Beginner: Diversifying / Bond trouble / Advice

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
jaw326
Posts: 2
Joined: Thu Jul 09, 2020 6:54 am

Beginner: Diversifying / Bond trouble / Advice

Post by jaw326 »

Hello all and thank you for reading. I am new, and understanding my portfolio might not make sense to knowledgeable people. I have been a forum lurker for about a year and that is also my investing experience.

I am 38-years old. I am already retired and receive a lifetime pension via the military. My only debt is my mortgage. I have no retirement account, but again I have a pension (I was injured young and never built a retirement account). My income is also not taxed by state or federal governments. I have a biochemistry and genetics education and a military background, so finance and business are all new to me. I am currently reading 'The Intelligent Investor' and have a few more books before I feel like I can invest and not just speculate.

However, I did inherit a 5-figure sum after a death in the family. And my journey into investing has lead me to some perplexing advice about diversification.

My asset allocation is 100% ETFs*. Whether it was early on in 'The Intelligent Investor' or some investor profile document I discovered... I do have the unusual circumstances where I can forgo bonds. And while I understand the underlying concept to diversifying... I do not understand how it makes sense to allocate resources to an area where my return will be noticeably weaker. AND this even gets worse because I am solely in the US market. I have the exact same issue with international funds. Why dilute your portfolio with investments with such sub-par earnings for the sake of diversity? I do understand that past performance is not a guarantee of future success. But... VOO versus bond ETFs or international ETFs aren't close. What am I not understanding? (And I did try to search the forums before I made this post, as I felt this might be a common question)
____________________________________________________________________________________________________________________

I would also welcome portfolio advice, if anyone would like to help speed up my education...

Emergency fund: 4 months of mortgage payments in a MMSA (but again I get a monthly federal pension)
Debt: Mortgage, Credit Cards = $0 balance but are used extensively to harvest travel miles
Taxes: I don't file taxes as you can't file $0 online/ easily by yourself. But I pay no federal or state tax
State: PA
Monthly addition: ~$1000
Goal: growth for 20+ years (zero withdraws, then maybe worry about taxes and spending it).
Mindset: Calm, I would never panic and sell. I am more likely to take a cash advance and invest if prices drop low again. And I practice dollar cost averaging with monthly purchases.

*My current portfolio ideology stems from the most common Warren Buffet advice for beginners....stick your money in the S&P500. I, however, made the core of my portfolio VUG because of its past performance versus VOO. Then I started speculating more and more based on what I believe is the best areas of the US economy (Our tech and pharm companies). Everything started at a 2:1:1:1 ratio. And I withheld a portion in reserve because I knew I didn't know enough.

I currently stand @
33% VUG - Core. I am happy with it. I buy 2 per month.
17% VGT - I wanted deeper/more tech exposure. I am completely comfortable with a high tech %. I buy 1 per month.
16% VHT - I initially wanted deeper/ more healthcare exposure. I am over-invested and stopped monthly contributions at this point.
15% VTV - Do not want it. Converting it to VOO once a few perimeters are met (e.g. a solid increase in VTV or a big drop in VOO). Buying 1 VOO instead per month.
17% in cash reserves that I am holding on to until the market drops again or election turmoil cools. But it is earmarked for VUG giving me 50% total.

I know I made some beginner mistakes. For instance,I found the "portfolio watch" recently and realized how much I have over-invested in specific sectors like healthcare. But with everything going on... I wanted more exposure to healthcare stocks, so I don't regret it. I have since stopped my monthly buying of VHT. But besides the 2 sector funds, my core is VUG and once my cash reserves (not emergency fund) are added I will be at 50% VUG. I am just waiting until recovery is more certain.

10,000 words ago I spoke about my issue with diversifying my portfolio. Well I had a crisis with trying to diversify VUG so I randomly bought VTV. And I regret it. It hasn't rebounded very well, I think it will still suffer issues through the pandemic. And I think I would do better in the long run with VOO. Also, I noticeably reduce my overall healthcare % in the swap while achieving a more normalized US portfolio (i.e. my sector investments better match that of the US market, with tech still being obviously high).

