Vanguard Sub-Asset Allocation Model, Personal Advisor Service

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jbuch002
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Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Thu Jul 12, 2018 7:57 am

I am questioning the recommendations in a recent Vanguard Financial Plan I received. My advisor informs me that VG uses a particular methodology to determine how your portfolio should be allocated given your age. I am 70. The recommended allocation for me in this plan is 60% Stocks and 40% bonds (my current allocation is 58/42). So, fine. My issue is with how the VG recommended sub-asset allocation is achieved.

In short, VG recommends I reduce my holdings from 6 VG funds (VEMAX, VFSVX, VWEAX, VGSLX, VBTLX, VTSAX) to 2 (VTIAX, VBTLX). Certainly, those two funds achieve the sub-asset allocation model the VG methodology recommends so, I get that. But, fundamentally, it is increasing by 2X my exposure to US large, midcap/small cap stocks in an already volatile US market segment with considerable down-side risk. It also recommends liquidating VGSLX - my best performing fund in the first half of 2018. I do like the better diversification of the bond segment of my portfolio that the VG recommendations include but not the equity/other (includes stocks and the REIT segments).

What are your thoughts on the VG modeling method and the recommendations that come from it?

sport
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by sport » Thu Jul 12, 2018 9:45 am

If you edit your post to include the names of the funds, you may get a better response to your question.

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vineviz
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by vineviz » Thu Jul 12, 2018 10:02 am

jbuch002 wrote:
Thu Jul 12, 2018 7:57 am
But, fundamentally, it is increasing by 2X my exposure to US large, midcap/small cap stocks in an already volatile US market segment with considerable down-side risk.
You haven't given us your current asset allocation, so I can't evaluate the change you think is proposed, but unless you are currently 75% international and 25% U.S. then I don't think the current holdings could possibly double your US exposure.

Also, whatever "downside risk" there is for US stocks is already priced into the market. Unless you know something that we don't know. Newspaper headlines and financial bloggers should not drive your asset allocation.
jbuch002 wrote:
Thu Jul 12, 2018 7:57 am
It also recommends liquidating VGSLX - my best performing fund in the first half of 2018.
For one, as you know, picking funds based only on past performance is a good way to lose your shirt. Second, VTIAX holds the market weight in global REITS.
jbuch002 wrote:
Thu Jul 12, 2018 7:57 am
What are your thoughts on the VG modeling method and the recommendations that come from it?
I think the combination of VTIAX and VBTLX is a pretty powerful one, and that virtually almost every individual investor would be as well served by those two funds as anything else they could own.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

AE81
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by AE81 » Thu Jul 12, 2018 10:35 am

Previous threads about PAS seemed to indicate they pretty much insisted on exposure to international stocks so this recommendation seems like an outlier.
Given their recommendation of 60/40 total stock and total bond (both U.S. only), I would consider just going with their balanced fund.

LinusP
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by LinusP » Thu Jul 12, 2018 12:45 pm

jbuch002 wrote:
Thu Jul 12, 2018 7:57 am
In short, VG recommends I reduce my holdings from 6 VG funds (VEMAX, VFSVX, VWEAX, VGSLX, VBTLX, VTSAX) to 2 (VTIAX, VBTLX).
vineviz wrote:
Thu Jul 12, 2018 10:02 am
I think the combination of VTIAX and VBTLX is a pretty powerful one, and that virtually almost every individual investor would be as well served by those two funds as anything else they could own.
Isn't VTIAX Vanguard's Total International Stock? If the Personal Advisor Service rep is recommending that and domestic bonds as a complete portfolio, I'd dump them on the spot.

Maybe there's confusion with the VTI Total Stock Market ETF.

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vineviz
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by vineviz » Thu Jul 12, 2018 3:28 pm

I think I was confused and assumed it was World Stock. But that’s is the ticker for International Stock, which is definitely not the same thing.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

VaR
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by VaR » Thu Jul 12, 2018 4:39 pm

jbuch002 wrote:
Thu Jul 12, 2018 7:57 am
I am questioning the recommendations in a recent Vanguard Financial Plan I received. My advisor informs me that VG uses a particular methodology to determine how your portfolio should be allocated given your age. I am 70. The recommended allocation for me in this plan is 60% Stocks and 40% bonds (my current allocation is 58/42). So, fine. My issue is with how the VG recommended sub-asset allocation is achieved.

