Asset Allocation

[JK]

Have read several of WCI posts about asset allocation, especially "150 portfolios better than yours" which was my favorite. Curious what everyone else utilizes for their allocation.

Me: PGY-2 derm, 28yo. Hoping to get an allocation that I'll be happy with in the long run, will require minimal rebalancing (1-2yr max), take advantage of Fama/French small/value benefits. Currently all money is in tax advantage accounts. Have a decent amount of the money in Fidelity's Spartan funds but will be transferring the money to Vanguard shortly.

Considering the following (all index funds)

-Stocks: 80% (~2/3 domestic, 1/3 international)

35% Total Market Index Fund (VTSMX, VTSAX) --> or 500 index fund if retirement plan doesn't have a total market option

10% Small cap value (VISVX, VSIAX)

10% REIT (VGSIX, VGSLX)

20% Total International (VGTSX, VTIAX)

5% Emerging Markets (VEIEX, VEMAX)

-Bonds: 20%

20% Total Market Index Fund (VBMFX)

 

Questions:

-Not aggressive enough at 80/20 or just right? Should it be closer to 85/15, 90/10 or is this just marginal differences at this point? Bernstein & Ferri seem to advocate not being more aggressive than 80/20 but with a longer time horizon, just wasn't sure.

-Too heavy on the REIT? Remove altogether?

-Read enough about Fama/french that I'd like to take advantage of small/value asset classes. Not sure the best way to do it, so lumping them together into "small-cap value" seemed like a nice compromise than dicing it up further into a "small-cap", "large cap value", and "small-cap value" funds. Seemed like a little too much work at this point and not sure what the extra yield would be. That said, is small-cap value allocation too small at only 10% or should you up to 20%?

-Does the bond portion make sense in total market bond or would you recommend a different class?

 

Finally, curious what everyone else does with their asset allocation, especially in the early years (residency, new attending). Thanks.

 

 

[Gas_Doc]

I think 80/20 is fine. Being a reader of WCI, you by now should understand your own risk tolerance. Bernstein has said the gold rule of stock to bond ratio is to match the amount of bonds to your age (ie. 60/40 stock/bond for a 40 year-old). But I know I'm quite risk tolerant, and at this point always see falling stock prices simply as stocks "going on sale." I'm 31 and finishing fellowship this year, so for comparison here is my current asset allocation:

 

US Total Market 25%

Large Value 5%

Extended Market 7.5%

Small Cap Value 7.5%

US Bond 15%

Investment-Grade Bond 5%

International 22.5%

Emerging markets 5%

REIT 7.5%

 

Obviously I have a bit of a value and small cap tilt. That's largely because I, like you, am 30+ years from retiring and am willing to take on the added risk for an expected increased return. In the end, I think I'm going to go with an "age minus 10" approach for my stock to bond ratio (ie, when I turn 40, I'll increase my bond portfolio to 30%). Also of note, as my portfolio grows in the future, I've considered dabbling in asset-backed crowd funding real estate investing from places like Patch of Land to further diversify. If I decide to go that route, I'll like make cuts to my REIT and Investment-grade bond allocations.

[Automatic]

Hey JK,

There's nothing 'wrong' with your portfolio. However, you mention wanting to stick with it for the long run and have easy rebalancing. I'll tell you what I do and why I do it. I am 50% VTSAX (total US stock market) and 50% VTIAX (total Intl stock market). So, I'm very diversified across size, style, currency, geography, etc. Also, as far as rebalancing and additional contributions - it doesn't get any easier. I'm 100% stock because I don't need this money for decades (I'm 32) and I know my level of intestinal fortitude to deal with a 50+% decline. Adding a total bond market fund or intermediate treasury fund at an allocation percentage that mathematically makes you at ease based on potential portfolio loses (based on past worst case scenarios) is recommended here. I keep the same allocation across all pre- and post-tax accounts to keep it simple. I'll start making 100% of new contributions toward a bond fund in my taxable account as I near financial independence (couple years out). All this said, simplicity and automation are your keys here. Keep it so simple that you won't be tempted to change your asset allocation tilts, etc. over the years - that usually equates to unknowingly selling low and buying high.

