Asset allocation - latest from Rick Ferri

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dinesh0580
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Asset allocation - latest from Rick Ferri

Post by dinesh0580 » Fri Mar 11, 2016 5:41 am

All,

I have been reading non-stop for the last two months on two things
1. Asset allocation
2. Go all in or dollar cost averaging

1. Asset allocation

It is amazing how much differences there are in asset allocation models - Betterment, Wealthfront, Schwab Intelligent Portfolios, Vanguard, Rick Ferri.

Here is what I found:
1. Most, except Rick Ferri, are recommending 80% - 100% to equities - Schwab - 77%, Betterment and Wealthfront at 90% and Vanguard at 100%
2. International: Rick recommends 40% of total equities to be international; Betterment, Wealthfront and Schwab are recommending 50% of total equities to be international equities
3. Emerging: This is where things begin to diverge: Rick recommends total international, which is 18% emerging; Betterment : 22% of international in emerging; schwab 25% of international in emerging; wealthfront recommends a hopping 43% of international in emerging
4. Tilt - this is another area where the 4 models are significantly different.
a. Vanguard - no tilt recommended
b. Wealthfront - 20% of domestic equity (which is 45% of total allocation and 50% of equity allocation) in vanguard dividend index (VIG)
c. Betterment: Major tilt towards value - 40% of domestic equity (which is 45% of total allocation and 50% of equity allocation) in large value (VTV), 10% of domestic equity is medium value (VOE), 10% small value (VBR) and remaining 40% of domestic equity is total stock market (VTI)
d. Rick Ferri - 4 fund portfolio recommends a tilt towards REIT with 10 of domestic equity being REIT
d. Of all of these portfolios Schwab is the most complex with as many as 15 asset classes. Tilt includes domestic fundamental, domestic small, domestic small fundamental, developed fundamental, developed small, developed small fundamental, emerging fundamental

So what to go with?

2. DCA: Seems no conclusive answer. I have almost 60% of my total savings in cash and remaining 40% in 401k. 401k is 70% equity. Rick seems to suggest that is more than 20% of the savings are in cash, go for DCA.
Last edited by dinesh0580 on Fri Mar 11, 2016 5:55 am, edited 1 time in total.

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dinesh0580
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Re: Asset allocation - latest from Rick Ferri

Post by dinesh0580 » Fri Mar 11, 2016 5:43 am

Needless to say when I said 80% - 100% in equities, that was based on my investor profile (36 years old, 25 years of investment horizon, high risk appetite).

Also here is what I am leaning towards:

Total domestic (VTI) : 50%
REIT (VNQ): 5%
Developed (VEA): 25%
Emerging (VWO): 10%
Bonds (BND): 10%

So 90% in equity, 40% of the equities in international, 30% of the international in emerging and 10% of the domestic in REITs.

malabargold
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Re: Asset allocation - latest from Rick Ferri

Post by malabargold » Fri Mar 11, 2016 6:48 am

Just beware the paralysis of over analysis.
Can't predict the future.

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Re: Asset allocation - latest from Rick Ferri

Post by Daryl » Fri Mar 11, 2016 6:50 am

You are underweight my favorite asset class - Fixed Income! I loving knowing that I'll have a nice chunk of change deposited into my account at the end of every month. :moneybag

If possible, I'd love to focus more on your "high risk appetite", as this will drive your success over the long term (not just you, but every investor). Many mature investors will break down risk appetite into the following components:
- Need
- Ability
- Willingness

To make this even more personal, the last half dozen years has been very kind to investors. As my investment portfolio / net worth grow in relation to my annual salary and expenses, my need to take risk has decrease. Last year I decreased my equity exposure.

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Re: Asset allocation - latest from Rick Ferri

Post by Toons » Fri Mar 11, 2016 6:50 am

malabargold wrote:Just beware the paralysis of over analysis.
Can't predict the future.

+1 :happy
Havne't heard that phrase in a while but it is true.
Determine what allocation YOU are comfortable with and stick to it :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Asset allocation - latest from Rick Ferri

Post by David Jay » Fri Mar 11, 2016 7:18 am

dinesh0580 wrote:Needless to say when I said 80% - 100% in equities, that was based on my investor profile (36 years old, 25 years of investment horizon, high risk appetite).

