I haven’t posted my investment portfolio since April, mainly because it hasn’t really changed much. But here’s another snapshot:
| Retirement Portfolio | ||
| Fund | $ | % |
| FSTMX – Fidelity Total Stock Market Index Fund | $15,132 | 19% |
| VIVAX – Vanguard [Large-Cap] Value Index | $14,567 | 18% |
| VISVX – V. Small-Cap Value Index | $14,251 | 18% |
| VGSIX – V. REIT Index | $8,163 | 10% |
| VTRIX – V. International Value | $8,686 | 11% |
| VEIEX – V. Emerging Markets Stock Index | $8,929 | 11% |
| VFICX – V. Int-Term Investment-Grade Bond | $7,616 | 10% |
| BRSIX – Bridgeway Ultra-Small Market | $2,126 | 3% |
| Cash | none | – |
| Total | $79,470 |
| Fund Transactions Since Last Update |
| Bought $1,000 of FSTMX on 6/26/07 (23.759 shares) |
Thoughts
Another couple of months have gone by, and my desire to re-define my asset allocation remains unfulfilled. All I did was buy some more of a Total US Market fund (FSTMX) through my self-employed 401(k). You’d think someone who writes about money on a daily basis would be on top of such things!
But really, I think I might actually be spending too much time on this. As Jack Bogle has stated, “The greatest enemy of a good plan is the dream of a perfect plan.” There is no perfect asset allocation, and I know that. I keep telling myself, I’m not looking for the perfect plan, just a better one which has been well-reasoned out, and one which I should have little reason to tinker with for a long time.
To achieve such a better plan, I have been re-reading each of my favorite investing books on top of many new ones (including All About Index Funds by Ferri, Unconventional Success by Swensen, Only Guide to a Winning Bond Strategy You’ll Ever Need by Swedroe), looking at their research, comparing their model portfolios, and trying to balance all the advice given. But after all these months, my slow deliberation has really just turned into what academics call “paralysis by analysis” and have been just been putting off making a decision for weeks. I do have some overall changes planned, including:
- Increasing my allocation to international assets,
- Decreasing my value tilt, and
- Increasing my bond allocation.
I want to avoid trying to time the market, or chasing recent performance. But I also don’t want to base my decisions on simply trying to avoid the impression of trying to time the market. Although I’m always open to suggestions, I feel I need to some fresh input. Got an asset allocation suggestion? Ideas on a better value/size/country tilt? Another book to read? Throw it at me.
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You seem to have most of your portfolio in the US, which makes sense since it’s your home country. But have you looked at putting more of your portfolio in foreign assets?
FT
I see the value decreasing as the biggest thing you should do. 20% to international is what Jack Bogle likes himself and since you quoted him, figured you might agree with him. He sees nothing wrong with 0-20%, personally I think international should be slightly lower than domestic, while others such as Paul Merriman think it should be 50%.
I do think you are leaning too much towards value as the biggest thing I would change. I do think that value should perform better than growth, but not to the point of leaning as far as you have.
Hi,
Have you tried typing it all into morningstar’s analysis software? Do you have a favorite software for that purpose?
What is your goal? You said you want to adjust the allocation, but not said why. Do you want to increase your potential returns? Reduce your portfolio risk? To find the northwest passage…err…efficient frontier? Do you plan to adjust frequently or are you looking for a buy and hold situation?
One thing I wonder is have you evaluated the overall standard deviation (risk) of your portfolio and matched that with potential changes? Maybe that could be your answer.
FWIW, I’ve been doing this same thing. One night a couple months ago I even wrote “paralysis by analysis” across the page I was making calculations on. My wife found it and laughed at me. So I know how you feel.
I know this may be heresy to a DIY diehard like yourself, but why not seek out the advice of a professional? Pay him a fee for a review and recommendations.
What would be the advantage of buying all those different mutual funds over putting all your money into something like Vanguard’s 2045 retirement fund. I do the latter for simplicity and since my RothIRA is at Scottrade, it costs less ($17 commission to purchase $4000 of it each year). On the other hand, I do have my own diversified portfolio of mutual funds through my Fidelity 401k since I don’t think they charge a commission if you constantly change the asset allocation (does anyone know about this?)