[jfoxcpacfp]

SC equities have returned, annual and on average, 12% (dividends included) since 1926 and 10% for LC's. Have you considered that bonds may not be in your best interest at your ages, considering that you are investing for the long term? If you are able to keep your emotions out of the investment process and you are disciplined, consider investing long-term money (any you don't plan to access for over 5 years) in an equity mutual fund/ETF portfolio divided equally among LC Value, LC Growth, SC Value, SC Growth, REITs, and International. Rebalance annually so that you are selling high and buying low. Over the long term, you will capture global growth with little complication.

[M]

Questions:

-Not aggressive enough at 80/20 or just right? Should it be closer to 85/15, 90/10 or is this just marginal differences at this point? Bernstein & Ferri seem to advocate not being more aggressive than 80/20 but with a longer time horizon, just wasn’t sure.

-Too heavy on the REIT? Remove altogether?

-Read enough about Fama/french that I’d like to take advantage of small/value asset classes. Not sure the best way to do it, so lumping them together into “small-cap value” seemed like a nice compromise than dicing it up further into a “small-cap”, “large cap value”, and “small-cap value” funds. Seemed like a little too much work at this point and not sure what the extra yield would be. That said, is small-cap value allocation too small at only 10% or should you up to 20%?

-Does the bond portion make sense in total market bond or would you recommend a different class?

 

Finally, curious what everyone else does with their asset allocation, especially in the early years (residency, new attending). Thanks.

 

 

Click to expand...

JK, coming from the perspective of someone 10 years into practice, I think you're (overall) on the right track.  To answer your questions and offer a couple of tweaks:

- An 80/20 allocation is reasonable, but you could consider being more aggressive based on your goals.  My goal (full disclosure) is an early retirement.  As I am in my early 40's now, have longevity in my family tree, and plan to retire within the next 5-8 years, my portfolio needs to last a good 40-45 years.  Therefore, the more I weight towards bonds, the less likely it is my portfolio will last (stocks have greater growth potential, as you know, while the returns on bonds could be eaten up by inflation, leading to portfolio failure).  So, if you think you can stomach greater volatility in your portfolio, you could consider a 90/10 split at this point (or higher), recognizing that you will go through several bear markets during your working life, which will give you the chance to buy more stock at a bargain.  Hopefully, as a PGY-2 resident (in derm, a great lifestyle specialty), you are not yet contemplating retirement, so your time horizon should be pretty long.

- While I do not currently have much in REITs, I think your proposed weighting is reasonable, as long as it stays in a tax advantaged account, as REITs are not tax-efficient.  For greater diversification, I think REITs are fine, even though JL Collins (www.jlcollinsnh.com) makes a pretty good argument for why he has "stepped away" from them (see Stock Series on his blog).

- Before you commit too much time, energy, and money to constructing a small/value tilted portfolio, make sure to read more of the arguments against it.  In this arena, I admit that I am not enough of an expert to guide you (WCI knows this space very well, of course, and I believe he tilts).  With my limited understanding, I find myself swayed by both sides of the argument, leading me to not try too hard to tilt my portfolio.  That said, when the asset allocation tool on Personal Capital tells me I am underweighted in value, I do try to rebalance by adding more to my Vanguard Value Index Fund (not really a tilt, of course).

- I think your bond fund choice is reasonable, as long as it is in a tax advantaged account.  While WCI has pointed out that bonds should often go in taxable (rightly), if you have the space in tax advantaged, you can use it.  Since I save very aggressively, my tax advantaged space is maxed pretty quickly, so I put a lot into taxable accounts every month.  For the portion of my investments that go into bonds, I use Vanguard's Intermediate-Term Tax-Exempt Bond Fund.

- I think your proposed asset allocation is pretty good.  But consider these points:

- If you decide to not tilt, just use the Total Stock Market Fund for your US allocation.

