Seeking diversification away from S&P 500

[InvisibleAerobar]

For most of my decade plus working life, I've invested almost exclusively in S&P 500 for the equity portion of my portfolio, but recent developments, including significant weight occupied by some high flyers, has me wanting to introduce other large caps in order to dilute contributions of the high flyers.

In addition, although I currently don't have any international equity positions, up to a few years ago I held some in my Roth IRA, though I've since closed out those positions.

I can't do much in my TSP account, as all I have are C (S&P 500), S (medium and small cap), and I (MSCI ACWI excl. China and HK) funds.

There is a bit more wiggle room in my Roth and joint taxable brokerage though (both held at Schwab), and I'm wondering what's a good way to structure the future contributions.

I'm thinking of adding perhaps a large cap value index and reducing the S&P 500, particular for taxable brokerage.

Foreign is a bit more complicated. For Schwab, I know there's SWISX for all foreign, but I would like to stay away from the UK and Japan if possible. Is there a way to construct a fund that captures large cap from the major Western European nations and South Korea?

Or perhaps the premise of my post is misguided, and I really shouldn't diversify that much away from S&P 500?

I would appreciate comments on this.

ETA: current holdings as follows, and I would appreciate comments re: the rebalancing as well.

Current holdings and investment plans are:

TSP, all traditional, ~$430k
-Desired allocation: 30% G-fund; 55% C-fund; 15% S-fund;
-Current allocation: 32% G-fund; 54% C-fund; 14% S-fund;
-Future contributions: 35% G-fund; 53% C-fund; 12% S-fund, contribution totaling ~$1,250/biweek.

Under past situations during which my bond allocation exceeds desired by 2%, I'd rebalance. But I'm not as sanguine about it right now. I'd certainly rebalance to 30%/55%/15% were S&P to drop to ~5000 though.

Roth IRA, ~$78k
-Current allocation: 75% equity; 10% long-term bonds (under-water but with no intention to sell); 15% MM (full intention of having these all eventually invested into equity);
-Equity position is ~2/3 S&P 500 index (SWPPX) and 1/3 TSM (SWTSX);
-Future contribution (from the MM portion) at $625/month.

Taxable Brokerage, ~$15k
-Present allocation: 75% SWPPX and 25% SWTSX
-Future contribution of $1,250 twice a month, split 75% and 25%.

We also have part of our emergency fund in a treasury/ CD ladder in taxable brokerage. Cost basis of ~63k. Rest of emergency fund of ~$46k in HYSA and $25k in I-bonds.

[id0ntkn0wjack]

Lot of missing information here to make an informed recommendation, but since it's the internet I'll give it a go anyway.

My understanding is that your Asset Allocation generally has more of an effect over time than the consistency of individual holdings within the AA as long as the holdings have a decent amount of diversification within low-expense funds.

If you don't think the S&P 500 is sufficiently diverse, overweight into Total Stock Market to gain diversification. There are an infinite number of US vs ex-US discussions on the Forum for your review. Speaking for myself, I'm 10% ex-US/Emerging which has been a drag on my returns for the past decade. YMMV.

You might want to consider reformatting your message in the B'Head recommended Portfolio Review format as those messages often get more specific recommendations.

[retiredjg]

The first level of diversification would be to add bonds or other fixed income.

The next level of diversification would be to add international stocks (and bonds if you want).

The third level of diversification would be to add some fraction of the US market that you have little of....but this is not going to change performance much and may not really be "added diversification" at all.

[InvisibleAerobar]

Lot of missing information here to make an informed recommendation, but since it's the internet I'll give it a go anyway.

My understanding is that your Asset Allocation generally has more of an effect over time than the consistency of individual holdings within the AA as long as the holdings have a decent amount of diversification within low-expense funds.

If you don't think the S&P 500 is sufficiently diverse, overweight into Total Stock Market to gain diversification. There are an infinite number of US vs ex-US discussions on the Forum for your review. Speaking for myself, I'm 10% ex-US/Emerging which has been a drag on my returns for the past decade. YMMV.

You might want to consider reformatting your message in the B'Head recommended Portfolio Review format as those messages often get more specific recommendations.

Thank you. Updated the first post.

The first level of diversification would be to add bonds or other fixed income.

The next level of diversification would be to add international stocks (and bonds if you want).

The third level of diversification would be to add some fraction of the US market that you have little of....but this is not going to change performance much and may not really be "added diversification" at all.

Thank you. I do have quite a bit of fixed income holdings I didn't mention, including ~$120k in TSP G-fund.

[Hypersion]

I used to slice and dice but now I just put all of my tax sheltered stock investments into VTWAX Vanguard Total World Stock Index Fund Admiral Shares and enjoy life.

