How to determine weights within portfolio

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

How to determine weights within portfolio

Post by flroots » Sat Jul 14, 2018 5:08 pm

I've been searching for a way to determine the optimum weighting of individual securities within a portfolio assuming the stock/bond ratio has already been determined. As an example, in the following portfolio I wish the 3 stock market ETFs to equal 75% of the total, but how do I determine the individual weighting?
VTI Vanguard Total Stock Market
VEA Vanguard FTSE Developed Markets
VWO Vanguard FTSE Emerging Markets
BND Vanguard Total Bond Market
I have been reading about modern portfolio theory and efficient frontiers, etc but have not come across any practical way of doing it myself other than simply copying what others have done. Wealthfront has written a white paper on how they do it (https://research.wealthfront.com/whitep ... thodology/), but is it really that complicated?

livesoft
Posts: 62716
Joined: Thu Mar 01, 2007 8:00 pm

Re: How to determine weights within portfolio

Post by livesoft » Sat Jul 14, 2018 5:14 pm

There are no lasting optimal weights for a portfolio. The optimal weights probably change monthly, if not daily, and are certainly different today than they will be in the future.

So my advice, is to give up on your quest and go with good enough.

And that's why you have not come up with any practical way of doing it.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
Hyperborea
Posts: 720
Joined: Sat Apr 15, 2017 10:31 am
Location: Osaka, Japan

Re: How to determine weights within portfolio

Post by Hyperborea » Sat Jul 14, 2018 6:07 pm

To add to the above, the default position seems to be the market weight. Start there and for every deviation from that point have a good reason that you understand and believe in. If you don't then when the returns for one piece of the allocation does poorly you will be tempted to sell it.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

mhalley
Posts: 6070
Joined: Tue Nov 20, 2007 6:02 am

Re: How to determine weights within portfolio

Post by mhalley » Sat Jul 14, 2018 6:19 pm

A reasonable portfolio is one that is well diversified, low cost and passive. The exact percentage of the underlying positions can’t be known, so you have to make a decision, but when you do it is one you should stick with unless new information comes to light that makes the previous portfolio null.
From white coat investor
. 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. But it doesn’t matter that much ....

I suggest you pick a portfolio you like and think you can stick with for a few decades, and then do so. Eventually, any given portfolio will have its day in the sun. Just don’t continually change your portfolio in response to changes in the investment winds.
https://www.whitecoatinvestor.com/150-p ... han-yours/

flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

Re: How to determine weights within portfolio

Post by flroots » Sun Jul 15, 2018 5:01 am

Hyperborea wrote:
Sat Jul 14, 2018 6:07 pm
To add to the above, the default position seems to be the market weight. Start there and for every deviation from that point have a good reason that you understand and believe in. If you don't then when the returns for one piece of the allocation does poorly you will be tempted to sell it.
By market weight, do you mean the total capitalization of each asset class? If so, where would I find such information? Ideally, I would like to see it broken out as follows:
US Large Cap
US Mid Cap
US Small Cap
International
International Small Cap
Emerging Market
Emerging Market Small Cap
US Real Estate
Alternatives
Intermediate Term Bonds

flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

Re: How to determine weights within portfolio

Post by flroots » Sun Jul 15, 2018 5:44 am

mhalley wrote:
Sat Jul 14, 2018 6:19 pm
A reasonable portfolio is one that is well diversified, low cost and passive. The exact percentage of the underlying positions can’t be known, so you have to make a decision, but when you do it is one you should stick with unless new information comes to light that makes the previous portfolio null.
From white coat investor
https://www.whitecoatinvestor.com/150-p ... han-yours/
Interesting article with tons of portfolios to choose from :happy I currently have a well diversified, low cost portfolio of mostly ETFs which I inherited from an advisor. The reason for starting this post was to try and figure out if the individual weightings made sense since I do not understand the original basis for them. I have discovered a tool for selecting those weightings called the Black-Litterman Asset Allocation Model:
https://www.portfoliovisualizer.com/bla ... rman-model

Coincidentally, this is the same model that Wealthfront uses. I don't fully understand how to run the model, but it seems that as a second step I must voice my opinion about the anticipated returns and confidence level of one or more asset classes. It will then recommend weightings for each asset class.

I agree with the points made in the article, but of course one must select the individual weightings as a starting point even if one is uncertain about the future.

averagedude
Posts: 178
Joined: Sun May 13, 2018 3:41 pm

Re: How to determine weights within portfolio

Post by averagedude » Sun Jul 15, 2018 7:57 am

Keep in mind, the long term returns you will get in the future will be mostly explained by how much you put into the bond fund portion of your four funds.

