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Asset allocation re: small-cap value vs. bonds

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  • Asset allocation re: small-cap value vs. bonds

    Hello all, wanted to get some opinions from you. I am an investing novice, so please not too harsh with the criticism!

    My current AA is: 50% US total stock or S&P 500, 25% INTL stock, 25% US bond. I'm happy with that equity/bond allocation, fits my risk tolerance. However, it seems that many people recommend slightly tilting my US stock holdings towards some small-cap value in order to increase returns. That sounds good, but then I was thinking if I really wanted to increase returns (and increase risk) then, why not just decrease my bond allocations from 75/25 to 80/20 or 85/15?

    Why slice-and-dice on the equity side when I could just as easily decrease bond holdings?

  • #2




    Hello all, wanted to get some opinions from you. I am an investing novice, so please not too harsh with the criticism!

    My current AA is: 50% US total stock or S&P 500, 25% INTL stock, 25% US bond. I’m happy with that equity/bond allocation, fits my risk tolerance. However, it seems that many people recommend slightly tilting my US stock holdings towards some small-cap value in order to increase returns. That sounds good, but then I was thinking if I really wanted to increase returns (and increase risk) then, why not just decrease my bond allocations from 75/25 to 80/20 or 85/15?

    Why slice-and-dice on the equity side when I could just as easily decrease bond holdings?
    Click to expand...


    By doing this you will take an additional risk by increasing equity allocation ,but not going to get SCV tilt .You will get proportional increase into large caps,mid caps ,REIT and still have the same % of small caps. Remember "stocks are to eat,bonds-to sleep"

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    • #3
      Larry Swedroe explains it best: http://www.etf.com/sections/index-investor-corner/22649.html?nopaging=1 "The Larry Portfolio".

      By allocating to small-value, you can boost returns over time (at least that has been the case in the past). You could, hypothetically, then reduce your equity allocation (and risk) by a small amount, to achieve similar upside to your current portfolio, with dampened volatility.

      Or you can leave your well-enough-diversified portfolio alone and not overthink things.

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      • #4
        Mostly because you presumably have your bond allocation set for a volatility/risk tolerance and not for a straight up return reasoning. This accounts to you taking on more risk, for the possibility of greater returns, though not guaranteed. If you slice/dice your equity portfolio, your risk is basically the exact same since youre just tweaking how that 75 is allocated and not altering the overall balance.

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        • #5
          You can do whatever you want.  It's all good.

          Some people believe strongly in the small value premium, and one portfolio allocates 50% to that.   Some people see no good reason to hold bonds, at least if you're 5 or 10 years from needing that money.  Some people ( eg John Bogle ) don't like international stocks.  So you can make a good argument for no international, for no bonds, for no international and no bonds, or even for all small cap value.

          Just decide what works for you, and stick with it.

          But if you have bonds in order to smooth volatility, and to help you sleep at night, then you need to keep that percentage of bonds.   If not, maybe you shouldn't have any bonds at all.

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          • #6
            AlexDDS, ouch! Hope you feel/see better.

            Vagabond MD, great link. That cleared up a few things for me.

            Thanks all!

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