Also here is what I am leaning towards:

Total domestic (VTI) : 50%
REIT (VNQ): 5%
Developed (VEA): 25%
Emerging (VWO): 10%
Bonds (BND): 10%

So 90% in equity, 40% of the equities in international, 30% of the international in emerging and 10% of the domestic in REITs.
This seems reasonable. Remember, 10% one way or another will not make a dramatic difference in your portfolio. 5% REIT is window dressing (won't make a real difference, up or down).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Asset allocation - latest from Rick Ferri

Post by retiredjg » Fri Mar 11, 2016 7:45 am

Your idea is reasonable.

There is something I don't get. You want an aggressive allocation, but you don't seem eager to invest your money. There's a disconnect there that does not make sense to me.

Are you sure you are an aggressive investor? You may very well be, but it is not evident from your post.

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Taylor Larimore
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When experts disagree

Post by Taylor Larimore » Fri Mar 11, 2016 7:50 am

It is amazing how much differences there are in asset allocation models - Betterment, Wealthfront, Schwab Intelligent Portfolios, Vanguard, Rick Ferri.
When experts disagree it is often because it makes no foreseeable difference.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Asset allocation - latest from Rick Ferri

Post by haywoodkb » Fri Mar 11, 2016 8:12 am

This article seems to say that allocation is less important than rebalancing.
http://whitecoatinvestor.com/150-portfo ... han-yours/

Any allocation can work well if you regularly rebalance back to the chosen allocation.

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Re: Asset allocation - latest from Rick Ferri

Post by livesoft » Fri Mar 11, 2016 8:27 am

One should be able to figure out that percentages within about 5% are not meaningfully different.

There are a lot of people though that don't like to have their allocations rounded off to 5% or 10%, so they use prime numbers like 29%. But even so, 29% is close enough to 31%.
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Taylor Larimore
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Re: Asset allocation - latest from Rick Ferri

Post by Taylor Larimore » Fri Mar 11, 2016 8:36 am

Here is what I found:
1. Most, except Rick Ferri, are recommending 80% - 100% to equities - Schwab - 77%, Betterment and Wealthfront at 90% and Vanguard at 100%
dinesh0580:

The Vanguard Target Funds have equities ranging from 90% maximum to 30% minimum (Target Retirement Income Fund).

Can you give a source for Vanguard at 100%?

Thank you and best wishes.
Taylor
Last edited by Taylor Larimore on Fri Mar 11, 2016 10:57 am, edited 2 times in total.
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Asset allocation - latest from Rick Ferri

Post by JW-Retired » Fri Mar 11, 2016 8:43 am

dinesh0580 wrote:Here is what I found:
1. Most, except Rick Ferri, are recommending 80% - 100% to equities - Schwab - 77%, Betterment and Wealthfront at 90% and Vanguard at 100%
What would be Rick Ferri's recommendation for you? I can't see where you mentioned it.
JW
Retired at Last

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Re: Asset allocation - latest from Rick Ferri

Post by jjface » Fri Mar 11, 2016 8:54 am

Personally I wouldn't look at wealthfront, betterment and schwab robo advisor allocations as a guide. They are products looking to be different in the market to stand out over each other.

If you want a guide look at target retirement funds - Say vanguard target retirement 2040 - 89% equity of which 40% is overseas. 11% bonds.

Or the rough guide of age in bonds 36% bonds and 64% equity. Though if you really do have a high risk appetite then age - 10% or even 20% is often cited. So 16% bonds 84%:equity.

For every expert there is a different portfolio. Pick something and stick to it. Don't bother tilting unless you know what you are doing.

A lot of people would just go with the 3 fund portfolio - vti, vxus and bnd
Keep it simple and avoid being overwhelmed with choices.

Right now what is most important is for you to learn to keep your money in the market. Then keep regularly saving each year a good amount and rebalancing every year or when needed.

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Re: Asset allocation - latest from Rick Ferri

Post by Erwin » Fri Mar 11, 2016 9:02 am

My suggestion as one that has been investing for 30 years is to pick what feels right to you. Nothing extreme, of course, and then STICK to it.
Just as a guide, most index puritans, believe in total market investing, would take an allocation similar to the world equity allocation, meaning about 50% US, 40% Developed World ex US, and 10% Emerging Markets. On the fixed income side, the plain vanilla US Aggregate Bond Index, and then split the equities and fixed income according to what you feel comfortable.
Erwin

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Rick Ferri
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Re: Asset allocation - latest from Rick Ferri

Post by Rick Ferri » Fri Mar 11, 2016 9:24 am

There is no right answer. There is only the right answer for you.

