Better Asset Allocation?

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TopHatFox
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Better Asset Allocation?

Post by TopHatFox » Tue Sep 19, 2017 7:53 pm

So today I learned more about better asset allocation at work! Yay!

I now see why Target Date Funds and Total Market funds are not optimal. For one, they make it hard to rebalance sub-asset classes. In fact, with either, you can't control sub-asset class percentages. The fund managers do. For instance, you can't change how much small-cap equity you own compared to large-cap if you own a total US stock market fund. This is sub-optimal if a sub-asset class is at a lower cost than another, but you must buy both as part of the fund. Same if you want an allocation that strays from the funds'. Furthermore, total bond indexes are often market-weighted. This means that the largest holdings of total bond funds are bondholders that owe the most. Simply because a bond issuer owes the most doesn't mean they're offering a great return or minimal credit risk. Finally, target date funds or total market funds may not own material amounts of some asset classes. For instance, they may not own small cap international equity, emerging market equity, or any international bond holdings. These asset classes are important to own to increase return in what may be a low yield world going forward.

All of this is to say that my current asset allocation of VTSAX (total domestic stock market), VTIAX (total international), and VTBLX (total US bond) is merely OK. It needs more exposure to different asset classes, and more asset classes placed under my control. I just need to figure out the specific percentages of each asset class and sub-asset class. Then the actual investments to buy. And then the account to place them in.

------------------------------------------------------------------

Some preliminary thoughts. Will figure out percentages and funds to buy. I'll be using an 80/20 split among:

US Large Cap
US Small Cap

Developed International Large Cap
Developed International Small Cap

Emerging Market Large Cap
Emerging Market Small Cap

A tiny portion of REITS

and

"Diversified Bonds" (still working on splitting out the bond portion)

-------------------------------------------------------------------

Portfolio creation sanity check? I don't think managing ~10-15 funds is too much work. How have you allocated your portfolio and why? Should you care to share.

Disclaimer: I realize increasing income and savings is #1. That's taken care of for now.

MDFIRE2024
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Re: Better Asset Allocation?

Post by MDFIRE2024 » Wed Sep 20, 2017 3:14 am

TopHatFox wrote:
Tue Sep 19, 2017 7:53 pm
How have you allocated your portfolio and why? Should you care to share.
My overall asset allocation is:
1) Bonds (20%)
2) Equities (60%)
3) Real Assets (20%)

I try to diversify as much as possible and build in many uncorrelated assets.

My second principle is to diversify between regions
50% developed markets
50% emerging markets
I apply this share to bonds and equities, because I think in the long-term emerging markets will have much more influence in the world economy than today. And I live in a developed country (real estate, social security, income by paid job) therefore I want to diversify here as best as possible.

My third principle is to diversify within the equity market, such as:
50% Small and Mid Cap
50% Big Cap

For Real Assets I diversify:
10% basket of commodities
10% precious metal (Gold, Silver, mining companies)

When include my portfolio asset allocation with my total networth assets (real estate, social security, income by paid job) I do get a roughly share of
80% developed markets
20% emerging markets.
If I view my total networth like this, I am satisfied with risks, return, share btw. DM/EM, ...

wood
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Re: Better Asset Allocation?

Post by wood » Wed Sep 20, 2017 6:32 am

I think we're headed for a major downturn in valuation of assets across the board in less than 2 years. It feels like it could happen any day now although I try to keep emotions out of the world of money. Several stock sectors/regions seem so elevated in price it's difficult to find a bargain with low downside and high upside (tech stocks, US stocks in general, many real estate markets etc). Not to mention all the credit floating around and I have a gut feeling interest rates will rise faster than people expect. If I was to place a bet, I'd put my money on something something USA and China being the catalyst.

We're in a low yield world not because of low earnings, but because of high valuations (a situation that would be reversed with higher interest rates). With this in mind I invest with caution, increase my cash holdings and avoid broad market index investing. I expect to allocate alot of my holdings into broad index funds post market crash. Right now, when it comes to investing in stocks, I try to swingtrade single stocks making use of technical analysis and search for companies with healthy fundamentals, stable earnings and a decent P/E (15 or below). I stay away from high P/E, leverage and balance sheets I don't understand. Coincidentally I've noticed that many active funds are doing pretty well these days compared to broad index funds. Maybe I should concede defeat and just put my stock money with one of them instead of thinking I can do better.