User avatar
k66
Posts: 494
Joined: Sat Oct 27, 2012 1:36 pm

Re: How to determine weights within portfolio

Post by k66 » Sun Jul 15, 2018 8:44 am

flroots wrote:
Sat Jul 14, 2018 5:08 pm
I've been searching for a way to determine the optimum weighting of individual securities within a portfolio assuming the stock/bond ratio has already been determined. As an example, in the following portfolio I wish the 3 stock market ETFs to equal 75% of the total, but how do I determine the individual weighting?
VTI Vanguard Total Stock Market
VEA Vanguard FTSE Developed Markets
VWO Vanguard FTSE Emerging Markets
BND Vanguard Total Bond Market
I have been reading about modern portfolio theory and efficient frontiers, etc but have not come across any practical way of doing it myself other than simply copying what others have done. Wealthfront has written a white paper on how they do it (https://research.wealthfront.com/whitep ... thodology/), but is it really that complicated?
There really is no method that will allow you to determine the optimal fund assignments for future performance; it is as much guess-work as anything else. There is also something to be said for simplicity.

In the above example, why not consider 25% to each of the four funds, or alternatively 1/N to each of the (N=3) equity funds and the remainder to bonds for your given equity/bond allocation?
LOSER of the Boglehead Contest 2015 | lang may yer lum reek

rkhusky
Posts: 5547
Joined: Thu Aug 18, 2011 8:09 pm

Re: How to determine weights within portfolio

Post by rkhusky » Sun Jul 15, 2018 9:15 am

flroots wrote:
Sun Jul 15, 2018 5:01 am
By market weight, do you mean the total capitalization of each asset class? If so, where would I find such information? Ideally, I would like to see it broken out as follows:
US Large Cap
US Mid Cap
US Small Cap
International
International Small Cap
Emerging Market
Emerging Market Small Cap
US Real Estate
Alternatives
Intermediate Term Bonds
If you want market weight, choose Total Stock Market and Total International. Look at the Morningstar and Vanguard sites for breakdowns of those funds.

flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

Re: How to determine weights within portfolio

Post by flroots » Sun Jul 15, 2018 9:19 am

k66 wrote:
Sun Jul 15, 2018 8:44 am
flroots wrote:
Sat Jul 14, 2018 5:08 pm
I've been searching for a way to determine the optimum weighting of individual securities within a portfolio assuming the stock/bond ratio has already been determined. As an example, in the following portfolio I wish the 3 stock market ETFs to equal 75% of the total, but how do I determine the individual weighting?
VTI Vanguard Total Stock Market
VEA Vanguard FTSE Developed Markets
VWO Vanguard FTSE Emerging Markets
BND Vanguard Total Bond Market
I have been reading about modern portfolio theory and efficient frontiers, etc but have not come across any practical way of doing it myself other than simply copying what others have done. Wealthfront has written a white paper on how they do it (https://research.wealthfront.com/whitep ... thodology/), but is it really that complicated?
There really is no method that will allow you to determine the optimal fund assignments for future performance; it is as much guess-work as anything else. There is also something to be said for simplicity.

In the above example, why not consider 25% to each of the four funds, or alternatively 1/N to each of the (N=3) equity funds and the remainder to bonds for your given equity/bond allocation?
Thanks for the feedback. As mentioned, I've inherited these asset classes from a prior advisor:
US Large Cap
US Mid Cap
US Small Cap
International
International Small Cap
Emerging Market
Emerging Market Small Cap
US Real Estate
Alternatives
Intermediate Term Bonds
so the need is to allocate weights between them. I've pretty much decided:
Stocks 75%
Bonds 15%
Real Estate 5%
Alternatives 5%
so it's only a matter of the individual weights within the 7 stock asset classes

Xyz214
Posts: 66
Joined: Thu Jul 04, 2013 8:35 am

Re: How to determine weights within portfolio

Post by Xyz214 » Sun Jul 15, 2018 9:59 am

flroots wrote:
Sun Jul 15, 2018 5:01 am
Hyperborea wrote:
Sat Jul 14, 2018 6:07 pm
To add to the above, the default position seems to be the market weight. Start there and for every deviation from that point have a good reason that you understand and believe in. If you don't then when the returns for one piece of the allocation does poorly you will be tempted to sell it.
By market weight, do you mean the total capitalization of each asset class? If so, where would I find such information? Ideally, I would like to see it broken out as follows:
US Large Cap
US Mid Cap
US Small Cap
International
International Small Cap
Emerging Market
Emerging Market Small Cap
US Real Estate
Alternatives
Intermediate Term Bonds
You might find these links helpful. Cheers!

