Bogleheadism goes mainstream?

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ilmartello
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Bogleheadism goes mainstream?

Post by ilmartello » Sun Mar 25, 2012 3:33 pm

http://www.theatlantic.com/business/arc ... nk/255007/

Farhad Manjoo gives Slate readers advice on "how to stop investing your money like an idiot." He lucidly explains the principles of good investing, but then says that "for people who have extra money but not a lot of time or facility with investing, there has never been a simple way to invest in the rigorous, disciplined way that experts advise." Manjoo is far from the first writer to make this claim (and I'm kind of a broken record on the subject), but this isn't true. Vanguard has had funds that do exactly that since 2003, and they're significantly cheaper than the options Manjoo discusses in his article.

Manjoo reviews three options, and the one option Manjoo ultimately recommends, called Betterment, is pretty good. You tell Betterment how you want to allocate your money between relatively risky assets (like stocks) and relatively safe ones (like Treasury bonds). Betterment then automatically buys a mix of assets that fit your criteria and automatically adjusts them over time.

It's a great service, with one major weakness: the cost. Betterment itself charges between 0.15 percent and 0.35 percent of your money to help you decide which funds to buy, and the underlying funds Betterment buys, called ETFs, cost another 0.19 percent, on average. For example, if you invest $50,000 with Betterment, the annual costs will be around 0.44 percent, or about $220. That's pretty good. Many mutual funds have "expense ratios" around 1 percent, so you can save hundreds of dollars each year in fees--and end up with thousands of dollars more at retirement--by transferring your money from a higher-cost fund to Betterment.

But you can get an even better deal from Vanguard, long considered the lead in low-priced mutual funds. For example, my wife has her IRA invested in Vanguard's Target Retirement 2045 fund, which as the name suggests is for people planning to retire around 2045. Like Betterment, this fund buys a mix of stocks and bonds, automatically keeps its portfolio balanced, and gradually shifts to more conservative assets as you get closer to retirement. But for our hypothetical customer with $50,000 to invest, this fund costs less than half what Betterment does--0.19 percent, or about $95 per year. The $125 you save each year by switching from Betterment to Vanguard will really add up over the course of your career.

Vanguard has two big advantages that allow it to keep its costs much lower than its competitors. First, while most mutual funds are run by commercial firms that expect to earn a profit, Vanguard is owned by its customers. That means there are no conflict of interest between customers and shareholders--customers get every dime of Vanguard's "profits." Second, Vanguard's vast size--$1.8 trillion under management--allows them to take advantage of economies of scale.


--
http://www.forbes.com/sites/timothylee/ ... isnt-hard/


With people making new year’s resolutions, both Megan McArdle and Felix Salmon are offering readers personal financial advice. Megan says you should be saving more—she recommends saving around 15 percent of your income. Salmon says that you shouldn’t try to beat the market, but should instead buy a diversified portfolio at the lowest possible cost. (Megan largely agrees) I agree with everything both of them says except for this part from Salmon:

Simply following Blodget’s good advice — buy a handful of index funds, and rebalance automatically when the allocations get out of whack — is much harder than it should be. It’s hard enough that a company called Betterment feels comfortable charging a fee of 0.9% of all your assets, every year, just for doing it for you. The fee continues to rise as your asset base rises, but starts falling as a percentage once it goes over $25,000: if you have a nest egg of, say, $200,000, then Betterment will charge you $1,250 a year to put it in index funds: that’s 0.625%, over and above all of the fees on the index funds it’s investing in. To give an idea of what that means, $200,000 compounded at 7% over 20 years will become $770,000. The same amount compounded at 7.625% over 20 years will become $870,000. That’s a difference of $100,000.

I’m a bit of a broken record on this subject, but I don’t think anyone should write a column on this topic without mentioning Vanguard. As I pointed out in September, Vanguard makes prudent, efficient investing really easy. You can buy into one of Vanguard’s “lifecycle funds” (we’re in our early 30s, so my wife is invested in this one). A lifecycle fund automatically adjusts your portfolio, gradually shifting into lower-risk assets as you get near your target retirement date. And the fund’s “expense ratio” is under 0.2 percent, a fraction of the 1 to 2 percent fees many other mutual fund companies charge.