My current allocation:
Cash 17%
Individual stocks 12%
Land (physical) in 3rd world 28%
Local real estate 43%

Ideally cash would be higher relative to local real estate, but the upswing in housing prices has made it like this. I've stopped putting more money into stocks (or anything for that matter!) months ago and keep increasing my cash. I hope to have a good chunk when the crash comes. I'm not so sad about losing out on a final market surge before the crash. I'd be very sad to lose half my portfolio because greedy. Yes, I'm attempting to time the market. But I think there's a difference between selling out in anticipation of a downturn vs stop investing more. I've simply stopped buying at this point.

Scott 2
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Re: Better Asset Allocation?

Post by Scott 2 » Wed Sep 20, 2017 7:54 am

What is the difference in return you expect from a more "optimal" allocation?

In a year's time, how much value does that provide vs. your saving rate?

Are you sure you understand the game well enough to not !@#% it up?


My current net worth spread is:

Home - 30%
Stocks - 42%
Bonds - 18%
Cash - 10%

This ignores social security, which as a decent earner in my mid 30's, with low expenses, is a significant safety net. At 100% solvency, it covers my current living expenses from age 62 on. I assume 50% solvency for planning purposes.

Investments are 60% of net worth and indexed at 70/30. Long term, I expect a 5-6% return on that investment, before accounting for inflation. It's an arbitrary guess based on more recent historical data. It may be conservative, since a simulator like firecalc shows a 6% return, after inflation.

Contributions from annual income will grow net worth by 10-12% this year. So roughly 80% of my expected annual growth in net worth comes from my savings. This is with an FI level of assets already accumulated.

My appetite for actively managing my accounts is low, as well as my tolerance for volatility. Working for an extra 6-12 months, at the massive savings rates people here have, outstrips the performance of investing smarter, IMO.

I am likely to pick up a little part time work that covers my living expenses upon retirement anyway. Safety nets upon safety nets...

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Re: Better Asset Allocation?

Post by jacob » Wed Sep 20, 2017 9:13 am

TopHatFox wrote:
Tue Sep 19, 2017 7:53 pm
Portfolio creation sanity check? I don't think managing ~10-15 funds is too much work.
Depends ... Not if they're sitting in the same [retirement] account where everything gets collated into one annual statement. Then it's pretty easy. Like, maybe you'll exclusively cater with one single mutual fund company.

For individual taxable accounts, the number of papers in your binder will be approximately:

#funds x (3 quarterly statements + #years owned x ( + 1 annual statement + 1 1099)) x (1-3 per set of papers)

And the number of entries in your annual taxes will be

#funds x 0-3+ lines (ST, LT, Div, other)

Every time you move, the number of address changes you have to file is: #companies or in some cases #funds because the company treats all accounts separately.

And the risk, P, that at least one idiot screwed up somewhere in the reporting chain and have to send you a corrected return which either delays your filing or requires a 1040X is

P=1-p^#funds, where p is, say, a 98% success rate which is not bad for one failure point, but not good if you have 15 independent failure points.

Same calculation for identity theft but with a different p.

When I started investing (I started with mutual funds) I naively thought that keeping track of all this and reading all their material would be fun, like Monopoly with real money :roll: but then I realized that it's not [fun] :? It took me several years to extricate myself from all that paperwork. Now it's been 7+ years since I last owned a fund outside a retirement account (where they are often the only option) so I think I could in principle shred all the remaining paperwork. But I'm still keeping my final statements from each of them, just in case.

oldbeyond
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Re: Better Asset Allocation?

Post by oldbeyond » Wed Sep 20, 2017 1:04 pm

This is a decent overview: http://mebfaber.com/2013/07/31/asset-al ... ategies-2/
Eerily similar returns except for the PP and bond-heavy Arnott and Risk-P. But bonds have their own risks: https://earlyretirementnow.com/2016/05/ ... tock-risk/ Also Faber is using data from -73 onwards, I'd guess correlations are even higher now.

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Tyler9000
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Re: Better Asset Allocation?

Post by Tyler9000 » Wed Sep 20, 2017 5:50 pm

Yep -- asset allocation is a lot more interesting than many people realize. Congrats on diving in!

If you haven't already, check out my pet project Portfolio Charts. You should find both the Portfolios and Calculators sections particularly useful to explore how varying asset percentages affects portfolio performance.

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BRUTE
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Re: Better Asset Allocation?