Jonathan,
You definitely know more about this than me, but if it were me, I would probably reduce my REIT holdings a little and increase my international holdings. I know that some analysts have said that some housing and REIT companies are attractively priced right now, but I think:
1)The housing downturn is sure to last at least another year or two
2) Most experts I have read (though you have read more than me) say to invest far less of a percentage in REITS.
3) REITs are very tax inefficient.
4) Long run- I definitely favor having at least 20% in international stocks.
I would say, even given the rate hikes overseas, their capital markets are still much stronger that the U.S. Plus, we’re just starting to see fallout from subprime lending, which should continue to slow the U.S. markets. Private equity also seems to have peaked, among other financial services firms that have lead the market in structuring M&A deals…in short, up your investments in international markets.
I’m just getting started with researching for a 401k and IRA. The whole ordeal is a little stressful.
They never taught us this in school!!
I’ve always been a fan of KISS. Right now I have my 401ks that are currently being funded rolled into a rollover IRA with Vanguard and have the Margaritaville portfolio of VTSMX (40%), VGTSX (35%), and VIPSX (25%). It’s simple and seems to work.
why increase ur bond exposure? with so many years ahead of u, keep it in stocks.
def increase ur international exposure…id focus on europe, esp eastrn europe, asia (minus japan), and india (despites overheating sentiment)
also, specific sectors: solar and water. great long term plays but id wait on solar as most of the good stocks in the sector are up like 100% this year…
I think you are doing great with your asset allocation. I do, however, like you idea of leaning away from value stocks. Growth has been long overdue for a comeback, or at least that is what every fianncial journalist that wants to eventually sound like they know how to predict the future has been saying, but I’m not sure that is the reason why you should do it. You should do it to have more balance for diversification reasons. Timing the market is for the birds. I think value is the better play for the long term, but infusing some more growth stocks could definitely help your portfolio overall.
Here are some large/mid/small cap growth fund ideas (expense ratio in parentheses):
Vanguard Explorer – VEXPX (0.46%)
Vanguard Morgan Growth – VMRGX (0.41%)
Fidelity Growth Company – FDGRX (0.96%)
T. Rowe Price Growth Stock – PRGFX (0.70%)
Meridian Growth – MERDX (0.85%)
If you don’t intend to tap your retirement for 30 years should you have bonds at all? Everybody says stocks do better than bonds for the long haul, and if 30 years isn’t a long haul what is?
Iwillteachyoutoberich.com says bonds are for old people.
I’m not sure myself, and I have some bonds in an allocation fund. But the rates aren’t much better than a money market, and interest rates are low so I don’t see much of a way to profit from them by rates going down.
Why worry about re-allocation? You’ve covered a lot of bases in your allocation.
Let’s look at your historical performance:
2000 2001 2002 2003 2004 2005 2006
VFINX -9 -12 -22.2 28.5 10.7 4.8 15.6
You 2.83 -0.7 -11.04 35.98 18.51 10.61 20.97
You’re beating the market (VFINX = Vanguard S&P 500)!
The only things you don’t really have are international small cap and an S&P 500 fund; however, 75% or 80% of a total market fund is the S&P 500.
I’m studying asset allocation here: http://sdrone.net/2007/06/big-picture-portfolio-diversification.html. The linked article is a really good study of why/how to do allocation.
And I’ll add Merriman’s portfolios here in the next couple of weeks, if you’re interested: http://www.sdrone.net/myportfolio.html
Why you need to increase bond? Isn’t 10% enough at this point of time? I do feel that you can use a little more international exposure. Did you look at Dodge & Cox? If your investments are in 401(k), you may not have access to D&C, but if it’s in IRA, then D&C would make an excellent choice. Also Oakmark fund has a very solid international fund as well.
This is slightly off-topic, but I enjoyed “The Paradox of Choice” by Barry Schwartz. http://www.amazon.com/Paradox-Choice-Why-More-Less/dp/0060005696. I found it insightful in terms of recognizing when I was allowing a plethora of choices to consume me, and deciding just to decide and stick with it (though I still have a ways to go.)
I am curious what your YTD return on your REIT portion is. Mainly b/c mine is around -10% for the year and it would make me feel better to know I am not alone!
I’m currently debating if I should dump my REIT portion but my gut says to weather the storm. :-\ I think the whole REIT market is just taking a short drop b/c of the sub-prime mess in the residential sector. The index that my REIT matches only has around 2% of residential real estate. What do you guys think?