In short, VG recommends I reduce my holdings from 6 VG funds (VEMAX, VFSVX, VWEAX, VGSLX, VBTLX, VTSAX) to 2 (VTIAX, VBTLX). Certainly, those two funds achieve the sub-asset allocation model the VG methodology recommends so, I get that. But, fundamentally, [b[it is increasing by 2X my exposure to US large, midcap/small cap stocks in an already volatile US market segment with considerable down-side risk. It also recommends liquidating VGSLX - my best performing fund in the first half of 2018[/b]. I do like the better diversification of the bond segment of my portfolio that the VG recommendations include but not the equity/other (includes stocks and the REIT segments).

What are your thoughts on the VG modeling method and the recommendations that come from it?
I will do the work for you, you can pay me back later. :)

You have:
VEMAX - Vanguard Emerging Markets Stock Index Fund Admiral Shares
VFSVX - Vanguard FTSE All-World ex-US Small Capital Index Fund Investor Shares
VWEAX - Vanguard High-Yield Corporate Fund Admiral Shares
VGSLX - Vanguard Real Estate Index Fund Admiral Shares
VBTLX - Vanguard Total Bond Market Index Fund Admiral Shares
VTSAX - Vanguard Total Stock Market Index Fund Admiral Shares

Vanguard recommends:
VTIAX - Vanguard Total International Stock Index Fund Admiral Shares
VBTLX - Vanguard Total Bond Market Index Fund Admiral Shares

First off, you've probably misquoted your advisor's recommended plan because the two funds you've listed, VTIAX and VBTLX, don't include the U.S. equity market at all. I know it's a mistake because that information is at odds with your worry about his/her recommended investment choices in point #1 below. Please make the corrections and include the fund names that I gave you. Also list the percentage allocations. That way, people here can actually answer your quest. Your original post doesn't contain the information that we need to answer your question unless we guess at the model portfolio that your Vanguard advisor recommended.

I've put some of your statements in bold because I'd like to address them:
1. "it is increasing by 2X my exposure to US large, midcap/small cap stocks in an already volatile US market segment with considerable down-side risk" - Both bogleheads and Vanguard advisors will not make asset allocation recommendations based on valuation assessments. They currently recommend holding a U.S. Equity to International Equity ratio at market weight - about 50/50, I believe. Anything less than 80/20 is sketchy in my book. Most people here will recommend at least 70/30 U.S./international, unless they are in the "domestic only" school.
2. "It also recommends liquidating VGSLX - my best performing fund in the first half of 2018" - Saying that you don't want to sell because something is the best performing fund in a six month period is returns chasing. Vanguard advisors will not recommend an overweight to real estate, but may (or may not) be able to accommodate that based on your feedback. Given that you are returns chasing, I don't think you have a good reason to overweight real estate. It would be different if you said that you think the real estate industry sector is underrepresented in the public U.S. equity market.

jbuch002
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Mon Jul 16, 2018 4:44 pm

For those of you that have posted comments ....... thank you.

I have been out of town and just returned this evening.

I have a Taxable Brokerage account in Vanguard's Life Strategy Conservative Growth Fund which I am considering reallocating to 2 or more other funds as well as non-taxable IRA accounts under consideration for reallocation. I'm pretty sure I crossed ticker symbols when describing these two accounts.

My question referred to my IRA accounts that do currently have 6 funds:

Vanguard Emerging Markets Stock Index Fund (VEMAX) -
Vanguard FTSE All-World ex-US Small Capital Index Fund Investor Shares (VFSVX) -
Vanguard High-Yield Corporate Fund Admiral Shares - (VWEAX)
Vanguard Real Estate Index Fund Admiral Shares (VGSLX)
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

I've been a lurker on the Boggleheads site for years. I retired a year ago and now have plenty of time to manage my own equity and fixed income assets with some guard rails from PAS. I just moved my retirement and brokerage accounts from a financial manager to Vanguard PAS on April 15th this year. That might explain my short time horizon with respect to the performance of VGSLX. The six VG funds above provide the following allocations:

Overall: 58% Stocks, 42% Bonds.

Stocks: 34.5% International, 64.5% US.

10% U.S. large-cap stock
4% U.S. mid/small-cap stock
28% International stock
15% Individual/Sector stock

Bonds: All Taxable, 69.4% Hi grade, 35.1% Lo.

