Quick Question regarding tilting until retirement

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spdoublebass
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Quick Question regarding tilting until retirement

Post by spdoublebass »

I'm hoping this will be my last question for a while. This forum really is unbelievable for helping people like myself avoid big mistakes.

My question is this: if one tilts, should they hold the tilt up until retirement?

This is a fictitious example.

If your equities are:

75% total stock market
25% Small Cap Value

You start out with an 80/20 AA of which means you'd have:
60% total Stock
20% SCV
20% Bonds

Let's say your retirement AA is 50/50
Should you be holding then:
37.5% total stock
12.5% SCV
50% bonds

Or should your end goal be 50% total stock and 50% bonds?

This has come up before in the forum obviously. However, usually when I read those suggestion it's for portfolios > a million.
I'm asking this in regards to portfolios less than a million. For smaller portfolios is it wise to hold your tilts until and in retirement?

I'm assuming one should because otherwise you might be selling off the Small Cap Value (in this example) and it could be when it is low instead of when it is high.

Thanks in advance.
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Avo
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Re: Quick Question regarding tilting until retirement

Post by Avo »

Tilting to SCV is based on the belief that, over time, SCV stocks will do better than TSM (total market). The reason for this may be (1) SCV has higher risk that TSM, or (2) it is a behavioral anomaly. Whatever the explanation is, there is no guarantee that the long-term higher return of SCV will persist into the future, or if it does, whether it will "show up" over the next decade, next 2 decades, etc. Of course it may also be that SCV will do much better than TSM. This happened over the period of the dotcom crash, and now that TSM is headed by frothy FANG stocks, maybe that will be true again.

So there is no right answer to whether to tilt or not, or whether to stop tilting in retirement or not. You have to make your own judgment about which course feels best for you. (And I use the word "feels" specifically, because no objective analysis will give a definitive answer).

I do believe that people who are unsure are better off not tilting. The danger is that if you tilt, and tilting underperforms, that you will then decide tilting is not for you after all, and sell SCV at the wrong time.
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Re: Quick Question regarding tilting until retirement

Post by spdoublebass »

Avo wrote:Tilting to SCV is based on the belief that, over time, SCV stocks will do better than TSM (total market). The reason for this may be (1) SCV has higher risk that TSM, or (2) it is a behavioral anomaly. Whatever the explanation is, there is no guarantee that the long-term higher return of SCV will persist into the future, or if it does, whether it will "show up" over the next decade, next 2 decades, etc. Of course it may also be that SCV will do much better than TSM. This happened over the period of the dotcom crash, and now that TSM is headed by frothy FANG stocks, maybe that will be true again.

So there is no right answer to whether to tilt or not, or whether to stop tilting in retirement or not. You have to make your own judgment about which course feels best for you. (And I use the word "feels" specifically, because no objective analysis will give a definitive answer).

I do believe that people who are unsure are better off not tilting. The danger is that if you tilt, and tilting underperforms, that you will then decide tilting is not for you after all, and sell SCV at the wrong time.
Thanks.
All of what you say is of course correct. I was asking more from the theoretical side.

People tilt many things. I'm just curious if they hold them in proportion through retirement. I only used SCV as an example.
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jbolden1517
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Re: Quick Question regarding tilting until retirement

Post by jbolden1517 »

If by "bonds" you mean short or intermediate term high quality bonds (what is recommended here) then they don't matter for the tilt. Those sorts of bonds mainly dilute the allocation. If you were 90% bonds you could still do 7.5% TSM, 2.5% SV. If you were on 3::1 leverage you would do 300% TSM, 100% SV, -300% cash.

If by "bonds" you start taking on lots of credit risk (lower quality) and duration risk (longer term) then you might want to change your asset allocation as far as stocks since your bond portfolio starts picking up its own characteristics.
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Re: Quick Question regarding tilting until retirement

Post by spdoublebass »

jbolden1517 wrote:If by "bonds" you mean short or intermediate term high quality bonds (what is recommended here) then they don't matter for the tilt. Those sorts of bonds mainly dilute the allocation. If you were 90% bonds you could still do 7.5% TSM, 2.5% SV. If you were on 3::1 leverage you would do 300% TSM, 100% SV, -300% cash.

If by "bonds" you start taking on lots of credit risk (lower quality) and duration risk (longer term) then you might want to change your asset allocation as far as stocks since your bond portfolio starts picking up its own characteristics.
Thank for the reply. Great points. I hadn't thought of that. For this example I was just keeping it basic and meaning a general bond fund.

I guess the reason why I was thinking about it is that I read on this forum that a lot of people have 10% (of their equity) tilts, even some with 5% tilts. I was curious what they did in retirement. If you're 50/50 and have a 5% tilt that becomes 2.5% overall. And people recommend not having anything under 5% overall. That's why I was asking. Do these people eventually just sell it off? Or hold it.

