Split AA across VG and T-C

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jdsmith
Posts: 28
Joined: Tue Nov 10, 2009 3:59 pm

Split AA across VG and T-C

Post by jdsmith »

After quite some time noodling, I've come up with the following high-level AA (for a married 37yro):
  • Stocks: 65%
    • International: 30%
      Domestic: 70%
      • Domestic Broad: 90%
        Domestic Value: 10%
  • Bonds: 25%
    • Total Market: 60%
      Inflation-Indexed: 30%
      Fixed: 10%
    Real Estate: 10%
where each indented sub-category refers to its parent (e.g. international: 30% * 65% = 19.5% total allocation). I plan to split the difference across Vanguard (Rollover + Roth IRA's + a small but growing taxable account) and TIAA-CREF (all retirement). Current weighting is VG:T-C = 2.7:1, but that will be reduced slowly over the years as T-C is an active retirement account being funded at 20.5% of salary. I plan to implement the above allocations as follows:

<table border="1" cellpadding="10">
<tr><th>Asset Class</th><th>Allocation</th><th>Vanguard</th><th>TIAA-CREF</th></tr>
<tr><td>International</td><td>19.5%</td><td>Total International Adm - VTIAX (0.20%)</td><td>TIAA Access International Equity Fund (Managed, compared to EAFE Index, 0.71%)</td></tr>
<tr><td>Domestic Broad</td><td>40.95%</td><td>Total Stock Market Adm - VTSAX (0.07%)</td><td>TIAA ACCESS Equity Index Fund (Russell 3000, 0.21%)</td></tr>
<tr><td>Domestic Value</td><td>4.55%</td><td>Value Index Adm - VVIAX (0.14%)</td><td></td></tr>
<tr><td>Bonds/Total</td><td>15%</td><td>Total Bond Market Adm - VBTLX (0.12%)</td><td>CREF Bond Market (Managed, Barclay's + sector weighting + <20% junk, 0.41%)</td></tr>
<tr><td>Bonds/Inflation</td><td>7.5%</td><td>Inflation-Protected Sec - VIPSX (0.25%)</td><td></td></tr>
<tr><td>Fixed</td><td>2.5%</td><td></td><td>TIAA Traditional</td></tr>
<tr><td>Real Estate</td><td>10%</td><td>REIT Adm - VGSLX (0.13%)</td><td>TIAA Real-Estate (1.06%)</td></tr>
</table>

where the four categories which are split across VG and T-C are proportioned accordingly. I plan to rebalance yearly, and hold a portion of VTIAX and VTSAX in the taxable VG account. Everything else is tax sheltered.

I'd appreciate thoughts on this breakdown, on my plan to hold VTIAX and/or VTSAX in taxable (which at present represents ~10% of the total portfolio), and thoughts on asset class splitting between T-C/VG. Should I value or small-cap tilt my international class? Anything else to consider before finally pulling the trigger?

Thanks.

[Edited for a 65:35 equity split, increasing international to 30% of equities, and adding ER to the table]
Last edited by jdsmith on Thu Mar 03, 2011 11:17 am, edited 2 times in total.
grberry
Posts: 234
Joined: Fri Jul 20, 2007 1:16 pm
Location: Boston, MA

Post by grberry »

It is good that you are going to have some asset classes in both vehicles. That will allow you to rebalance as investment returns cause divergence from the target portfolio.
555
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Joined: Thu Dec 24, 2009 7:21 am

Post by 555 »

I don't think you need to have all asset classes with both V and TC. TC is 2/3 of my portfolio and it's basically all CREF Stock, since that is what works best when I treat all holdings as one big portfolio, and just make the best of what's available.
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House Blend
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Joined: Fri May 04, 2007 1:02 pm

Post by House Blend »

jdsmith,

Note that the TIAA International Equity Fund is either expensive and actively mismanaged, or developed markets only. VTIAX has emerging markets, small caps, is indexed, and is amazingly cheap.

I would redesign my portfolio in such a way as to make VTIAX 100% of my international holdings (assuming that I don't want to tilt).

Also, make sure you understand lumping REITs and TIAA Real Estate together is like lumping together steam and ice. Both are H2O, but that's about all they have in common... (I'm not saying it's wrong to do this, just make sure you're doing this with your eyes wide open.)
Topic Author
jdsmith
Posts: 28
Joined: Tue Nov 10, 2009 3:59 pm

Post by jdsmith »

Thanks, both. In some cases, such as real estate, this represents real diversification, given the difference between the two underlying investments. But other cases, as 555 points out, are simple duplications for the sake of rebalancing flexibility (since T-C will be funded regularly, and VG irregularly, and the total values will diverge with time). Some differences are probably slight, but real. For example VTIAX tracks the MSCI ACWI ex USA IMI Index, whereas TIAA International is managed.

Since I first posted, I backed off by 5% on the equity allocation fraction, and increased international to 30% of equity holdings. I've updated the table above to reflect this, as well as to add expense ratios for both the VG and TC choices.

Any additional thoughts on this plan and in particular on optimizing the TC-VG breakdown? Is 10% of domestic equities enough of a value tilt to be meaningful? Is it worth tilting international equities?

Thanks in advance.
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House Blend
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Post by House Blend »

I think minimizing costs (which includes taking into account taxes and ERs) is a more important consideration than maintaining a fund for every asset class at both T-C and VG. The need to rebalance should be rare, and is generally cost-free in tax-advantaged accounts (absent redemption fees, etc).

I'm sure that the tilting cult will laugh at your puny 10% slice of SV; sorta like smoking a joint but not inhaling. But ultimately this is something you need to read about and study and decide whether the extra fuss of maintaining a tilt is worth it. Don't do it because it's what the cool kids are doing.

Also keep in mind that adding a tilt without reducing your overall equity slice increases the risk level of your portfolio.

Edited to add: I just noticed that you said Value, not Small Value. It doesn't really change my thoughts, but SV is what the cool kids are smoking.
Topic Author
jdsmith
Posts: 28
Joined: Tue Nov 10, 2009 3:59 pm

Post by jdsmith »

Thanks, HB. TIAA International is the most concerning of the bunch, for sure. You've sold me; I'm looking into shifting international entirely over to VG. It also felt odd lumping the REIT with TIAA-RE, since I can see how different the underlying investments are. I could split those into separate categories certainly (say 5% each); but at present it wouldn't make a big difference.

I'm also certainly willing to listen to the hazy musings of SV tilt-smokers. I've read all about the historical minor outperformance of small-value, but of course am not totally convinced it will persist, thus my reluctance to go all in. Perhaps I should eliminate the tilt altogether... or adopt a 10% SV tilt (though that has twice the ER of a simple value tilt).

Other perspectives?
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