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Started By
Message
Thoughts on this Asset Allocation Strategy?
Posted on 6/16/15 at 11:39 am
Posted on 6/16/15 at 11:39 am
I'm 30 years old, have a stable income and a high risk tolerance, and I'm looking at a 30-40 year window (before starting withdrawals). 20+ percent of my income will be directed to this portfolio, and I'm committed to making monthly contributions and staying the course with my asset allocation strategy. This is the asset allocation strategy I'm considering, after doing some reading the past couple months.
Bond allocation will be my age minus 20. The numbers below represent my starting allocation. With each passing year, I'll increase bond allocation by 1 percent and decrease stock allocation by 1 percent; real estate will remain 10%.
Stocks - 80%
60% VTSAX (Vanguard Total Stock Market) [48% of total]
30% VTIAX (Vanguard Total International Stock) [24%]
5% VSIAX (Vanguard Small-Cap Value) [4%]
5% VEMAX (Vanguard Emerging Markets Stock) [4%]
Bonds - 10%
70% VBTLX (Vanguard Total Bond Market) [7%]
30% VTABX (Vanguard Total International Bond) [3%]
Real Estate - 10%
100% VGSLX (Vanguard REIT) [10%]
This is probably a larger number of funds than many people would recommend, but I'm OK with that. I also realize there's some overlap with the small-cap value and emerging markets funds with the total stock market and total international stock funds, respectively. That small tilt is just a personal preference, but I'm open to changing it (or getting rid of it).
I plan to make equal monthly contributions to the portfolio (to achieve dollar-cost averaging), and I'll rebalance the portfolio annually. Some money will also be kept in a money market (or similar) fund, but I haven't included that here. Tax-inefficient assets (e.g., bonds, REIT) will be kept - as much as possible - in tax-advantaged retirement accounts, while more tax-efficient funds (stocks) will be placed in a taxable account.
I'm still a novice when it comes to investing, but I think this plan is the sum of all the advice I've read so far. What are your thoughts? All advice is much appreciated.
Bond allocation will be my age minus 20. The numbers below represent my starting allocation. With each passing year, I'll increase bond allocation by 1 percent and decrease stock allocation by 1 percent; real estate will remain 10%.
Stocks - 80%
60% VTSAX (Vanguard Total Stock Market) [48% of total]
30% VTIAX (Vanguard Total International Stock) [24%]
5% VSIAX (Vanguard Small-Cap Value) [4%]
5% VEMAX (Vanguard Emerging Markets Stock) [4%]
Bonds - 10%
70% VBTLX (Vanguard Total Bond Market) [7%]
30% VTABX (Vanguard Total International Bond) [3%]
Real Estate - 10%
100% VGSLX (Vanguard REIT) [10%]
This is probably a larger number of funds than many people would recommend, but I'm OK with that. I also realize there's some overlap with the small-cap value and emerging markets funds with the total stock market and total international stock funds, respectively. That small tilt is just a personal preference, but I'm open to changing it (or getting rid of it).
I plan to make equal monthly contributions to the portfolio (to achieve dollar-cost averaging), and I'll rebalance the portfolio annually. Some money will also be kept in a money market (or similar) fund, but I haven't included that here. Tax-inefficient assets (e.g., bonds, REIT) will be kept - as much as possible - in tax-advantaged retirement accounts, while more tax-efficient funds (stocks) will be placed in a taxable account.
I'm still a novice when it comes to investing, but I think this plan is the sum of all the advice I've read so far. What are your thoughts? All advice is much appreciated.
8
Posted on 6/16/15 at 11:54 am to Patrick_Bateman
I'd lose the small cap and emerging but that's me. You're already heavy in stocks which is good but it'll just be simple.
Posted on 6/16/15 at 11:55 am to Patrick_Bateman
Sounds like you've spent the last week with the Bogleheads haha
Posted on 6/16/15 at 12:29 pm to Patrick_Bateman
This is a pretty sound strategy and I'm following something similar.