Again, I know I'm over simplifying things.
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Re: Quick Question regarding tilting until retirement

Post by rkhusky »

It is for you to decide. But if you decide that you do not want SCV in retirement, I suggest creating a glide path to divest of the SCV. Like you say, you don't want to hit retirement and then have to sell all your SCV in one fell swoop.

I plan to keep my minor tilts through retirement. My glide path only involves adjusting the stock/bond ratio over time. The stock allocation remains constant over time.
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Re: Quick Question regarding tilting until retirement

Post by jbolden1517 »

spdoublebass wrote: I guess the reason why I was thinking about it is that I read on this forum that a lot of people have 10% (of their equity) tilts, even some with 5% tilts. I was curious what they did in retirement. If you're 50/50 and have a 5% tilt that becomes 2.5% overall. And people recommend not having anything under 5% overall. That's why I was asking. Do these people eventually just sell it off? Or hold it.

Again, I know I'm over simplifying things.
I don't see anything wrong with small tilts. For example in the SIP portfolio (a good portfolio) they have a 5% REIT position but divide it 3% domestic 2% international. They have a 1% holding in high quality corporate bonds with the bulk in junk bonds. Lots of small tilts make a huge difference in portfolio returns. To pick an extreme example a 4% volatility futures holding does wonders for portfolio returns when mixed with USA stocks (almost a percent better) yet you wouldn't want to hold much of it (-8% expected annual return). If you were to do something like 60 days VIX calls you would unquestionably want them to be a under 1% of the portfolio since they in almost all months they would go to 0, while having massive outsized portfolio protecting returns only a small fraction of the time.

I think the 5% rule is just bad advice.
Last edited by jbolden1517 on Mon Jul 31, 2017 3:04 pm, edited 1 time in total.
rkhusky
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Re: Quick Question regarding tilting until retirement

Post by rkhusky »

Removing funds that are only small parts of your portfolio is primarily for simplicity. Sometimes when starting out, people see the huge list of funds available and figure that to be diversified they need a lot of funds. Or perhaps their "financial advisor" has saddled them with 15-20 funds for his own profit. Or perhaps they started out slicing and dicing, owning a fund for each of Morningstar's stock and bond segments. If you have a solid reason for wanting to hold a particular fund as a small fraction of your portfolio, it probably won't hurt.
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Re: Quick Question regarding tilting until retirement

Post by spdoublebass »

rkhusky wrote:Removing funds that are only small parts of your portfolio is primarily for simplicity. Sometimes when starting out, people see the huge list of funds available and figure that to be diversified they need a lot of funds. Or perhaps their "financial advisor" has saddled them with 15-20 funds for his own profit. Or perhaps they started out slicing and dicing, owning a fund for each of Morningstar's stock and bond segments. If you have a solid reason for wanting to hold a particular fund as a small fraction of your portfolio, it probably won't hurt.

Well.... since everyone is writing such good responses I'll be more specific.

I really don't want to start debating my portfolio, but what I have now, and will stay the course with is:
50% VT Total World
25% VBR SCV
25% VSS Int. SC

I guess what I'm asking is when I move along in life and end up with a 50/50 AA It would make me:
25% VT
12.5 VBR
12.5 VSS

Is this normal for people who tilt? Or should I try to put more into VT over the years. I don't want to sell anything (other than to rebalance), but I was wondering if my end goal should be as stated above or not.

Again, I'm really not trying to hash out why I chose what I did. I'm really comfortable with the amount of EM and REITS that these funds include.
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Re: Quick Question regarding tilting until retirement

Post by MotoTrojan »

Could also implement a Larry portfolio and hold a strong SCV tilt, but less equities overall. For me, if I were getting close to retirement, and SCV had a pop-up similar to Novenber 2016, I'd probably transition to 100% broad market.

I believe the value in SCV is its added risk and thus return over long time periods. In retirement, I'm less likely to be around long enough. Thus, if an out performance occurred, I'd happily market-time and sell high.
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Re: Quick Question regarding tilting until retirement

Post by spdoublebass »

MotoTrojan wrote:Could also implement a Larry portfolio and hold a strong SCV tilt, but less equities overall. For me, if I were getting close to retirement, and SCV had a pop-up similar to Novenber 2016, I'd probably transition to 100% broad market.

I believe the value in SCV is its added risk and thus return over long time periods. In retirement, I'm less likely to be around long enough. Thus, if an out performance occurred, I'd happily market-time and sell high.