The Bogleheads' philosophy of low-cost passive investing is universal among all members. We're all of the same mindset. However, no two Bogleheads will have the exact same portfolio because we're all difference. How you design and implement your strategy is personal to you. The right asset allocation and funds you select is the one that you'll stick with long-term and through all market conditions.

The three principals of successful passive investing are:

1) Philosophy (universal)
2) Strategy (personal)
3) Discipline (paramount!)

Good luck!

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: Asset allocation - latest from Rick Ferri

Post by stemikger » Fri Mar 11, 2016 9:30 am

Rick Ferri wrote:There is no right answer. There is only the right answer for you.

The Bogleheads' philosophy of low-cost passive investing is universal among all members. We're all of the same mindset. However, no two Bogleheads will have the exact same portfolio because we're all difference. How you design and implement your strategy is personal to you. The right asset allocation and funds you select is the one that you'll stick with long-term and through all market conditions.

The three principals of successful passive investing are:

1) Philosophy (universal)
2) Strategy (personal)
3) Discipline (paramount!)

Good luck!

Rick Ferri
Thanks Rick. This is worth printing out and refer to it when I lose my way.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

quantAndHold
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Re: Asset allocation - latest from Rick Ferri

Post by quantAndHold » Fri Mar 11, 2016 9:45 am

Meb Faber wrote a book "Global Asset Allocation" where he backtested all of the commonly recommended asset allocations. He found that, other than the Permanent Portfolio, which is too cash heavy to make much money, all of the allocations performed roughly the same. The important point is to pick an allocation and stick with it.

Your proposed allocation looks fine to me.

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Re: Asset allocation - latest from Rick Ferri

Post by Dulocracy » Fri Mar 11, 2016 10:19 am

I tilt small value, and I tilt hard to small/value. I like risk. I need risk. I started late, so I have the need and tolerance for risk, so I am taking it. I would NOT, however, go to 50% emerging. I have a 60 US / 40 International portfolio. Of the international portion, 25% is emerging, which is 10% of my overall portfolio.

My equity portfolio looks like this:
20% Vanguard Equity-Income
10% Vanguard Mid-Value
10% Vanguard Mid Index
15% DFA Small Value
5% Vanguard Small Index
16% DFA International
14% DFA International Small
4% Vanguard Emerging
3% DFA Emerging Value
3% DFA Emerging Small

Over time, my contributions to the small/value factors will diminish, as those are long-term strategies. It would not make sense to implement a long term strategy shortly before I needed the money. So, over time, I will have less and less of a tilt to small and value. It is important to note that the equity-income fund is a value play, and it is the only large-value option available to me. I would not hold a dividend fund in a taxable account.

There were two studies that I read on the ideal for international exposure. One from Vanguard said 30-40%. Another said 40-50%. I figured both included 40%, and that was good enough. I do not plan on altering course. While my allocation to value is on a declining curve, my allocation to international will remain consistent. I would not risk more than 25% of my international portfolio on emerging markets, even though I do hold a higher than market exposure to it.

For most people looking for a tilt, I would probably say 50% large, 30% Mid, 20% small would work. (Market weight is roughly 70/20/10). Be cognizant that Vanguard's small and small value funds hold a very large portion of mid-caps in them if you break it down.

My portfolio was based on Rick Ferri's All About Asset Allocation and Larry Swedroe's The Only Guide to a Winning Investment Strategy You'll Ever Need. Both would likely say that I tilt too far to small/value based on the strategies in their books. However, because of a later start, I have a greater need for risk (and part of this strategy takes into account that my wife is a decade younger than I am, so I am trying to provide money after my death). I hope this thought process helps.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: Asset allocation - latest from Rick Ferri

Post by jhfenton » Fri Mar 11, 2016 10:27 am

Taylor Larimore wrote:
Here is what I found:
1. Most, except Rick Ferri, are recommending 80% - 100% to equities - Schwab - 77%, Betterment and Wealthfront at 90% and Vanguard at 100%
dinesh0580:

The Vanguard Target Funds have equities ranging from 10% to 70%.

Can you give a source for Vanguard at 100%?

Thank you and best wishes.
Taylor
The Vanguard Target Retirement funds start at 90% equities. I don't know where the 100% would come from.

