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  • need help with portfolio and asset location

    Hi Everyone

    I am new to this forum.

    I am trying to get my financial house in order and would love to get your feedback on my portfolio and the location of the assets
    so far i have been using the fidelity freedom funds 2045 fund (FFKGX) (ER 0.64) in my 401k and 457 at fidelity.
    I also have roth IRA account for myself and my wife, plus a taxable account at Vanguard. I use the Vanguard personal advisory service for the vanguard accounts (they charge 0.3%). Unfortunately they dont help much with the non-vanguard accounts.
    I want to take the money out of the Fidelity freedom funds and use the low cost index funds
    Age: 40
    Desired Asset allocation: 75% stocks / 25% bonds
    Desired International allocation: 33% of total stocks
    I would like the following allocation
    REIT Vanguard REIT index fund 10%
    Remaining 65% of stocks are divided as follows
    US stocks 43% of total portfolio
    33% Vanguard total stock market index fund
    10% iShares S&P SmallCap 600 Value Idx (ETF)
    22% international stocks will be invested in Vanguard Total international stock market index fund
    For 25% Bonds I would like to divide it between an index bond fund and TIPS.
    12.5% Vanguard total Bond market index fund (available in 401k) or some other bond fund (I am open to suggestions)
    12.5% in TIPS
    Now regarding the location of the different funds in different accounts, here is what I am thinking
    REIT index fund goes in the ROTH IRAs
    Extra REIT amount which did not fit into ROTH IRA goes into 401K ( I can use fidelity brokerage link to access fidelity REIT index fund)
    401 K and 457 will also hold the following funds
    – iShares S&P SmallCap 600 Value Idx (ETF)
    – Vanguard total Bond market index fund (available in 401k)
    – TIPS (suggestions welcome for a fidelity fund)
    Taxable Account
    -Vanguard Total Stock Market index fund
    -Vanguard Total International stock market index Fund
    I would really appreciate any feedback . I am open to suggestions if you think there is a better way to locate these funds or if there any suggestions to improve the portfolio.
    Thanks a lot

  • #2
    Couple questions:

    1. What is your financial goal? Specifically, what is the asset base size you need by the time you retire and what is this timeline? How much do you think you will need during your retirement?

    2. Based on (1) and your current asset size, how much return do you think you need to achieve your target asset base prior to returement?

    Answers to 1 and 2 should help you determine your allocation. I see you are diversifying between different asset classes. What is your objective for diversification?

    Comment


    • #3
      objective of diversification is to decrease risk and possibly increase return.

      i tilted toward value stocks for possibly higher return.

      i added REIT for increased diversification. Rest of the portfolio is total stock market, international stock market and bonds. The bonds portion is divided between total bond index and TIPS .

       

      i would appreciate any feedback regarding the portfolio and location of assets

      Comment


      • #4
        Diversification does not reduce risk. It only decreases portfolio volatility. The general notion is to equate risk and volatility which in my view is a misperception. I define risk as loss of capital and opportunity cost....the cost of missing an opportunity to earn a higher return. I also see diversification as a recommended tactic since it is not possible to know upfront which asset class is going to outperform. Therefore it is recommended to put some eggs in all the baskets. This also has its downsides. By diversifying, one not only reduces volatility but also gives up on the ability to maximize return. There have been asset classes that have underperformed the US stock market in this latvdecade and a few did not really do much. Even bonds underperformed the stock market in this last decade. Maximizing returns has less to do with diversification and more to do with investment goal and a suitable strategy that would emable to take action to minimize risk (loss of capital and opportunity to get a higher return).
        Also if you are planning to adopt a buy and hold strategy, then your investment is not yielding you a compunded return. If anyone tells you this is the case you are being misled. They are only giving you an apparent compound return and not true compound return. What you get from buy and hold is somewhere between a simple interest and an apparent compound rate.

        Now back to my first question that was posed in my first reply. What is the anticipated asset base at retirement and what returns will help you achieve that based on your current asset base and contributions?

