Diversified/Tilted Portfolio using Vanguard index funds

[Perplexity]

This seems to come up a lot so I'm going to post what I do. My goal is to have a global portfolio, all index funds, with a few tilts: value over growth, small over large, and emerging over developed.

I use 7 funds (all Vanguard):

REIT Index Fund (VGSIX)
Small-Cap Value Index Fund (VISVX)
Small-Cap Growth Index Fund (VISGX)
Value Index Fund (VIVAX)
Growth Index Fund (VIGRX)
Developed Markets Index Fund (VDMIX)
Emerging Markets Stock Index Fund (VEIEX)

A couple things to note:

Vanguard's value/growth index funds are constructed in such a way that holding $1 of each is equivalent to holding $2 of the corresponding untilted fund. That is, no stocks are left out because they are in the middle between value and growth. You're not missing out on anything by holding only the value and growth.

Their large-cap and small-cap funds complement each other in a similar way. The Large-Cap index fund (and the Value Index Fund and Growth Index Fund that I use) are based on the MSCI Prime 750 Index. The Small Cap index fund (and the value/growth versions) are based on the MSCI Small Cap 1750 Index. There is no gap between the Prime 750 and the Small Cap 1750.

So using the 6 stock funds, you get pretty thorough coverage, but can still add some tilts quite easily.

My allocations:

95% stock / 5% real estate

Within stock: 66.7% US and 33.3% foreign. I'm thinking about bumping foreign up to 40%.

Within US: double weight (relative to market cap) on small cap. The market cap weights are about 86% in Prime 750 and 14% in Small-Cap 1750, so I do 72% large (which includes mid) and 28% small.

Within US/large and US/small: I do 60/40 value/growth in both. Some people think the value effect is stronger for small caps, which would suggest overweighting value more in small cap.

Within foreign: 50%/50% developed/emerging. This is a very large overweight on emerging (market cap ratio is about 85/15).

Multiplying through and rounding, this yields:

5% - REIT Index Fund (VGSIX)
10.6% - Small-Cap Value Index Fund (VISVX)
7.1% - Small-Cap Growth Index Fund (VISGX)
27.4% - Value Index Fund (VIVAX)
18.2% - Growth Index Fund (VIGRX)
15.8% - Developed Markets Index Fund (VDMIX)
15.8% - Emerging Markets Stock Index Fund (VEIEX)

[TheMetetron]

It seems like you thought this out well. I'm more value/small cap than you are and I have international value as well, but you have a lot of emerging comparatively. I also have 50/50 domestic and international, but I consider REITs part of domestic stock (because that's essentially what it is).

Anyways, people could argue over the differences but if you have thought out what you want and this is it, then your selections seem fine. I do think more than anything else you have a lot of emerging markets exposure and this from someone who has 10% of their stock portfolio in emerging markets.

[lambdb]

Very well planned IMO. That could practically be a model for a safe well researched investment.

One quesiton that comes to mind is with the U.S economy growth rate projected to be slower relative to the foreign markets over the next while. I don't play around much in the US market but now seems like a good time to move a larger % of your stocks to the overseas market. thoughts?

Whats with all the love over Vanguard I.F's here? Best return? Most consistent? I'm not from the States so was just wondering..

I like your investments though, that portfolio is mint.

[TheMetetron]

Vanguard has a lot of different asset classes available via low cost index funds. It's an incredible place to create a diversified portfolio with rock-bottom fees.

[yellowbastard]

Don't you think you're paying way to much for the REIT fund right now at 47x earnings?

[dazraf69]

[ QUOTE ]
5% - REIT Index Fund (VGSIX)
10.6% - Small-Cap Value Index Fund (VISVX)
7.1% - Small-Cap Growth Index Fund (VISGX)
27.4% - Value Index Fund (VIVAX)
18.2% - Growth Index Fund (VIGRX)
15.8% - Developed Markets Index Fund (VDMIX)
15.8% - Emerging Markets Stock Index Fund (VEIEX)

[/ QUOTE ]

I am moving some money into Vanguard for retirement and have been going through the various portfolios. Since will be going through Vanguard it made sense to take advantage of their index funds.

Any thoughts on OP portfolio/anything you would change?

[Jeff W]

I think the supposed long term outperformance of small and value is based on doubtful data(rife with survivorship bias) and assumptions, so I just keep it simple and use total market funds.

Looks okay, if unnecessarily complicated. There is no reason to hold growth and value separately. They "cancel" each other out and you're left with essentially a blend fund that has elevated turnover(-EV from transaction costs) and higher tax cost.

[dazraf69]

I realize there are numerous post regarding portfolio distribution. I appreciate those who have taken the time to entertain yet another post regarding portfolio investment.

[ QUOTE ]
I think the supposed long term outperformance of small and value is based on doubtful data(rife with survivorship bias) and assumptions, so I just keep it simple and use total market funds.

Looks okay, if unnecessarily complicated. There is no reason to hold growth and value separately. They "cancel" each other out and you're left with essentially a blend fund that has elevated turnover(-EV from transaction costs) and higher tax cost.

[/ QUOTE ]

I like the more simple approach. What would an ideal portfolio consisting of index funds look like in your opinion.

From the FAQ,courtesy of jively, this was another portfolio breakdown using Vanguard index funds. After doing some of my own research, this distribution seemed more aggressive over a 30yr period.

20% US large cap (Vanguard Large-Cap Index Fund)
20% US large cap value (Vanguard Value Index Fund)
10% US small cap(Vanguard Small-Cap Index Fund)
10% US small cap value(Vanguard Small-Cap Value Index Fund)
10% US real estate stocks (Vanguard REIT Index Fund)
20% International stocks (Vanguard Total International Stock Index Fund)
10% Emerging markets stocks (Vanguard Emerging Markets Stock Index)


This will just be a general investment. This is not going to be in a Roth IRA. I am fully invested in Vanguard's Target retirement 2040 until I have enough to diversify. I also have a 403(b) through my employer.

Thanks in advance. Any thoughts will be appreciated.

Farzad

[Jeff W]

[ QUOTE ]
What would an ideal portfolio consisting of index funds look like in your opinion.

[/ QUOTE ]

Dunno about ideal, but I just own VIPSX (Vanguard TIPS), VTI (Vanguard US Market) and VEU (Vanguard all-world ex-us). Most important ratio is stocks/bonds. The more risk tolerant you are, the more you should tilt to stocks. Within stocks, I split it up into 2/3 U.S. and 1/3 Foreign(Market weighted including Emerging Markets).

[napkins]

[ QUOTE ]
This will just be a general investment. This is not going to be in a Roth IRA.

[/ QUOTE ]

If this is the case, I don't think your portfolio is very tax efficient. The issue of whether or not to tilt has been going on for years, but in general everyone can agree that if you do value tilt, then you should at least be separating the more heavily taxed funds in your IRA's and/or 401k.