I have my stock breakdown allowing me greater ability to rebalance between large cap (VLCAX) and mid/small mix (VEXAX). I'm just looking to catch swings.
If you follow your plan, you're very likely to accumulate a great deal of wealth.
I have my stock breakdown allowing me greater ability to rebalance between large cap (VLCAX) and mid/small mix (VEXAX). I'm just looking to catch swings.
If you follow your plan, you're very likely to accumulate a great deal of wealth.
Posted on 6/16/15 at 12:59 pm to Sigma
quote:Can't lie
Sounds like you've spent the last week with the Bogleheads haha
. I've also been reading a few books. I figure this first stage is the most important, so I'm putting in the time to get it right. Once the asset allocation is set, it'll be on cruise control from here until retirement.
Posted on 6/16/15 at 2:03 pm to Patrick_Bateman
Is this all going into tax advantaged or some taxable accounts? Since Vanguard has added small cap to Emerging markets and most of the international oriented equity index funds I don't know if I would bother added small amounts into small cap, etc until you have a large amount of money invested. Used to have to add international small or emerging small to gain those segments or tilt, now it would be a lot easier to go total fund/ETF.
Posted on 6/16/15 at 3:02 pm to tirebiter
quote:As much as possible in tax-advantaged accounts. But with the amount I plan to invest, I will need a taxable account as well. Obviously, I'll try to utilize those accounts wisely (with tax-inefficient assets like bonds and real estate in the tax-advantaged accounts).
Is this all going into tax advantaged or some taxable accounts?
quote:That's good advice. I will only add the small-cap value and emerging markets funds once I have a substantial amount invested. Regarding the small-cap value fund, there seems to be a lot of evidence supporting a "small-cap value premium," which derives from the increased risk of both the small-cap and value aspects. By tilting a small portion of my portfolio in that direction, I would hope to take advantage of that premium over the long haul.
Since Vanguard has added small cap to Emerging markets and most of the international oriented equity index funds I don't know if I would bother added small amounts into small cap, etc until you have a large amount of money invested.
Re: the emerging markets fund, that's just a gut feeling of mine. 18.8% of the Vanguard Total International Stock fund is already allocated to emerging markets. By adding a little more, I'd just be tilting the portfolio ever-so-slightly toward markets like China's and India's, which my gut tells me will outpace the others, especially over the next, say, 50 years. If I'm wrong, then only that small portion of my portfolio would suffer the hit, which I could live with. Basically, higher risk, higher reward - and I am comfortable accepting the risk.
Posted on 6/16/15 at 5:50 pm to Patrick_Bateman
With equity REITs added, that is going to be a very volatile portfolio. I don't know, especially at current market levels. Bear markets can make people wish they made other choices. 60/40 might be a better starting point until you are comfortable. International is likely better in taxable if you are going to truly invest long term for foreign tax credits + capital loss harvesting of international and domestic equity.
Posted on 6/16/15 at 6:08 pm to Patrick_Bateman
I can't comment on your choices, as only you know what works for you. But I am impressed with the logic that you've employed in putting that together. Nice work.
Posted on 6/16/15 at 8:58 pm to Patrick_Bateman
I like the sentiment, and appreciate that some folks love a lot of slicing and dicing and keep everything balanced, tax-loss harvesting, etc.
But I'm in Target Retirement and LifeStrategy funds that fit my age and risk tolerance. That's enough involvement for me.
But I'm in Target Retirement and LifeStrategy funds that fit my age and risk tolerance. That's enough involvement for me.
Posted on 6/16/15 at 10:13 pm to Patrick_Bateman
quote:
Real Estate - 10%
100% VGSLX (Vanguard REIT) [10%]
great choice.
no healthcare? utilities?
Posted on 6/17/15 at 12:03 pm to Fat Bastard
quote:It's tempting. I see, in particular, the huge recent gains of healthcare funds. But I'm skeptical. Buying healthcare funds now would be buying high, which is probably not a good idea. Plus, the assets in a healthcare fund are already covered by the Total Stock Market fund, so I wouldn't gain any diversification by buying it. Same for utilities.
no healthcare? utilities?