https://www.bogleheads.org/wiki/Approxi ... ock_market

https://www.bogleheads.org/wiki/Approxi ... ock_market

http://portfolio.morningstar.com/Rtport ... Entry.aspx?

staythecourse
Posts: 6016
Joined: Mon Jan 03, 2011 9:40 am

Re: How to determine weights within portfolio

Post by staythecourse » Sun Jul 15, 2018 10:13 am

mhalley wrote:
Sat Jul 14, 2018 6:19 pm
A reasonable portfolio is one that is well diversified, low cost and passive. The exact percentage of the underlying positions can’t be known, so you have to make a decision, but when you do it is one you should stick with unless new information comes to light that makes the previous portfolio null.
I would be very cautious of the last point. It is very easy to change (active management) and justify it is based on "new information". The role of academics is to publish (publish or perish mantra) so if one is going to incorporate new information there will ALWAYS be new information as folk's jobs are dependent on it. This is NO different the FA who push their services as a MUST. One's asset allocation should really only change if your willingness/ ability/ need to take risk changes or even if your situation changes (change in job/ tax status/ etc...).

The problem with academics in finance is they heavily rely on torturing previous data and then spitting it out and ASSUMING it plays out the same going forward. In medicine, the gold standard is a PROSPECTIVE randomized controlled trial. If one published the papers one does in finance in medicine they would get a pat on the back and told to start a prospective trial to see if the results can be replicated. Not so in finance. So one can NOT assume all new information in financial literature makes a difference.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

User avatar
Hyperborea
Posts: 720
Joined: Sat Apr 15, 2017 10:31 am
Location: Osaka, Japan

Re: How to determine weights within portfolio

Post by Hyperborea » Sun Jul 15, 2018 10:22 am

flroots wrote:
Sun Jul 15, 2018 9:19 am
so it's only a matter of the individual weights within the 7 stock asset classes
Unless you want to over/under weight one of the equity sub-classes then just buy either a total world index or the US total market + Total International. The rough breakdown of the US:Total International is about 50:50 at the current time though it does vary over time. If you do want to overweight a small number of them then holding the total + some extra of one one of the sub-classes (e.g. emerging market or US SCV) will probably be the easiest to maintain. You can keep the rebalancing to new cash and/or exchanges inside tax deferred accounts. Though again, if you decide to over/under weight then you need to know why you are doing it and be willing to stick to the allocation and not be doing just because some "smart" guy told you to do so.

If you want to look at some numbers then the World Bank has a lot of data to play with - https://data.worldbank.org/indicator/CM ... view=chart
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

rkhusky
Posts: 5547
Joined: Thu Aug 18, 2011 8:09 pm

Re: How to determine weights within portfolio

Post by rkhusky » Sun Jul 15, 2018 10:38 am

As mentioned, I've inherited these asset classes from a prior advisor
Why do you need to maintain these individual asset classes? You are unable to sell?

flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

Re: How to determine weights within portfolio

Post by flroots » Sun Jul 15, 2018 1:54 pm

rkhusky wrote:
Sun Jul 15, 2018 10:38 am
As mentioned, I've inherited these asset classes from a prior advisor
Why do you need to maintain these individual asset classes? You are unable to sell?
I need to maintain them to avoid short term capital gains. Even after gains become long term I would need a very good reason to sell and generate long term gains. Having said that, I can certainly move towards other targets using dividends and RMDs if desired.
Last edited by flroots on Sun Jul 15, 2018 2:34 pm, edited 1 time in total.

retiredjg
Posts: 33881
Joined: Thu Jan 10, 2008 12:56 pm

Re: How to determine weights within portfolio

Post by retiredjg » Sun Jul 15, 2018 2:19 pm

flroots wrote:
Sun Jul 15, 2018 9:19 am
Stocks 75%
Bonds 15%
Real Estate 5%
Alternatives 5%
so it's only a matter of the individual weights within the 7 stock asset classes
The stocks would be divided into US and Foreign - maybe something like 52% and 23%.


But really.....If you have stuff already and you want to mold your stuff into the numbers above....you need to show us your stuff and let us help you with that.

And you should not try to avoid all taxes when fixing a mess (if that is what you have). Paying some taxes on some earnings is a small price to pay to get a portfolio you really like.

flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

Re: How to determine weights within portfolio

Post by flroots » Sun Jul 15, 2018 3:44 pm

retiredjg wrote:
Sun Jul 15, 2018 2:19 pm
flroots wrote:
Sun Jul 15, 2018 9:19 am
Stocks 75%
Bonds 15%
Real Estate 5%
Alternatives 5%
so it's only a matter of the individual weights within the 7 stock asset classes
The stocks would be divided into US and Foreign - maybe something like 52% and 23%.


