Diversification

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Nlu822
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Diversification

Post by Nlu822 »

29 with anout 100k in stocks 50 in 401k 50 in a brokerage. My 401k is 45% vanguard 500 index 35% vanguard total international stock index 10% mid cap index 10% small cap index. I am looking for thoughts and opinions on how to diversify the remaining 50 k in my brokerage account. I currently have it in 50% vanguard total us stock market index 50% extended market index and just about $500 a cruptocurrency. Any way I can better diversify this ? Also looking to put about 5 - 10% in a particular sector. What sectors generally do best during rising rates?
dbr
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Re: Diversification

Post by dbr »

A balance of total US and total International is perfectly well diversified. Taking sector bets is not recommended. You are already bought in on factor investing, which is plenty enough asset allocation scheming for anyone.
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nisiprius
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Re: Diversification

Post by nisiprius »

I do not think there is any need to "diversify" into alternative assets outside of securities (stocks and bonds). "Diversification" is often oversold, because if you cannot say anything else good about some weird investment, you can always say that it is "diversifier." Pay attention: if you check out investments described as "good diversifiers" and "low correlation with stocks," you will see that many of them have had high volatility and low return. You probably know the disclaimer about past performance not guaranteeing future results, but if you keep your eyes open you will also notice that any time a firm uses the word "diversification" in its official descriptions, it will also contain a disclaimer like "Diversification does not ensure a profit or protect against a loss."
Within your stock portfolio you are already well diversified.
The most important diversification you are missing is bonds. Well, you need to decide about that. Since you mention "rising rates" you have probably been convinced that bonds are not going to do well, and they may not, but that is what diversification means. The good part of diversification is having some assets rise, or at least not go down, when other assets are falling. The logical flip side, as inseparable as the head and the tail of a coin, is that if you are diversified you are going to see some of your assets go down when others are going up.
Stocks and bonds have been, in the past, had a reliable near-zero correlation (which is very unusual). They have moved independently. (They have not reliably moved in opposite directions, just independently. When stocks have gone down, bonds have sometimes gone up and sometimes gone down. When stocks have gone up, bonds have sometimes gone down and sometimes gone up.).
I firmly believe that statements about what things "tend to do" or "generally do" or "usually do" are highly unreliable and should not be trusted. Usually, when I've checked them out I've found no consistency at all. Typically, these statements refer to one great shining moment that was not repeated before, or in some cases, since. Some groups of stocks (small value, REITs) were very impressive in 2000-2002 by rising when the stock market in general fell. They did not repeat that in 2008-2009. I do not think you should rely on vague statements about the relative behavior of different classes of stocks.
Furthermore, you ask "What sectors generally do best during rising rates?" Notice that you are trying to win an "exacta," two different predictions at once. 1) Are "rates" really going to rise? 2) If they do, will claims about what certain kinds of stocks "generally" do best in that situation be fulfilled? They often aren't. And there's a third condition: even if they do, will it actually be enough to matter much, or will it just be a talking point, a tiny amount betters? Investing isn't the Olympics. A tiny amount isn't the difference between a medal and no medal, a tiny amount is a tiny amount.
Stocks are stocks. No witches' brew of clever choices of stocks is likely to make much difference when the market crashes. Below: the lower blue line is a plain old S&P 500 index fund. The orange, green, and yellow lines are other stock funds, with characteristics that some say might provide "downside protection."
In contrast, the red line is the bond fund usually recommended by default in this forum, the Vanguard Total Bond Index Fund. The upper blue line is a corporate-oriented bond fund, Vanguard Intermediate-Term Investment Grade, which I deliberately picked because I know that it did relatively poorly in 2008-2009 and is thus an example of what a disappointing bond fund looked like.
Source
Image
You can see how the bond funds did, and please notice that you can see easily enough that, no, they didn't earn as much as stocks, you don't expect them to; and, yes, rates have been rising for about a year and you can see what the effect on the bond funds has been, it's that sag at the right end.
If you just can't bear the thought of putting your money into bonds, because you've been led to believe that "rates" will continue to rise (likely in my personal unreliable opinion) and that when they do (they already have) it will trigger a catastrophic meltdown in the bond market that will ruin the portfolio of everyone holding anything with the word "bond" in it (very unlikely in my personal opinion)... well, consider putting into the best bank account products you can find, the highest-yielding "money market deposit accounts" (I have some at Capital One 360 earning 1.5%) and competitive bank CDs.
About the other stock funds in that chart.
The orange line, Schwab Fundamental U.S. Large Company Index, is touted as a superior alternative to the S&P 500 because it bases its weighting on earnings and dividends rather than cap-weighting. DLN is the WisdomTree Large-Cap Dividend ETF, dividend stocks sometimes being claimed to provide "downside protection." And FCNTX is the Fidelity Contrafund, which, I don't know what it does but it's actively managed and quite famous for how well it's done. Contrafund is the only one of the three that dropped less than 500 Index. But, seriously: 500 Index dropped -53%, Contrafund dropped -48%. Was it powerful protection against a downturn?
Last edited by nisiprius on Thu Feb 22, 2018 9:49 am, edited 2 times in total.
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Sandtrap
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Re: Diversification

