VT or slice/dice during accumulation stage?

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guppyguy
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VT or slice/dice during accumulation stage?

Post by guppyguy »

Is there any advantage of owning a world cap based portfolio in market cap weighted components (VTI+VEA+VWO) versus in a total fund such as VT during the accumulation stage?

Lets say one is contributing an amount approximately 5% of their current portfolio balance every year spread out on a bi-monthly basis via paycheck contributions. Also lets assume its for a US investor who has no desire to make a guess as to valuations but just hold the global market cap of equities.

Before you answer, yes, I know there are subtle differences in holdings between VTI vs VTI+VEA+VWO (or some other combination). Lets put that aside for a moment and also assume all holdings are in a tax advantaged/401K type account.

My guess is that it depends upon how often VT rebalances itself. As US vs Developing vs Emerging markets may be uncorrelated over periods of time I would suspect that holding a market cap portfolio in pieces allows new funds to be purchased directly. However, I don't know if I am turning something which could be simplified into a single holding more complex by behaviorally believing I am affecting an improvement.
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Re: VT or slice/dice during accumulation stage?

Post by vineviz »

If the goal is to "hold the global market cap of equities" then a fund like Vanguard Total World Stock ETF (VT) is the obvious, easiest, and most effective way to do it.

Any supposed "reasons" to complicate things by splitting up the allocation between multiple funds will be either un-impactful or, more likely, detrimental to your long-term goal.
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Re: VT or slice/dice during accumulation stage?

Post by Ferdinand2014 »

If your goal is world market cap, go with VT. Behavioral effects will almost certainly drown out any other road to market cap. Historically the average investors return lags the average mutual fund return by about 2% per annum due to behavior.
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Re: VT or slice/dice during accumulation stage?

Post by geerhardusvos »

guppyguy wrote: Fri Apr 09, 2021 2:28 pm Is there any advantage of owning a world cap based portfolio in market cap weighted components (VTI+VEA+VWO) versus in a total fund such as VT during the accumulation stage?

Lets say one is contributing an amount approximately 5% of their current portfolio balance every year spread out on a bi-monthly basis via paycheck contributions. Also lets assume its for a US investor who has no desire to make a guess as to valuations but just hold the global market cap of equities.

Before you answer, yes, I know there are subtle differences in holdings between VTI vs VTI+VEA+VWO (or some other combination). Lets put that aside for a moment and also assume all holdings are in a tax advantaged/401K type account.

My guess is that it depends upon how often VT rebalances itself. As US vs Developing vs Emerging markets may be uncorrelated over periods of time I would suspect that holding a market cap portfolio in pieces allows new funds to be purchased directly. However, I don't know if I am turning something which could be simplified into a single holding more complex by behaviorally believing I am affecting an improvement.
I personally use VTI and VXUS. Have a great total international institutional shares fund in my 401(k), everything else (Roths, taxable) is in VTI.
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dan23
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Re: VT or slice/dice during accumulation stage?

Post by dan23 »

I do VT. I don't believe there is rebalancing in the same way as there would be if you were slice and dicing as VT holds a global basket of securities that grow. To the extent the underlying index changes they have to "rebalance," but given it is cap weighted, I think its growth should roughly match automatically making reblancing unnecessary (did not read up to verify, just giving the logic).

I love the simplicity and it also makes regularly buying an ETF (as opposed to fund through Vanguard) much simpler, which for me made it easier to use brokerages other than Vanguard.

Negatives:
1) Somewhat higher expense ratio then you could create if you mixed, for example, total us and total international. I believe the extra cost is less than in the past. Over the course of my ownership Total World expense ratio has come down a lot.
2) In taxable accounts - Some years (though not all) you lose out on the foreign tax credit - I believe it only applies when international hits 50% during whatever the measurement time is. I have not been able to take it past 2 years, but did for a few previously if I remember correctly.
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Re: VT or slice/dice during accumulation stage?