9% U.S. short-term bond
9% U.S. intermediate-term bond
4% U.S. long-term bond
0% International bond
21% Other bond

VG recommendation for my IRA Accounts is to sell VEMAX, VFSVX, VWEAX, VGSLX and buy VBTLX and VTSAX. With those two holdings, the recommended sub-asset allocations for stocks is as follows:

Overall: 60% Stocks, 40% Bonds.

For Stocks:

25% U.S. large-cap stock
11% U.S. mid/small-cap stock
24% International stock
0% Individual/Sector stock

For Bonds:

11% U.S. short-term bond
11% U.S. intermediate-term bond
6% U.S. long-term bond
12% International bond
0% Other bond

Hope this is all clear now. Looking forward to your responses to my initial question. What do you think about the recommendations that the VG PAS model produces in comparison to my current allocation/sub asset allocation?

mhalley
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by mhalley » Mon Jul 16, 2018 7:04 pm

Most of the time vanguard pas is very similar to their target retirement fund. I don’t think your original fund picks are bad, how did you come up with tat aa and why do you think you need pas? some might disagree with the high yield, but come si come sa. Kind of surprised it is so aggressive for a 70 yo.

nasrullah
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by nasrullah » Mon Jul 16, 2018 7:25 pm

jbuch002 wrote:
Thu Jul 12, 2018 7:57 am
It also recommends liquidating VGSLX - my best performing fund in the first half of 2018.
Past performance does not guarantee future results.

Vanguard (and as a result) PAS is very consistent on their recommended holdings based on your asset allocation target. They will account for your existing holdings and cost basis/tax implications for suggested transactions, and they will use funds like S&P 500 and Emerging Markets to keep the overall target percentages/weights in place. I have never seen a recommendation from Vanguard to hold real estate (or commodities, gold, sectors, etc...) so selling these holdings in your tax advantaged accounts is not out of line for them.

They are balancing your portfolio to their exact recommendation - 40% international equities, 30% international bonds - and doing it in the most efficient way possible.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

jbuch002
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Tue Jul 17, 2018 5:36 am

mhalley wrote:
Mon Jul 16, 2018 7:04 pm
...... I don’t think your original fund picks are bad, how did you come up with tat aa and why do you think you need pas? some might disagree with the high yield, but come si come sa. Kind of surprised it is so aggressive for a 70 yo.
As I mentioned, I've been a lurker for years at the bogglehead site. The selection of the funds in my non-taxable, IRA portfolio came from reading posts on this site, most notably, those in response to questions asked by new investors with longer time horizons for their investments. Then, I assembled my pick of the six VG funds I thought made sense and researched them on the VG site.

Yes, the overall portfolio is a bit aggressive compared to the PAS model. I have a low reliance rate on my equity and income investments as a means of supporting annual spending and therefore feel it reasonable to shift to a slightly more aggressive strategy with a bit more risk.

jbuch002
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Wed Jul 18, 2018 10:15 am

VaR wrote:
Thu Jul 12, 2018 4:39 pm
......... you've probably misquoted your advisor's recommended plan because the two funds you've listed, VTIAX and VBTLX, don't include the U.S. equity market at all. I know it's a mistake because that information is at odds with your worry about his/her recommended investment choices in point #1 below. Please make the corrections and include the fund names that I gave you. Also list the percentage allocations. That way, people here can actually answer your quest. Your original post doesn't contain the information that we need to answer your question unless we guess at the model portfolio that your Vanguard advisor recommended.

I've put some of your statements in bold because I'd like to address them:
1. "it is increasing by 2X my exposure to US large, midcap/small cap stocks in an already volatile US market segment with considerable down-side risk" - Both bogleheads and Vanguard advisors will not make asset allocation recommendations based on valuation assessments. They currently recommend holding a U.S. Equity to International Equity ratio at market weight - about 50/50, I believe. Anything less than 80/20 is sketchy in my book. Most people here will recommend at least 70/30 U.S./international, unless they are in the "domestic only" school.
2. "It also recommends liquidating VGSLX - my best performing fund in the first half of 2018" - Saying that you don't want to sell because something is the best performing fund in a six month period is returns chasing. Vanguard advisors will not recommend an overweight to real estate, but may (or may not) be able to accommodate that based on your feedback. Given that you are returns chasing, I don't think you have a good reason to overweight real estate. It would be different if you said that you think the real estate industry sector is underrepresented in the public U.S. equity market.
VaR, I've studied the issues you addressed above. Yes, I did misquote my advisor's recommendations. The two funds he recommended:

Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

In a post up thread, I fleshed out the percentage allocations and sub-asset allocations for my current fund holdings and these two funds for you to have a look at regarding suitability for my circumstance previously described and as you requested to allow a more informed review by posters here.