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Re: Asset allocation - latest from Rick Ferri

Post by pkcrafter » Fri Mar 11, 2016 10:31 am

dinesh0580 wrote:
I have been reading non-stop for the last two months on two things
1. Asset allocation
2. Go all in or dollar cost averaging
Your first post on the forum was back in 2013 and it was on the same subject of asset allocation. Did you find your perfect portfolio back in 2013 and are now changing it?

Were you a new investor back in 2013? Has your emotional reaction to big market swoons been tested? You want 90% equity but you want to DCA. These decisions would seem to be in conflict. You can DCA in only to find that when your are finally in and up to target AA, the market will fall. It should be clear that there is no optimal portfolio for all times.

Rick Ferri is the only one I know who tries to account for the over optimism of new investors. He knows many new investors don't really know their emotional tolerance for losses and they sell in their first confrontation with market turmoil. So, he recommends starting with a lower allocation to equities, and then with some positive experience move up if desired. I agree with Rick's recommendation. All the analysis you can possibly do won't produce a perfect portfolio nor will it protect you in falling markets. If you want to overweight REITs or EM, then you increase the potential max loss. If you are worried and want to DCA, do you really have a high risk appetite? There is nothing really wrong with your proposed 90/10 portfolio, but it never will be perfect, and that isn't something to worry about.
Daryl wrote: If possible, I'd love to focus more on your "high risk appetite", as this will drive your success over the long term (not just you, but every investor). Many mature investors will break down risk appetite into the following components:
- Need
- Ability
- Willingness
These are good, but the most important component is emotional tolerance, which needs to be distinguished from cognitive, rational decision making (willingness). Emotions are also linked to ability. When we think of ability it is financial ability, which can be calculated. But there are also emotional ability limits, and again, they will override the best rational decisions. When emotional tolerance is exceeded, rational planning decisions may be tossed aside in a heart beat.

retiredjg noted:
There is something I don't get. You want an aggressive allocation, but you don't seem eager to invest your money. There's a disconnect there that does not make sense to me.
Yes, it's a warning sign.

Rick Ferri:
The three principals of successful passive investing are:

1) Philosophy (universal)
2) Strategy (personal)
3) Discipline (paramount!)
Precisely. Investor behavior is the NO. 1 reason investors don't capture what their investment produce. If you want to get it right, spend your time on common behavioral pitfalls.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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goingup
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Re: Asset allocation - latest from Rick Ferri

Post by goingup » Fri Mar 11, 2016 10:53 am

dinesh0580 wrote: I have almost 60% of my total savings in cash and remaining 40% in 401k.
As other posters have noted, being 60% in cash is unusual. How did this happen? Did you sell out during the Market pullback? Have you been too nervous to invest in equity? Did you come into a windfall?

It would be helpful for you to consider how you having been behaving. It's not as though you can flip a switch and become a different investor just because you have been reading books for 2 months.

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dinesh0580
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Re: Asset allocation - latest from Rick Ferri

Post by dinesh0580 » Fri Mar 11, 2016 3:30 pm

Thank you all for your thoughts.
Taylor Larimore wrote:
Can you give a source for Vanguard at 100%?

Thank you and best wishes.
Taylor
I spoke to one of their advisors to find out more about Vanguard Personal Advice service and this is what they told me.


Regarding why I have ended up with cash, I started working at 21 and until 30 didn't even think about retirement or investment. By the time I started thinking about it, I took an international assignment and got busy with that. By the time I started again seriously considering investing, I had an even bigger pile of cash and started wondering if it was the right time to go all in. Very well knowing the pitfall of even asking that question.

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Re: Asset allocation - latest from Rick Ferri

Post by Artsdoctor » Fri Mar 11, 2016 3:55 pm

Dinesh,

The biggest problem will be discipline. It appears that you've done your homework so you have an idea of what a lot of advisors recommend.

You say that you have a decent appetite for risk, but I'd argue that it's not been tested. You were old enough to go through the 2008-2009 meltdown but you were not investing any significant sums of money at that time, based on your post. Consequently, you may think that you have more risk tolerance than you actually do (this isn't unique to you). This creates a potential danger in that you'll sell at least some of your investments at inopportune times, which is what many did in 2009. Or, not quite as bad but still bad, you won't steadily be buying into your losing assets as they fall.

You'll probably want to keep things simple, so I'd stay away from any advisor that wants you in 12-15 funds. If you want to tilt or further segregate your funds, perhaps you can do that later once you get more experience.