Vanguard is able to offer low costs in part due to its unusual structure. Most mutual fund companies are for-profit companies trying to generate returns for their shareholders. As a result, they set their fees as high as they feel they can get away with. In contrast, Vanguard is owned directly by the people who invest in its mutual funds. This means that it only charges as much as it needs to cover its costs, with any “profits” plowed directly back into the funds.
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bob90245
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Re: Bogleheadism goes mainstream?

Post by bob90245 » Sun Mar 25, 2012 3:45 pm

I wouldn't consider Forbes a "mainstream" media outlet. The Atlantic might be more "mainstream".

What are some of the most popular "mainstream" media outlets that most Americans read? The national paper USA Today?
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

Mortgasm
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Re: Bogleheadism goes mainstream?

Post by Mortgasm » Sun Mar 25, 2012 3:57 pm

bob90245 wrote:I wouldn't consider Forbes a "mainstream" media outlet. The Atlantic might be more "mainstream".

What are some of the most popular "mainstream" media outlets that most Americans read? The national paper USA Today?



"Mainstream' is hard to define, but Forbes circulation is double The Atlantic.

tomforshort
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Re: Bogleheadism goes mainstream?

Post by tomforshort » Sun Mar 25, 2012 4:05 pm

To the OP, do you really want Bogleheadism to go mainstream? If everyone switches to low-cost index fund investment, would that not "change the game" substantially? Could the market be efficient, if it even is now, if all investments were just market cap weighted index buys? Somebody needs to be out there actively trading.

NERD777
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Re: Bogleheadism goes mainstream?

Post by NERD777 » Sun Mar 25, 2012 4:11 pm

tomforshort wrote:To the OP, do you really want Bogleheadism to go mainstream? If everyone switches to low-cost index fund investment, would that not "change the game" substantially? Could the market be efficient, if it even is now, if all investments were just market cap weighted index buys? Somebody needs to be out there actively trading.


This is an important point not often made. People on here tend to scoff at traders, but without them the market would not function properly. If every dollar in the market was indexed, the market would cease to be even remotely efficient.

yobria
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Re: Bogleheadism goes mainstream?

Post by yobria » Sun Mar 25, 2012 4:29 pm

Thanks for the link. According to this article, http://www.mymoneyblog.com/bettermentco ... -cost.html, the suggested Betterment ETF stock portfolio was:

•10% SPDR Dow Jones Industrial Average ETF (DIA)
•20% iShares S&P 500 Value Index ETF (IVE)
•20% iShares S&P 1000 Value Index ETF (IWD)
•15% iShares Russell 2000 Value Index ETF (IWN)
•15% iShares Russell Midcap Value Index ETF (IWS)
•20% Vanguard Total Stock Market ETF (VTI)

Doesn't inspire confidence, on a number of levels.

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bob90245
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Re: Bogleheadism goes mainstream?

Post by bob90245 » Sun Mar 25, 2012 4:34 pm

tomforshort wrote:If everyone switches to low-cost index fund investment, would that not "change the game" substantially? Could the market be efficient, if it even is now, if all investments were just market cap weighted index buys? Somebody needs to be out there actively trading.

Don't worry yourself. Human nature what it is, there will always be traders acting overconfident thinking they can "beat the market" by being the next Warren Buffet or star hedge fund manager.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

tomforshort
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Re: Bogleheadism goes mainstream?

Post by tomforshort » Sun Mar 25, 2012 4:42 pm

bob90245 wrote:
tomforshort wrote:If everyone switches to low-cost index fund investment, would that not "change the game" substantially? Could the market be efficient, if it even is now, if all investments were just market cap weighted index buys? Somebody needs to be out there actively trading.

Don't worry yourself. Human nature what it is, there will always be traders acting overconfident thinking they can "beat the market" by being the next Warren Buffet or star hedge fund manager.


