I would appreciate any comments on my asset allocation and fund selection

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Topic Author
mikewitteman
Posts: 10
Joined: Wed Mar 16, 2011 2:17 am

I would appreciate any comments on my asset allocation and fund selection

Post by mikewitteman »

I have an asset allocation plan that I've derived from reading Willam Bernstein, Rick Ferri, JF Collins, and John Bogle books. I'm about a year from retirement, so this is the portfolio I plan to have in retirement. Here it is:

Equity (total 65%)
Total Stock Market (VTI) 34%
US Value (VTV) 8%
US Small Value (VBR) 8%
US REITS (VNQ) 6%
International (VEU) 6%
Emerging Markets (VWO) 3%

Bonds (total 35%)
Total Bond Fund (BND) 20%
Stable Value Fund 15%

Note: I am considering replacing the Stable Value Fund with Inflation Protected Bonds (VTIP)

I'm interested in any thoughts on my allocation and/or fund choices.

I check the portfolio every month to see if I need to rebalance. I have triggers to rebalance. I also put tax efficient investments in my taxable accounts and less tax efficient investments in my IRA and IRA-like accounts.
Thanks.
Topic Author
mikewitteman
Posts: 10
Joined: Wed Mar 16, 2011 2:17 am

Re: I would appreciate any comments on my asset allocation and fund selection

Post by mikewitteman »

I saw that there is a requested format to put your portfolio in for this forum. I've used the template and here is my portfolio for your comment and advice.

Emergency funds: I have an emergency fund
Debt: I have a mortgage with a 3.125% rate

Tax Filing Status: Married Filing Jointly

Tax Rate: 37% Federal, 10% State

State of Residence: Oregon

Age: 57

Desired Asset allocation: 65% stocks / 35% bonds
Desired International allocation: 9% of portfolio

Approximate size of your total portfolio: mid seven-figures

I have an asset allocation plan that I've derived from reading Willam Bernstein, Rick Ferri, JF Collins, and John Bogle books. I'm about a year from retirement, so this is the portfolio I plan to have in retirement. Here it is:

Equity (total 65%)
Total Stock Market 34% -- VTI. Vanguard Total Stock Market Index Fund ETF
US Value 8% -- VTV. Vanguard Value Index Fund ETF
US Small Value 8% -- VBR. Vanguard Small-Cap Value Index Fund ETF
US REITS 6% -- VNQ. Vanguard Real Estate Index Fund ETF
International 6% -- VEU. Vanguard FTSE All World ex US ETF
Emerging Markets 3% -- VWO. Vanguard Emerging Markets Stock Index Fund ETF

Bonds (total 35%)
Total Bond Fund 20% -- BND. Vanguard Total Bond Market Index Fund ETF
Stable Value Fund 15% -- no ticker. Part of my company's 401k plan with Fidelity

I check the portfolio every month to see if I need to rebalance. I have triggers to rebalance. I also put tax efficient investments in my taxable accounts and less tax efficient investments in my IRA and IRA-like accounts.

Thanks.

Questions:
1. I'm interested in any thoughts on my allocation and/or fund choices.

2. Note: I am considering replacing the Stable Value Fund with Inflation Protected Bonds (VTIP). What does the forum think about TIPs?
TurtleBeatsHare
Posts: 121
Joined: Fri Jun 25, 2021 2:01 pm

Re: I would appreciate any comments on my asset allocation and fund selection

Post by TurtleBeatsHare »

According to https://www.etfrc.com/funds/overlap.php, 99.7% of VTV's holdings and 100% of VBR's holdings are contained within VTI. In effect, you are overweighting part of VTI--specifically, the VTV holdings. What's the reasoning behind this?

15% of your equities in international seems low to me (9% of 65%). https://personal.vanguard.com/pdf/ISGGE ... Online.pdf seems to suggest (at Pg. 5) that something like 30% international (and not more than 35%) can reduce volatility over a 10 year period for both 100% equities and 60/40 portfolios. These results are based on the VCCM--which are the results from 10,000 simulations--not historical data. But, Pg. 6 suggests that the correlation between US/International has increased to .86% as of 2020--so less international may be necessary in the future. But I tend to favor international more heavily in my portfolio than many on this forum--I've been proven wrong for doing so over the last decade and may continue to be proven wrong again. However, if mean reversion is right, Pg. 7 (together with the P/E ratios in the US and the artificially low bond rates due to QE) suggests that overweighting the United States is not the right call.