Post by Sandtrap »

Nlu822 wrote: Thu Feb 22, 2018 8:34 am 29 with about
100k in stocks
50k in 401k
50k in a brokerage.
401k is 45% vanguard 500 index
35% vanguard total international stock index
10% mid cap index
10% small cap index.

I am looking for thoughts and opinions on how to diversify the remaining
50 k in my brokerage account.
50% vanguard total us stock market index
50% extended market index

$500 a criptocurrency.

Any way I can better diversify this ?
Also looking to put about 5 - 10% in a particular sector.
What sectors generally do best during rising rates?
1. Your funds are already diversified.
2. Have a long range comprehensive plan. Settle on an allocation. Write an IPS statement (goal).
3. Looks like 100% equities. No bonds? No fixed? Emergency fund?
In a strong market dip, would you be prepared to lose 50% of your equities, or more?
Pay heed to "nisiprius" to balance your portfolio with bonds, and other fixed.
4. Are you planning to invest more in crypto? Why is your take on that going forward?

Again, make a comprehensive plan going forward to a tangible goal with actionable steps along the way.

Define General Investment Goals and Objectives (what is your plan?)
https://www.bogleheads.org/wiki/Invest ... statement
Asset Allocation (what is right for you?)
https://www.bogleheads.org/wiki/Asset_allocation
Emergency Fund
https://www.bogleheads.org/wiki/Emergency_fund
Free Reading: "If You Can" by Bernstein
https://www.google.com/url?sa=t&rct=j& ... -SB3S580I5

mahalo,
j :D
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Watty
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Re: Diversification

Post by Watty »

Nlu822 wrote: Thu Feb 22, 2018 8:34 am 29 with anout 100k in stocks 50 in 401k 50 in a brokerage. My 401k is 45% vanguard 500 index 35% vanguard total international stock index 10% mid cap index 10% small cap index. I am looking for thoughts and opinions on how to diversify the remaining 50 k in my brokerage account. I currently have it in 50% vanguard total us stock market index 50% extended market index and just about $500 a cruptocurrency. Any way I can better diversify this ? Also looking to put about 5 - 10% in a particular sector. What sectors generally do best during rising rates?
Short term bonds would help with diversification and would quickly catch up with rising rates.
Topic Author
Nlu822
Posts: 24
Joined: Tue Apr 11, 2017 1:04 pm

Re: Diversification

Post by Nlu822 »

I have about 30 in cash high yield savings account at ally... I feel like that's a Better bet than the bond market right now
livesoft
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Re: Diversification

Post by livesoft »

I was going to write that adding fixed income is a diversification, but your Ally savings account fulfills that diversification role. You are all set. As long as 30 means $30,000 and not $30.00 :)
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ruralavalon
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Re: Diversification

Post by ruralavalon »

Nlu822 wrote: Thu Feb 22, 2018 8:34 am 29 with anout 100k in stocks 50 in 401k 50 in a brokerage. My 401k is 45% vanguard 500 index 35% vanguard total international stock index 10% mid cap index 10% small cap index.
Your stock holdings are already well diversified.


Nlu882 wrote:I am looking for thoughts and opinions on how to diversify the remaining 50 k in my brokerage account. I currently have it in 50% vanguard total us stock market index 50% extended market index and just about $500 a cruptocurrency. Any way I can better diversify this ? Also looking to put about 5 - 10% in a particular sector. What sectors generally do best during rising rates?
Are you eligible to contribute to an IRA? If so you would be better off contributing to an IRA, rather than a taxable account. It's important to make fullest possible use of tax-advantaged accounts.

The two U.S. stock funds you are using in the taxable brokerage account are already well diversified.

I don't try to predict what sectors will do well, and don't trust the predictions in the media or from advisors. Predictions are not facts, they are just opinions which often are inaccurate.

Any sector funds that might help in diversification would be those which have a low correlation to the total stock market because they are very volatile (and therefore are very risky).
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