Post by secondopinion »

guppyguy wrote: Fri Apr 09, 2021 2:28 pm Is there any advantage of owning a world cap based portfolio in market cap weighted components (VTI+VEA+VWO) versus in a total fund such as VT during the accumulation stage?

Lets say one is contributing an amount approximately 5% of their current portfolio balance every year spread out on a bi-monthly basis via paycheck contributions. Also lets assume its for a US investor who has no desire to make a guess as to valuations but just hold the global market cap of equities.

Before you answer, yes, I know there are subtle differences in holdings between VTI vs VTI+VEA+VWO (or some other combination). Lets put that aside for a moment and also assume all holdings are in a tax advantaged/401K type account.

My guess is that it depends upon how often VT rebalances itself. As US vs Developing vs Emerging markets may be uncorrelated over periods of time I would suspect that holding a market cap portfolio in pieces allows new funds to be purchased directly. However, I don't know if I am turning something which could be simplified into a single holding more complex by behaviorally believing I am affecting an improvement.
The answer is no regardless of the stage; there is no point splitting into VTI + VEA + VWO if market cap is just going to be followed. As far as I know, VT does not rebalance; but those holding VTI + VEA + VWO and aiming for market cap would have to adjust their holdings when a country is reclassified. It does not work well to try doing contributions into those three components by market weight. Only split it up if there is a good reason to do otherwise (e.g. reduce VWO holdings because emerging markets carry more volatility than what one cares to have). I do split the categories, but that is because I have to due to offerings in my tax-advantaged accounts and I have a taxable account where overlap would be a problem.

If one is holding VTI + VEA + VWO in a specific allocation (for reasons like mentioned earlier), then adjustments would be merely needed for rebalancing (country reclassifications mean nothing here; just the general asset behavior) and is much easier to manage automatically; but you no longer match market cap.
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Re: VT or slice/dice during accumulation stage?

Post by asset_chaos »

guppyguy wrote: Fri Apr 09, 2021 2:28 pm My guess is that it depends upon how often VT rebalances itself. As US vs Developing vs Emerging markets may be uncorrelated over periods of time I would suspect that holding a market cap portfolio in pieces allows new funds to be purchased directly. However, I don't know if I am turning something which could be simplified into a single holding more complex by behaviorally believing I am affecting an improvement.
You may be misapprehending one of the defining features of an index fund that weights stocks by market capitalization. Total world never needs to rebalance; market capitalization index funds never need to rebalance; price movements in the stocks in the fund automatically change the market capitalizations of the stocks and hence automatically adjust their weights in the fund. E.g. the stock price of company A doubles and simultaneously the value of the shares of company A in the fund doubles. The fund has no need to buy or sell any shares of company A in response to only its stock price change. VT never rebalances. Only when the fund gets new cash, does it need to split up the new cash to buy the correct number of new shares in each company.

Likewise, if you take VTI+VEA+VWO and apportion your investment in each according to its percentage of the global market today, then the combination will continue to match the global market in the future. (Technically there would be small drift due to dividends and corporate actions, but that drift is very small.) Investing in the global market via three funds would only require effort on your part when you wanted to add new money. In that sense there is very little difference between VT and a three fund version.

If you want to bring rebalancing in, then you want the three funds with your chosen fixed weights between the three funds. Then you could rebalance back to your fixed weights as the pieces of the global market change size relative to one another.

If your portfolio is large enough, there may be some cost saving by having various pieces of the global portfolio inside taxable and tax advantaged accounts, but there is no rebalancing benefit. And total world is the simplest way to hold the global stock market index.
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Re: VT or slice/dice during accumulation stage?

Post by inbox788 »

VT fine in a tax advantaged account, so you can change when needed. In a taxable account, 2 or 3 separate funds help tax management options when needed. No need to slice and dice too thin.
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Re: VT or slice/dice during accumulation stage?

