domestic value tilt AA

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Topic Author
kiki
Posts: 36
Joined: Tue Sep 04, 2007 12:57 am

domestic value tilt AA

Post by kiki »

I've been playing around with my AA and in trying to keep it simple (hold less funds), I started to think about value-tilting all my domestic holdings. What I originally had was:

20% - S&P500
20% - Large Cap Value
10% - Small Cap Blend
10% - Small Cap Value

And what I'm now thinking if it wouldn't be easier to go with:

40% - Large Cap Value
20% - Small Cap Value

When I put this into Simba's worksheet, there's a lower SD with a gain in CAGR. But I'm curious to know what others think of this approach.

Btw, for those that would mention why not do a total market, my 401k only has an S&P500 and Large Value Index, forcing me to slice and dice domestic.

Also, the missing 40% is REIT/International.

Thanks!
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stratton
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Post by stratton »

And what I'm now thinking if it wouldn't be easier to go with:

40% - Large Cap Value
20% - Small Cap Value
If value gets punished like right now you don't do so well. Hence the reason lots of portfolios have the blend funds too.

Conversely if you look at the equity part of balanced funds like Wellesley and Wellington they are value tilted. I haven't compared them to value only versus equal amounts of blend and value.

You can use M* Xray and figure this out for yourself.

Paul
InvestingMom
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My 2 cents

Post by InvestingMom »

I like your original plan. Because the blend funds already hold value (they are a blend of value and growth) you are in effect heavily tilting towards value with your original plan of (in effect) 50/50 blend/value.

I have read many of the suggested books on this web site but the one which has recently influenced my thinking is Paul Merrimans' book Live it up without outlinving your money. He also advocates value, but does not go so far as to suggest 100% value. You can see his suggested portfolios on fundadvice dot com. If anything and if possible you might see if your 401k offers foreign value.

Lastly, you did not ask, but you are not investing in any bonds?
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Taylor Larimore
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Location: Miami FL

Value tilting?

Post by Taylor Larimore »

Hi Kiki:
I started to think about value-tilting all my domestic holdings.


"Recency" has a strong influence on the media, statistics, and our perceptions:

http://socialize.morningstar.com/NewSoc ... 74458.aspx

http://www.ski.org/Admin/RSPoole_grp/EB ... eturns.pdf

My approach would be to use Total Stock Market Index Fund (which holds all domestic value stocks) and then, if you decide to "tilt," add a value fund(s) in a tax-deferred account.

The advantage to this approach is fewer funds and better tax-efficiency.

Best wishes.
Taylor
Topic Author
kiki
Posts: 36
Joined: Tue Sep 04, 2007 12:57 am

Post by kiki »

Thanks for the responses. I'm going to stick with my original plan, which actually is:

15% - S&P 500
15% - Large Cap Value Index
10% - Small Cap Blend Index
10% - Small Cap Value Index
10% - REITS
10% - European Index
10% - Pacific Index
10% - EAFE Value Index
10% - Emerging Markets

I'm using all Vanguard fund's, except for the EAFE Value Index, where I plan to use EFV.

If anyone has any comments on this allocation, I'd love to hear them, since I always appreciate the extra input.

The earlier numbers reflect me flip-flopping between leaving out the EAFE Value Index and have 20% for S&P500 and LCV. I'd like to keep everything using Vanguard funds/ETFs, since I think this will make it easier rebalancing (we have a 403b that can only have funds). But I'd still like to somehow have intl. value.

Right now I don't have a bond allocation, but within the next 10 years I plan to add 10% into Vanguard's total bond index. It's probably helpful to note that I have a 30 year time frame before I need these funds.

The reasons for this are more logistical than anything else. Right now, a majority of my funds (low six figures) are all in my 401k and my 401k doesn't have very many options. For indexing, it's S&P500, LCV, or SCG. If I look at my current AA, it's about 75% invested in my 401k, evently split between S&P500 and LCV.

My plan right now is to figure out my AA, and then evenly fund into the other assets yearly and with time, this will bring down the overall percentage of S&P500 and LCV in my 401k, eventually bringing it to my target allocation. Once I get to the 15% for each, I'll then add 10% to a total bond fund and keep reducing until they reach 10%. I don't include this now, since I want to hit my equity allocation before I focus on bonds.

Does that make sense?
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stratton
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Post by stratton »

I'm using all Vanguard fund's, except for the EAFE Value Index, where I plan to use EFV.
Instead of Intl LV how about using Intl SV through the ETF DLS? That gets you both value and small exposure which you're not with this listing.

If you want to really load up on the best returning intl assets then equal parts Intl LV, Intl SV and EM will max out your return. If you want LB add an equal part of developed markets such as using EFA or VG's VEA (?? the ETF for developed markets) or even Tax Managed Intl (1% withdraw penalty for 5 years).

Paul
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LH
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Post by LH »

15% - S&P 500
15% - Large Cap Value Index
10% - Small Cap Blend Index
10% - Small Cap Value Index
10% - REITS
10% - European Index
10% - Pacific Index
10% - EAFE Value Index
10% - Emerging Markets

I think that is fine.

If you wanted to simplify, you could go TSM taxable with a SV fund for a SV tilt. So you would use TSM instead of sp500, LV, small blend and you would keep the SV fund. Would decrease your funds from 9 to 7. If you are stuck with SP500, thats fine too, use sp500 instead of TSM. sp500 + SV. Just realize you are not tilting as much as you think you are, because part of the SV in the SV fund goes to replace the missing SV from using the SP500 instead of the TSM. Not really that big a deal per se, just something to keep in mind.

I would really consider adding in a Bond position though. If you cannot bear the thought of bonds, maybe just add in 5-10 percent TIPS, and use that as your inflation hedge. The more I consider it, the more I think its just good to have some bonds no matter what age you are.

good luck,

LH
Topic Author
kiki
Posts: 36
Joined: Tue Sep 04, 2007 12:57 am

Post by kiki »

Thanks for the feedback. Not too long ago, I wouldn't have cared about having bonds, but after thinking about it and looking at my overall AA, I agree that you can easily have 10% without any big difference.

As I mentioned, I plan to add 10% bonds, but I want to get the equities portion up to their allocated levels. The way I look at it, even if equities performed bad right now, I don't mind losing 30%/year, since the amount lost would be a little over a years savings and I know within my time frame it would recover. In practice, the portfolio balance would probably stay about the same (losing what I contribute). But if I had a million, then I would be thinking about this differently...
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