I particularly like this thought of yours: .......Both bogleheads and Vanguard advisors will not make asset allocation recommendations based on valuation assessments. They currently recommend holding a U.S. Equity to International Equity ratio at market weight - about 50/50, I believe. Anything less than 80/20 is sketchy in my book. Most people here will recommend at least 70/30 U.S./international, unless they are in the "domestic only" school.

I don't think I'm chasing returns regarding Real Estate Index Fund Admiral Shares (VGSLX). But, you make an excellent point about the better reason for owning this fund: "that you think the real estate industry sector is underrepresented in the public U.S. equity market." Frankly, I don't know if the real estate sector is under represented in the US public equity sector. Is it? If it is, I would think I should own this fund along with the two others my advisor is recommending (VBTLX, VTSAX).

From what others have said, including the most recent post by nasrullah, the Vanguard, and by extension the PAS investment model, is a useful one and allows customization where it's appropriate. So, since I'm paying for advice and am willing to do so for a number of reasons, I should probably listen to it. While my current asset allocation by percentage is pretty close to Vanguard's (my PAS's) recommendation, the sub-asset allocations of my current funds are quite different from the sub-asset allocation of the two funds recommended by my advisor. I think I get the gist of why sub-asset allocation is important (diversification) but what is the advantage beyond that fundamental reason, if there is one at all, for following these different sub-asset allocation recommendations present in the two recommended funds?

nasrullah
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by nasrullah » Wed Jul 18, 2018 11:16 am

Real Estate Index Fund Admiral Shares (VGSLX) is a sector focused fund in the same way that the Information Technology Index Fund Admiral Shares (VITAX) and Health Care Index Fund Admiral Shares (VHCIX) are. You have a very focused allocation in a specific sector when you hold any of these funds.

The Boglehead way (if you want to call it that) is to own the entire market, not just slices of it. This is represented in the funds that were recommended to you as replacements:

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)

When sectors/stocks/funds get hot the natural impulse is to pile into them and chase their past performance with an expectation that it will continue into the future. VGSLX would have looked like a very smart holding 2006 and 2007, but not so much in 2008:

https://finance.yahoo.com/chart/VGSLX#e ... luIjoxfQ==

And even less so when you expand the date range to present:

https://finance.yahoo.com/chart/VGSLX#e ... 1pbiI6MX0=

The point of all of this is that nobody knows what is going to happen tomorrow. You don't know if Elon Musk is going to say something crazy on twitter and drive down the price of TSLA stock. You don't know if financial services, healthcare, energy, etc... is going to climb or crash. So instead of guessing wildly you buy everything, and you do it with the least costs and highest tax efficiency possible.

The last part of this is the International allocation. There's an argument that global markets are already interconnected and US companies have international exposure already - so hold 0%. Vanguard has provided their research that 40% International equities is the way to go for the best diversification and performance (or stability). A common target with the Three Fund is to split the difference at 20%. If you use VPAS they will follow their research and advice to the letter and give you 40%, if you do it yourself you get to decide.

But again nobody has a crystal ball and can predict the future. If the US economy were to fall into a recession like the 70s, holding a percentage in International would make you look very smart after the fact.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

nasrullah
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by nasrullah » Wed Jul 18, 2018 11:37 am

This is more of a general observation I've noticed.

When I discovered MPT through a Robo I never questioned their allocation percentages, what the holdings were, why, etc... I just selected my risk value and gave them money. I had no idea what I was doing, my taxable accounts had a relatively low risk profile and my tax advantaged accounts were maxed out.

When I wanted to learn more about MPT and low cost investing and eventually found this site I was looking for complicated answers to what I thought was a complicated question. It turns out it's almost exactly the opposite - it's a simple answer to a simple question. The problem is that I didn't trust it, there's no way it could be this easy. There must be a mistake, I'm missing the secret, there's a catch.