Thank you for the reply. So, you have to pay attention. If you are close to retirement and ahead of the game with SCV (or any similar tolt) you could transition out of it and take a more broad approach. That's what I was asking. I assumed one would have to, or maybe should, but wasn't sure.
I don't personally tilt REIT's, but from what I understand, those function different than SCV, so one might hold a REIT tilt in retirement as opposed to SCV.
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Re: Quick Question regarding tilting until retirement

Post by MotoTrojan »

spdoublebass wrote:
MotoTrojan wrote:Could also implement a Larry portfolio and hold a strong SCV tilt, but less equities overall. For me, if I were getting close to retirement, and SCV had a pop-up similar to Novenber 2016, I'd probably transition to 100% broad market.

I believe the value in SCV is its added risk and thus return over long time periods. In retirement, I'm less likely to be around long enough. Thus, if an out performance occurred, I'd happily market-time and sell high.

Thank you for the reply. So, you have to pay attention. If you are close to retirement and ahead of the game with SCV (or any similar tolt) you could transition out of it and take a more broad approach. That's what I was asking. I assumed one would have to, or maybe should, but wasn't sure.
I don't personally tilt REIT's, but from what I understand, those function different than SCV, so one might hold a REIT tilt in retirement as opposed to SCV.
That is of course just my take. It also depends on the expected duration of retirement. There is a big difference between 50 and 65, and retiring at 50 with a Larry Portfolio that only has SCV for equities may not be unreasonable at all.

And yes, I would assume whatever reason one held REITs during accumulation would make just as much sense as in retirement. I don't personally tilt to REITs.
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Re: Quick Question regarding tilting until retirement

Post by rkhusky »

You don't have to divest of SCV, but you can. It's whatever you feel comfortable with. To maintain the same level of risk you could increase your stock allocation (i.e. instead of 50% VT, you could bump up to 60%) or you could just keep the same allocation (i.e. 50% VT), with reduced risk. You'll only know the right answer in hind sight.
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Re: Quick Question regarding tilting until retirement

Post by The Wizard »

Reasonable tilts are just fine in retirement.
Many people gradually reduce their overall stock exposure in the five years or so prior to retirement but that has nothing to do with tilting.
Once in retirement, many of us continue to maintain a 50/50 AA, but that can vary...
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Re: Quick Question regarding tilting until retirement

Post by spdoublebass »

The Wizard wrote:Reasonable tilts are just fine in retirement.

I guess that is my question. What is a reasonable tilt?
I've learned quickly in this forum that while it's great to get reassurance, you have to be careful because everyone's financial situation is not the same.

As described above my equities are 50% VT/25%VBR/25%VSS.....
at an AA of 50/50 that would make it 25%VT/12.5%VBR/12.5%VSS/50%Bonds

if my portfolio is 400-500K is that too much risk to hold 25% of my portfolio in small cap tilts?

I've looked at ways to glide out of it. Basically, I could have two simultaneous glide paths. One for an increased bond allotment and one for a decreased tilt.
50% VT/25%VBR/25%VSS could be looked at as a 50% equity tilt. I could shrink that over time to a 20% and end up with 40%VT/5%VBR/5%VSS/50%BND

Again, I'm not trying to make this complicated, it's just the more i have planned out, the less I will screw this up down the road.
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Re: Quick Question regarding tilting until retirement

Post by Admiral »

spdoublebass wrote: if my portfolio is 400-500K is that too much risk to hold 25% of my portfolio in small cap tilts?
25% is not a tilt, in my view. That's a core holding. Whether it's too risky is a question only you can answer. Small Cap Value is an "aggressive" fund (Vanguard's description) that has had fairly significant price swings. A tilt of 5-10% is not going to alter the volatility of your portfolio all that much. A tilt of 25%, with this fund, will. You just have to decide what kind of risk you're comfortable with.
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Re: Quick Question regarding tilting until retirement

Post by spdoublebass »

Admiral wrote:
spdoublebass wrote: if my portfolio is 400-500K is that too much risk to hold 25% of my portfolio in small cap tilts?
25% is not a tilt, in my view. That's a core holding. Whether it's too risky is a question only you can answer. Small Cap Value is an "aggressive" fund (Vanguard's description) that has had fairly significant price swings. A tilt of 5-10% is not going to alter the volatility of your portfolio all that much. A tilt of 25%, with this fund, will. You just have to decide what kind of risk you're comfortable with.
Just to be clear. You understood I meant 25% total. Not in one fund.
If I wanted to end up with a 50/50 AA, which would be divided as so:
25%VT/12.5VBR/12.5%VSS/50% Bonds/fixed income

Are you saying that VBR and VSS in this scenario would still be considered a core holding? I'm just trying to make sure we are on the same page.