I'd have to research the portfolios in greater detail, but 6% FTSE ex-US and 3% Emerging Markets seems like it overweights EM beyond free-float market capitalization. I happen to believe that is the correct decision because the indices--using free float--tend to reflect exposure to the Chinese markets through offshore available shares in Hong Kong/US and underweight A-shares because of legal limitations on foreign ownership and state ownership of substantial A-shares. I ran a quick search and was only able to find 2018 data, but China A-shares were roughly .1% of the MSCI ACWI and .7% of MSCI EM, even though MSCI estimated that, if they included Chinese A-shares using a free-float method, that the A-shares would be 5.4% and 39.9% of the two indices. For comparison, the full market capitalization percentages were 12.1 and 49.8%. On top of the legal limitations surrounding A-shares, there's also currency manipulation that potentially undervalues Chinese exposure, depending upon how the indices determine market capitalization for shares traded in manipulated currencies. I don't know enough about how the various indices are calculated to know whether they adjust for this and whether the adjustment is sufficient, but it's another issue to consider.

However, I tend to be very pro-China; you'll find multiple, recent posts talking about not investing in China or reducing Chinese exposure, so I've concluded I'm likely a minority opinion on this forum. I won't comment further to avoid derailing your thread, but you should think about whether there's a good reason to more heavily weight your exposure to EM--which is not synonymous with China, but might tilt that way increasingly over time. One consequence of addressing these underweighting concerns with an EM buy is that, while this might help to increase your exposure to China it adds overexposure to the particular stocks/companies/securities because many A-shares are still off limits to foreigners. And as others will likely note, there is both legal and political risk in China, so perhaps the standard, FTSE ex-US market weighting is the best balance for all these concerns. However, I do tend to think that there is something fundamentally off with investors being 60-70% in the US and less than 5% in China, when China's GDP is something like 73% of the US GDP by exchange-rate numbers and 118% of the US by PPP numbers and when China's growth rates are typically somewhere between 2x and 3x of the US.

I don't treat REITs at an equity (although I can see the argument for doing that). I consider them part of the alternative asset class, and so don't factor them into my US/international allocation calculations.

35% in bonds might be high for your age, depending upon how many years of expenditures that reflects, or it might be just right. I try to hold no more in bonds than is necessary to either (a) provide sufficient income to cover expenses or (b) to be able to be sold and cover enough expenses to allow the equity market to recover over an ZZZ year period and avoid resales during downturns. Note that the latter theory assumes a negative correlation between bonds (specifically treasuries) and equities. That's been true for the last...25 or so years, but wasn't true before that. Here’s a decent overview article on correlations: https://www.bloomberg.com/news/articles ... each-other. Someone linked the historical data on this recently in a post, so you'll have to decide whether your bond portfolio should aim to do (a) or whether you'll assume negative correlations will continue in the future and building a portfolio for (b), which allows you to hold fewer bonds.

Edit: I should also add that w/r/t to bonds, I also tend to try and maximize returns by holding as few bonds as possible—again, that’s probably a minority style on these forums. 35% is well within many rules of thumb for your age.

Edit 2: Again, this is another minority viewpoint, but I think relying exclusively on BND and other US dollar denominated bond funds and dollar inflation risk is non-diversified wrt to currency, central bank inflation risk, debtor. Generally, that’s not my preferred investment allocation for any generic asset class, and I’m especially wary of betting so strongly on the dollar given the US’s debt load, structural deficits and political inability to address them, and an increasingly shoulder shrug attitude towards inflation and open embrace of certain questionable (in my opinion) economic theories, like MMT. There are plenty of stable, law-abiding countries that borrow (like most of the OECD) and so I think it makes sense to hold a basket of bonds, and not bet exclusively on the US/dollar.
Last edited by TurtleBeatsHare on Sun Aug 01, 2021 11:55 am, edited 3 times in total.
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dogagility
Posts: 3237
Joined: Fri Feb 24, 2017 5:41 am

Re: I would appreciate any comments on my asset allocation and fund selection

Post by dogagility »

mikewitteman wrote: Sun Aug 01, 2021 1:11 am I have an asset allocation plan that I've derived from reading Willam Bernstein, Rick Ferri, JF Collins, and John Bogle books.

Equity (total 65%)
Total Stock Market (VTI) 34%
US Value (VTV) 8%
US Small Value (VBR) 8%
US REITS (VNQ) 6%
International (VEU) 6%
Emerging Markets (VWO) 3%
Those authors favor simplicity over complexity.

Your portfolio is placing emphasis (some would say bets) on specific sectors outperforming the total stock market. Are you convinced these sectors will outperform the total stock market? If these sectors don't perform, are you willing to stay the course even in the face of multiple years of under performance? If you don't, you will likely end up performance chasing and buying high and selling low.