BTW Jonathan, I think you could benefit from a MyMoneyBlog message board for questions like this…
Jon,
I understand the desire to tinker and change allocations, I’m tempted by it often from all the blogs, forums, books I read too. But you’ll always be finding things to add or tweak from something you’ve just read. TIPS, mid caps, precious metals, commodities, someone released an international bond fund, etc.
Is exchanged 10% of your value exposure to “blend” stocks really going to make that much of a difference in long term returns or volatility? Paraphrasing a common quote I’ve come across, the investor is usually his own worst enemy. Find an allocation, stick with it and rebalance annually. Or perhaps open up that play money account so you can tinker and satisfy these urges in there.
Keep up the good work on the blog.
Oops, portfolio link for my post above should be:
http://www.sdrone.net/portfolios.html
Jbo: Merriman doesn’t think international should be 50% of your portfolio. In general, he’s referring to 50% of your equities. In his suggested 60% equities/40% bonds portfolio, that means international equities are only 30% of the total portfolio.
I am with Bogle as far as simplicity. You have too many funds…total stock market funds capture everything so it is not necessary to have REITs, small caps, etc…There has been some good analysis done showing that small caps and value stocks may not be all they are cracked up to be and that they are simply more risky in a lot of ways.
So I would say to just do total stock market, total international stock market, and total bond (or intermediate/short term bond index). Make your life easy…everything is so much better when you have just 3 funds.
Where is the large/mid growth in your portfolio (other than that in VTSMX)? A sector that has underperformed this long is certain to outperform in the near term.
Thanks for the comments so far. Just wanted to address this question first on a general level and save the details for another post:
Reasons for Bonds
1) It’s easy to recommend 100% stocks right now, the stock market has been doing great. Your long-term return is not only dependent on your asset allocation, it is dependent on your ability to KEEP your asset allocation. Sure, 100% stocks will probably outperform in the long run, but in the middle there will be a period when bonds will outperform during a long period of time. During that time, you can bet popular media will be promoting a “safe havens” such as bonds.
2) Going to 80% or 90% stocks will lower your expected return a bit, but lower your expected risk an even larger amount. As reader Chris commented in a previous post:
“It?s been shown time and time again that just a small sliver of bond allocation results in a significant reduction in risk with only a minor reduction in return.”
Ramit has some good advice but he also likes to oversimplify in order to make things easier to understand. There is no one answer for everyone. If people want to go 100% stocks and think they can maintain it during periods of uncertainty I have zero problem with that.
You are doing very well at indexing investment already. I don’t know if you are prefect yet, but I certainly don’t have anything to add in that area. However, in my opinion, you are at a point that you are better off spending additional time learning about individual stock picking or technical trading. I am totally against buying individual stocks without proper education. However, I think we should spend a little amount of time to educate ourselves in that area and leave a small crack open for opportunities to come in.
Jbo – Thanks, I agree.
“Have you tried typing it all into morningstar?s analysis software? Do you have a favorite software for that purpose?”
Hi Elizabeth – Which software to do you speak of? Is it free?
“What is your goal? You said you want to adjust the allocation, but not said why. Do you want to increase your potential returns?”
I just don’t think lowering standard deviation is the end-all anymore, as the efficient frontier moves so much depending on what time period you look. I’m trying to increase the probability that my portfolio will do fine in a variety of world future scenarios. I’m also lowering risk because I think I can save enough not to have to take as much risk as others.
Mike – Benefits over a single fund include more flexibility for asset allocation, and also asset location for optimal tax efficiency. However, I like the Target Funds and think they work well for many people.
I agree, upon reflection, with other posters who suggested a bit more international allocation. For specific risk/reward, consider Japan: Japan has been down so long that bumping up that market’s allocation, at this point, would seem a rather low-risk bet (with potentially high returns). Look at the success of their individual companies (e.g., Toyota overtaking GM, etc.). World’s second-largest economy (I mean, we’re not talking, say, France here…) with some of the best prospects.
Do you have a way to diversify via commodities (or some fund with TIPS, energy, global real estate, timber, etc.)? In the institutional world, real asset/commodities, 130/30 (mini-hedge funds), infrastructure, and pseudo-private equity (e.g., “leveraged company” or micro-micro venture-cap type) funds are all the rage.