- Your proposal of using Total International makes a separate allocation to Emerging Markets a duplication of effort, as VGTSX includes emerging markets as well.  If you want to slice and dice this category, you can use Vanguard Developed Markets (VDVIX/VTMGX) and Vanguard Emerging Markets Index (VEIEX/VEMAX).  I do the latter, but don't try to replicate my portfolio.  It is the result of lots of ugly trial and error over many years, and could be much cleaner.  But it gets the job done.

Hope this helps.

[M]

 

Questions:

-Not aggressive enough at 80/20 or just right? Should it be closer to 85/15, 90/10 or is this just marginal differences at this point? Bernstein & Ferri seem to advocate not being more aggressive than 80/20 but with a longer time horizon, just wasn’t sure.

-Too heavy on the REIT? Remove altogether?

-Read enough about Fama/french that I’d like to take advantage of small/value asset classes. Not sure the best way to do it, so lumping them together into “small-cap value” seemed like a nice compromise than dicing it up further into a “small-cap”, “large cap value”, and “small-cap value” funds. Seemed like a little too much work at this point and not sure what the extra yield would be. That said, is small-cap value allocation too small at only 10% or should you up to 20%?

-Does the bond portion make sense in total market bond or would you recommend a different class?

Finally, curious what everyone else does with their asset allocation, especially in the early years (residency, new attending). Thanks.

JK, coming from the perspective of someone 10 years into practice, I think you're (overall) on the right track.  To answer your questions and offer a couple of tweaks:

- An 80/20 allocation is reasonable, but you could consider being more aggressive based on your goals.  My goal (full disclosure) is an early retirement.  As I am in my early 40's now, have longevity in my family tree, and plan to retire within the next 5-8 years, my portfolio needs to last a good 40-45 years.  Therefore, the more I weight towards bonds, the less likely it is my portfolio will last (stocks have greater growth potential, as you know, while the returns on bonds could be eaten up by inflation, leading to portfolio failure).  So, if you think you can stomach greater volatility in your portfolio, you could consider a 90/10 split at this point (or higher), recognizing that you will go through several bear markets during your working life, which will give you the chance to buy more stock at a bargain.  Hopefully, as a PGY-2 resident (in derm, a great lifestyle specialty), you are not yet contemplating retirement, so your time horizon should be pretty long.

- While I do not currently have much in REITs, I think your proposed weighting is reasonable, as long as it stays in a tax advantaged account, as REITs are not tax-efficient.  For greater diversification, I think REITs are fine, even though JL Collins (www.jlcollinsnh.com) makes a pretty good argument for why he has "stepped away" from them (see Stock Series on his blog).

- Before you commit too much time, energy, and money to constructing a small/value tilted portfolio, make sure to read more of the arguments against it.  In this arena, I admit that I am not enough of an expert to guide you (WCI knows this space very well, of course, and I believe he tilts).  With my limited understanding, I find myself swayed by both sides of the argument, leading me to not try too hard to tilt my portfolio.  That said, when the asset allocation tool on Personal Capital tells me I am underweighted in value, I do try to rebalance by adding more to my Vanguard Value Index Fund (not really a tilt, of course).

- I think your bond fund choice is reasonable, as long as it is in a tax advantaged account.  While WCI has pointed out that bonds should often go in taxable (rightly), if you have the space in tax advantaged, you can use it.  Since I save very aggressively, my tax advantaged space is maxed pretty quickly, so I put a lot into taxable accounts every month.  For the portion of my investments that go into bonds, I use Vanguard's Intermediate-Term Tax-Exempt Bond Fund.

- I think your proposed asset allocation is pretty good.  But consider these points:

- If you decide to not tilt, just use the Total Stock Market Fund for your US allocation.