I am confident that some individuals will continue to chase returns. I am a bit concerned about large pension funds switching to passive investment, although that does make sense for the funds and those that depend upon their returns. I don't know how trading volume breaks down by group of investor, but I would guess that pension funds are a pretty large component of the total trading volume. Of course, pensions themselves are becoming a thing of the past, so perhaps it does not matter.

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gatorking
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Re: Bogleheadism goes mainstream?

Post by gatorking » Mon Mar 26, 2012 8:58 am

Note: The Atlantic article is under Megan McArdle's byline but not written by her. It is written by "Timothy B. Lee -- Writer with Ars Technica and the Cato Institute" who also wrote the Forbes article. So, this is essentially the same article and doesn't count towards Bogleheadism going mainstream.
Last edited by gatorking on Mon Mar 26, 2012 9:05 am, edited 1 time in total.

sscritic
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Re: Bogleheadism goes mainstream?

Post by sscritic » Mon Mar 26, 2012 9:01 am

gatorking wrote:Note: The Atlantic article is under Megan McArdle's byline but not written by her. It is written by "Timothy B. Lee -- Writer with Ars Technica and the Cato Institute".

Megan is on vacation/working on another project. Guests are filling in for these three weeks.
Megan McArdle is a senior editor for The Atlantic who writes about business and economics. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and The Economist. She is currently on leave.

sscritic
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Re: Bogleheadism goes mainstream?

Post by sscritic » Mon Mar 26, 2012 9:03 am

gatorking wrote:Note: The Atlantic article is under Megan McArdle's byline but not written by her. It is written by "Timothy B. Lee -- Writer with Ars Technica and the Cato Institute".

As is the forbes article. One article, two publications. Ah, I remember that from academia. Just a little rewrite here, a little rewrite there, and you can double count!

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bottlecap
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Re: Bogleheadism goes mainstream?

Post by bottlecap » Mon Mar 26, 2012 9:24 am

You probably should put the quoted portions in quotes. I know I'm slow, but I read the text before I go to the link and initially thought that the text of the post contained your thoughts, as opposed to being copied from the links.

JT

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Re: Bogleheadism goes mainstream?

Post by sscritic » Mon Mar 26, 2012 9:30 am

bottlecap wrote:You probably should put the quoted portions in quotes. I know I'm slow, but I read the text before I go to the link and initially thought that the text of the post contained your thoughts, as opposed to being copied from the links.

And forum policy strongly suggests you don't just copy someone else's work (or just a link) without comment. The OP should have given his own thoughts on the two (really one) articles, even if just a sentence to say he was surprised to see Vanguard mentioned in a positive light (not that any of us should be surprised that Vanguard would be mentioned in a favorable light, but at least it's a comment).

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Re: Bogleheadism goes mainstream?

Post by VennData » Mon Mar 26, 2012 11:34 am

NERD777 wrote:
tomforshort wrote:To the OP, do you really want Bogleheadism to go mainstream? If everyone switches to low-cost index fund investment, would that not "change the game" substantially? Could the market be efficient, if it even is now, if all investments were just market cap weighted index buys? Somebody needs to be out there actively trading.


This is an important point not often made. People on here tend to scoff at traders, but without them the market would not function properly. If every dollar in the market was indexed, the market would cease to be even remotely efficient.


I disagree with the "obvious" conclusion. If more people indexed, I think volatility would drop, this would make equities more valuable. And assuming every single investor/trader would ever index is a real leap.

jonstein
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Re: Bogleheadism goes mainstream?

Post by jonstein » Mon Mar 26, 2012 1:28 pm

Jon Stein, founder and CEO of Betterment here. The best place to view the up-to-date Betterment portfolio is on the Betterment website:

https://www.betterment.com/about/investments/

The stock market portfolio currently consists of:
    25% VTI: Vanguard Total Stock Market
    25% IVE: iShares S&P 500 Value Index
    25% VEA: Vanguard Europe Pacific
    10% VWO: Vanguard Emerging Markets
    8% IWS: iShares Russell Midcap Value Index
    7% IWN: iShares Russell 2000 Value Index

The bond portfolio currently consists of:
    50% TIP: iShares Barclays TIPS Bond Fund
    50% SHY: iShares Barclays 1-3 Year Treasury Bond Fund

The portfolio is designed to reflect the broad US and international stock market, and is selected for its low fees, liquidity, and appropriate exposure.