If I were in your situation, I would have my equity allocation invested only in VTI and a total international index fund. Simple. Invested in everything. No need to angst over specific investments.
Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
livesoft
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Joined: Thu Mar 01, 2007 7:00 pm

Re: I would appreciate any comments on my asset allocation and fund selection

Post by livesoft »

Your listed portfolio is well within the typical set of portfolios presented on the forum and not dissimilar to my own portfolio There is nothing special about it and will be fine. However, since your mention books: It seems you have read some older books where Ferri, Bernstein, et al. recommended small-cap and value tilted portfolios. If you look at some of their more recent musings, they seem to nowadays recommend a more total-market weighted portfolio. My point is that even gurus change their advice. Perhaps the most vocal is Paul Merriman who has also simplified his advice changing with the times.

I have questions for you: You wrote that this is what you plan to do. What has been going on with your portfolio in the past 3 years? What exactly did you do with it from February 2020 to May 2020?
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HomeStretch
Posts: 11415
Joined: Thu Dec 27, 2018 2:06 pm

Re: I would appreciate any comments on my asset allocation and fund selection

Post by HomeStretch »

Consider I-Bonds for a portion of your 35% fixed income allocation. Newly issued bonds have a 3.54% rate. The bonds are Federal tax deferred, state tax exempt and have some inflation protection,
babystep
Posts: 775
Joined: Tue Apr 09, 2019 9:44 am

Re: I would appreciate any comments on my asset allocation and fund selection

Post by babystep »

mikewitteman wrote: Sun Aug 01, 2021 1:35 am I saw that there is a requested format to put your portfolio in for this forum. I've used the template and here is my portfolio for your comment and advice.

Emergency funds: I have an emergency fund
Debt: I have a mortgage with a 3.125% rate

Tax Filing Status: Married Filing Jointly

Tax Rate: 37% Federal, 10% State

State of Residence: Oregon

Age: 57

Desired Asset allocation: 65% stocks / 35% bonds
Desired International allocation: 9% of portfolio

Approximate size of your total portfolio: mid seven-figures

I have an asset allocation plan that I've derived from reading Willam Bernstein, Rick Ferri, JF Collins, and John Bogle books. I'm about a year from retirement, so this is the portfolio I plan to have in retirement. Here it is:

Equity (total 65%)
Total Stock Market 34% -- VTI. Vanguard Total Stock Market Index Fund ETF
US Value 8% -- VTV. Vanguard Value Index Fund ETF
US Small Value 8% -- VBR. Vanguard Small-Cap Value Index Fund ETF
US REITS 6% -- VNQ. Vanguard Real Estate Index Fund ETF
International 6% -- VEU. Vanguard FTSE All World ex US ETF
Emerging Markets 3% -- VWO. Vanguard Emerging Markets Stock Index Fund ETF

Bonds (total 35%)
Total Bond Fund 20% -- BND. Vanguard Total Bond Market Index Fund ETF
Stable Value Fund 15% -- no ticker. Part of my company's 401k plan with Fidelity

I check the portfolio every month to see if I need to rebalance. I have triggers to rebalance. I also put tax efficient investments in my taxable accounts and less tax efficient investments in my IRA and IRA-like accounts.

Thanks.

Questions:
1. I'm interested in any thoughts on my allocation and/or fund choices.

2. Note: I am considering replacing the Stable Value Fund with Inflation Protected Bonds (VTIP). What does the forum think about TIPs?
Sounds like you know what you are doing. I would say it is complicated for average person going into the retirement and specially when you have mid seven-figures.

4 good things added together may not result in as good as those 4 things?

Would you keep re-balancing like this at 60 and 70?

6% and 3% are just noise, not a material difference.
Topic Author
mikewitteman
Posts: 10
Joined: Wed Mar 16, 2011 2:17 am

Re: I would appreciate any comments on my asset allocation and fund selection

Post by mikewitteman »

I thank you all for your thoughtful comments. Let me answer some questions:
@TurtleBeatsHare -- I have overweighted on value and small value for years. It didn't go well for a few years, but seems to be coming back. I appreciate your thoughts and links on international and will read them. The ETF tool you sent is also quite interesting. Thanks.

@dogagility and @livesoft -- In February 2020 and May 2020, I stuck with this portfolio and rebalanced by buying more stock across the portfolio. Turned out well. Over the last 3 years I have carefully and consistently rebalanced. I have the discipline to stick to the plan.

@HomeStrech -- I will check into I-bonds. However, I thought you can only buy something like $10k.

@babystep -- I do plan to continue rebalancing. I guess if it became too much work, I would significantly simplify.

I should mention that I also have a small allocation in specific stocks that has grown significantly. I got lucky and was an early buyer of Tesla and Square. As the small allocation became a bigger part of my portfolio, I've been selling and putting the money to work in the portfolio allocation I've listed above.

thanks again everyone.
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