Post by BRUTE » Wed Sep 20, 2017 7:34 pm

TopHatFox wrote:
Tue Sep 19, 2017 7:53 pm
US Large Cap
US Small Cap

Developed International Large Cap
Developed International Small Cap

Emerging Market Large Cap
Emerging Market Small Cap
is there a real difference between a large/small split vs. total? seems like unnecessary work.

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Seppia
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Re: Better Asset Allocation?

Post by Seppia » Thu Sep 21, 2017 4:47 am

Please keep in mind I am based in Europe, Euro Area (Italy). My allocation would be different if I lived in the States (I'll explain why)

My split today is:

85% equities
15% cash
plus, an emergency fund of 2 years' worth of current expenses (I estimate that in case of a real emergency it could easily be stretched to 3,5-4 years)
If you considered all the cash lumped together it would be 75%-25%

Aside from the emergency fund, I am usually 90% equities, but I built up a bit of liquidity as I consider a stock market drop (maybe even a very sizeable one) not to be unlikely within the next 2-3 years.

Equities are split 8% emerging markets, 2% USA, 90% europe.
I have been very underweight USA since january 2016 because of the combination of valuations + strong dollar

I own cash instead of bonds because depending on the suration of the bond, yields in europe are negative or so low that a CD pays more and has zero risk. I'm not touching high yield bonds with a 10 ft pole.

I own no house because 1) I have moved a lot and often in my life and 2) because in italy today it's much better to rent VS own of you do the math.
Tyler9000 wrote:
Wed Sep 20, 2017 5:50 pm
Yep -- asset allocation is a lot more interesting than many people realize. Congrats on diving in!

If you haven't already, check out my pet project Portfolio Charts. You should find both the Portfolios and Calculators sections particularly useful to explore how varying asset percentages affects portfolio performance.
Tyler is very humble so I'll say it: his site is most probably the best resource you can find on the internet if you want to play around and simulate/backtest different asset allocations.

IlliniDave
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Re: Better Asset Allocation?

Post by IlliniDave » Thu Sep 21, 2017 7:36 am

My allocation is about 70% Equities and 30% bonds. The equities are about 70% US, 30% ex-Us and the ex-US is around 70/30-60/40 developed/emerging. My US equities are about 20% small cap and 80% total market. I have about 16 funds total but that's an artifact of being split between a retirement plan with a short list of investment choices, a taxable account, and a small Roth IRA that is my "play" money (6 of the 16 funds are in the Roth although it represents about 5% of my total invested assets).

The why/how it got to be that way is complicated to explain and not really important. I think the most important thing about an AA is coming up with the one you will spend the least amount of time thinking about. We all like to think we're different, but the numbers say that among retirement investors, the amount of fiddling with the account is negatively correlated with returns over time. Other than directing new contributions, it's been 2 years, maybe more, since I moved any money around in my retirement accounts, and were it not for some tax loss harvesting in 2015 and 2016 it would be that long since I "managed" my taxable account. In the past I've gone 5 years or more without doing anything with my 401k except shoveling in more money. I've never done a proper rebalance. I'm tolerant of drift and a high savings rate plus patience allows changes to be made incrementally. Although ~30 years into the game it starts to get hard effecting changes that way.

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TopHatFox
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Re: Better Asset Allocation?

Post by TopHatFox » Tue Oct 17, 2017 3:06 pm

Here's the potential new allocation I'm thinking about. The basic structure is as follows:

1. 25% US Large-Cap
2. 25% US Small-Cap
3. 25% International
4. 25% US Short-term Bonds

This breaks down to:

1. 15% US Large-Cap, 10% US Large-Cap Value
2. 15% US Small-Cap, 10% US Small-Cap Value
3. 15% Developed Market, 5% Emerging Market, 5% International Small-Cap
4. 25% US Short-term Bonds

The Vanguard funds I'm using for these percentages would be:

1. 15% VFINX, 10% VIVAX
2. 15% NAESX, 10% VISVX
3. 15% VDVIX, 5% VEIEX, 5% VFSVX
4. 25% VBSIX

-------------------------------------------

These would be split among:

Taxable

15% VFINX
15% VDVIX

Retirement

10% VIVAX
15% NAESX
10% VISVX
5% VEIEX
5% VFSVX
25% VBSIX

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Gilberto de Piento
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Re: Better Asset Allocation?