Jon.


yobria wrote:Thanks for the link. According to this article, http://www.mymoneyblog.com/bettermentco ... -cost.html, the suggested Betterment ETF stock portfolio was:

•10% SPDR Dow Jones Industrial Average ETF (DIA)
•20% iShares S&P 500 Value Index ETF (IVE)
•20% iShares S&P 1000 Value Index ETF (IWD)
•15% iShares Russell 2000 Value Index ETF (IWN)
•15% iShares Russell Midcap Value Index ETF (IWS)
•20% Vanguard Total Stock Market ETF (VTI)

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Re: Bogleheadism goes mainstream?

Post by FinanceFun » Mon Mar 26, 2012 1:38 pm

jonstein wrote:Jon Stein, founder and CEO of Betterment here. The best place to view the up-to-date Betterment portfolio is on the Betterment website:

https://www.betterment.com/about/investments/

The stock market portfolio currently consists of:
    25% VTI: Vanguard Total Stock Market
    25% IVE: iShares S&P 500 Value Index
    25% VEA: Vanguard Europe Pacific
    10% VWO: Vanguard Emerging Markets
    8% IWS: iShares Russell Midcap Value Index
    7% IWN: iShares Russell 2000 Value Index

The bond portfolio currently consists of:
    50% TIP: iShares Barclays TIPS Bond Fund
    50% SHY: iShares Barclays 1-3 Year Treasury Bond Fund

The portfolio is designed to reflect the broad US and international stock market, and is selected for its low fees, liquidity, and appropriate exposure.

Jon.


yobria wrote:Thanks for the link. According to this article, http://www.mymoneyblog.com/bettermentco ... -cost.html, the suggested Betterment ETF stock portfolio was:

•10% SPDR Dow Jones Industrial Average ETF (DIA)
•20% iShares S&P 500 Value Index ETF (IVE)
•20% iShares S&P 1000 Value Index ETF (IWD)
•15% iShares Russell 2000 Value Index ETF (IWN)
•15% iShares Russell Midcap Value Index ETF (IWS)
•20% Vanguard Total Stock Market ETF (VTI)


Tilting Large Value and short duration bonds.... no REIT's. Ill give this a 7 out of 10 score. Not horrible. But not great.

Add in REIT's and intermediate term tres for +2

Remove Large Value Tilt, or move it to Small Value for +1

and one last thing... on your website front page you have "Because stocks are risky, their returns tend to be higher to compensate investors for the risk they are taking." If you want to build credibility, use grammar correctly. Sentences don't start with "because."

"You'll just pay a low annual management fee of 0.15% to 0.35%" Epic.

yobria
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Re: Bogleheadism goes mainstream?

Post by yobria » Mon Mar 26, 2012 2:07 pm

jonstein wrote:Jon Stein, founder and CEO of Betterment here. The best place to view the up-to-date Betterment portfolio is on the Betterment website:

https://www.betterment.com/about/investments/

The stock market portfolio currently consists of:
    25% VTI: Vanguard Total Stock Market
    25% IVE: iShares S&P 500 Value Index
    25% VEA: Vanguard Europe Pacific
    10% VWO: Vanguard Emerging Markets
    8% IWS: iShares Russell Midcap Value Index
    7% IWN: iShares Russell 2000 Value Index

The bond portfolio currently consists of:
    50% TIP: iShares Barclays TIPS Bond Fund
    50% SHY: iShares Barclays 1-3 Year Treasury Bond Fund

The portfolio is designed to reflect the broad US and international stock market, and is selected for its low fees, liquidity, and appropriate exposure.

Jon.


