Add international value?

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hazlitt
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Add international value?

Post by hazlitt » Mon Nov 20, 2017 10:32 pm

My taxable Vanguard account is mostly based on Paul Merriman's Ultimate Buy & Hold strategy. It's basically 80% stocks, 10% bonds, and 10% gold. Bonds and gold are my security blankets to make sure I don't ever deviate from the plan; regardless of the market. Yes, I know that it's not advised to own REITs in a taxable account. But my small business provides cash flow now that I might not have later and I've simply decided to go ahead and bite the tax bullet.

I'm 37 years old and my time horizon on this account is probably 25-30 years.

VOO - US large cap blend - 10%
VIOO - US small cap blend - 10%
VONV - US large cap value - 10%
VTWV - US small cap value - 10%
VNQ - US REITs - 10%
VEA - Intl large cap blend - 10%
VSS - Intl small cap blend - 10%
VWO - Intl emerging markets - 10%
VGIT - US govt intermediate - 5%
VGSH - US govt short term - 5%
IAU - gold - 5%
GDX - gold miners - 5% (I started this account about three years ago and GDX has been by far my biggest winner.)

The big question now is whether to go "more Merriman" and add international value. I see that Paul added VYMI to his recommendations in the international large cap value bucket, but I can't find a Vanguard ETF for intl small cap value. If for no other reason than symmetry, I would rather have both or none. Also, I don't know enough about VYMI to judge whether it is sufficiently a "value" fund or how much overlap it has with VEA.

Honestly, I was pretty much set to leave everything alone until I discovered VYMI.

Thanks in advance for any help!

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saltycaper
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Re: Add international value?

Post by saltycaper » Mon Nov 20, 2017 10:41 pm

I think splitting up your int'l allocation any further will result in slices so small that the likely performance differences will have little impact compared to what you have now.
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9-5 Suited
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Re: Add international value?

Post by 9-5 Suited » Mon Nov 20, 2017 10:57 pm

The 10% slices thing has some aesthetic value, but IMO it provides a false sense of precision and diversification. Consider that 75% Total US Stock Market (VTSAX) and 25% Small Cap Value (VTWV) is basically identical in recent (measured since 2010 when data was available) and expected (measured by correlation) performance to 25% slices of the four US funds you have equal stakes in.

Simpler VTSAX + VTWV: 12.6% CAGR, 0.99 US Market Correlation
Your Four US Funds: 12.3% CAGR, 0.96 US Market Correlation

There's just very low likelihood of yet another slice providing any meaningful impact to your portfolio. The overlap in holdings and the thinness of each slice makes it highly unlikely.

livesoft
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Re: Add international value?

Post by livesoft » Mon Nov 20, 2017 11:05 pm

For your reading pleasure: Simplified Merriman, less funds, same or better performance: viewtopic.php?t=38374

I don't own any international value except DGS and have done fine without it.

If you like symmetry (and who doesn't?), then why not 4 funds equally weighted?
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tooluser
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Re: Add international value?

Post by tooluser » Mon Nov 20, 2017 11:25 pm

I have a 10-speed portfolio (in taxable) of 10% allocation to each of 10 categories, one of which is international value (iShares EFV, European Value). That was down relative to the other sectors for a long time, and I often bought shares to keep it in line. What a terrible waste to keep throwing money into a dog? The last 18 months or so it is one of the better performers and I currently have no reason to buy more. Patience is a virtue.

Be sure that if you do change your investment strategy, that it is maintainable long-term, not just chasing the current leaders. If you chase the leaders, over time you will end up with a well-diversified portfolio that you bought at a relatively high price to what you could have had if you had started out that way and rebalanced. It is very difficult to take a step back and plan for the longterm success of your portfolio.

When slicing and dicing, I don't think the value to the portfolio is so much that one sees an outperformance of any one sector, so much as that when one rebalances, one is guaranteed to buy more of the cheaper sectors and less of the more expensive sectors, at least in a relative sense. My analogy is that I am always helping the lower pistons of my engine get to the top of their stroke, whether sooner or later.

Other than Fama-French, I have absolutely no evidence that this is better than a simpler 3-fund portfolio, for which that effect seems relatively muted and less emotionally gratifying. But if I were starting over I would probably go with that. And in fact my non-taxable accounts have largely gone to a Vanguard LifeStrategy (4-fund) portfolio. There are value stocks in there. Capital gains in the taxable account prevent a rational decision to go to the same place on that side.
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betablocker
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Re: Add international value?

Post by betablocker » Tue Nov 21, 2017 1:16 pm

I think the best diversifier is int small cap value. It makes sense as they would be more exposed to their home markets rather than global markets. Each slice of 10 doesn’t have the same diversification value. I’d think about just holding large cap blend and then more scv to tilt. I doubt small cap blend and large value add much to that.

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grabiner
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Re: Add international value?

Post by grabiner » Tue Nov 21, 2017 7:11 pm

betablocker wrote:
Tue Nov 21, 2017 1:16 pm
I think the best diversifier is int small cap value. It makes sense as they would be more exposed to their home markets rather than global markets. Each slice of 10 doesn’t have the same diversification value. I’d think about just holding large cap blend and then more scv to tilt. I doubt small cap blend and large value add much to that.
It should be a good diversifier, but it is expensive. The three ETFs in this class are expensive: DLS (dividend weighted) at 0.58%, FNDC (fundamentally weighted) at 0.39%, and PDN (fundamentally weighted) at 0.50%.

Emerging markets small-cap, which should be an even better diversifier, has the same problem; the least expensive option is DGS at 0.63% expenses.
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betablocker
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Re: Add international value?

Post by betablocker » Tue Nov 21, 2017 7:33 pm

Fees are always important but the 50 basis point difference for a fund with higher expected returns and diversification benefits seems like a bargain. At some point I don’t want to be penny wise and pound foolish.

hazlitt
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Re: Add international value?

Post by hazlitt » Tue Nov 21, 2017 8:04 pm

Thank you for the replies. Another factor to consider is that, for simplicity's sake, I'm keeping all stock funds equal weight to each other. Adding two more international funds would cause my stocks to be roughly 50/50 split between US and international. Currently, I'm at 62.5/37.5 (equal shares of eight funds).

Not sure if it makes a difference, but this account has about $450K in it. Slicing and dicing doesn't make a lot of sense to me if there's not much money in each bucket. And all rebalancing is done on the buying side (directing new money to underweighted funds). So it might take a while to catch up since I wouldn't sell any current funds to buy the new ones.

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randomizer
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Re: Add international value?

Post by randomizer » Tue Nov 21, 2017 10:09 pm

This would be way too complicated for my tastes, but if it makes you happy...
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Longtermgrowth
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Re: Add international value?

Post by Longtermgrowth » Thu Nov 23, 2017 12:46 am

hazlitt wrote:
Mon Nov 20, 2017 10:32 pm
The big question now is whether to go "more Merriman" and add international value. I see that Paul added VYMI to his recommendations in the international large cap value bucket, but I can't find a Vanguard ETF for intl small cap value. If for no other reason than symmetry, I would rather have both or none. Also, I don't know enough about VYMI to judge whether it is sufficiently a "value" fund or how much overlap it has with VEA.
This tool can give a general idea on fund overlap, but sometimes isn't completely accurate depending on funds compared: https://www.etfresearchcenter.com/tools ... ea&f2=Vymi

VYMI also includes a slice of emerging markets, but to get a slice of emerging small value along with developed small value, you'd need two of the non Vanguard funds mentioned by Mr. Grabiner.

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