        If you are unsure how to determine this, i would recommend downloading Ez calculator on iphone and then using the TVM calculator to determine rate of return.

        Comment


        • #5
          Thanks for your detailed reply

          I am not sure if i understand your comments regarding buy and hold strategy and compound return.

          Do you mind explaining?

          I will try to do the calculation regarding the required returns and anticipated asset base.

          what do you think regarding the portfolio and also the location of the assets in different accounts

          thanks alot

           

           

           

          Comment


          • #6
            Sorry havent replied to your question. Willget back to you regarding compound return and return for buy and hold. In the meantime, here is my thought on asset allocation.
            35% of your portfolio (bonds and reit) is most likely giving you less return than if you invested it s&p or small caps or international stocks. Both sectors are underperforming. Is there a reason you want to invest in these classes now?

            Comment


            • #7




              Diversification does not reduce risk. It only decreases portfolio volatility. The general notion is to equate risk and volatility which in my view is a misperception. I define risk as loss of capital and opportunity cost….the cost of missing an opportunity to earn a higher return. I also see diversification as a recommended tactic since it is not possible to know upfront which asset class is going to outperform. Therefore it is recommended to put some eggs in all the baskets. This also has its downsides. By diversifying, one not only reduces volatility but also gives up on the ability to maximize return. There have been asset classes that have underperformed the US stock market in this latvdecade and a few did not really do much. Even bonds underperformed the stock market in this last decade. Maximizing returns has less to do with diversification and more to do with investment goal and a suitable strategy that would emable to take action to minimize risk (loss of capital and opportunity to get a higher return).
              Also if you are planning to adopt a buy and hold strategy, then your investment is not yielding you a compunded return. If anyone tells you this is the case you are being misled. They are only giving you an apparent compound return and not true compound return. What you get from buy and hold is somewhere between a simple interest and an apparent compound rate.

              Now back to my first question that was posed in my first reply. What is the anticipated asset base at retirement and what returns will help you achieve that based on your current asset base and contributions?

              If you are unsure how to determine this, i would recommend downloading Ez calculator on iphone and then using the TVM calculator to determine rate of return.
              Click to expand...


              You are arguing mostly semantics. Volatility will keep you from achieving a stated cagr and thus missing a higher return. Thats the same as a loss of capital. It gets tiring to hear people say only a permanent loss of capital is 'risk', not volatility. Well, with enough volatility and due to opportunity cost which you mentioned, it translates into a permanent loss of capital since you dont get to go back in time and reallocate.

              Of course if we knew which assets were going up and which werent, wed all only be in one asset class. Diversification is an admittance of the obvious. Looking for a target rate of return based on what you need to achieve to retire is a dangerous and fool hardy way to plan and almost always leads to taking on more risk without the attendant reward promised.

              Going to assume based on your liberal reinterpretation of standard definitions that your compounding talk is also somewhat a vague semantic issue.

              Comment


              • #8
                i understand that the bonds are REITs are under performing when compared to stocks but that is no surprise

                bonds are expected to return less.

                this portfolio should be long term and not short term.

                we dont know about the future long term return of REIT vs stocks. I understand there is a strong correlation between stock market and REITs but it is not 100% so if the market tanks atleast i have some assets in bonds and REITs.

                 

                thanks

                 

                Comment


                • #9
                  i agree with your comments regarding diversification.

                  do you have any thoughts about my asset allocation and location of assets?

                  I would appreciate any input

                  thanks

                   

                  Comment


                  • #10




                    i agree with your comments regarding diversification.

                    do you have any thoughts about my asset allocation and location of assets?

                    I would appreciate any input

                    thanks

                     
                    Click to expand...


                    Sure, its so overly complicated that its hard to make it through the list. I very much doubt this over slicing will do anything other than make a large group of etfs for you to handle. REITs are part of the S/P now, no need for another sector anymore. Same with small caps, etc..etc...most of these factors have dubious histories and data supporting their past premium. It doesnt actually exist in that way.