Post by Gilberto de Piento » Tue Oct 17, 2017 3:13 pm

There's a lot about this sort of thing on Bogleheads if you haven't looked there already. Especially since you are looking at Vanguard.

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TopHatFox
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Re: Better Asset Allocation?

Post by TopHatFox » Tue Oct 17, 2017 3:19 pm

BRUTE wrote:
Wed Sep 20, 2017 7:34 pm
TopHatFox wrote:
Tue Sep 19, 2017 7:53 pm
US Large Cap
US Small Cap

Developed International Large Cap
Developed International Small Cap

Emerging Market Large Cap
Emerging Market Small Cap
is there a real difference between a large/small split vs. total? seems like unnecessary work.

Yeah, since Vanguard's Total Market fund is cap-weighted, it underweights small-cap US stocks to about 9%. I want 25%, so it makes sense to get a small-cap fund.

The Intelligent Asset Allocator's research attributes a premium to stock allocations weighted more toward small-cap and value stocks than a conventional 60% large-cap US Stock, 40% US Bond allocation does.

Mustache did a review of this allocation on an old post: http://www.mrmoneymustache.com/2012/02/ ... allocator/

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Re: Better Asset Allocation?

Post by jacob » Tue Oct 17, 2017 3:31 pm

Asset allocation and rebalancing, n: A strategy for those who enjoy professing how they don't believe in market timing or mechanical trading but like to do it anyway :roll: #trolling #justignoreme ;)

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TopHatFox
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Re: Better Asset Allocation?

Post by TopHatFox » Tue Oct 17, 2017 3:47 pm

There are different strengths to the efficient market hypothesis. :P

Also, active management in bonds is being shown to be worthwhile when compared to equities.

Troll on~

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Re: Better Asset Allocation?

Post by jacob » Tue Oct 17, 2017 4:04 pm

TopHatFox wrote:
Tue Oct 17, 2017 3:47 pm
Also, active management in bonds^H^H^H^H^Hdependable yield is being shown to be worthwhile when compared to equities.
Agree!

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Tyler9000
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Re: Better Asset Allocation?

Post by Tyler9000 » Tue Oct 17, 2017 4:56 pm

jacob wrote:
Tue Oct 17, 2017 3:31 pm
Asset allocation and rebalancing, n: A strategy for those who enjoy professing how they don't believe in market timing or mechanical trading but like to do it anyway :roll: #trolling #justignoreme ;)
Nah. As Irving Kristol might say, asset allocation proponents are active traders who have been mugged by reality. #runsforcover #snowballfight ;)

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Re: Better Asset Allocation?

Post by jacob » Tue Oct 17, 2017 5:52 pm

:lol: ;)

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BRUTE
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Re: Better Asset Allocation?

Post by BRUTE » Tue Oct 17, 2017 8:59 pm

jacob wrote:
Tue Oct 17, 2017 4:04 pm
^H^H^H^H^H
what is this, some kind of emacs magick?

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FBeyer
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Re: Better Asset Allocation?

Post by FBeyer » Wed Oct 18, 2017 12:48 am

BRUTE wrote:
Tue Oct 17, 2017 8:59 pm
jacob wrote:
Tue Oct 17, 2017 4:04 pm
^H^H^H^H^H
what is this, some kind of emacs magick?
I learned recently that it’s supposed to mean: strike through, on forums where the admin is too parsimonious to include a formatting button.

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Re: Better Asset Allocation?

Post by jacob » Wed Oct 18, 2017 7:33 am

I'm apparently dating myself.

https://en.wikipedia.org/wiki/Backspace#.5EH

ThisDinosaur
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Re: Better Asset Allocation?

Post by ThisDinosaur » Wed Oct 18, 2017 8:50 am

jacob wrote:
Tue Oct 17, 2017 4:04 pm
TopHatFox wrote:
Tue Oct 17, 2017 3:47 pm
Also, active management in bonds^H^H^H^H^Hdependable yield is being shown to be worthwhile when compared to equities.
Agree!
Reference? How does one define "dependable?"

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BRUTE
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Re: Better Asset Allocation?

Post by BRUTE » Wed Oct 18, 2017 9:10 pm

seems pretty inefficientciwslow

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FBeyer
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Re: Better Asset Allocation?

Post by FBeyer » Sat Oct 21, 2017 8:23 am

Wouldn't that be <esc>bcw? Presumably you've typed all the way to the end and is still in insert mode.

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