- Your proposal of using Total International makes a separate allocation to Emerging Markets a duplication of effort, as VGTSX includes emerging markets as well.  If you want to slice and dice this category, you can use Vanguard Developed Markets (VDVIX/VTMGX) and Vanguard Emerging Markets Index (VEIEX/VEMAX).  I do the latter, but don't try to replicate my portfolio.  It is the result of lots of ugly trial and error over many years, and could be much cleaner.  But it gets the job done.

Hope this helps.

[M]

 

JK, coming from the perspective of someone 10 years into practice, I think you're (overall) on the right track.  To answer your questions and offer a couple of tweaks:

- An 80/20 allocation is reasonable, but you could consider being more aggressive based on your goals.  My goal (full disclosure) is an early retirement.  As I am in my early 40's now, have longevity in my family tree, and plan to retire within the next 5-8 years, my portfolio needs to last a good 40-45 years.  Therefore, the more I weight towards bonds, the less likely it is my portfolio will last (stocks have greater growth potential, as you know, while the returns on bonds could be eaten up by inflation, leading to portfolio failure).  So, if you think you can stomach greater volatility in your portfolio, you could consider a 90/10 split at this point (or higher), recognizing that you will go through several bear markets during your working life, which will give you the chance to buy more stock at a bargain.  Hopefully, as a PGY-2 resident (in derm, a great lifestyle specialty), you are not yet contemplating retirement, so your time horizon should be pretty long.

- While I do not currently have much in REITs, I think your proposed weighting is reasonable, as long as it stays in a tax advantaged account, as REITs are not tax-efficient.  For greater diversification, I think REITs are fine, even though JL Collins (www.jlcollinsnh.com) makes a pretty good argument for why he has "stepped away" from them (see Stock Series on his blog).

- Before you commit too much time, energy, and money to constructing a small/value tilted portfolio, make sure to read more of the arguments against it.  In this arena, I admit that I am not enough of an expert to guide you (WCI knows this space very well, of course, and I believe he tilts).  With my limited understanding, I find myself swayed by both sides of the argument, leading me to not try too hard to tilt my portfolio.  That said, when the asset allocation tool on Personal Capital tells me I am underweighted in value, I do try to rebalance by adding more to my Vanguard Value Index Fund (not really a tilt, of course).

- I think your bond fund choice is reasonable, as long as it is in a tax advantaged account.  While WCI has pointed out that bonds should often go in taxable (rightly), if you have the space in tax advantaged, you can use it.  Since I save very aggressively, my tax advantaged space is maxed pretty quickly, so I put a lot into taxable accounts every month.  For the portion of my investments that go into bonds, I use Vanguard's Intermediate-Term Tax-Exempt Bond Fund.

- I think your proposed asset allocation is pretty good.  But consider these points:

- If you decide to not tilt, just use the Total Stock Market Fund for your US allocation.

- Your proposal of using Total International makes a separate allocation to Emerging Markets a duplication of effort, as VGTSX includes emerging markets as well.  If you want to slice and dice this category, you can use Vanguard Developed Markets (VDVIX/VTMGX) and Vanguard Emerging Markets Index (VEIEX/VEMAX).  I do the latter, but don't try to replicate my portfolio.  It is the result of lots of ugly trial and error over many years, and could be much cleaner.  But it gets the job done.

Hope this helps.

[M]

JK, coming from the perspective of someone 10 years into practice, I think you're (overall) on the right track.  To answer your questions and offer a couple of tweaks:

• An 80/20 allocation is reasonable, but you could consider being more aggressive based on your goals.  My goal (full disclosure) is an early retirement.  As I am in my early 40's now, have longevity in my family tree, and plan to retire within the next 5-8 years, my portfolio needs to last a good 40-45 years.  Therefore, the more I weight towards bonds, the less likely it is my portfolio will last (stocks have greater growth potential, as you know, while the returns on bonds could be eaten up by inflation, leading to portfolio failure).  So, if you think you can stomach greater volatility in your portfolio, you could consider a 90/10 split at this point (or higher), recognizing that you will go through several bear markets during your working life, which will give you the chance to buy more stock at a bargain.  Hopefully, as a PGY-2 resident (in derm, a great lifestyle specialty), you are not yet contemplating retirement, so your time horizon should be pretty long.