Lastly, if you go off the crude graphs at etfdb.com I actually own about 8% mid-cap and ~1% small/micro-cap. But everywhere else no one speaks of any of these ETFs as being anything but large-cap. Is that site accurate?

Honestly thanks for reading.
mhalley
Posts: 8517
Joined: Tue Nov 20, 2007 6:02 am

Re: Beginner: Diversifying / Bond trouble / Advice

Post by mhalley »

I think the problem you have is that you don't have an investors policy statement. You are making many investment mistakes. You are performance chasing, You are trying to time the market and trying to time sectors of the market. If you are comfortable with 100% equities, that is fine. Buffets advice is meant for his wife, who will have more money than G*d when he dies. So what you need to do is come up with a desired asset allocation and stick with it. You might check out these posts:
WCI 150 portfolios better than yours:
https://www.whitecoatinvestor.com/150-p ... han-yours/
The truth is that no one knows which portfolio is going to outperform in the future. You can change all the factors you want — more or less diversification, additional risks/factors, lower costs vs additional risk or diversification, more of this and less of that. Does it matter? Absolutely. Take a look at Madsinger’s Monthly Report some time, where a Bogleheads poster has been tracking the returns of a dozen balanced portfolios for the last decade. But it doesn’t matter that much. No diversified portfolio in that report has done better than 1-2% per year more than a similarly risky portfolio over the last 15 years. Now 1-2% does matter, especially over long periods of time, but keep in mind the edge that a very complex portfolio might provide over a very simple one can easily be eaten up by advisory fees, behavioral errors, and poor tax management.
IPS
https://www.bogleheads.org/wiki/Investm ... _statement

https://www.morningstar.com/articles/82 ... -statement
whereskyle
Posts: 1290
Joined: Wed Jan 29, 2020 10:29 am

Re: Beginner: Diversifying / Bond trouble / Advice

Post by whereskyle »

jaw326 wrote: Thu Jul 09, 2020 10:23 am Hello all and thank you for reading. I am new, and understanding my portfolio might not make sense to knowledgeable people. I have been a forum lurker for about a year and that is also my investing experience.

I am 38-years old. I am already retired and receive a lifetime pension via the military. My only debt is my mortgage. I have no retirement account, but again I have a pension (I was injured young and never built a retirement account). My income is also not taxed by state or federal governments. I have a biochemistry and genetics education and a military background, so finance and business are all new to me. I am currently reading 'The Intelligent Investor' and have a few more books before I feel like I can invest and not just speculate.

However, I did inherit a 5-figure sum after a death in the family. And my journey into investing has lead me to some perplexing advice about diversification.

My asset allocation is 100% ETFs*. Whether it was early on in 'The Intelligent Investor' or some investor profile document I discovered... I do have the unusual circumstances where I can forgo bonds. And while I understand the underlying concept to diversifying... I do not understand how it makes sense to allocate resources to an area where my return will be noticeably weaker. AND this even gets worse because I am solely in the US market. I have the exact same issue with international funds. Why dilute your portfolio with investments with such sub-par earnings for the sake of diversity? I do understand that past performance is not a guarantee of future success. But... VOO versus bond ETFs or international ETFs aren't close. What am I not understanding? (And I did try to search the forums before I made this post, as I felt this might be a common question)
____________________________________________________________________________________________________________________

I would also welcome portfolio advice, if anyone would like to help speed up my education...

Emergency fund: 4 months of mortgage payments in a MMSA (but again I get a monthly federal pension)
Debt: Mortgage, Credit Cards = $0 balance but are used extensively to harvest travel miles
Taxes: I don't file taxes as you can't file $0 online/ easily by yourself. But I pay no federal or state tax
State: PA
Monthly addition: ~$1000
Goal: growth for 20+ years (zero withdraws, then maybe worry about taxes and spending it).
Mindset: Calm, I would never panic and sell. I am more likely to take a cash advance and invest if prices drop low again. And I practice dollar cost averaging with monthly purchases.

*My current portfolio ideology stems from the most common Warren Buffet advice for beginners....stick your money in the S&P500. I, however, made the core of my portfolio VUG because of its past performance versus VOO. Then I started speculating more and more based on what I believe is the best areas of the US economy (Our tech and pharm companies). Everything started at a 2:1:1:1 ratio. And I withheld a portion in reserve because I knew I didn't know enough.