[UpperNwGuy]

The answer is staring you in the face, but you apparently don't want to hear it:
— buy the rest of the US market, not just the S&P 500
— buy an international fund (and forget about avoiding UK and Japan — who does that?)
— buy bonds

[tibbitts]

I've never heard of anyone excluding the UK and Japan. Now, China or EM in general is another story. But why the UK and Japan?

[SnowBog]

I'd ask yourself "why" and "what are you hoping to accomplish."

If I read into "significant weight occupied by some high-flyers" - that seems to imply you question "big tech." Further, it seems to imply that somehow the S&P 500 (and/or the stock market) has picked "big tech."

OK, let's take a step back... What were the biggest companies 10 years ago? 20 years ago? If a reference (with potentially annoying audio) helps - watch https://www.youtube.com/watch?v=Z93yWXb9Tb0&t=5s.

Notice anything? The market changes... Yesterday's "high flyers" may not be tomorrow's "high flyers." So, by your assumed logic, the S&P 500/market should see big changes when those "high flyers" crash and get replaced...

Now, take a look at the S&P over that same time period (use the sliders to get to 1979 - current aligned with this video). https://www.macrotrends.net/2324/sp-500 ... chart-data

Now, find where the "high-flyers" changed on that chart? You can't? That tell you something?

Now, if you want some more diversification, the most logical would be to move to a Total Stock Market fund. However, the difference is almost negligible - reason being the funds are still "market weighted", meaning those "high-flyers" still represent the largest portion of the market. https://www.forbes.com/sites/robertberg ... ors-guide/

But to the underlying - and presumed concern - think about it this way, a "total stock market" fund owns [typically most] "publicly available stocks." Or in your "high-flyer" context, it hold's today's high-flyers and tomorrow's high-flyers. Said differently, at some point, big tech won't dominate the market... I don't know when that will happen, but history has shown us that "something else" will come along and claim the top spots. More-over, I don't care. Whether I hold a "total stock market" which already owns tomorrow's high-flyers (before they become high-flyers), or I own an S&P 500 which will replace the current "top" companies with the "new high-flyers", I'll "own whatever the current high-flyers are. I don't need to "pick", I don't need to "read the market news", I just need to let the indexes do what they do...

Now, compare that to your proposal...

has me wanting to introduce other large caps in order to dilute contributions of the high flyers.

Your crystal ball show something mine doesn't? Why do you think that "other large caps" are going to help? To the "tomorrow's high-flyer" comment, they might not be large-caps (at least not today). And I'm not sure what "large-caps" exist that aren't reflected by the S&P 500 already... Maybe there's a few - but the S&P 500's nature is to hold the "largest" companies by market capitalization (that meet their other requirements).

Again, why not simply hold the entire market instead of trying to "guess" what comes next (and then what comes after that, and then after that). The math shows the index approach is far more likely to prove successful...

I currently don't have any international equity positions

This is something you can address!

However, I'll caution from "the noise" making you think you should do this. If you are reacting to the news/media/etc. - you are effectively attempting to time the market and "pick" stocks [or segments]. Again, unless your crystal ball shows something mine doesn't, this is a sure-fire way to end up having worse results...

That said - sometimes we recognize that our diversification and/or AA isn't adequate anymore. Ideally, we have an Investor Policy Statement (IPS) that helps define the "why" we did something, and acts as a safeguard on making changes as "reactions" or "chasing" things per above...
Some might make a process of writing down a proposed change - and then "sitting on it" for X months, to see if they still feel the same way before implementing. The goal is to make good long-term choices. https://www.bogleheads.org/wiki/Investm ... _statement

But let's keep looking:

Foreign is a bit more complicated. ... but I would like to stay away from the UK and Japan if possible. Is there a way to construct a fund that captures large cap from the major Western European nations and South Korea?

Back to crystal ball and "picking" winners... Seems again a sure-fire way to have less than ideal results, and definitely not "long-term" thinking... What will you do in 5 years when "the news" makes it sounds like UK & Japan are crushing things - but you don't have any exposure to them? Or maybe Brazil takes over as an economic powerhouse?

Wouldn't it be simpler to let the indexes do what they do... Any "Total International Stock Market" fund will hold the biggest/best international stocks available - in their market weight. If one country, one segment, or one company becomes the source of the next "high-flyer", you are set! And when that changes, you are still set! And when that changes again, you are still set! No crystal ball needed...