Thanks for your reply
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Re: Quick Question regarding tilting until retirement

Post by jbolden1517 »

spdoublebass wrote: I guess that is my question. What is a reasonable tilt?
I've learned quickly in this forum that while it's great to get reassurance, you have to be careful because everyone's financial situation is not the same.

As described above my equities are 50% VT/25%VBR/25%VSS.....
at an AA of 50/50 that would make it 25%VT/12.5%VBR/12.5%VSS/50%Bonds

if my portfolio is 400-500K is that too much risk to hold 25% of my portfolio in small cap tilts?
Small cap value stocks in general will be companies with lots of debts, i.e. they are short bonds. A 12.5% SV is going to have a negative correlation with your bond holdings. You obviously love small value. The bonds you are picking aren't very volatile the SV will likely still dominate a bit, the bonds you are short are probably more volatile than the bonds you are long even at a 4::1 ratio. Those two work together well to produce a 62.5% core of high yielding inflation protected bonds. The 12.5% small cap international is going to have low correlation with the 25% VT for a nice 37.5% balanced equity. I like this portfolio a lot for income with some potential for growth.

I think you are doing great. Well done! Don't be worried about your small value and if you want to go small value on the international do that as well.
There are tweaks I would make. But your tilts are fine.
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Re: Quick Question regarding tilting until retirement

Post by patrick013 »

spdoublebass wrote:
Let's say your retirement AA is 50/50
Should you be holding then:
37.5% total stock
12.5% SCV
50% bonds

Or should your end goal be 50% total stock and 50% bonds?
Either way is not uncommon. 25% Invest Grade IT Corp 25% IT TRSY bonds
and 50% TSM can get thru most market events with a positive return. Or
25% BSV and 25% BIV for bonds - all investment grade.

Some people might tilt Health Care or Information Technology but my
short list is below for a good 10% tilt. VG products are similar. My
favorite is VPU utilities because of low beta, yours is SCV of course.
No problem. If it's 12.5% so be it. Has long horizon written on it.
I'd rather AA a EM index with TSM than this World Stock idea but I'm not
a big Intl investor anyway. Or a 10% tilt for Mid-cap additionally.

Portfolio would look like :
25% ST Bond Index
25% IT Bond Index
10% EM Index
10% SCV
10% MC Index
20% TSM ( has sizable Dev Intl revenues )

Image
age in bonds, buy-and-hold, 10 year business cycle
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Re: Quick Question regarding tilting until retirement

Post by Northern Flicker »

If your equities are:

75% total stock market
25% Small Cap Value

You start out with an 80/20 AA of which means you'd have:
60% total Stock
20% SCV
20% Bonds

Let's say your retirement AA is 50/50
Should you be holding then:
37.5% total stock
12.5% SCV
50% bonds

Or should your end goal be 50% total stock and 50% bonds?
One reasonable strategy (among many) would be to see where they stand at retirement. If SCV significantly overperformed, dial it back and just hold TSM for US equity exposure-- this is just taking the opportunity the market gave you to be guaranteed of beating the market). Otherwise, stick with the same 3:1 ratio of TSM:SCV as held until then.
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Re: Quick Question regarding tilting until retirement

Post by The Wizard »

I think almost any sort of tilt or core emphasis to growth/value or too large/mid/small caps is going to work out okay so long as you stay with it and don't sell out during underperforming periods.
And Im talking about index style funds with a large number of holdings.

The usual advice to favor a total stock market approach for maximum diversification is "good" but not the only way to get to the desired end result...
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Re: Quick Question regarding tilting until retirement

Post by saltycaper »

I wouldn't change a tilt just because I was retired or nearing retirement unless I was making specific change to the risk profile of my asset allocation, for instance, trying to make it less vulnerable to inflation, reducing term risk, etc. (I don't mean these motivations are specific to your tilts, I'm just speaking generally.)

If the idea is that a tilt may pay off only over the long term, and the length of time you have left to invest is shrinking, therefore you should undue the tilt, that I disagree with. Presumably you have tilted because you believe in factor diversification. If so, it doesn't make sense to me to reduce factor diversification just because your investment timeframe has shrunk.

I would make an exception if I was trying to simplify things for myself in old age or for my spouse. Then it's more of a practical matter of reducing the chance of making a behavioral error or reducing the amount of attention the portfolio requires.
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Re: Quick Question regarding tilting until retirement

Post by spdoublebass »

All of these comments were VERY helpful. When you read about things you don't always get the full picture. I am and have been very happy with my tilts, but it was hard to find information on what happens 30 years from now. I'm just trying to get as much in my IPS as possible so I can't change anything for some reason.

I think I may simplify things during retirement. Not that 3 funds are too much, but I may want less risk.

This forum is unbelievable with advice/information.

Thanks again.
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