I currently stand @
33% VUG - Core. I am happy with it. I buy 2 per month.
17% VGT - I wanted deeper/more tech exposure. I am completely comfortable with a high tech %. I buy 1 per month.
16% VHT - I initially wanted deeper/ more healthcare exposure. I am over-invested and stopped monthly contributions at this point.
15% VTV - Do not want it. Converting it to VOO once a few perimeters are met (e.g. a solid increase in VTV or a big drop in VOO). Buying 1 VOO instead per month.
17% in cash reserves that I am holding on to until the market drops again or election turmoil cools. But it is earmarked for VUG giving me 50% total.

I know I made some beginner mistakes. For instance,I found the "portfolio watch" recently and realized how much I have over-invested in specific sectors like healthcare. But with everything going on... I wanted more exposure to healthcare stocks, so I don't regret it. I have since stopped my monthly buying of VHT. But besides the 2 sector funds, my core is VUG and once my cash reserves (not emergency fund) are added I will be at 50% VUG. I am just waiting until recovery is more certain.

10,000 words ago I spoke about my issue with diversifying my portfolio. Well I had a crisis with trying to diversify VUG so I randomly bought VTV. And I regret it. It hasn't rebounded very well, I think it will still suffer issues through the pandemic. And I think I would do better in the long run with VOO. Also, I noticeably reduce my overall healthcare % in the swap while achieving a more normalized US portfolio (i.e. my sector investments better match that of the US market, with tech still being obviously high).

Lastly, if you go off the crude graphs at etfdb.com I actually own about 8% mid-cap and ~1% small/micro-cap. But everywhere else no one speaks of any of these ETFs as being anything but large-cap. Is that site accurate?

Honestly thanks for reading.
There are 2 books you need to read. The first is The Little Book of Common Sense Investing by John C. Bogle. The second is A Random Walk Down Wall Street by Burton Malkiel. They should help you understand that your life will be a whole lot easier if you just buy VTI instead of sector funds that basically add up to it. Inasmuch as you seem to want to tilt toward growth and tech stocks based on recent performance, these books should help you understand why you are likely to underperform by buying the most expensive stocks while they are the most expensive. You should want to buy things while they are cheap, i.e., all the stocks you are not buying: non-tech and non-growth stocks. These books will help orient your perspective for the long term and will make your investing life much easier, less risky, and more rewarding.

Good luck!
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
User avatar
galeno
Posts: 2109
Joined: Fri Dec 21, 2007 12:06 pm

Re: Beginner: Diversifying / Bond trouble / Advice

Post by galeno »

I agree. 100% VTI if you want only USA-domiciled equities. 100% VT if you want all world all cap equities. Anything else is just mental masturbation.
KISS & STC.
hnd
Posts: 246
Joined: Mon Jun 22, 2020 11:43 am

Re: Beginner: Diversifying / Bond trouble / Advice

Post by hnd »

When i talk with people about investing i sometime get asked for advice. The thousands of "growth" etf and funds have leveraged against FAANG the past decade and basically look amazing compared to a properly weighted index/TM fund. I am also in a VUG/MGK/VGT mix but its only 3% of my total portfolio. In your shoes If I liked VUG I'd keep it but (this is what I tell people who ask)i'd build my portfolio around VOO/VTI/VTSAX/VFIAX (choose your flavor) at least 80% of my equities (currently for me its 88%) and and keep your attempts to beat the market at a minimum over the long haul.

IMO FAANG isn't going away. I think we haven't even scratched the surface of what data mining and distribution is going to do our society and those companies hae the funding and are leading the charge in that.
User avatar
galeno
Posts: 2109
Joined: Fri Dec 21, 2007 12:06 pm

Re: Beginner: Diversifying / Bond trouble / Advice

Post by galeno »

Just for fun. The PE of QQQ = 31.4. VTI = 22.1. VXUS = 16.0.
KISS & STC.
sycamore
Posts: 1340
Joined: Tue May 08, 2018 12:06 pm

Re: Beginner: Diversifying / Bond trouble / Advice

Post by sycamore »

jaw326

Welcome to the forum, and thank you for your military service.