• While I do not currently have much in REITs, I think your proposed weighting is reasonable, as long as it stays in a tax advantaged account, as REITs are not tax-efficient.  For greater diversification, I think REITs are fine, even though JL Collins (www.jlcollinsnh.com) makes a pretty good argument for why he has "stepped away" from them (see Stock Series on his blog).

• Before you commit too much time, energy, and money to constructing a small/value tilted portfolio, make sure to read more of the arguments against it.  In this arena, I admit that I am not enough of an expert to guide you (WCI knows this space very well, of course, and I believe he tilts).  With my limited understanding, I find myself swayed by both sides of the argument, leading me to not try too hard to tilt my portfolio.  That said, when the asset allocation tool on Personal Capital tells me I am underweighted in value, I do try to rebalance by adding more to my Vanguard Value Index Fund (not really a tilt, of course).

• I think your bond fund choice is reasonable, as long as it is in a tax advantaged account.  While WCI has pointed out that bonds should often go in taxable (rightly), if you have the space in tax advantaged, you can use it.  Since I save very aggressively, my tax advantaged space is maxed pretty quickly, so I put a lot into taxable accounts every month.  For the portion of my investments that go into bonds, I use Vanguard's Intermediate-Term Tax-Exempt Bond Fund.

• I think your proposed asset allocation is pretty good.  But consider these points:

- If you decide to not tilt, just use the Total Stock Market Fund for your US allocation.

- Your proposal of using Total International makes a separate allocation to Emerging Markets a duplication of effort, as VGTSX includes emerging markets as well.  If you want to slice and dice this category, you can use Vanguard Developed Markets (VDVIX/VTMGX) and Vanguard Emerging Markets Index (VEIEX/VEMAX).  I do the latter, but don't try to replicate my portfolio.  It is the result of lots of ugly trial and error over many years, and could be much cleaner.  But it gets the job done.

Hope this helps.

[Sajimone]

Agree with gas doc.  Definitely depends on your risk tolerance?  I'm 37 and 95% equities and 5% bonds.  I plan to increase that ratio as time goes by and these are mostly in tax deferred accounts that I don't plan to touch for 30+ years.  People always say you really don't know your risk tolerance until you go through a crash... Most young investors on this blog including myself are probably praying for that to happen...

Maximize all tax advantages accounts roth and tax deferred and plus some with taxable accounts.  My savings rate is 20-30%.  Regarding allocation... Yours looks reasonable.

Me...

Index -25%

large cap -25%

mid cap -15%

small cap - 10%

reit -5%

international -15%

vanguard bond in taxable -5%

i don't think there's a wrong answer except perhaps being all or most bonds at this age.  More important to continue to save, keep cost low, don't bail out during market downturns perhaps buy more during those firesales... Create and Follow your investment policy statement.

[Sajimone]

Agree with gas doc. Definitely depends on your risk tolerance? I'm 37 and 95% equities and 5% bonds. I plan to increase that ratio as time goes by and these are mostly in tax deferred accounts that I don't plan to touch for 30+ years. People always say you really don't know your risk tolerance until you go through a crash... Most young investors on this blog including myself are probably praying for that to happen...

Maximize all tax advantages accounts roth and tax deferred and plus some with taxable accounts. My savings rate is 20-30%. Regarding allocation... Yours looks reasonable.

Me...

Index -25%

large cap -25%

mid cap -15%

small cap - 10%

reit -5%

international -15%

vanguard bond in taxable -5%

i don't think there's a wrong answer except perhaps being all or most bonds at this age. More important to continue to save, keep cost low, don't bail out during market downturns perhaps buy more during those firesales... Create and Follow your investment policy statement.