A lump sum is going to be best MOST of the time. However, it's not going to be universal. Because the sum you're describing makes up a very large percentage of your portfolio, you would probably want to invest it in stages.

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David Jay
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Re: Asset allocation - latest from Rick Ferri

Post by David Jay » Fri Mar 11, 2016 7:12 pm

Rick Ferri wrote:There is no right answer. There is only the right answer for you.

The Bogleheads' philosophy of low-cost passive investing is universal among all members. We're all of the same mindset. However, no two Bogleheads will have the exact same portfolio because we're all difference. How you design and implement your strategy is personal to you. The right asset allocation and funds you select is the one that you'll stick with long-term and through all market conditions.

The three principals of successful passive investing are:

1) Philosophy (universal)
2) Strategy (personal)
3) Discipline (paramount!)

Good luck!

Rick Ferri
Dinesh:

What Rick says about Discipline is the most important issue. A little difference in Asset Allocation will only make a little difference in outcome. Freaking out when the market drops 30% (that will happen 2 or 3 times in your investing lifetime) and changing AA after market the drop (i.e. selling low) will destroy your portfolio performance.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Asset allocation - latest from Rick Ferri

Post by jginseattle » Fri Mar 11, 2016 7:43 pm

I would also look into a portfolio of 80% equities and 20% long-term Treasury bonds.

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Re: Asset allocation - latest from Rick Ferri

Post by mhalley » Fri Mar 11, 2016 7:52 pm

No one knows the perfect allocation. I think wci had a lot of good points in his post about 150 portfolios better than yours. Each portfolio has someone that thought it was great.
"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. "
"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."
So pick your aa, create your ips and stick with it. No mater which of the 150 you pick, you will do fine.

http://whitecoatinvestor.com/150-portfo ... han-yours/

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Re: Asset allocation - latest from Rick Ferri

Post by inbox788 » Fri Mar 11, 2016 8:45 pm

haywoodkb wrote:This article seems to say that allocation is less important than rebalancing.
http://whitecoatinvestor.com/150-portfo ... han-yours/

Any allocation can work well if you regularly rebalance back to the chosen allocation.
I'm not convinced rebalancing is all that important if you can tolerate wider swings and deviation from your AA. It's still not clear to me that there is a rebalancing benefit, since you cancel out much or most of the benefit of buying low in dips with selling low in rising markets. I rebalance very infrequently (less than once a year).
It turns out that infrequent rebalancing is better than frequent rebalancing to take advantage of momentum. So don’t feel like you need to be rebalancing every month. Many balanced funds and endowments do daily rebalancing, however. The two most frequent methods, both of which are fine, is to rebalance once a year (this is what I do with my parent’s portfolio which doesn’t receive regular contributions) or to rebalance when it exceeds the 5/25 rule.

http://whitecoatinvestor.com/rebalancing-the-525-rule/

For most young investors, you just rebalance by directing new contributions to the lagging asset classes.
http://whitecoatinvestor.com/150-portfo ... ent-300570

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Re: Asset allocation - latest from Rick Ferri

Post by boyler99 » Fri Mar 11, 2016 8:57 pm

dinesh0580 wrote:Needless to say when I said 80% - 100% in equities, that was based on my investor profile (36 years old, 25 years of investment horizon, high risk appetite).

Also here is what I am leaning towards:

Total domestic (VTI) : 50%
REIT (VNQ): 5%
Developed (VEA): 25%
Emerging (VWO): 10%
Bonds (BND): 10%

So 90% in equity, 40% of the equities in international, 30% of the international in emerging and 10% of the domestic in REITs.

You and I are very similar in age, horizon, and risk tolerance, and I've also consulted nearly every source on AA that you've consulted, and I've reached an almost identical AA as you. Go for it, and don't tinker with it every year. A phrase I often like to use is, "The perfect is the enemy of the good." There is no perfect AA, but a "good" AA that you stick with is, effectively, perfect. I've also documented my glide path in my IPS, and I suggest you do the same, so that when you turn 40, you'll adjust your AA accordingly. Nice job doing your homework -- you're all done once you put your AA and IPS into practice!

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dinesh0580
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Re: Asset allocation - latest from Rick Ferri

Post by dinesh0580 » Sat Mar 12, 2016 5:08 am

Thanks everyone.