Hundreds if not thousands of incredibly smart people have devoted their life to figuring out what the best possible plan is. Harry Markowitz won a Nobel Prize for his work in MPT. Vanguard publishes countless research papers by PHDs on the subject. All of the competing low cost indexers/robo investors have PHDs on staff doing the same thing.

The catch is, there is no catch.

The financial system is rigged against outsiders, there was a post recently sharing how brokerage firms will sell order data to HFT platforms. Literally the HFT systems get to know what the brokerage customers are going to do before they do it. How do you win when you are competing against this kind of stacked advantage? You play a different game completely.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

jbuch002
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Wed Jul 18, 2018 12:07 pm

nasrullah wrote:
Wed Jul 18, 2018 11:37 am
......... How do you win when you are competing against this kind of stacked advantage? You play a different game completely.
....... and I assume that "different game" is the one generally assigned to John Bogle, among others of similar investment mind.

Thanks nasrullah for your two recent posts. Great reads.

jbuch002
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Wed Jul 18, 2018 12:11 pm

Incidentally, I found an article from last year that summarizes John Bogle's investment philosophy very nicely. I've glanced at a couple of his books but this article does a good job of crystallizing his thoughts on investing. All you old hands here know this stuff but for the newbies to investing, and I see a lot of posts from this type, should read this short article linked below.

https://www.marketwatch.com/story/7-tim ... 2017-06-06

livesoft
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by livesoft » Wed Jul 18, 2018 12:21 pm

I think the Vanguard advice is perfect for you, but you don't have to follow it. As for the REIT, selling now would be selling high, so why wouldn't you want to do that?

Also, the way these forums and this thread works is that you should probably edit the FIRST post in this thread to reflect the corrected information and get rid of the incorrect information. Lots of folks will read the first post and ignore many of the later posts.
Wiki This signature message sponsored by sscritic: Learn to fish.

jbuch002
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Wed Jul 18, 2018 8:22 pm

Thanks, livesoft ...... good idea. I'll do that in future posts.

VaR
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by VaR » Wed Jul 18, 2018 9:28 pm

There's nothing to complain about with the Vanguard PAS recommendation. It's a textbook portfolio for your age and risk tolerance.

Here are some highlights on what I think are its worthwhile corrections to the original portfolio allocations, IMHO:
1. It eliminates a moderate tilt towards "small vs large" and "emerging markets vs developed markets" in the international equity allocation. Are the size allocations of 10% U.S. large-cap stock and 4% U.S. mid/small-cap stock across your entire portfolio? I'd guess so. Is there a reason for you doing so?
2. Is the 15% individual/sector stock due solely to the REIT holding? If so, that's a very strong tilt as it equals your allocation to other U.S. equities. Most (mainstream) people who overweight REITs only hold it as 5% or at most 10% of their portfolio and the latter only when they otherwise have large (80%) allocations to equity.

Additional thoughts:
1. Do you have an investment policy statement?
2. Have you read the various forum threads on factor tilting towards small value? What about the articles on tilting towards emerging markets? If not, they are worth an extensive read. The one aspect that jumps out at me that you might note is that in both cases, the possible additional return comes at the cost of additional volatility and that there may be long periods of underperformance. To me, this speaks to their appropriateness only to those people who have a lot of time before they will begin drawing on their portfolio.
3. REITs/real estate are another "sector" where potential additional return comes with additional volatility/risk. Again, to me, this speaks against their use in your portfolio.
4. It's less urgent, but read the various threads here in the forums on international bonds. I'm not personally a fan of them but that comes with the caveat that I have a potentially ill-advised sophisticated hypothesis about currency-protected international bonds in the current rates environment. That said, I might be changing my tune due to the fact that international bonds have provided (positive) return diversification over the past few years compared to a portfolio of only U.S. bonds.

jbuch002
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Thu Jul 19, 2018 7:19 am

Thanks, VaR ....... appropriate, detailed and very useful in my circumstance. Just printed out the IPS page you linked to. I'll be working on that. I will read the threads you suggested.

VaR
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by VaR » Thu Jul 19, 2018 3:32 pm

jbuch002 wrote:
Thu Jul 19, 2018 7:19 am
Thanks, VaR ....... appropriate, detailed and very useful in my circumstance. Just printed out the IPS page you linked to. I'll be working on that. I will read the threads you suggested.
You're very welcome. Let me know if you want some help in finding the threads. I don't know them offhand but I've been told I have powerful mojo with search.