But really.....If you have stuff already and you want to mold your stuff into the numbers above....you need to show us your stuff and let us help you with that.

And you should not try to avoid all taxes when fixing a mess (if that is what you have). Paying some taxes on some earnings is a small price to pay to get a portfolio you really like.
My stock weightings are:
US Stock
US Large Cap 22.5
US Mid Cap 10.5
US Small Cap 4.5
Total US 37.5

International Stock
Developed 18.0
Developed small cap 4.5
Emerging Mkt 11.25
Emerg Mkt Small Cap 3.75
Total International 37.5
As you can see US and World (Ex US) are 50:50. I'm guessing that's OK. It does appear the Emerging Market at 15% is quite high?

drk
Posts: 756
Joined: Mon Jul 24, 2017 10:33 pm
Location: Seattle

Re: How to determine weights within portfolio

Post by drk » Sun Jul 15, 2018 3:53 pm

flroots wrote:
Sun Jul 15, 2018 3:44 pm
As you can see US and World (Ex US) are 50:50. I'm guessing that's OK. It does appear the Emerging Market at 15% is quite high?
There's nothing wrong with 50/50. Plenty of Bogleheads are there.

EM at 15% is a little high (a 50% tilt relative to current market cap), but it's reasonable if you intend to overweight and can stick with it. Be aware going in that you'll be exposed to more volatility, which means more opportunities to tax-loss harvest and buy low.

flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

Re: How to determine weights within portfolio

Post by flroots » Sun Jul 15, 2018 4:00 pm

drk wrote:
Sun Jul 15, 2018 3:53 pm
flroots wrote:
Sun Jul 15, 2018 3:44 pm
As you can see US and World (Ex US) are 50:50. I'm guessing that's OK. It does appear the Emerging Market at 15% is quite high?
There's nothing wrong with 50/50. Plenty of Bogleheads are there.

EM at 15% is a little high (a 50% tilt relative to current market cap), but it's reasonable if you intend to overweight and can stick with it. Be aware going in that you'll be exposed to more volatility, which means more opportunities to tax-loss harvest and buy low.
Thanks. US is now at 43% of world (so 50% is a bit over-weighted) according to this interesting article:
https://www.nasdaq.com/article/us-stock ... e-cm942558

drk
Posts: 756
Joined: Mon Jul 24, 2017 10:33 pm
Location: Seattle

Re: How to determine weights within portfolio

Post by drk » Sun Jul 15, 2018 4:06 pm

flroots wrote:
Sun Jul 15, 2018 4:00 pm
Thanks. US is now at 43% of world (so 50% is a bit over-weighted) according to this interesting article:
https://www.nasdaq.com/article/us-stock ... e-cm942558
The allocations for Vanguard Total World Stock Market (based on the FTSE Russell Global All-Cap Index [PDF]) is a better guide because it only considers investable markets and freely floated shares. It currently pegs the US at about 53%.

retiredjg
Posts: 33881
Joined: Thu Jan 10, 2008 12:56 pm

Re: How to determine weights within portfolio

Post by retiredjg » Sun Jul 15, 2018 4:07 pm

flroots wrote:
Sun Jul 15, 2018 3:44 pm
My stock weightings are.....
I actually meant to show us the funds you hold and what accounts you hold them in. See the link at the bottom of this message for how to do that.

flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

Re: How to determine weights within portfolio

Post by flroots » Sun Jul 15, 2018 4:31 pm

retiredjg wrote:
Sun Jul 15, 2018 4:07 pm
flroots wrote:
Sun Jul 15, 2018 3:44 pm
My stock weightings are.....
I actually meant to show us the funds you hold and what accounts you hold them in. See the link at the bottom of this message for how to do that.
Thanks. Not sure about your reference to link, but here is a spreadsheet showing the requested info:
Image

retiredjg
Posts: 33881
Joined: Thu Jan 10, 2008 12:56 pm

Re: How to determine weights within portfolio

Post by retiredjg » Sun Jul 15, 2018 4:42 pm

My reference was to the link at the bottom of every message I post. It is "Asking Portfolio Questions".

Your spreadsheet might do, but frequently they do not. Depends on how you built it.