The above represent as-of-yet not fully exploited markets. Infrastructure (where governments sell of income streams such as highway tolls and lottery revenues) and commodities seem the most interesting and perhaps offer the greatest diversification benefit for the next down cycle.
Hey Jonathan, I may be the only boob on the boards who actually likes market timing, so my thoughts may be biased 🙂
Your all-stars here actually seems to be the VEIEX (emerging) and the VTRIX (international), so the questions seem to be:
1. Are the international/emerging going to continue to perform well?
2. Is this big rally by the Dow going to continue? Is it just the Dow or some International phenomenon making everything go up?
3. Are interest rates going up or down? Will an incresase place downward pressure on the Dow?
4. Where’s the USD going, how will that influence my international/emerging funds?
You seem to have inherently made a couple of these calls with your picks and really which is OK, b/c hey, you gotta make some decision.
Right now, I think that the USD has lots of downward pressure and US interest rates have some upward pressure. International / Emerging still seems quite bullish and Emerging funds may have a lot more upside b/c they’re so far behind.
I actually like your approach, I’ve been looking over my own portfolio (now that it actually has money worth moving around) and I’m coming to pretty much the same conclusions: more International equity and local Bonds using money shifted from my local Equities.
FYI GoGators – Vanguard Explorer is closed to new investors. I’ve had it in my IRA for years. As irrational as it may be, for some reason that makes it harder for me to exchange shares.
?Have you tried typing it all into morningstar?s analysis software? Do you have a favorite software for that purpose??
If you sign up at http://www.morningstar.com (give email address, etc.) you can create portfolios to follow using free Morningstar tools.
If you’re just tracking performance, it doesn’t require much more time (sometimes less time) to simply do your own spreadsheet.
As for portfolio allocation to cash: I’d point out that while Jonathan does not have cash listed in his portfolio, you could easily count an emergency fund (stashed in money markets or whatever) as the cash portion of your portfolio.
I?m trying to increase the probability that my portfolio will do fine in a variety of world future scenarios.
IF that is really what you’re after, then why not use JTMurdock’s Margarita Portfolio of VTSMX (40%), VGTSX (35%), and VIPSX (25%) or a life cycle fund?
In case my previous links didn’t make it through, below are some links to good sources of allocation ideas:
Index Fund Advisors (who use Dimensional Funds, a worth Vanguard competitor) give some idea of their (successful) allocation ideas; also, their library is tremendous: http://www.ifa.com/
Easy Allocator is a free tool for basic allocation: http://www.easyallocator.com/
The Journal Of Indexes, for lively debate on with hard-core Bogle-heads: http://www.indexuniverse.com/
MPT Pioneer William J. Bernstein has his own site with great articles on the efficient frontier:
http://www.efficientfrontier.com
From my point of view, I think you’re missing some cash and commodities exposure. Agreed commodities are volatile and not for everyone — I currently have a small % (5-6%) allocated to PCRDX. The expense ratio is quite high and there is a sales load but I avoid the load by buying through the Vanguard super funds market. I have only owned pcrdx for the last 12-18 months so the jury on the long term benefits of this exposure is still out. I’m not fully convinced this is a good move but I’m sticking to it for now atleast. Second, just psychologically, I like some cash/money market in my portfolio as a ballast in rough times. Might be irrational but atleast a few portfolio gurus do recommend up to 5% (I have around 10% right now). Final, perhaps some international bond to spice the bond side of things. Also works as a dollar hedge.
Good blog, btw. I’ve just started reading your articles.
Ok, ok, I like comparing portfolios.
Since I just put your portfolio in a spreadsheet, and I already had Merriman’s portfolios in a spreadsheet, here are the comparisons.
1st is his suggested Vanguard 100% equity portfolio. It’s the only one you don’t beat all the time. 2nd is his suggested Vanguard balanced portfolio (60% equities, 40% bonds. Of the equities, 50% are international). 3rd is your portfolio. Finally, after the blank line, Vanguard’s S&P 500 fund for comparison.
2001 2002 2003 2004 2005 2006
-6.98 -13.91 39.8 20.66 13.2 24.44
-1.124 -3.218 25.288 13.86 8.804 15.772
-0.698 -11.039 35.976 18.513 10.616 20.978
-12 -22.2 28.5 10.7 4.8 15.6
Heh. I should just turn this into a blog post.