As noted in a previous reply, you'll want to make your own Investment Policy Statement and decide on an Asset Allocation.

To determine your AA, I suggest ignoring the current pandemic and uncertainty and apparent success of growth stocks. All of those things are transient and will change over the years and decades to come. You want an IPS and AA that will last decades so you don't go changing your investments when it appears that one sector of the economy is doing better than another -- you'll be switching too frequently, increasing your chances of timing it wrong.

What I found helpful to set my AA was considering my ability, willingness, and need to take risk in stocks.

Given that you've got a pension, your may not really "need" to achieve a high rate of return by investing in stocks. Actually, the correct metric is your residual living expenses, that is, what's not covered by pension. If your RLE are low then you don't need to take risk in stocks.

Or maybe you have some family or charity you want to provide for later on, in that case your "need" goes up and therefore you would want a higher exposure to risk.

Your willingness to take risk is apparently high :) Regarding "ability", if you don't think you could get another job (say due to injury) that would normally indicate taking less risk in stocks because you couldn't afford to lose what assets you have. Again, though, if your pension covers your expenses, that means the "ability" factor isn't as important.

That may helpful frame your decision on an Asset Allocation.

You may well end up with a 100% stocks AA after all that, but it'll be good to have a more grounded rationale for it.
Topic Author
jaw326
Posts: 2
Joined: Thu Jul 09, 2020 6:54 am

Re: Beginner: Diversifying / Bond trouble / Advice

Post by jaw326 »

Thanks for the insight. And the time you all took.

@mhalley... You gave me a lot to digest, thanks. I don't fully understand the performance chasing comment. Because we all are after performance aren't we? But I admit to choosing ETFs based on consistent past performance over 3,5, and 10-year spans, so I can see the comment's validity. I am just confused as to what makes a non-performance chaser. I invested in all of this in March/April after the massive slide and I expected a rebound. So, I was speculating based on my ignorant view of the economy and investing. I associate our best industries with our tech and big pharma (I have a big pharmacy background)... so that is why I wanted to expand deeper into those sectors. They were never meant to be kept at their current allocation rate. I was just being an opportunist with the market slide.... I kinda saw a huge slide and got overly excited. My intention was never to keep the sector funds at those levels... I bought them cheap and was going to just sit on them. I haven't even thought about re-balancing.

I also did Investopedia's investor profile a long time ago. I just didn't follow it when I purchased the sector funds. Those things are designed towards average people. I am not average.... I was retired at 25, I don't have tax issues, retirement accounts, any care where risk is concerned, my healthcare is taken care of and I am guaranteed to make the same amount at 120 years old as I do know adjusted for inflation. Now that is no excuse, but I think I kinda forgot about it because the majority of it was blank and not for me. Thanks for the critique and I will go over your links. Hopefully this isn't the last time we talk.
_______________________________________________________________________________________________________________________

@whereskyle... Thanks for the book recommendations I will Amazon them (I have Bogle's 'The Clash of the Cultures' and 'On Mutual Funds'). I actually have been furiously debating what to do because I don't want to buy the ETFs that keep rising. I bought everything en masse in March/April after that massive slide. So I only picked up a share or 2 of each since then, because I messed up and only bought 1 VUG last month and haven't invested this month yet. I figured I need to get some tough love and honest critique by people who understand this area a lot more than I do. However, I do fully grasp the buy low/ sell high. It is just that everything was just priced so low and now it rebounded. And now I am surpassing the very little I know about investing...

