Asset Allocation

[f97tosc]

Interesting thread. A few thoughts:

1. I think the discussion on diversification seems to over-emphasize the number of funds rather than their composition and interrelationships. And some "funds of funds" like Vanguard Star already contain a portfolio sort of like the one you have constructed.

2. Related to 1, if we know the covariance between different funds, it doesn't seem too complicated to find the "optimal" (most diversified) mix. Obviously historical covariance doesn't necessarily need to hold in the future, but it still seems like a more analytical approach than just pulling some numbers out of a hat.

3. If the portfolio is relatively small, we should also consider the extra cost of having a large number funds. At Vanguard they typically charge extra fees for funds with less than $10k, and if you buy ETF there may be transaction fees.

[kimchi]

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I agree that the REIT allocation is high. I like 10% of the stock portion be in REITs. REITs are stocks, not fixed income, even though they have a higher yield.


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I also agree that the REIT allocation is too high. I have a REIT but it doesn't invest in stocks, but in real commercial property around Europe. The annual statement shows the addresses of the offices/shopping centres held in the trust.

This can add real diversity to a portfolio, but a fund that invests in real estate stocks doesn't.

[Jeff W]

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Yes, good point. Everything is in a taxable account, except maybe 15% of the REIT which is in my 401k. I put the REIT in there because I thought it was the least tax-efficient of the funds that my 401k offered (their bond funds didn't look so great).

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REITs and Bonds suck in taxable. You're going to lose about 2% each year to taxes. I don't like VISVX or VTRIX in taxable either--both figure to lose at least 1% to taxes (despite an anomalous 5-year run for VISVX, small value is inefficient in taxable). I'd rather put the VISVX allocation in VTMSX or BRSVX and redistribute the VTRIX allocation amongst my international funds. That does lose some of the value tilt, but VISVX really isn't deep value anyway(and it nearly falls into the midcap range).

Also, your Emerging markets allocation is out of whack with the market allocation. The total international fund for Vanguard is something like 58 Europe/26 Pacific/16 Emerging Markets. If you think there will be additional erwards there in the future, that's fine, but keep in mind you're increasing your volatility in turn(Beta 1.67).

[Jeff W]

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This can add real diversity to a portfolio, but a fund that invests in real estate stocks doesn't.

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Why do you say that? Pretty sure that's wrong and REITs are a great diversifier:

[wpr101]

REIT allocation should be closer to 12% than 22%. I don't see the point of having anything in bonds.

Btw, is this for a retirement account or just regular account?