I want to clarify one thing. I looked at Rick's AA and there are two different allocations - one for tax deferred accounts and one for taxable account. If one had both and was optimising across two, would one just take the allocation for tax deferred, apply it across the total portfolio (taxable + tax deferred funds) and just put the tax inefficient assets in tax deferred (401k) account. So final allocation would look something like this (in this hypothetical example $1m each in 401k and brokerage account)

Image

retiredjg
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Re: Asset allocation - latest from Rick Ferri

Post by retiredjg » Sat Mar 12, 2016 7:07 am

I can't help with that last question because I don't know what Rick would do. I do recall he is not as concerned with "no bonds in taxable unless necessary" as the basic Boglehead philosophy suggests. However, I can't imagine that Rick would put REIT in taxable or hold those particular bonds in taxable (in a higher tax bracket).

I believe the portfolio you have posted may have been suggested by Rick before there was a real total international index available. You can reduce your international holdings from 4 to 1 by using Vanguard's Total International Index.

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Re: Asset allocation - latest from Rick Ferri

Post by StevieG72 » Sat Mar 12, 2016 7:21 am

malabargold wrote:Just beware the paralysis of over analysis.
Can't predict the future.
I was guilty of this and sat on the sidelines for a bit too long!

I have had the expanded portfolio breaking down International to Pacific, Europe, and Emerging but have since switched back to Vangaurds Total International. This was partially done for tax loss harvesting but also for simplification. If you own Pacific, Europe, and Emerging separately they will run off in different directions and then you have to decide when to rebalance, if it will incur taxable gain or loss if in taxable etc.

In my experience starting off I wanted to take advantage of every tilt / tweek recommended. After going at it for a few years I am of the "less is more" mindset. I am in the process of reducing funds and accounts they are held in.
Fools think their own way is right, but the wise listen to others.

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Re: Asset allocation - latest from Rick Ferri

Post by JonnyDVM » Sat Mar 12, 2016 9:21 am

As I understand it REITs throw off a ton of tax and need to be in tax advantaged space. Where bonds should go is now debatable as the low rate of return mean bond funds aren't throwing off taxable gains like they used to. I believe most people still put them preferentially in tax advantaged but that probably less important than it used to be. There are a lot if variations on asset allocation. Simplicity vs complexity, REIT vs no REIT, even international vs no international. Review what others recommend, pick the one that makes the most sense to you. The most important thing is to not change the allocation you've picked a few years down the road based on recent market activity. If you're one of those people (and there have been several) posting how you're going to sell all your international because international has been down for a while that's not going to work well.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

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Re: Asset allocation - latest from Rick Ferri

Post by Nowizard » Sat Mar 12, 2016 9:46 am

According to Morningstar, approximately 70% of equities are large-cap, 20% mid-cap and 10% small-cap. That is a starting point for many in determining their own strategy for balanced exposure or over/under-weighting on the equity side of the equation.

Tim

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Re: Asset allocation - latest from Rick Ferri

Post by Dirghatamas » Sat Mar 12, 2016 3:43 pm

Dinesh
You are making things more complicated than necessary if you are just starting out. As many have pointed out, small deltas will be meaningless over time. Tilts matter if they are big enough. Otherwise, simplify.

1) Lump sum vs. DCA gets endlesslessly debated. If you believe that the stock markets in the long run go up (otherwise why are you investing?) then statistically, lump sum will beat DCA. If you have a long term horizon (which you do given your young age), then just lump sum it. Sure the market may go down the next day after..so what, your returns over 30 years will be mostly dictated by time in market..

2) You don't know your risk taking/risk aversion unless you have been through 1 or 2 bear markets with substantial % of assets invested. So, saying you have high risk tolerance is meaningless. How would you know? This is an advantage one gets if they start investing say in early twenties. That way by the time they actually have enough to make mistakes (say by early thirties), they know their own brains. I for example have been 100% stocks my entire investing career (45 year old, investing for 23 years). However, I would not recommend that to anyone with substantial assets just starting out. Something like 20-30% bonds would be good simply because you don't know your own brain and how it will react to market volatility. Theory is one thing, really getting punched in the mouth is another thing entirely :happy

3) Your stock investments are more complicated than need be. You could simply chose Vanguard World Stock as 1 stock fund which covers all your needs and have another 1 bond fund. That's it a 2 fund portfolio. If your assets are big, one may want to split the world stock into two (US total stock and Total International), simply because the ER is lower that way. Then over the next few years, as you gain more experience, figure out if you want tilts like REITs or emerging markets or small cap or value or whatever.