I'll keep you up-to-date if I find out anything new about international bonds. If it's any consolation, I think I have a certain mental resistance against it as a "new" idea, but am trying to be open to it especially now that I've seen it work.

jbuch002
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Fri Jul 20, 2018 8:27 am

VaR, took a close look at the IPS as you suggested. Over the last 10 years and with my previous financial advisor, I've covered all the big-picture ground in the IPS. However, none of the nitty gritty items (e.g., holding limits and target allocation) were ever discussed. I identified my goals and risk tolerance and from there my holdings were managed by the advisor. Every quarter, I'd look at my portfolio and compare it to various bench marks. Things looked fine as after fees I was pushing a 10y, 7.5% growth in a 60/40 portfolio - both equity and income funds compared favorably with the appropriate indices. During the Great Recession I kept contributing at the same level and didn't initiate any changes in my portfolio myself but the advisor did rebalancing consistent with my goals and risk tolerance. Happy camper, I was until I started realizing what the advisor was costing me in returns and then having the time to start "advising" myself, I made the decision to come back to VG. At one time my entire portfolio was with Vanguard and Fidelity but when it grew to the point that I was worried about my capacity to manage it well, I went with an advisor. This blog has been a great help in making the decision to come back to VG and now, in reviewing what my PAS is recommending. I'll be on line with my PAS this morning to finalize my plan. This is what I'll end up with in a 60/40 equity to income portfolio:

Vanguard Total Bond Market Index Fund Admiral Shares
Vanguard Total Stock Market Index Fund Admiral Shares
Vanguard Total International Stock Index Fund Admiral Shares
Vanguard Total International Bond Index Fund Admiral Shares

Overall, the asset mix will look like this:

25% U.S. large-cap stock
11% U.S. mid/small-cap stock
24% International stock
0% Individual/Sector stock

11% U.S. short-term bond
11% U.S. intermediate-term bond
6% U.S. long-term bond
12% International bond
0% Other bond

I also looked around at the threads you mentioned on factor tilting and international bonds. While it was hard to find them, I did find some links within the threads that took me to papers that explained factor tilting, it's benefits on returns (assuming one can tolerate increased volatility) and risks/benefits of holding international bonds. If I'm understanding factor tilting correctly it simply means increasing your holdings of undervalued stocks (value market segment). Understanding my portfolio analysis provided by my PAS in terms of factor tilting is not possible. I'll ask him about that today. I got the impression from reading the international bond threads that holding these in the current global markets environment is a good idea. You can see I have a 12% asset allocation in my recommended portfolio. I can see increasing that to 15%. Your thoughts?

jbuch002
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Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Fri Jul 20, 2018 4:01 pm

Here is what my PAS said about factor tilting: we can do this by adding funds to you portfolio that accomplish factor tilting if you want to do that. The up-side is that factor tilting funds have the potential for better performance over time than an Index fund. It requires some element of market timing and when the fund you pick hits the right spot, great. The downside is that it requires market timing and in doing this you are almost always going to get it wrong and long term performance is going to suffer. He advised he didn't think I was at the right spot in terms of my goals and time horizons for this kind of investment. He stressed these are appropriate funds in some portfolios but probably not mine. He pointed me to this very informative link:

https://advisors.vanguard.com/web/cf/factor/products

Here's what my PAS told me about International Bonds: The current sub-asset allocation in my portfolio is correctly market weighted for International Bonds at 12%. I had thought about going to 15%. He said there is not a substantial advantage with regard to the potential for improved performance in my portfolio by making that small 3% change from VG's market weighted model. He said he'd arrange for that if I wanted and didn't really care one or the other. He did stress the power of the market weighted approach to sub asset allocation and offered that if the international bond market were to suddenly significantly outperform the US Bond Market or the US Bond market shows signs of flattening (more so than is already the trend), that would affect market weighting and my recommended sub asset allocation percentage for international bonds would change. My PAS would make the changes in my portfolio to keep the market weights where the VG model recommends they should be.

I did not buy a value factor tilted fund for my portfolio nor did I increase my share of International Bonds in it. I went with the funds and the allocations exactly as you see them above.