Again, all this means is that your diversified portfolio is doing well against the market.
I found this site which lists some interesting models: http://www.softcode.com/stocks.html
I find the “Ultimate ETF Strategy” interesting, and have been tracking it since Sep 06. Right now, it is lagging my current allocation which is:
50% SP500 Index (VFINX)
20% International Blend (FDIVX)
15% Large Growth (FCNTX)
10% Large Value (DODGX)
5% Individual Stocks
I recently sold a small cap fund, and will probably re-introduce another small cap fund in the future.
I use Quicken to do my asset allocation. It’ll break down your stock and mutual funds and give you the same kinda pie chart (though not as detailed as yours, they only have 6 generic categories). I ignore their model allocation suggestions and just do 120-age for stock/bond ratio (which tracks closely to your previous blog post). As far as stock breakdown I try to keep small to at most 20% and international to at most 20% and leave everything else to large/domestic. Fortunately FLPSX does this all by itself plus give me value exposure to boot. It’s done so well I pretty much have to balance against it.
If you annualized those returns from Stephens post, Jonathan beat Paul Merriman’s Vanguard portfolios over the past 6 years while taking less risk.
Here’s the annualized returns with risk (stdev)
PM Vang: 11.32 (20.15)
PM Bal: 9.45 (10.79)
Jonathan: 11.34 (16.68)
S&P500: 2.80 (18.56)
Past performance…yadda yadda yadda
The Instant X Ray isn’t really free to non-premium subscribers.
What you CAN do is set up portfolios with the free membership. You can track your exact portfolio, or you can set up watch portfolios. you will have to create your own view to get a total return number after setting up a portfolio.
Which is why I find it just as easy to use a spreadsheet to track performance.
Was Elizabeth referring to morningstar’s free “x-ray” analysis tool?
portfolio.morningstar.com/InstantXRay/InstantXrayDEntry.asp
As I’m reading through all these comments it makes me laugh at how confused we all are in trying to determine the right allocation. I’ve taken the liberty to speak with a financial advisor. And, the conventional wisdom they gave me was to buy index products and diversify. Nothing I haven’t read already in a hundred different places. I guess this falls into the category of fiduciary responsibility.
With all that being said, I’m a big fan of http://www.indexinvestor.com. The author of the site has identified 11 different assets classes.
1. U.S. Equity
2. Foreign Equity (EAFE)
3. Emerging Mkt. Equity
4. Real Return Bonds
5. US Bonds
6. Non-U.S. Bonds
7. Domestic Commercial Property
8. Foreign Commercial Property
9. Commodities
10. Timber
11. Equity Market Neutral
The author also has his recommended target portfolios. I’ve mirrored one of the target portfolios and when things get too out of alignment, I buy and or sell to reset my targets. (Maybe once or twice a year.)
My overall goal is to match, and or exceed the market return while taking on the least amount of risk as possible.
I welcome any comments.
I use Financial Engines (http://www.financialengines.com) to determine my asset allocation. There are optimal allocations with respect to models and Financial Engines is one tool for finding it. It has some shortcomings, though. It will pick funds for you from your world of options but doesn’t tell you which world to be in (ie ETrade, Fidelity, Vanguard, etc), which affects transaction costs and to some extent which funds are available. It also assumes that you have a goal in mind: retirement. It does a very good job of creating a portfolio to match your specific needs but does little to help you with needs that you don’t know. In other words, its great for retirement but poor for money that you don’t need liquid but don’t know if you’ll need it 5 years from now or 30. I use a simple balanced fund for that.
actually, no! Diversification is a way of making sure you do NOT “revert to the mean.” Parts of your portfolio zig when the market zags.
Some parts of your portfolio will go up, some down in any particular year. Diversification will help smooth out the ride.
The fact that my portfolio has done well against the market recently could simply be taken as an indicator that soon things will return to the mean and I will eventually underperform the market 😉
I wish I could use FinancialEngines, but that usually costs money, no? I know it’s provided for free to certain corporate employees.