Jon, thanks for the update. Looks like some pretty dramatic allocation shifts, if the mymoneyblog article is correct. That's why I manage my own money - no risk of "being in" X on Monday, Y on Tuesday. Fortunately, looks like you're mostly shifting in the right direction, however it's still a better's portfolio - you've bet on value as growth as been winning, on short term bonds while long term's had a run, etc. Diversify broadly, keep it simple.

jonstein
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Re: Bogleheadism goes mainstream?

Post by jonstein » Mon Mar 26, 2012 2:11 pm

Jon Stein, founder and CEO of Betterment. Thanks FinanceFun for your suggestions on what Betterment could be doing better.

I'm glad to say that our portfolio does tilt small value, not large value. You need lower percentages of small and mid cap equities to get proper exposure to them, because they represent a smaller portion of the market. We've had our portfolio analyzed by DFA, and they agree that it tilts to small value.

Medium- and long-duration bonds may not be a good idea today for investors with medium-term horizons. Short-term - who can say (certainly not me); long-term - perhaps it's okay (everything averages out in the long-term). But, because interest rates are at bottom and will eventually go up, medium- to long-term bonds don't belong in a low-risk portfolio today. In fact, we are likely reducing the duration of our Treasury bond funds this quarter, perhaps moving from TIP to STIP.

Looking ahead, we may introduce duration-matching at Betterment.com. This way, everyone gets the right duration of bonds for the term you want to be invested.

We have not yet introduced Real Estate into the portfolio, though we likely will. RE correlates strongly with equities of late, and is already represented in equity holdings (I've heard experts propose 2-4%). But, for some people, particularly those saving for an RE purchase or who don't own RE otherwise, higher RE exposure may be appropriate, and we expect to introduce that for them.

Since you mentioned it, I learned that sentences can start with "because," so long as you use a comma to denote the subordinate clause, as we do in your example from our site. See: http://grammar.quickanddirtytips.com/ca ... cause.aspx

FinanceFun wrote:Tilting Large Value and short duration bonds.... no REIT's. Ill give this a 7 out of 10 score. Not horrible. But not great.

Add in REIT's and intermediate term tres for +2

Remove Large Value Tilt, or move it to Small Value for +1

and one last thing... on your website front page you have "Because stocks are risky, their returns tend to be higher to compensate investors for the risk they are taking." If you want to build credibility, use grammar correctly. Sentences don't start with "because."

"You'll just pay a low annual management fee of 0.15% to 0.35%" Epic.

ilmartello
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Re: Bogleheadism goes mainstream?

Post by ilmartello » Mon Mar 26, 2012 2:14 pm

Dear Jon, I think your fees are excessive, although not as bad as some other managers.

FinanceFun
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Re: Bogleheadism goes mainstream?

Post by FinanceFun » Mon Mar 26, 2012 2:26 pm

jonstein wrote:Jon Stein, founder and CEO of Betterment. Thanks FinanceFun for your suggestions on what Betterment could be doing better.

I'm glad to say that our portfolio does tilt small value, not large value. You need lower percentages of small and mid cap equities to get proper exposure to them, because they represent a smaller portion of the market. We've had our portfolio analyzed by DFA, and they agree that it tilts to small value.


You are tilting Large Value. VTI represents market weight relative to market cap. This is incorrect.

jonstein wrote:Medium- and long-duration bonds may not be a good idea today for investors with medium-term horizons. Short-term - who can say (certainly not me); long-term - perhaps it's okay (everything averages out in the long-term). But, because interest rates are at bottom and will eventually go up, medium- to long-term bonds don't belong in a low-risk portfolio today. In fact, we are likely reducing the duration of our Treasury bond funds this quarter, perhaps moving from TIP to STIP.

Looking ahead, we may introduce duration-matching at Betterment.com. This way, everyone gets the right duration of bonds for the term you want to be invested.


So you are actively managing your bonds allocation based on yield curve projections. I can't argue too much with this, I do agree with shortened durations at this point. But it isn't ivory tower purest.

jonstein wrote:We have not yet introduced Real Estate into the portfolio, though we likely will. RE correlates strongly with equities of late, and is already represented in equity holdings (I've heard experts propose 2-4%). But, for some people, particularly those saving for an RE purchase or who don't own RE otherwise, higher RE exposure may be appropriate, and we expect to introduce that for them.