[Sajimone]

Definitely depends on your risk tolerance? I'm 37 and 95% equities and 5% bonds. I plan to increase that ratio as time goes by and these are mostly in tax deferred accounts that I don't plan to touch for 30+ years. People always say you really don't know your risk tolerance until you go through a crash... Most young investors on this blog including myself are probably praying for that to happen... Maximize all tax advantages accounts roth and tax deferred and plus some with taxable accounts. My savings rate is 20-30%. Regarding allocation... Yours looks reasonable.

Me...

Index -25%

large cap -25%

mid cap -15%

small cap - 10%

reit -5%

international -15%

vanguard bond in taxable -5%

i don't think there's a wrong answer except perhaps being all or most bonds at this age. More important to continue to save, keep cost low, don't bail out during market downturns perhaps buy more during those firesales... Create and Follow your investment policy statement.

[Sajimone]

Definitely depends on your risk tolerance? I'm 37 and 95% equities and 5% bonds. I plan to increase that ratio as time goes by and these are mostly in tax deferred accounts that I don't plan to touch for 30+ years. People always say you really don't know your risk tolerance until you go through a crash... Most young investors on this blog including myself are probably praying for that crash to happen...

Maximize all tax advantages accounts roth and tax deferred and plus some with taxable accounts. My savings rate is 20-30%. Regarding allocation... Yours looks reasonable.  i don't think there's a wrong answer except perhaps being all or most bonds at this age. More important to continue to save, keep cost low, don't bail out during market downturns perhaps buy more during those firesales... Create and Follow your investment policy statement.

[Sajimone]

Definitely depends on your risk tolerance? I'm 37 and 95% equities and 5% bonds. I plan to change that ratio as time goes by and these are mostly in tax deferred accounts that I don't plan to touch for 30+ years. People always say you really don't know your risk tolerance until you go through a crash... Most young investors on this blog including myself are probably praying for that to happen...

Maximize all tax advantages accounts roth and tax deferred and plus some with taxable accounts. My savings rate is 20-30%. Regarding allocation... Yours looks reasonable.

Me...

Index -25%

large cap -25%

mid cap -15%

small cap - 10%

reit -5%

international -15%

vanguard bond in taxable -5%

i don't think there's a wrong answer except perhaps being all or most bonds at this age. More important to continue to save, keep cost low, don't bail out during market downturns perhaps buy more during those firesales... Create and Follow your investment policy statement.

[Sajimone]

Definitely depends on your risk tolerance? I'm 37 and 95% equities and 5% bonds. I plan to increase that ratio as time goes by and these are mostly in tax deferred accounts that I don't plan to touch for 30+ years. People always say you really don't know your risk tolerance until you go through a crash... Most young investors on this blog including myself are probably praying for that to happen...

Maximize all tax advantages accounts roth and tax deferred and plus some with taxable accounts. My savings rate is 20-30%. Regarding allocation... Yours looks reasonable.

Me...

Index -25%

large cap -25%

mid cap -15%

small cap - 10%

reit -5%

international -15%

vanguard bond in taxable -5%

i don't think there's a wrong answer except perhaps being all or most bonds at this age. More important to continue to save, keep cost low, don't bail out during market downturns perhaps buy more during those firesales... Create and Follow your investment policy statement.

[Sajimone]

Definitely depends on your risk tolerance? I'm 37 and 95% equities and 5% bonds. I plan to change that ratio as time goes by and these are mostly in tax deferred accounts that I don't plan to touch if I'm alive for 30+ years. People always say you really don't know your risk tolerance until you go through a crash... Most young investors on this blog including myself are probably praying for that to happen.. Maximize all tax advantages accounts roth and tax deferred and plus some with taxable accounts. My savings rate is 20-30%. Regarding allocation... Yours looks reasonable.

Me..

Index -25%

large cap -25%

mid cap -15%

small cap - 10%

reit -5%

international -15%

vanguard bond in taxable -5%

i don't think there's a wrong answer except perhaps being all or most bonds at this age. More important to continue to save, keep cost low, don't bail out during market downturns perhaps buy more during those firesales... Create and Follow your investment policy statement.