Jonathan,
Any particular reason you have FSTMX over VTSMX ? Just curious since most of your funds are Vanguard funds…
Binita
Just for fun I plugged your numbers into a spreadsheet I use to calculate my performance vs. the benchmark. Here’s what I came up with:
Ticker, YTD%, YTD WR%, BMark YTD%, BMark YTD Weighted%
FSTMX 9.30% 1.77% 9.30% 1.77%
VIVAX 8.96% 1.61% 9.30% 1.67%
VISVX 7.70% 1.39% 9.30% 1.67%
VGSIX 3.23% 0.32% 3.20% 0.32%
VTRIX 10.98% 1.21% 11.00% 1.21%
VEIEX 12.86% 1.41% 12.90% 1.42%
VFICX 1.20% 0.12% 1.20% 0.12%
BRSIX 4.81% 0.14% 9.30% 0.28%
7.98% 8.46%
It looks like the benchmark beat you by a half point.
Don’t do it, don’t tinker. For God’s sake, read your own advice! If you must, then reexamine your strategy but don’t tinker just for tinkering’s sake.
If you really hate your own, then just copy one of the IFA.com portfolios, or subscribe to financialengines.com as Uri suggests. It’s pretty cheap as far as investment costs go.
-Wes
Jonathan, how to you compare the performance of your portfolio to the market, i.e. which benchmark(s) do you use and how do you calculate it’s performance (e.g. excel XIRR, or other)?
Sorry if you’ve already stated this elsewhere, but I didn’t see it.
I have a bunch of the same Vanguard funds. I cashed out my old mutual funds and bought a bunch of index funds this year…in February. Needless to say, I’m a little p*ssed right now as I’ve taken a beating in S&P, Emerging Markets, REIT, and Small-Cap. The only real winner I have is my International index. I feel like I’d have been better off to just leave the money in my savings account (better return this year) or “Damn it, why could I have waited until late March to buy?!? *After* everything tanked 10%!”. 😉
To the person who was crying about their -10% REIT, I feel your pain, buddy.
Late in the game here, but I think your allocation is fine for the most part. Here’s how I look at it.
1) At a high level, 90% stocks, 10% bonds. This the most important decision you make. I use more bonds but some people do 100% stocks, some 80/20, some 60/40. You will have to make this call. FWIW, Benjamin Graham said an investor should have no less than 25% and no more than 75% in bonds.
2) Within stocks, you have 25% in international (22% / 90%). It’s reasonable. I don’t think you have to increase it.
3) Within US stocks, you have slightly less than 50% in large stocks (I counted 80% in Total Market fund as large). This is a bit low IMHO. I use 60%.
4) REIT at 15% of US stocks (10% / 68%) is pretty high already. So is Emerging Markets at 50% of international stocks.
5) If you work in a growth industry, value tilt is fine. When growth does well, you will do well in salary, bonus, stock-based compensation etc.
If this portfolio were mine, I’d direct new cash toward bonds, large US and international stock funds.
Bill M – I believe your method for comparison is somewhat faulty. It appears that you are comparing each of J’s funds to their respective benchmark. That is a valid comparison for determining if that particular “slice” is invested wisely, i.e. how is that fund against it’s peers.
In this case we are wanting to determine how J’s fund is doing overall. For that, we need to compare his total portfolio against a bench mark. Which one? For me in particular, I compare my total portfolio against the S&P500.
With asset allocation, we are trying to minimize risk and to meet or beat “the market”. So therefore we have to compare our portfolio to “the market”.
while we can all chase the market, i think if you want to build a set it and forget it portfolio, forget the market and follow the world.
whats going to happen in the future? 10 years from now? no one really knows exactly but a few things are going to be certain:
the third world will be more important
japanese companies will be but not japan the country (look at its huge falling birth rate and its soon to be massive problem of caring for the aged)
the us dollar will continue to be weak
water will be bigger issues
as will renewable energies
and china is going to be much bigger than it is (though i think it is in for a major major correction before that happens due to wealth inequality and environmental issues)
Id say Jon buy international, buy renewable, if ur going to buy US by big name companies.
I have little faith in the US to continue to be the engine of the world.
Nathan – maybe you’ve made some mistakes in calculating your returns? Vanguard’s S&P 500, emerging market, and small cap index funds are all positive since February.