Post by abuss368 »

Ferdinand2014 wrote: Fri Apr 09, 2021 3:35 pm If your goal is world market cap, go with VT. Behavioral effects will almost certainly drown out any other road to market cap. Historically the average investors return lags the average mutual fund return by about 2% per annum due to behavior.
I just read about the 2% difference in Jack Bogle’s book. Over time that is real money.

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Re: VT or slice/dice during accumulation stage?

Post by MotoTrojan »

Other than saving a bit on weighted expense ratio, the only thing I can think of is easier tax-loss harvesting with the individual funds. If that doesn't interest you (wouldn't in a 401k as you simplified to) then yeah I think just holding VT is the move. Will avoid tons of behavioral issues too.
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guppyguy
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Re: VT or slice/dice during accumulation stage?

Post by guppyguy »

asset_chaos wrote: Sat Apr 10, 2021 3:19 am
guppyguy wrote: Fri Apr 09, 2021 2:28 pm My guess is that it depends upon how often VT rebalances itself. As US vs Developing vs Emerging markets may be uncorrelated over periods of time I would suspect that holding a market cap portfolio in pieces allows new funds to be purchased directly. However, I don't know if I am turning something which could be simplified into a single holding more complex by behaviorally believing I am affecting an improvement.
You may be misapprehending one of the defining features of an index fund that weights stocks by market capitalization. Total world never needs to rebalance; market capitalization index funds never need to rebalance; price movements in the stocks in the fund automatically change the market capitalizations of the stocks and hence automatically adjust their weights in the fund. E.g. the stock price of company A doubles and simultaneously the value of the shares of company A in the fund doubles. The fund has no need to buy or sell any shares of company A in response to only its stock price change. VT never rebalances. Only when the fund gets new cash, does it need to split up the new cash to buy the correct number of new shares in each company.

Likewise, if you take VTI+VEA+VWO and apportion your investment in each according to its percentage of the global market today, then the combination will continue to match the global market in the future. (Technically there would be small drift due to dividends and corporate actions, but that drift is very small.) Investing in the global market via three funds would only require effort on your part when you wanted to add new money. In that sense there is very little difference between VT and a three fund version.

If you want to bring rebalancing in, then you want the three funds with your chosen fixed weights between the three funds. Then you could rebalance back to your fixed weights as the pieces of the global market change size relative to one another.

If your portfolio is large enough, there may be some cost saving by having various pieces of the global portfolio inside taxable and tax advantaged accounts, but there is no rebalancing benefit. And total world is the simplest way to hold the global stock market index.
Thanks...I think I see the distinction, or at least let me repeat what I think you and others are saying here.

The choice is really not between holding either VT vs VTI/VEA/VWO. It's whether I want to hold a portfolio that dynamically tracks a globally weighted portfolio OR one that simply holds a fixed geographic allocation.

If it's the later, then I'm making a personal decision, and perhaps there are a few valid reasons, to deviate from market cap weighting and thus maintain a STATIC non-global market cap fixed allocation across the 3 funds. Rebalancing would be appropriate.

In the former case, it really is illogical to NOT hold VT (other then for taxable account reasons) as three different funds.

My last question is, if I have a Roth account in addition to a tax deferred account, am I not losing a little tax efficiency by not being able to split the higher performing segments of VT (VWO for example) apart into the Roth side? Does this cost outweigh the behavioral advantage of owning only one fund?
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Re: VT or slice/dice during accumulation stage?

Post by investingforbank »

vineviz wrote: Fri Apr 09, 2021 2:35 pm If the goal is to "hold the global market cap of equities" then a fund like Vanguard Total World Stock ETF (VT) is the obvious, easiest, and most effective way to do it.

Any supposed "reasons" to complicate things by splitting up the allocation between multiple funds will be either un-impactful or, more likely, detrimental to your long-term goal.
Do you think this still applies in taxable, where VTWAX is not eligible for FTC currently? I sort of do, as my own tracking error of splitting VTWAX into VTSAX/VTIAX, the behavioral risks of overweighting/underweighting US or International based on past performance, as well as simplicity outweigh the FTC imo. Just curious to see your opinion in light of this tax situation.
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Re: VT or slice/dice during accumulation stage?