Just for perspective, I have followed this very simple portfolio (100% Global cap weighted stocks, completely passive) without any rebalancing, without any factor or regional or country tilts. I have done fine for 23 years. Don't assume that complexity is necessary in our retirement investments.

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Re: Asset allocation - latest from Rick Ferri

Post by CFM300 » Sat Mar 12, 2016 10:17 pm

Actually, here's my favorite quote from Rick Ferri about asset allocation:

"Most of the stuff you see about optimal allocation is garbage. It is trash. In the long run, the best allocation is typically the lowest cost one. That is the truth. You only need a few asset classes in your portfolio, and after that there are diminishing returns. The mutual funds you choose to represent those asset classes should be the lowest cost funds you can buy.

All of this nonsense about finding the ideal allocation is non-sense. The ideal portfolio can only be known in retrospect. We can only know what we should have done, not what will happen. So, choose a few low cost index funds in different asset classes, rebalance occasionally, and forgetaboutit."

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Taylor Larimore
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Great quotes

Post by Taylor Larimore » Sat Mar 12, 2016 11:42 pm

Most of the stuff you see about optimal allocation is garbage. It is trash. In the long run, the best allocation is typically the lowest cost one. That is the truth. You only need a few asset classes in your portfolio, and after that there are diminishing returns. The mutual funds you choose to represent those asset classes should be the lowest cost funds you can buy.

All of this nonsense about finding the ideal allocation is non-sense. The ideal portfolio can only be known in retrospect. We can only know what we should have done, not what will happen. So, choose a few low cost index funds in different asset classes, rebalance occasionally, and forgetaboutit."
CFM300:

That's a great quote from Mr. Ferri. It is similar to this one from Mr. Bogle:
The enemy of a good plan is the dream of a perfect plan. -- Don't look for the needle, buy the haystack
The above quotes are the basis for The Three-Fund Portfolio.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Asset allocation - latest from Rick Ferri

Post by abuss368 » Sun Mar 13, 2016 1:36 pm

Rick Ferri wrote:
The three principals of successful passive investing are:

1) Philosophy (universal)
2) Strategy (personal)
3) Discipline (paramount!)

Good luck!

Rick Ferri
Hi Rick,

I thought your post said very well the overall approach to Boglehead investing. I do however enjoy the above three principles!

Thanks!
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Asset allocation - latest from Rick Ferri

Post by Rick Ferri » Tue Mar 15, 2016 4:17 pm

Thanks, only I made a mistake. It's principles; not principals.

Sometimes we get too wrapped up in which fund to buy or which allocation is optimal. The analysis can become paralyzing and it can lead to no action taken. Relax! These details don't matter. What is important is having the right mindset, constructing a prudent portfolio of low-cost funds that's close to what you need, and applying willpower to implement this portfolio and stay the course.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: Asset allocation - latest from Rick Ferri

Post by Northern Flicker » Wed Mar 16, 2016 5:21 am

A model I like is to arrive at the asset allocation 2 ways, one by finding risk appropriate for age, the other by assessing emotional risk tolerance, and then take the less aggressive of the two.

For age-based allocation, pick a style:

Conservative: bond percentage = age + 10
Moderately conservative: bond percentage = age
Moderately aggressive: bond percentage = age - 10
Aggressive: bond percentage = age - 20

For each of the above, stock percentage (including REITs) is 100 - bond percentage.

For emotional risk tolerance, imagine the stock market dropping 10% every week. Imagine your hard-earned funds disappearing at this rate. You are getting very nervous when your portfolio is down 10%. At -20%, this is getting serious. How long will it take to recover? How would a 30% loss feel? What if the market doesn't recover? Should you pull the plug and stop the bleeding?

No? Well your assets are now down 40%. How would that feel? You worked hard to save these funds. You stick it out, and your assets are now down 50%. Terrified, can you ride it out, or would any further drop be unacceptable?

One of the hardest things is to be honest with yourself about how big a drawdown you can tolerate without pulling the plug because you couldn't accept further loss.

When you arrive at this number, double it. That is your maximum allocation to stocks.

At age 30, the age-based method would mean not exceeding 90% stocks, but you might not have the emotional risk tolerance for that aggressive of a portfolio. Given that you haven't invested any funds so far, I am skeptical that the aggressive age-based portfolio will feel comfortable when the market punches you in the gut.

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