401k = Fidelity
IRAs = Vanguard
Taxable = Bridgeway
Morningstar’s x-ray tool is free; it’s just not free if you want to save your results. It is excellent. I use it all the time to check my asset allocation. It looks at your mutual funds/stocks/etc. and figures out what they are invested in, not just their “name”. Merriman was just pointing out on his podcast that your US fund could be creeping into international exposure to boost its return, which would affect your asset allocation. Schwab and probably other online brokerage sites also have the ability to do this analysis, but in my experience Morningstar did a better job on more obscure funds (from my 401k e.g.)
Our public library has a subscription to a full-featured Morningstar service that I can access from home through the Library website. Check out your local library.
I second any recommendations of X-Ray…it was great. It helped me get a “real” balance of international to US by showing me exactly what was in some of those “balanced” funds from the 401K.
I’d just like to add that Vanguard has a portfolio analysis tool that is similar to the instant xray on Mstar. You can manually enter in all of your outside accounts and it will give you a very good snap shot of your allocation from different perspectives. It also saves this info and updates fund and stock prices daily, so its a good way to track everything.
For some reason I like to just look at taxable and retirement allocations separately and ignore what they look like combined, my Roth IRA is currently completely invested the Vanguard’s Global Equity Fund:
My taxable Zecco account looks like this:
5% in each of the growth and value vanguard ETFs (large, mid, small) so that is 30% total.
9% in each European, Asian, and Emerging ETFs for a total of 27%
6% in each of long, mid and short bonds for a total of 18%
12% in REITs
8% in commodities ticker DJP
and eventually 5% in a micro cap ETF
I’m probably splitting my money up way too much, and I know it’s probably on the risky side, but I really like the diversity and it will let me take really good advantage of rebalancing by buying what’s down. I’m only 24 years old so if it turns out I can’t stomach it when the market finally swings the other way I will be able to adjust my allocations without freaking out and just selling. Let me know what you think.
A portfolio with 10% bonds has outperformed a 100% stock portfolio over the long-term. The question for bonds now: has our secular decline in interest rates come to an end? It appears that the recent rise in interest rates is more than just a blip on the chart. If so, that spells trouble for bonds, unless you absolutely need the income, which you don’t right now.
Great Stuff!! I’m a big fan of Adam Bold’s The Mutual Fund Store and his radio show. He seems to use this allocation a lot this year for someone who has a long time to go and aggressive risk style:
Large Growth – 35%
Large Value – 20%
Small Growth – 20%
Small Value – 20%
International – 10%
He thinks you can beat index funds for the long term. Index seems very popular these days and the up and coming ETFs. I like to see folks hold great funds, index or not, for a long time and not chase magazine covers or popular news exclaiming the best funds to buy now. It’s like some folks are trading funds like they do stocks.
Jonathan,
I think you’re absolutely on the right track with index funds and avoiding market timing. I will try to offer some food for thought on your long-term portfolio.
Before I get into specifics, let me state some background and assumptions…
– I plugged your portfolio into a tool that I created. It merely shows splits for each of the key factors that drive investment performance.
– Allocation is done on an after tax basis.
– I assume your effective tax rate in retirement will be 20% (who really knows?).
– I have not adjusted for capital gains in taxable accounts.
– I assume your 401k is traditional rather than Roth.
– I assume your IRA is a Roth.
Specific comments…
Main asset classes (79% stock, 10% bond, 11% real estate):
– 10% in bonds. This should be driven by your specific risk tolerance, but it looks very reasonable to me for your age.
– 11% in real estate seems a little heavy. I might drop this to 5% and add another 5% in a broad commodities exposure (not just energy). Commodities are a great diversifier for an equity portfolio.
Bond duration (100% intermediate, high quality):
– You might add short-term and/or TIPS exposure to get more stability out of your bond holdings. After all, stability is the only reason you hold bonds, right?
Market cap (73% large, 23% small, 4% micro):
– I’d add more micro-cap exposure, primarily due to the lower correlation with large cap. BTW, BRSIX is an excellent choice here.
Value vs. market (62% value, 38% market):
– If you’ve got the stomach to ride it out, I think you will come out ahead over the long run with value. 62% value is aggressive though. I personally have opted for 40/60 value/market.
Domestic vs. foreign (71% domestic, 29% foreign):
– I think your choice is fine here. I personally opt for a 60/40 domestic/foreign split.
Developed vs. emerging foreign (51% emerging, 49% developed):
– According to Vanguard, 15% of the world’s capital is in emerging markets.