Post by GoneOnTilt »

guppyguy wrote: Fri Apr 09, 2021 2:28 pm Is there any advantage of owning a world cap based portfolio in market cap weighted components (VTI+VEA+VWO) versus in a total fund such as VT during the accumulation stage?
Rethink it all and go with VFIAX (Vanguard 500 Index Fund Admiral Shares).
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Re: VT or slice/dice during accumulation stage?

Post by WinstonTeracina »

guppyguy wrote: Fri Apr 09, 2021 2:28 pm Is there any advantage of owning a world cap based portfolio in market cap weighted components (VTI+VEA+VWO) versus in a total fund such as VT during the accumulation stage?
Mathematically yes, as you'd save some money on expense ratios and taxes but I personally do not believe these small gains are worth the added complexity and potential behavioral errors of adding additional funds.

I used to buy VT in taxable and then tax-loss harvest by buying appropriate amounts of VTI + VXUS; now I even stopped doing this and just buy & hold VT. With 30 years until retirement, I'm not convinced that continuously lowering the cost basis of my holdings is the best long-term strategy
75% - Equities (2/3 VT + 1/3 * (40% AVUV + 40% AVDV + 20% AVES)) | 25% - Series bonds + EDV
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Re: VT or slice/dice during accumulation stage?

Post by investingforbank »

WinstonTeracina wrote: Sun Jul 25, 2021 6:59 pm
guppyguy wrote: Fri Apr 09, 2021 2:28 pm Is there any advantage of owning a world cap based portfolio in market cap weighted components (VTI+VEA+VWO) versus in a total fund such as VT during the accumulation stage?
Mathematically yes, as you'd save some money on expense ratios and taxes but I personally do not believe these small gains are worth the added complexity and potential behavioral errors of adding additional funds.

I used to buy VT in taxable and then tax-loss harvest by buying appropriate amounts of VTI + VXUS; now I even stopped doing this and just buy & hold VT. With 30 years until retirement, I'm not convinced that continuously lowering the cost basis of my holdings is the best long-term strategy
Do you think that the benefits from VT outweigh the extra cost from the foreign tax credit? I'm considering going 100% VTWAX instead of splitting in taxable, due to simplicity, less behavioral risks, and potentially your own tracking error from trying to recreate an index from compromising funds. What do you think?
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Re: VT or slice/dice during accumulation stage?

Post by WinstonTeracina »

investingforbank wrote: Sun Jul 25, 2021 7:56 pm Do you think that the benefits from VT outweigh the extra cost from the foreign tax credit? I'm considering going 100% VTWAX instead of splitting in taxable, due to simplicity, less behavioral risks, and potentially your own tracking error from trying to recreate an index from compromising funds. What do you think?

I personally do but only you can say for sure. You may want to check out this thread to get an idea of the tax efficiencies of holding VT vs. (VTI + VXUS)

viewtopic.php?t=242137

I figured (for me) that the tax cost of holding VT was an additional basis point or two......something I'm willing to pay to avoid trying to recreate the index.
75% - Equities (2/3 VT + 1/3 * (40% AVUV + 40% AVDV + 20% AVES)) | 25% - Series bonds + EDV
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Re: VT or slice/dice during accumulation stage?

Post by investingforbank »

WinstonTeracina wrote: Sun Jul 25, 2021 8:26 pm
investingforbank wrote: Sun Jul 25, 2021 7:56 pm Do you think that the benefits from VT outweigh the extra cost from the foreign tax credit? I'm considering going 100% VTWAX instead of splitting in taxable, due to simplicity, less behavioral risks, and potentially your own tracking error from trying to recreate an index from compromising funds. What do you think?