                    First, pick you asset allocation. Is 75/25 right for you? Hard to say but that is too conservative for me and we're about the same age. This is personal and really difficult, but agree you are for sure accepting lower returns for this setup, which is okay.

                    I would choose something like VTI, total stock market for my domestic equities. Than whatever large ex-US portion total stock market one is, I think I currently have VEU (maybe wrong). Then I would choose a bond fund. Next, I would be done.

                    There is truly no reason to have a zillion of these things when they are all in "pre-diversified" in these larger total market ones. Your fees will be lower and everything simpler with a smaller portfolio.

                    Comment


                    • #11
                      Thanks for your reply

                      I have been trying to simplify things  and have come up with following plan

                      Desired Asset allocation: 80% stocks / 20% bonds
                      Desired International allocation: 33% of total stocks

                      I would like the following allocation

                      REIT Vanguard REIT index fund 7.5% (ER 0.12) (as total stock market has 3% REIT, this will get me around 10% REIT overall)

                      Remaining 72.5% of stocks are divided as follows

                      US stocks 48.5% of total portfolio will be invested in vanguard total stock market index fund (0.04) or Fidelity Total Stock market index FSTVX (ER 0.045)


                      24% international stocks will be invested in Vanguard Total international stock market index fund (0.11)


                      For 20% Bonds I will use Vanguard total Bond market institutional index fund (available in 401k/457, ER 0.04)

                      Now regarding the location of the different funds in different accounts, here is what I am thinking

                      REIT index fund goes in the ROTH IRAs

                      Extra REIT amount which did not fit into ROTH IRA goes into 401K ( I can use fidelity brokerage link to access fidelity REIT index fund FSRVX ER 0.09)

                      457 will hold the Vanguard total Bond market index institutional

                      401 K will hold the following funds
                      - Vanguard total Bond market index fund institutional VBTIX (ER 0.04)
                      - Amount left will be invested in Fidelity Total Stock market index fund FSTVX (ER 0.045)

                      HSA (small balance) will be invested in Vanguard REIT index institutional (ER 0.10 + 0.396 (extra fee charged by health equity) total ER 0.496)

                       

                      what do you think about this portfolio?

                      is it ok to invest all the bond allocation into the Vanguard total bond market fund?

                       

                      I appreciate your feedback

                      thanks

                      Comment


                      • #12




                        Thanks for your reply

                        I have been trying to simplify things  and have come up with following plan

                        Desired Asset allocation: 80% stocks / 20% bonds
                        Desired International allocation: 33% of total stocks

                        I would like the following allocation

                        REIT Vanguard REIT index fund 7.5% (ER 0.12) (as total stock market has 3% REIT, this will get me around 10% REIT overall)

                        Remaining 72.5% of stocks are divided as follows

                        US stocks 48.5% of total portfolio will be invested in vanguard total stock market index fund (0.04) or Fidelity Total Stock market index FSTVX (ER 0.045)

                        24% international stocks will be invested in Vanguard Total international stock market index fund (0.11)

                        For 20% Bonds I will use Vanguard total Bond market institutional index fund (available in 401k/457, ER 0.04)

                        Now regarding the location of the different funds in different accounts, here is what I am thinking

                        REIT index fund goes in the ROTH IRAs

                        Extra REIT amount which did not fit into ROTH IRA goes into 401K ( I can use fidelity brokerage link to access fidelity REIT index fund FSRVX ER 0.09)

                        457 will hold the Vanguard total Bond market index institutional

                        401 K will hold the following funds
                        – Vanguard total Bond market index fund institutional VBTIX (ER 0.04)
                        – Amount left will be invested in Fidelity Total Stock market index fund FSTVX (ER 0.045)

                        HSA (small balance) will be invested in Vanguard REIT index institutional (ER 0.10 + 0.396 (extra fee charged by health equity) total ER 0.496)

                         

                        what do you think about this portfolio?

                        is it ok to invest all the bond allocation into the Vanguard total bond market fund?