I hate to admit when I have stupid thoughts. But one night playing on the "portfolio watch" I thought to myself, "why not just buy sector funds in the %s of the US Market".... Then it dawned on me that VTI does that at a fraction of the cost. I am still learning and we all start somewhere.
_____________________________________________________________________________________________________________________

@galeno... Thanks. I don't know how many hours I spent comparing VTI and VOO. And you are right with the others mentioning VTI. Even my CFP friend recommended VTI over VOO.... I was up all night messing with P/E, EPS, PEG.... I am at that chapter in 'The Intelligent Investor.'
_____________________________________________________________________________________________________________________

@hud Thanks... My goal was similar at the start. I was going to be basically all VUG. I figured, I know nothing worth knowing about investing and Warren Buffet's comment about the S&P500 has some truth behind it numerically. But then the whole diversity issue started eating away at my understanding of investing. And the things I felt most comfortable with were our tech companies and big pharma. I really wasn't thinking about the future as a whole when I allocated the assists in the sector funds. I never had a plan B after they rebounded and made money but take up so much of my assets. I hate admitting stupid stuff. But that was definitely not my best move.
______________________________________________________________________________________________________________________

@sycamore Thanks. I took advantage of a situation that is still very advantageous... but I didn't think far enough ahead as I was doing it. I have no RLE. My pension easily covers my mortgage and that is really my only expense. I will check out your link. I think I ironed out some major things with this post.
____________________________________________________________________________________________________

THANK YOU ALL, to everyone who took the time to help me out. I feel like the mistakes that I understand were on a pretty basic level: Not sticking to my IPS, letting emotions get involved by speculating the sector funds and in turn making a mess of my asset allocations ... I need to get back to the basics and redo my IPS/AA and stick to it. And I need to get a few more books in me. Did I miss anything?
pkcrafter
Posts: 14419
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Beginner: Diversifying / Bond trouble / Advice

Post by pkcrafter »

jaw, when we look at risk we consider need, ability, and willingness. You have ability, but not a lot of need, and you seem to have willingness. So, what to do. Your chosen path seems to ignore the risk all together.

Here are a few things to consider--
By the end of the stock market downturn of 2002, stocks had lost $5 trillion in market capitalization since the peak. At its trough on October 9, 2002, the NASDAQ-100 had dropped to 1,114, down 78% from its peak.
Did it wipe out a lot of investors? Yes, it did.

11 historic bear markets--

http://www.nbcnews.com/id/37740147/ns/b ... wegZedlArg

When major crashes happen, virtually no one really knows what will be left after the dust settles. 2008 was a good example. I can say that the worst losses are big, unexpected surprises.

Yes, I'd say you have financial ability to take a major loss, but what is the point if you don't need to?


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
GMT-8
Posts: 190
Joined: Fri Mar 26, 2010 5:11 pm

Re: Beginner: Diversifying / Bond trouble / Advice

Post by GMT-8 »

Just an observation:

We on this site talk about "Why play the markets if you don't need to? Why take risk if you don't have to? Why chase performance?"

As a young investor I made moves like you are doing. I was in newspapers and thought that might be a good area to invest. I'm talking in the Sixties of the last century. Obviously it wasn't. I worked for the Thomson people, they got rid of all their papers early and didn't look back. I moved on.

Then I was in automotive and thought "That's a good area to invest and I know a lot about it." But it wasn't and I didn't know enough about K1 Partnerships and investors vs inventors, and goverment regulations and bankruptcy auctions. But I now know about those things, the hard way.

You are saying the same sort of things I was saying thirty and forty years ago, and since you have come to ask for advice, consider the simple Three Fund Portfolio at a low expense firm.

I did. I gave up the fancy tricks, compound inflation was my friend, I threw money into my IRA and 401(k) and retired at 60. We have had lots of fun since, and have adequate assets to share with the less fortunate. I hardly ever sell anything so I don't have to deal with tax loss harvesting, etc etc.

OR

You could be like my wife's aunt and uncle. They are both retired judges with lifetime pensions and don't even have a savings account. Or any investments! No time to waste investing or worrying - they just try to spend everything that comes in every month -- and they report that it's exhausting work. (Somebody has to do it.)

Best of luck,

GMT
User avatar
Taylor Larimore
Advisory Board
Posts: 30040
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Beginner: Diversifying / Bond trouble / Advice

Post by Taylor Larimore »

jaw326:

Thank you for your military service and welcome to the Bogleheads Forum!

I suggest you consider the simple Three-Fund Portfolio and its many benefits. Use the link below:

viewtopic.php?t=88005

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The odds of outpacing an all-market index fund are, well, terrible." -- "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
"Simplicity is the master key to financial success." -- Jack Bogle
Post Reply