VaR
Posts: 583
Joined: Sat Dec 05, 2015 11:27 pm

Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by VaR » Sat Jul 21, 2018 2:33 am

jbuch002 wrote:
Fri Jul 20, 2018 4:01 pm
Here is what my PAS said about factor tilting: we can do this by adding funds to you portfolio that accomplish factor tilting if you want to do that. The up-side is that factor tilting funds have the potential for better performance over time than an Index fund. It requires some element of market timing and when the fund you pick hits the right spot, great. The downside is that it requires market timing and in doing this you are almost always going to get it wrong and long term performance is going to suffer. He advised he didn't think I was at the right spot in terms of my goals and time horizons for this kind of investment. He stressed these are appropriate funds in some portfolios but probably not mine. He pointed me to this very informative link:

https://advisors.vanguard.com/web/cf/factor/products
I agree with your advisor that your time horizon is not consistent with the long time horizons needed for a factor approach to be worth it. I'm interested in the fact that he thought that a factor approach required market timing. Did you ask him why? I'd be interested in the answer. I'd also be interested in what he thinks about overweighting small cap. Note that I would not recommend that you overweight small cap, but I'm interested in what your PAS advisor says about the idea.
Here's what my PAS told me about International Bonds: The current sub-asset allocation in my portfolio is correctly market weighted for International Bonds at 12%. I had thought about going to 15%. He said there is not a substantial advantage with regard to the potential for improved performance in my portfolio by making that small 3% change from VG's market weighted model. He said he'd arrange for that if I wanted and didn't really care one or the other. He did stress the power of the market weighted approach to sub asset allocation and offered that if the international bond market were to suddenly significantly outperform the US Bond Market or the US Bond market shows signs of flattening (more so than is already the trend), that would affect market weighting and my recommended sub asset allocation percentage for international bonds would change. My PAS would make the changes in my portfolio to keep the market weights where the VG model recommends they should be.
Yeah, 3% isn't going to change things that much either way. That said, I'm not convinced that the market weighted approach for bonds is as compelling as the marketed weighted approach for stocks.
I did not buy a value factor tilted fund for my portfolio nor did I increase my share of International Bonds in it. I went with the funds and the allocations exactly as you see them above.
Good. BTW, if I were going to go with a factor approach I would go with the multifactor fund - value/momentum/quality. But again, I think your actions are spot on - both from a boglehead approach and my own (inadequate) personal assessment of your situation.

jbuch002
Posts: 19
Joined: Sun Apr 01, 2018 4:18 pm

Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Sat Jul 21, 2018 8:47 am

VaR ...... I should have been a little more specific regarding my PAS's discussion of factor tilting. I took some liberties with terms.

He said there is a bit of market segment chasing in these funds. IOW, the holdings in a particular factor fund might be trending upward in value but by the time the trend is obvious and you decide to buy, you have the risk of buying high and a return of fund value to the mean is already underway. Moreover, as skilled as the fund managers of these funds can be, the volatility inherent in them is risky. If you are willing to accept the volatility and it's inherent risk, factor fund performance has more upside benefit than an indexed fund..... but also more down side risk.

On small cap weighting: We didn't discuss this but its notable that my original VG funds were weighted less heavily to small cap than the recommended weighting which is significantly more weighted to large, mid, small cap (36%) than my original holdings of the same types (14%).

Mine:

10% U.S. large-cap stock
4% U.S. mid/small-cap stock
28% International stock
15% Individual/Sector stock

Recommended:

25% U.S. large-cap stock
11% U.S. mid/small-cap stock
24% International stock
0% Individual/Sector stock

On international bonds: TBH, his position was it's up to me if I wanted to increase my holdings of International Bonds albeit I'd need to do shift to something like a 20-30% holding in these bonds to significantly affect the performance (either positive or negative) of my portfolio.

I don't know enough about the International bond market to comment on your view that the market weighted approach for bonds is as compelling as the marketed weighted approach for stocks. I'd like to hear your thoughts on this as well as your thoughts on what appears to be an emerging currency war between the US and China that could do collateral damage to the global equities markets. I think the tit-for-tat tariff stuff was probably small potatoes and priced into the market but I'm not sure a currency war is, it being potentially much more harmful to equities over the short term.