Many experts recommend as high as 25% REIT. Although I stay 10-15%. The correlation argument is ridiculous. Data skew from the black swan of 07 has created an illusion that the long term correlation picture has changed. It hasn't. You manage black swans via proper AA.

Let me add that your portfolio seems to "blow in the wind" quite a bit (whats you 'new' allocation next week going to be?), and your fee's are excessive ($1500 per year per $1m? Ridiculous for a cookie cutter, where the only value add is rebalancing). Its also a "one size fits all" solution, which does not support people with different needs.

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MortgageOnBlack
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Re: Bogleheadism goes mainstream?

Post by MortgageOnBlack » Mon Mar 26, 2012 3:15 pm

What impact would Bogleism have on the market? Let's say if everyone in the market invested the exact same way? Would this be a bad thing?... :twisted: I've always been under the impression that if everyone "saved" and became minimalists then the economy would crash due to no consumption. What are others thoughts?

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Re: Bogleheadism goes mainstream?

Post by baw703916 » Tue Mar 27, 2012 10:44 am

Timothy B. Lee has a follow-up guest post on Megan McArdle's blog:

The Actively Managed Mutual Fund Racket
Most of my posts assume no behavioral errors.

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Re: Bogleheadism goes mainstream?

Post by NightOwl » Tue Mar 27, 2012 3:15 pm

FinanceFun wrote:and one last thing... on your website front page you have "Because stocks are risky, their returns tend to be higher to compensate investors for the risk they are taking." If you want to build credibility, use grammar correctly. Sentences don't start with "because."

Someone may have "taught" you this at some point (certainly many people seem to believe it), but it is nevertheless incorrect. "Because" is a perfectly acceptable subordinating conjunction.

Regarding the thread topic: all of my peers who know that I index -- and that I own bonds, for gosh sake -- think that I am completely insane. In fact, I know very few people who own mutual funds-- most people I know are invested 100% in single stocks. There's just no chance that everyone's going to index or invest passively. It's too counter-intuitive.

NightOwl
"Volatility provokes the constant dread that some investors know more than we do, making us fearful of ignoring such powerful price movements." | Peter Bernstein, "The 60/40 Solution."

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Random Musings
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Re: Bogleheadism goes mainstream?

Post by Random Musings » Tue Mar 27, 2012 4:04 pm

The stock market portfolio currently consists of:
    25% VTI: Vanguard Total Stock Market
    25% IVE: iShares S&P 500 Value Index
    25% VEA: Vanguard Europe Pacific
    10% VWO: Vanguard Emerging Markets
    8% IWS: iShares Russell Midcap Value Index
    7% IWN: iShares Russell 2000 Value Index

The bond portfolio currently consists of:
    50% TIP: iShares Barclays TIPS Bond Fund
    50% SHY: iShares Barclays 1-3 Year Treasury Bond Fund

The portfolio is designed to reflect the broad US and international stock market, and is selected for its low fees, liquidity, and appropriate exposure.


- if it would [url]truly[/url] reflect the investible market, international exposure would be higher and there would be no value tilts. Although I will note that the 35% int'l exposure is around the sweet spot that Vanguard has reported on in a recent report.

Saying that, this portfolio isn't bad, although I believe you could reduce the equity side (if small-value loadings are desired) to:

- TSM
- SCV
- TISM
- International small (or small value if cost effective) to tilt the int'l.
- and REIT's if desired

IMHO, utilizing four funds on the domestic side is more of a marketing ploy - you can use just two to get to a point on the style box grid. Perhaps there is some rebalancing bonus I'm not aware of.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

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Re: Bogleheadism goes mainstream?

Post by baw703916 » Tue Mar 27, 2012 4:46 pm

And now in this blog series, an opposing viewpoint:

The Worrisome Success of Index Funds

A quite interesting comments section of the articles. I'm not sure how many of the commenters are actually Bogleheads, but many seem to have a very good understanding of the concept.
Most of my posts assume no behavioral errors.

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