I had emerging markets exposure in the mid 2000's as it did very well. However, the past three years emerging markets have done very poorly, but the US has done ok, so it all sort of balances out. As nobody can predict the world, I would rather own it all. Good luck!
Image


Thank you for you post. It seems quite clear based upon the feedback here that I need to consider some international exposure. Based on historical data (which I understand doesn't guarantee future returns), an international index seems to yeild similar returns to domestic large cap while an emerging market fund carries much more volatility while at the same time yields even higher long term returns.

I am thinking of allocating 20% of equities to foreign, half to international index and half to an emerging markets index.

My 401k offers no emerging markets index so that I will have to account for in my Roth IRA.

My 401k offers VDIPX, would that be the ideal international fund of the offerings that I listed?

User avatar
sunnywindy
Posts: 282
Joined: Sat Jan 18, 2014 4:42 pm
Location: Wilmington, NC

Re: Long Term Allocation High Risk Tolerance

Post by sunnywindy » Sat Apr 16, 2016 2:18 am

Yes, VDIPX or Vanguard Developed Markets is a superior option to have because it is so cheap, it covers the entire breadth of the developed world, and it now includes Canada and small caps (the previous underlying index did not includes these). Consider yourself lucky to have this option.

Another chart you may enjoy is from Fidelity that shows the tug-of-war between US and International stocks and which outperforms the other and when. It shows that one asset class will always be outperforming the other and that your portfolio total return will be smoother over time with both. It also means you can't give up on either the US or developed when they underperform. Trust the chart! Trust the historical data (with a grain of salt)! It all seems to work in cycles!

Image

Regarding Emerging Markets, good funds are Vanguard Emerging Markets (VWO), iShares Emerging Markets (IEMG, not EEM), and Schwab Emerging Markets (SCHE). These are all super low cost and very broad in scope. I prefer VWO because they are adding China A-Shares (more China exposure) to the index and I believe long term this is a very good move. The other's will do this at some time in the future, I predict.

You can get fancier Emerging Market exposure (I also own iShares Emerging Market Minimum Volatility EEMV), but at your age something like this would just be a drag on returns. Just go market cap weighting and be done with it.
Powered by chocolate!

Pinotage
Posts: 181
Joined: Sat Nov 12, 2011 6:02 am

Re: Long Term Allocation High Risk Tolerance

Post by Pinotage » Sun May 08, 2016 8:20 am

Hi Pharmacist,

Bumping this thread because I noticed your questions about value vs. growth.

It is great that you are thinking about investment and retirement savings so early in life. A few things to consider:

1 - This early in your investment journey, your savings rate will far, far outweigh your market return.

2 - This early in your professional life, focusing on your career development and earning potential will likely reap higher reward than value vs. growth.

3 - This early in your financial life, living below your means and managing any debt will go a long way in setting you up for a financially successful life.

So the theme is "this early". You've got a long road ahead of you. Life happens along the way. Focusing on a high savings rate, increasing income, and LBYM will help you have the resources to build a strong financial future. No matter what asset allocation or tilt you decide on these three things will increase your odds of success.

And since it is early May, perhaps congratulations are in order and you are now officially a "Pharmacist"? After becoming licensed, of course :wink:

Cheers!

LibertyLover
Posts: 74
Joined: Thu May 05, 2016 5:56 am

Re: Long Term Allocation High Risk Tolerance

Post by LibertyLover » Sun May 08, 2016 8:58 am

The expense ratios on these funds are the lowest of the funds offered which is also a bonus. The core equity is based on the S&P 500 and overlaps quite a bit with the Mid Cap Index which is why Mid Cap is only 20% while Small Cap is at 30%. This allocation is as follows:

Image


How did you come up with this allocation chart for your investments? I'd like to do it on mine.

I heavily tilt in order of highest to lowest: small cap, large and small value, and international Emerging Markets.

Play around with https://portfoliocharts.com/ and you'll get a decent picture of the pros and cons of your allocation.

Post Reply