I wish Vanguard had a good commodities index.
Posted on 6/17/15 at 1:21 pm to Patrick_Bateman
I'm a Boglehead too. My allocation:
Large cap - 20%
Mid cap - 12%
Small cap - 12%
Dev Intl - 12%
Emerging Intl - 12%
REITs - 12%
Intermediate bonds - 5%
Long bonds - 10%
Intl Bonds - 5%
I like to slice and dice, but 80% stock and 20% bond. I treat reits as a stock. In my opinion, you should always have a minimum of 20% bonds. This is to smooth the volatility and can be used to re-balance. Though I mainly re-balance by directing new funds.
I'm not a fan of changing the allocation every year between stocks and bonds. When I turn 45, I'll probably change to 70/30 as I'll be 10 years away of my goal to retire at 55. Also, when I hit certain milestones (i.e. 2 comma club) that would affect how quickly I'll change my allocation.
If you itemize your tax return, then I'd put your international funds in taxable accounts. You get a tax credit (not deduction) for the foreign taxes taken out of the dividends.
Large cap - 20%
Mid cap - 12%
Small cap - 12%
Dev Intl - 12%
Emerging Intl - 12%
REITs - 12%
Intermediate bonds - 5%
Long bonds - 10%
Intl Bonds - 5%
I like to slice and dice, but 80% stock and 20% bond. I treat reits as a stock. In my opinion, you should always have a minimum of 20% bonds. This is to smooth the volatility and can be used to re-balance. Though I mainly re-balance by directing new funds.
I'm not a fan of changing the allocation every year between stocks and bonds. When I turn 45, I'll probably change to 70/30 as I'll be 10 years away of my goal to retire at 55. Also, when I hit certain milestones (i.e. 2 comma club) that would affect how quickly I'll change my allocation.
If you itemize your tax return, then I'd put your international funds in taxable accounts. You get a tax credit (not deduction) for the foreign taxes taken out of the dividends.
Posted on 6/17/15 at 1:52 pm to gpburdell
quote:Just in the past couple days, I've started to agree with that. I may change bond allocation to age minus 10 (instead of age minus 20).
In my opinion, you should always have a minimum of 20% bonds. This is to smooth the volatility and can be used to re-balance.
quote:That's my plan as well. I don't like the idea of selling (and any taxes that come with it). I'm considering putting some portion of my total investments (maybe 5% or 10%?) in something like a money market fund, and using that fund as much as possible to rebalance at the first of each year. If the fund can't cover the rebalancing, then I'll resort to selling. And if the fund happens to start accumulating a lot of money, I can use it to invest heavily after a market downturn.
Though I mainly re-balance by directing new funds.
quote:I'm sure we'll be fine either way. But it seems simple enough to achieve - in my case, just add 1% to bond allocation during each year's rebalancing.
I'm not a fan of changing the allocation every year between stocks and bonds.
Posted on 6/17/15 at 9:30 pm to Patrick_Bateman
quote:
It's tempting. I see, in particular, the huge recent gains of healthcare funds.
I got in way back and have done quite well. I also recently acquired the T. Rowe Price healthcare fund which was the top rated at the time. I have that and the vanguard one in my ROTH IRA. You can always get in and just DCA if you are worried about the NAV being too high now.
Posted on 6/18/15 at 2:10 pm to Patrick_Bateman
quote:
I'm considering putting some portion of my total investments (maybe 5% or 10%?) in something like a money market fund, and using that fund as much as possible to rebalance at the first of each year. If the fund can't cover the rebalancing, then I'll resort to selling. And if the fund happens to start accumulating a lot of money, I can use it to invest heavily after a market downturn.
I assume you are contributing new money every month (401k, roth ira, etc). Just use that money to buy new shares of whatever class you're under allocated each month. I'd rather have the money invested immediately than sitting on the sidelines. Then you shouldn't have to sell anything at least til your portfolio gets sizable.
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