Either way, your link to your spreadsheet does not work.

flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

Re: How to determine weights within portfolio

Post by flroots » Sun Jul 15, 2018 4:49 pm

retiredjg wrote:
Sun Jul 15, 2018 4:42 pm
My reference was to the link at the bottom of every message I post. It is "Asking Portfolio Questions".

Your spreadsheet might do, but frequently they do not. Depends on how you built it.

Either way, your link to your spreadsheet does not work.
That's interesting since the spreadsheet shows up on my computer and I tried it with two different browsers. I used Google Drive to upload the image of spreadsheet then pasted the image ID into the following URL

Code: Select all

https://drive.google.com/uc?export=download&id=<put image ID goes here>

retiredjg
Posts: 33881
Joined: Thu Jan 10, 2008 12:56 pm

Re: How to determine weights within portfolio

Post by retiredjg » Sun Jul 15, 2018 4:54 pm

Perhaps I should have said it does not work for me.

drk
Posts: 756
Joined: Mon Jul 24, 2017 10:33 pm
Location: Seattle

Re: How to determine weights within portfolio

Post by drk » Sun Jul 15, 2018 4:58 pm

flroots wrote:
Sun Jul 15, 2018 4:31 pm
Thanks. Not sure about your reference to link, but here is a spreadsheet showing the requested info:
Image
I see your image just fine. Maybe it's an ad-blocker issue. Note that VEA and IEMG are not complementary funds because they both hold South Korean stocks. VWO is the complement to VEA, as IDEV is to IEMG.

flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

Re: How to determine weights within portfolio

Post by flroots » Sun Jul 15, 2018 5:21 pm

drk wrote:
Sun Jul 15, 2018 4:58 pm

I see your image just fine. Maybe it's an ad-blocker issue. Note that VEA and IEMG are not complementary funds because they both hold South Korean stocks. VWO is the complement to VEA, as IDEV is to IEMG.
Thanks. You sure know your ETFs :happy IDEV looks real new with limited volume. Wonder if that's an issue? Of course I could swap IEMG for VWO, right?
Last edited by flroots on Sun Jul 15, 2018 5:30 pm, edited 1 time in total.

User avatar
Hyperborea
Posts: 720
Joined: Sat Apr 15, 2017 10:31 am
Location: Osaka, Japan

Re: How to determine weights within portfolio

Post by Hyperborea » Sun Jul 15, 2018 5:24 pm

flroots wrote:
Sun Jul 15, 2018 5:21 pm
drk wrote:
Sun Jul 15, 2018 4:58 pm

I see your image just fine. Maybe it's an ad-blocker issue. Note that VEA and IEMG are not complementary funds because they both hold South Korean stocks. VWO is the complement to VEA, as IDEV is to IEMG.
Thanks. You sure know your ETFs :happy
It's the difference in the way that the MSCI vs FTSE indices map certain countries. MSCI puts South Korea into emerging markets and FTSE puts it into the developed markets. So, all the funds that use those indices do the same. To be consistent one needs to pick one family of indices and stick with it but not doing so won't matter too much.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

Re: How to determine weights within portfolio

Post by flroots » Sun Jul 15, 2018 5:31 pm

Hyperborea wrote:
Sun Jul 15, 2018 5:24 pm
flroots wrote:
Sun Jul 15, 2018 5:21 pm
drk wrote:
Sun Jul 15, 2018 4:58 pm

I see your image just fine. Maybe it's an ad-blocker issue. Note that VEA and IEMG are not complementary funds because they both hold South Korean stocks. VWO is the complement to VEA, as IDEV is to IEMG.
Thanks. You sure know your ETFs :happy
It's the difference in the way that the MSCI vs FTSE indices map certain countries. MSCI puts South Korea into emerging markets and FTSE puts it into the developed markets. So, all the funds that use those indices do the same. To be consistent one needs to pick one family of indices and stick with it but not doing so won't matter too much.
Thanks, that's good to know.

flroots
Posts: 105
Joined: Tue Jul 08, 2014 3:18 am

Re: How to determine weights within portfolio

Post by flroots » Mon Jul 16, 2018 7:00 am

Since Wealthfront (WF) seems to have a very sophisticated way of weighting assets I decided to compare their recommended asset allocations to my existing asset allocations. Initially one must complete a questionnaire which resulted in a risk factor of 7.5. The results for a taxable account as percent of equity are:

Code: Select all

Asset Class      Mine    WF
US Stock          50    52.50
International     30    28.75
Emerg Mkt         20    18.75
As can be seen they are quite close. In general, I'm underweighted with respect to US Stock and slightly overweighted with respect to International and Emerging Markets.

Post Reply