                         

                        I appreciate your feedback

                        thanks
                        Click to expand...


                        It seems fine. Why such a heavy REIT concentration now that they are in the SP? Its totally fine to tilt of course and we all do it. Nothing wrong with your choices and the costs are excellent.

                        Comment


                        • #13
                          I have seen recommendations to add REIT from multiple people including WCI, poF etc.

                           

                          is it ok to invest all the bond allocation into the Vanguard total bond market fund? Are there any other bond funds to consider?

                           

                          what are your thoughts about holding small value index in taxable? what fund would you recommend for taxable

                           

                          thanks

                          Comment


                          • #14
                            Zaphod:

                            Thanks for your comments.

                            What I have stated are not semantics. Very few probably realize how things actually work. I am not surprised about this either. What is common and consistent is not necessarily true, but we all tend to follow the herd until we realize it.

                            So here are some clarifications/responses (in blue) to your comments (in italics):

                            ou are arguing mostly semantics. Volatility will keep you from achieving a stated cagr and thus missing a higher return. Thats the same as a loss of capital. It gets tiring to hear people say only a permanent loss of capital is ‘risk’, not volatility. Well, with enough volatility and due to opportunity cost which you mentioned, it translates into a permanent loss of capital since you dont get to go back in time and reallocate.

                            You are right in the last two lines of your response above viz., "due to opportunity cost which you mentioned, it translates into a permanent loss of capital since you dont get to go back in time and reallocate." The rest of what I mentioned is not semantics. Volatility and risk are different. Volatility will result in capital loss and missed opportunity only in a short term scenario when one gets in and out at the wrong time when volatility strikes. If one is a buy and hold investor in a true sense for the long term, what difference does volatility make? It shouldn't mean any harm because the basic premise of buy and hold is that the markets will eventually recover and move up just like it did in 2007 and 2000. Volatility is a mathematically derived factor (standard deviation of annual returns over a period) that has a physical meaning and implication for the short term or when someone is nearing retirement. Otherwise it has no implication. Yes, it is used to look at risk based returns but it is just a fancy representation of facts. Logically speaking it should not matter for the ling term. Too many people, in my view, have misconstrued this concept. Volatility is derived using simple math, but I think few realize how it is calculated and what its actual physical significance is. What diversification does is combine assets that have different volatilities and average it out. Hence a diversified portfolio has lower volatility. It is plain simple. Again, if one is a buy and hold, none of this should matter if one has the ability to sit through gut wrenching bear markets and crashes. The only other reason why volatility would matter is what one does when volatility strikes. Rebalancing is one such act that could be done regardless of market conditions. There is a general notion that rebalancing can be done any time of the year once or twice a year. If this is done at time that the markets are volatile then one could end up with losses or gains. 

                            Of course if we knew which assets were going up and which werent, wed all only be in one asset class.

                            Now you are getting greedy

                            Diversification is an admittance of the obvious....the ignorance 

                            Looking for a target rate of return based on what you need to achieve to retire is a dangerous and fool hardy way to plan and almost always leads to taking on more risk without the attendant reward promised.

                            Have you ever gone on vacation without a plan or a destination, without figuring how you are going to get there? Not knowing your target rate of return is a kin to not knowing where exactly you need to be heading. It seems like you are a business owner. So I assume you would be making annual goals and re-checking to ensure you are on target with achieving your goals correct? So why should the approach be different with the portfolio management? In fact, knowing what you need to achieve and defining the metrics enables to define the risk and not rely on socially constructed and accepted definitions of risk measures such as volatility which means nothing in the grand scheme of things. By the way there is more than one way to address volatility if that is a concern.

                            Going to assume based on your liberal reinterpretation of standard definitions that your compounding talk is also somewhat a vague semantic issue.

                            Perhaps re-visiting simple and compound interest and how they work would be beneficial here to know whether it is semantics or not. Buy and hold is never a compound interest based approach. If anything it gives somewhere between a simple and compound interest rate only because of rebalancing, provided it is not done at the wrong time.

                            Comment

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