– There are some financial advisors that would say 50/50 developed/emerging split makes a lot of sense due to the low correlation between emerging markets and domestic US markets.
– I personally opt for a 70/30 developed/emerging split, but again, I have more overall in foreign than you do.
Taxes:
You’ve made a wise choice to locate your tax-inefficient bond and real estate holdings in tax advantaged accounts. Here are a couple of additional ways I try to squeeze out a little more.
– I put my bonds in my tax deferred accounts. You have to pay taxes on the money when it comes out, so why not put the slowest growing asset class here?
– I put my foreign holdings in taxable accounts. You have to pay foreign taxes on these investments. If you hold them in tax advantaged accounts, you can’t take the foreign tax credit.
Expenses:
The weighted expense ratio for your portfolio is 0.26%, which is great. It may go up a bit if you put more into microcap and get some commodities exposure. These asset classes typically carry a higher expense ratio, but I think the diversification is worth it.
Best of luck,
Joe
I read that Fidelity offers %.10 expense ratio index funds now… tho it seems it wouldn’t work for me (who’s just starting out and doesn’t have the 10,000 minimum investment needed).
But I was curious if you’ve looked at Fidelity’s funds and would consider them over Vanguard for your IRA at all? They seem to offer a lot more choices, tho maybe it’s not more choices that you need. 🙂
I’m trying to decide myself whether to put my IRA in Vanguard or Fidelity, so that’s why I’m curious if you (or anyone else) have compared the two for Index Fund investing.
Fidelity has a limited amount of low-cost index funds, but they do have a few with 0.10% expense ratios, which is nice. Of course the $10,000 minimum is a hurdle. I use them in my Fidelity Solo 401k exclusively.
However, overall I find Vanguard’s index fund offerings much more wide. Fidelity has more funds, but most are overpriced and trade too much. So I will stick with Vanguard for my IRAs for now.
Two interesting articles from fundadvice.com on asset allocation that you may or may not be aware of:
1. The Ultimate Buy-and-Hold Strategy
http://www.fundadvice.com/fehtml/bhstrategies/0108/0108a.html
– a study to determine the asset allocation that maximizes returns. Their recommended allocation beats a plain vanilla 60% S&P 500 / 40% bond portfolio by 3% by diversifying that 60% amongst 10 stock classes.
2. Fine Tuning Your Asset Allocation
http://www.fundadvice.com/articles/buy-hold/fine-tuning-your-asset-allocation.html
– a look at how altering the basic 60/40 split would affect returns.
Both articles look at returns from 1970-2006, and the first suggests Dimensional Funds (available only through select money managers) as the best way to match the optimal asset allocation.
I found them an interesting read.
Jonathan,
I spent a lot of time allocating when I started my job. In several cases, I was debating between 2 different funds in the same category. So I just put half of my money (dedicated to that category) in each and decided to see how things pan out. Maybe not sophisticated, but whichever does better, you still will feel good that you didn’t totally miss out on the right choice! So, a good choice from a psychological perspective, I guess.
And yes, I think it is a great idea to have a good chunk in Int’l funds.
Hi Jonathan (and all),
Do you know of any website (or utility) that allows you to enter one’s total $$ in all mutual funds owned, and which then calculates one’s asset allocation across stocks, bonds, cash, based on the most recent fund allocation per latest fund prospectus?
I currently am spread across a couple of dozen mutual funds (old employer’s 401k, current employer’s 401k, a few IRAs from over the years) and I have to calculate my asset allocation by hand every 6 months or so.
I know this is probably an indication that I need to consolidate my funds and accounts, but for now it would be great if there was some automated way to do this. Someon above mentioned the Morningstar site, but I was unable to track down anything there.
Thanks in advance for any pointers from you or any other readers.
Great blog and great site!
Floyd
Floyd –
Type in your holdings here: Morningstar X-ray
Floyd,
Morningstar X-Ray, don’t know if the one with all the features is free though. Vanguard’s portfolio analysis tool allows you to do this too. It is free, at least for customers. It also allows you to input non-Vanguard holdings.
@Jonathan & Joe,
Thanks guys. Both sites (Morningstar & Vanguard) had exactly what I needed. and their figures actually agree. 🙂
Now, on to my consolidation !
Cheers,
Floyd
That certainly is a nice little tool, the morningstar x-ray!