VaR
Posts: 583
Joined: Sat Dec 05, 2015 11:27 pm

Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by VaR » Sat Jul 21, 2018 12:14 pm

jbuch002 wrote:
Sat Jul 21, 2018 8:47 am
VaR ...... I should have been a little more specific regarding my PAS's discussion of factor tilting. I took some liberties with terms.

He said there is a bit of market segment chasing in these funds. IOW, the holdings in a particular factor fund might be trending upward in value but by the time the trend is obvious and you decide to buy, you have the risk of buying high and a return of fund value to the mean is already underway. Moreover, as skilled as the fund managers of these funds can be, the volatility inherent in them is risky. If you are willing to accept the volatility and it's inherent risk, factor fund performance has more upside benefit than an indexed fund..... but also more down side risk.
Ah, I see. This makes sense.
On small cap weighting: We didn't discuss this but its notable that my original VG funds were weighted less heavily to small cap than the recommended weighting which is significantly more weighted to large, mid, small cap (36%) than my original holdings of the same types (14%).

Mine:

10% U.S. large-cap stock
4% U.S. mid/small-cap stock
28% International stock
15% Individual/Sector stock

Recommended:

25% U.S. large-cap stock
11% U.S. mid/small-cap stock
24% International stock
0% Individual/Sector stock
This seems a good thing.
On international bonds: TBH, his position was it's up to me if I wanted to increase my holdings of International Bonds albeit I'd need to do shift to something like a 20-30% holding in these bonds to significantly affect the performance (either positive or negative) of my portfolio.
Yeah, in the absence of compelling evidence of *outperformance* of the international bond market, I don't see a compelling reason to overweight international bonds.
I don't know enough about the International bond market to comment on your view that the market weighted approach for bonds is as compelling as the marketed weighted approach for stocks.
The weighting of U.S. Treasury bonds in the overall bond market decreased from 25% to 15% between 1997 and 2007. The weighting of mortgage and asset-backed bonds in the overall bond market increased from 25% to 35% between 1997 and 2007. And then between 2008 and today this has completely reversed. Plus the influence of the Fed taking 2.7 trillion dollars worth of bonds out of the market in QE1, QE2, and QE3 has also distorted the bond marketplace. And note that over the next several years this distortion will be reversed.

Then there's the question of how much it makes sense to weight holdings based on what bond maturities each issuer decides to issue. As an example, if an issue decides to issue 5 year bonds because they are a "good deal", then it seems counter-intuitive to weight those more heavily.

I've been considering using the Vanguard Core Bond fund as an alternative to the Total Bond Market Index.

Also note that active management and non-market cap weighting in a bond fund doesn't have the tax drag that it does with an equity fund.
I'd like to hear your thoughts on this as well as your thoughts on what appears to be an emerging currency war between the US and China that could do collateral damage to the global equities markets. I think the tit-for-tat tariff stuff was probably small potatoes and priced into the market but I'm not sure a currency war is, it being potentially much more harmful to equities over the short term.
The outcome is unpredictable since we don't know exactly what will happen. And even if it weren't is not actionable since the timing isn't known. Conventional wisdom says that a trade war will be damaging and a currency war will also be damaging but there's no reasonable action to take that isn't market timing. I mean at this point, the fears of the impact of what has already transpired are already "priced in". In fact, the weighted probabilities of what might happen in the future are already "priced in" as well.

jbuch002
Posts: 19
Joined: Sun Apr 01, 2018 4:18 pm

Re: Vanguard Sub-Asset Allocation Model, Personal Advisor Service

Post by jbuch002 » Sat Jul 21, 2018 1:03 pm

Thanks ..... appropriate take on the impact of a currency war re my implied question, should I be doing something. Answer. No.

I read today that Treasury has never put any country on it's list of currency manipulators mainly because US law regarding these matters requires strict criteria be met to do so. However it has warned foreign central banks when their currency takes steep drops against the dollar with a clear indication that the drop is to make the cost of their exported goods cheaper. ...... "we're watching you."

I thought Trump's proclamation yesterday that "China is a currency manipulator" was another example of him opening his big mouth, probably against advice it it was offered, and it probably wasn't because he is impulsive to a fault. It simply sharpens the edge of already sharp trade tensions between the US and China making compromise on either side more difficult. I have said often that Trump's penchant to see negotiations of all types as win or lose, is a very risky and ill-advised way to go about any kind of negotiations on the international level.

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