24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

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GentlemanInvestor
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24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by GentlemanInvestor »

Hello all,

I posted on this forum a few weeks ago on investing in mutual funds for my Roth IRA. I have decided to go down the ETF route until I have enough money to upgrade to admiral shares for each individual investment.

I am ok with complexity and I am able to tolerate extreme risk as a long-term investor. I seek guidance on how I can make small but effective changes in what I have come up with thus far, particularly in regards to redundancies and potentialities for higher long term returns. I would like to somewhat retain the overall framework of my portfolio as I am attached to the final product resulting from many hours of research and deliberation. I have much to learn about personal finance and I look forward to continuing on this journey, it is all very fascinating!

Theoretical Roth IRA Asset Allocation in my Portfolio:

Allocation 100% Equity:

80% Domestic Stocks:

VTI Vanguard Total Stock Market 30% - Large Blend
VONG Vanguard Russell 1000 Growth 15% - Large Growth

Sector Specific -
VHT Vanguard Health Care - 10%
VGT Vanguard Information Technology - 10%
VFH Vanguard Financials - 5%

VNQ Vanguard REIT 5% - US Real Estate
VYM Vanguard High Dividend Yield 5% - Dividends/Large Value

20% Foreign Stocks:

VXUS Vanguard Total International Stock 10% - Foreign Large Blend
VNQI Vanguard Global ex-U.S. Real Estate 5% - Global Real Estate
VYMI Vanguard International High Dividend Yield 5% - Dividends/Foreign Large Value


I appreciate the opportunity of heeding what this fine community of experienced investors has in mind for my portfolio.
123
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Re: 24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by 123 »

I know it's not very exciting but I would just use Vanguard Total Market (VTI) and Vanguard Extended Market (VXF) in whatever combination suits you. VXF is more of a bet on smaller companies, instead of specific sectors. But there is no assurance that VXF will outperform VTI, sometimes VTI is the champ.
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PFInterest
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Re: 24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by PFInterest »

it looks needlessly complex with such small slices that may or may not impact your overall picture 40 years from now.
MotoTrojan
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Re: 24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by MotoTrojan »

Simplify. If you want to tilt, pick one tilt (small-cap value, emerging market, etc...) and be done with it for now).

I started with an overly complicated portfolio like this before realizing it makes life difficult, especially with small monthly contributions (Roth limits), and adds no real value; 5% holdings are insignificant. I opted for 55% VTI (Total US), 25% VXUS (Total Int.) and 20% VIOV (S&P600 SCV) and now it is time to save-save-save.

Why Large-cap Growth... Did you know that Large-cap Value was historically better for a long horizon? Why those sectors... Planning to change that strategy if/when they outperform? Why a dividend related fund, when total return is what matters?
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spdoublebass
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Re: 24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by spdoublebass »

I do not want to give you advice because I am nowhere near as knowledgable as others on this site. I can share some things that I've pieced together from reading as much of this forum as I could the last 6 months.

-Great job of doing this at 24.

-When I put my first portfolio together I had many funds. I posted it here and someone commented all you really need is VTI and VXUS. At first I thought they were talking down to me, or assuming I didn't have a risk tolerance that I knew I did. In reality, they were saying any of that, they were giving great advice. All anyone really needs is VTI and (if you want international) VXUS. This is true especially in the beginning. When you are first starting out, if you know these two will be you "main" funds, then one could just feed those their first few years. This is what I believe other were trying to tell me. I know more now then I did 6 months ago when I started out. It won't change anything if you implement a bunch of tilts, but it won't hurt you to wait to implement those tilts either.

-I'm not saying to not tilt towards growth, but I will say (even with my limited knowledge) many people here probably tilt to Value over Growth...If they tilt at all. I'd search the forum on that topic.

-Bogle and Bogleheads from what I have read on this forum do not suggest tilting sectors. There are plenty of Tech, Health, and Financials in VTI. The one exception could be for REIT's. However, REIT's are included in VTI and VXUS (and even VYMI). Again, I'm not giving you advice only repeating what I've read. I was thinking of tilting REIT's as well, but I decided not to. I passed on them because I had market weight already from the other funds. Also, there are many posts that say the REIT ship might have already sailed. There might be a window for International REIT's still, but that's really over my head. You should search the forum for this topic.

-VYMI.... I looked into this fund when I first started on this site. I was looking at it not for Dividends but for the Value nature of this fund. The advice I got (or read) was that it may one day turn into a good fund (from the value perspective) but be careful of the Volume. The Volume today for VMYI was 43,972 and the Average Volume is 52,214. That's really low. Again, I'm no investing Guru and can't tell you everything about what this means. I can say thought that low volume can mean it's hard to sell. VTI for example has an average volume of 1.939 million.

-On a personal note. I set out with the idea of having many funds (maybe like 8-10), then I opened my account and decided on 4 (not including 1 bond fund). Since then I simplified to 3 and just had a recent post of thinking of going to 2. All I mean is, the more I learn, the more things to me point to simplification. Simplification doesn't mean I have given up, quite the opposite. To me it means I have read a lot and learned I don't have control of the market. Tilts may or may not pan out. Bogle himself with his TellTALE charts says everything will revert back to the mean eventually.
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willthrill81
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Re: 24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by willthrill81 »

MotoTrojan wrote: Thu Aug 24, 2017 6:19 pm Simplify. If you want to tilt, pick one tilt (small-cap value, emerging market, etc...) and be done with it for now).

I started with an overly complicated portfolio like this before realizing it makes life difficult, especially with small monthly contributions (Roth limits), and adds no real value; 5% holdings are insignificant. I opted for 55% VTI (Total US), 25% VXUS (Total Int.) and 20% VIOV (S&P600 SCV) and now it is time to save-save-save.