I personally do but only you can say for sure. You may want to check out this thread to get an idea of the tax efficiencies of holding VT vs. (VTI + VXUS)

viewtopic.php?t=242137

I figured (for me) that the tax cost of holding VT was an additional basis point or two......something I'm willing to pay to avoid trying to recreate the index.
I don't see VT on the spreadsheet. Am I missing something?
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Re: VT or slice/dice during accumulation stage?

Post by WinstonTeracina »

investingforbank wrote: Sun Jul 25, 2021 8:38 pm I don't see VT on the spreadsheet. Am I missing something?
VT is not on there......I linked the tool more as a general guide to see the impact of the foreign taxes paid. You can look at VXUS as a baseline and then replace the foreign tax paid value to $0.00 if you want compare.
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Re: VT or slice/dice during accumulation stage?

Post by sf_tech_saver »

I believe 'active rebalancing' is a distraction during the accumulation phase. I've got a buy and 'never' sell mentality now that I find much more relaxing!

I'm happily buying 50/50 VTI/VT this year for new equities purchases. I have no plan to ever 'rebalance' that into some fixed ratio of VT vs. VTI.

My personal goal is to save $10M+ and just live off the dividends. Adding some VT to that mix recently feels like its making my portfolio even lazier for me which I like :)

I've also started adding all additional bonds through a blended Vanguard fund VTMFX (not an ETF so I can only buy it with my Vanguard online account). I found myself worrying far too much during the pandemic swings about 'rebalancing'. I ended up doing nothing which I find to be the best move in index investing.

VT
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...and never sell :)
VTI is a modern marvel
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Re: VT or slice/dice during accumulation stage?

Post by investingforbank »

WinstonTeracina wrote: Sun Jul 25, 2021 9:36 pm
investingforbank wrote: Sun Jul 25, 2021 8:38 pm I don't see VT on the spreadsheet. Am I missing something?
VT is not on there......I linked the tool more as a general guide to see the impact of the foreign taxes paid. You can look at VXUS as a baseline and then replace the foreign tax paid value to $0.00 if you want compare.
Oh yea. I get that holding VT in taxable vs VTI and VXUS is like adding 0.1% to the net expense ratio in taxable. I'm just trying to decide whether that 0.1% extra is worth the tradeoffs.
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Re: VT or slice/dice during accumulation stage?

Post by bogledogle87 »

Ferdinand2014 wrote: Fri Apr 09, 2021 3:35 pm If your goal is world market cap, go with VT. Behavioral effects will almost certainly drown out any other road to market cap. Historically the average investors return lags the average mutual fund return by about 2% per annum due to behavior.
This has always been my favorite anecdotal sentiment. The fact that the so many investors underperform their own holdings really offers all the perspective you need for simplicity and setting yourself up for long-term durability - not only against unexpected events - but more importantly, yourself!
VTWAX and chill
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Re: VT or slice/dice during accumulation stage?

Post by guppyguy »

Just an update:
I ended up just mirroring the components of VFORX - Vanguard 2040 TDF. At Schwab so I can't buy directly without a transaction fee...if only there was an ETF version. I update the loadings whenever new money is available to invest. I use VTI/VXUS instead of VT because I already own them separately in a taxable account (very small percentage). If I end up moving this into a Roth I may switch to VT.

My TDF options thru my employer (and Schwab) are not that great and I finally got tired of analyzing remaining human capital vs inflation protection vs safe withdrawal rates vs and on and on and on and on. Why recreate the wheel?

So 18 years to go and VFORX is the mast I shall tie myself to for the ride. Is this the most "optimum"?.... no idea but I really don't care anymore....is this wrong?
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Re: VT or slice/dice during accumulation stage?

Post by investingforbank »

vineviz wrote: Fri Apr 09, 2021 2:35 pm If the goal is to "hold the global market cap of equities" then a fund like Vanguard Total World Stock ETF (VT) is the obvious, easiest, and most effective way to do it.

Any supposed "reasons" to complicate things by splitting up the allocation between multiple funds will be either un-impactful or, more likely, detrimental to your long-term goal.
What about the foreign tax credit and lower costs?
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