Now - a "problem" with international is deciding how much to own... Here decisions vary greatly, with arguments to be made for nearly every position possible, such as:

• 0% - you already have international diversification through the international operation of the US Businesses held in S&P 500/TSM funds
• 0 - 20% of your stocks - this was Bogle's recommendation, as he believed the above was "correct", but wasn't opposed to people owning some more
• "market weight" - around something like 40% I believe - under the view that "this represents the real market weight"
• "over-weight" - which I can't endorse, as the underlying assumption IMHO comes back to "stock picking" and "market timing"

For those that want a "market weight", you can address that - and your broader "more diversified" concern with a "Total World Stock Market" type fund, which as the name implies, holds both US & international stocks - at their market weights. It's hard to get more diversified than that. And at which point, again you don't care who "wins" or "losses", which countries do well or struggle. As Bogle used to say "don't try to find the needles, own the haystack."

One of my favorite quotes is Bogle talking about the Three Fund Portfolio, popular here on BH. It was something to the effect of "it might not be the best portfolio, but it's better than an infinite number of alternatives." Personally, I like the "sure and steady" approach - I don't want to see my life savings get lost on bad decisions - I'll take the "better than an infinite number of alternatives"!

Just my 2 cents...

[InvisibleAerobar]

I've never heard of anyone excluding the UK and Japan. Now, China or EM in general is another story. But why the UK and Japan?

Japan, due to overall anemic economy. Though I may have overstated its effects, as the largest companies (Nikkei 225) seemed to have done well despite headwinds.

UK, due to post-Brexit effects.

Otherwise not interested in emerging markets (incl. PR China an other BRICS, or BICS as things currently stand).

[Ultane]

Why are you changing?

[InvisibleAerobar]

I appreciate the various ideas raised. Definitely takes a while to digest.

As for the practical matters, say I just want to diversify into the Western European nations (really would like to avoid the UK), is there an index for that? Assume for practical purposes that I’d be fine with components from Canada, Japan, S. Korea, Australia, and NZ, though none of the foregoing has to be included.

[bombcar]

You can find ETFs that track almost any index you want. Here's some Euro ones: https://etfdb.com/etfdb-category/europe-equities/

HOWEVER and this should be a big bold warning:

You really need to seriously think why you would want to do this.

If it is "NVDA and TLSA are overvalued" you're basically doing stock-picking market-timing with extra steps. More likely, your asset allocation is wrong, meditate on your IPS.

If it is "if I own UK stocks, the Queen will come back from the dead and drag me back to England to be the Crown Duke of Cornhole" - that's an entirely different question. Some people may be prohibited from investing in certain countries or markets or industries for any number of reasons.

Taking me as an example, with something like a 80/10/10 US/Int/Bond, most of US is in VTI, and so 4.77% is in NVDA and 1.89% is in TSLA. That means that about 6% of 80%, or 4.8% of my total funds are in those two. Do I like it? Maybe not much.

But I do like the increases they've given me, and I had no way of knowing which way they'd go, so I ignore it.

Unfortunately there is no long-term low-cost way to "uninvest" in a company - buying puts against NVDA or similar is expensive, time-consuming, and never seems to work well.

[Escargot9655]

[quoted post and reply removed by admin LadyGeek]

I understand being nervous in the face of a market downturn --- and maybe that's what a lot of this is, is just processing nerves --- but bearing volatility and uncertainty, and resisting the "this time it's different" thought, is literally why and how you get paid in investing. And we all know this in our brains. (Which is why the stomach is, indeed, the most important organ in investing.)

[heyyou]

Some of us have been so wrong, so often on allocation changes, that we are no longer changing since the recommended default positions have been superior long term, to whatever changes we did make. That was my experience with 10% of my portfolio put into a commodities futures fund touted by Larry Swedroe.

Good luck on your quest for more, by trying to avoid the extent of future declines. To expand on Mr. Bogle's analogy, we are rewarded by "staying the course" through thick and thin, because we can only see in retrospect what would have been the better allocations. To attract readers/customers, the financial media will often tout what would have been optimal in the most recent past, and those positions may well be sub-optimal for the future.

[bertilak]

Vanguard's extended market fund (VEXAX) or the equivalent ETF (VXF) holds every US company NOT in the S&P 500.

[LadyGeek]

I removed an off-topic post and reply. As a reminder, see: General Etiquette

We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

[HighLonesome]

It appears too many are watching/reading the latest click bait. These dire warnings never stop because it forces some to watch/read. We all know a correction would be coming, we just dont know when. And this may not even be a correction, only time will tell.



Boglehead and chill. Be grateful for any buying opportunity.

[InvisibleAerobar]

Many thanks to @ladygeek and forumites who provided helpful constructive feedback (including constructive critiques). Constructive feedback and the dialectical exchanges are the primary reasons for why I read this forum in the first place. A reminder of why sticking with a particular index, even when a particular subset thereof represents an increasing share of the index, is helpful.

For the record, nothing major has changed in my investing plan in the last ~15 years. It has almost always been ~70% equity and ~30% G-fund, through various corrections and the pull-back in 2020, though I might have been rebalancing a tad too frequently at times.