Why Large-cap Growth... Did you know that Large-cap Value was historically better for a long horizon? Why those sectors... Planning to change that strategy if/when they outperform? Why a dividend related fund, when total return is what matters?
+1

Even for those who want to tilt, I think that holding 50% in TSM and the other 50% in some combination of LCV/SC/SCV/EM (maybe 12.5% in each) is a simple strategy that's likely to outperform the OP's.
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MotoTrojan
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Re: 24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by MotoTrojan »

willthrill81 wrote: Thu Aug 24, 2017 10:00 pm
MotoTrojan wrote: Thu Aug 24, 2017 6:19 pm Simplify. If you want to tilt, pick one tilt (small-cap value, emerging market, etc...) and be done with it for now).

I started with an overly complicated portfolio like this before realizing it makes life difficult, especially with small monthly contributions (Roth limits), and adds no real value; 5% holdings are insignificant. I opted for 55% VTI (Total US), 25% VXUS (Total Int.) and 20% VIOV (S&P600 SCV) and now it is time to save-save-save.

Why Large-cap Growth... Did you know that Large-cap Value was historically better for a long horizon? Why those sectors... Planning to change that strategy if/when they outperform? Why a dividend related fund, when total return is what matters?
+1

Even for those who want to tilt, I think that holding 50% in TSM and the other 50% in some combination of LCV/SC/SCV/EM (maybe 12.5% in each) is a simple strategy that's likely to outperform the OP's.
Definitely better than what the OP had, but still tinkering more than is probably necessary (why SC if you believe in SCV). Another change I have considered is to swap my Total Int. for Small-cap Int. to get more diversification, since large-caps are so multi-national. But after my initial portfolio, I don't think I'll ever hold more than 4 equity-related classes (up to 8 funds due to TLH'ing).

I understand where the OP is coming from. I am also a money-tinkerer, and get a kick out of managing a complicated spreadsheet and moving funds around; but it just isn't necessary, and to be frank I think some of the funds you are interested in are downright going to reduce risk-adjusted returns, on top of the annoying complexity.
WanderingDoc
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Re: 24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by WanderingDoc »

What would be the point of holding ETFs instead of mutual funds in an IRA? Or said another way, what are the advantages/disadvantages of ETFs and mutual funds in IRAs, for the average investor?
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Topic Author
GentlemanInvestor
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Re: 24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by GentlemanInvestor »

I must thank you all for your replies. My naivety and arrogance would have started me off on shakier footing. As I age, I continue to learn the value of asking for help.

I will focus my attention on two to four equity funds maximum at this time. Consensus tells me that a majority holding in VTI and a substantial portion in VXUS are good starting points. I am open to more suggestions on proper percentages for these investments, as well as to adding one or two funds to spice things up just a little bit to tame my greedy impulses.

I continue to be impressed with the maturity, sincerity, and sagacity of my fellow investors here. I will make great use of the resources provided by this forum going forward. I wish to impart knowledge gained here to help out those seeking financial advice.
MotoTrojan
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Re: 24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by MotoTrojan »

GentlemanInvestor wrote: Thu Aug 24, 2017 11:57 pm I must thank you all for your replies. My naivety and arrogance would have started me off on shakier footing. As I age, I continue to learn the value of asking for help.

I will focus my attention on two to four equity funds maximum at this time. Consensus tells me that a majority holding in VTI and a substantial portion in VXUS are good starting points. I am open to more suggestions on proper percentages for these investments, as well as to adding one or two funds to spice things up just a little bit to tame my greedy impulses.

I continue to be impressed with the maturity, sincerity, and sagacity of my fellow investors here. I will make great use of the resources provided by this forum going forward. I wish to impart knowledge gained here to help out those seeking financial advice.
Not arrogance, just a desire to over-tune things :).

VTI and VXUS are an excellent base. I have seen a few studies saying 25-30% of equities in International gets you >>90% of the diversification (I believe Random Walk Down Wallstreet covers this, my favorite book by the way!), thus I went with 25%.

As to tilts, there are some international options (VSS for Small-cap, VWO for Emerging Market), but I haven't gone that path yet since my International being 25% would make those tilts 5-10% of total portfolio, and thus too small to be worth it in my eyes. I went for Small-cap value though, and instead of using the Vanguard VBR, which is cheaper, I went for VIOV. This tracks the S&P600, rather than CRSP, resulting in a smaller median-cap, and better capturing the size premium. This is 20% of my total portfolio, or 27% of my US equities. A path like this would be simple and more diverse than what you originally mentioned.

Do keep it mind that some of these tilts are not very tax-efficient (VIOV is however), so if holding outside of tax-advantaged (you mentioned Roth, so all is well) keep placement in mind.
MotoTrojan
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Re: 24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by MotoTrojan »

WanderingDoc wrote: Thu Aug 24, 2017 10:27 pm What would be the point of holding ETFs instead of mutual funds in an IRA? Or said another way, what are the advantages/disadvantages of ETFs and mutual funds in IRAs, for the average investor?
I just prefer knowing exactly what price I am buying/selling at and enjoy the tinkering aspect of ETF purchases. The advantage of mutual funds is that you can automate them 100%, other than rebalancing.
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Re: 24 year old seeking reassurance and critiques of Roth IRA ETF portfolio asset allocation

Post by pkcrafter »

WanderingDoc wrote: Thu Aug 24, 2017 10:27 pm What would be the point of holding ETFs instead of mutual funds in an IRA? Or said another way, what are the advantages/disadvantages of ETFs and mutual funds in IRAs, for the average investor?
In this case, the OP would require a lot of cash to create his portfolio with funds because he as some allocations at 5% and min. for entry is 3K/fund.

Paul
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