Core 4 portfolio with a few stocks

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Fiat lux
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Core 4 portfolio with a few stocks

Post by Fiat lux » Sat Jan 13, 2018 5:46 pm

I have been using a variant of the 3-fund portfolio which also includes a REIT (IE a 4 fund portfolio). I still however own a few individual stocks in my portfolio as well as some small cap funds. My question is, when I am doing my allocations should I ignore these individual stocks and small cup funds that don't really fit into any of 3 categories set by a 3-fund portfolio, and just figure my percentages on the actual equities that fit into 3 categories tidily?

dbr
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Re: Core 4 portfolio with a few stocks

Post by dbr » Sat Jan 13, 2018 5:49 pm

Count them because the most important asset allocation decision is the proportion between high risk and low risk components.

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Fiat lux
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Re: Core 4 portfolio with a few stocks

Post by Fiat lux » Sat Jan 13, 2018 6:02 pm

dbr wrote:
Sat Jan 13, 2018 5:49 pm
Count them because the most important asset allocation decision is the proportion between high risk and low risk components.

Ok so you are saying to include everything in my portfolio for asset allocation. I am a newbie, so just trying to understand here and I would rather include everything as it just seems to make more sense. But-- How does including everything help the decision between high and low risk if all the risky equities are lumped in with all the others?

dbr
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Re: Core 4 portfolio with a few stocks

Post by dbr » Sat Jan 13, 2018 6:14 pm

Fiat lux wrote:
Sat Jan 13, 2018 6:02 pm
dbr wrote:
Sat Jan 13, 2018 5:49 pm
Count them because the most important asset allocation decision is the proportion between high risk and low risk components.

Ok so you are saying to include everything in my portfolio for asset allocation. I am a newbie, so just trying to understand here and I would rather include everything as it just seems to make more sense. But-- How does including everything help the decision between high and low risk if all the risky equities are lumped in with all the others?
Well, at the first cut low risk is bonds and high risk is stocks. If you want a more sophisticated analysis you have to actually compute the standard deviation of annual returns for the portfolio from the standard deviations of annual returns or each asset class and the correlations of returns among the asset classes. It is indeed a problem if some of the assets are far more risky and risky in a different way from other assets. That could apply for individual stocks, applies even more for in the money stock options, which are leveraged against the underlying stocks, etc.

It is possible that some assets are so risky they should not be counted in the portfolio and at the same time because they are so risky should be considered also to have no value. A way to finesse management stock options, as an example, is to not count them until exercised, at which point the proceeds are income that is invested somewhere. I don't know how risky your holdings are. Small cap stocks probably have an SD of maybe 26% where the total stock market is 21%, just as a rough estimate.

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Alexa9
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Re: Core 4 portfolio with a few stocks

Post by Alexa9 » Sat Jan 13, 2018 6:41 pm

Consider your individual stocks "gambling money" :mrgreen:

Lafder
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Re: Core 4 portfolio with a few stocks

Post by Lafder » Sat Jan 13, 2018 10:23 pm

3 fund portfolio =
US stocks
International Stocks
Bonds

Individual stocks = US or International Stocks depending on country
REITs = US or International stocks " "

Yes they absolutely count in your asset allocation. Why wouldn't they?

Some consider International bonds the 4th component of a 4 fund portfolio. See the holdings in Vanguard's Life strategy and Target date funds. The total stock market index should include some REIts already. Yes a number of people hold a category of REITs.

lafder

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