ETF Investment Plan-in-Progress with Questions: Criticism Welcome

[matt holland]

This is my first entry into the market. It is my intention to invest in the asset classes and corresponding ETFs below through zecco.com as part of a long-term buy-and-hold strategy.

10% US Large Cap - Vanguard Large Cap ETF (VV)
10% US Small Cap - Vanguard Small Cap ETF (VB)
10% US Large Cap Value - Rydex S&P 500 Pure Value (RPV)
10% US Small Cap Value - Rydex S&P Smallcap 600 Pure Value (RZV)
10% US REITs - Vanguard REIT Index ETF (VNQ)
10% INT Large Cap - 5% Vanguard European Stock ETF (VGK) & 5% Vanguard Pacific Stock ETF (VPL)
10% INT Small Cap - WisdomTree International SmallCap Div (DLS)
10% INT Large Cap Value - iShares MSCI EAFE Value Index (EFV)
10% INT Small Cap Value - WisdomTree International SmallCap Div (DLS)
10% Emerging Markets - Vanguard Emerging Markets Stock ETF (VWO)

Most of my final decisions on which ETF to choose were based on this page and its resulting links: http://www.altruistfa.com/dfavanguard.htm
I had to double-up on DLS as my International Small Cap and Small Cap Value because of the lack of offerings in the International Small Cap Value asset class.

I plan to go with ETFs instead of index funds because I plan on investing ~$20,000, which at Vanguard would leave me below the minimum initial investment amount for their index funds based on the # of asset classes I am interested in. It would also require me to pay the $10/yr. fee for all of my funds because their balances would be below $10,000. Also, investing solely through Vanguard’s index funds would not allow me to satisfy the asset classes I’m targeting as well as I would like. Since I’m in the spring of my junior year, I don’t expect to be making any substantial income or any more deposits into these funds for around 18 months and don’t believe I should be too concerned with bid-ask spread “fees” adding up.

A couple questions for anybody generous enough to answer:
How much of a mistake is it to have Vanguard REIT Index (VNQ) in a taxable account? And what options do I have? (besides filing professionally when I earned ~$15,000 this year from poker and little to nothing from anything else.)
This question is for jively specifically if he reads this, but I would appreciate anybody else’s feedback as well: I noticed in many of your recommended equity-only asset allocations you allocate 30% of your assets to International. Reading at fundadvice.com favored allocating 50% of assets to International investments. Could you explain this difference?
Does anybody recommend/not recommend using limit orders between bid/ask spreads? Is this something I should be concerned with?

All feedback is appreciated.

Matt

[gull]

Your plan and portfolio look great.

The home bias puzzle is interesting. Why do people like to overweight their own countries? Some Americans argue the correlation between US and international markets are so great that there's no diversification benefit and people should invest entirely in the US (because it's cheaper). Others argue that the markets aren't perfectly correlated and that adding international equities to a purely US portfolio will boost risk-adjusted returns. Many people are confused, and try to compromise between these two views.

The second view, that diversifying internationally boosts risk-adjusted returns is the correct view. Studies have shown that international diversification has helped historically. Furthermore, it's a good idea to diversify not only your portfolio, but all of your wealth. This means accounting for "human capital" and future earnings, which are correlated with the strength of the US economy. This correlation suggests an even lower US allocation. A problem with international investments is the inability to weight small and value. For example, DLS really isn't all that small and the expense ratio is relatively high.

Finding the perfect domestic allocation is impossible. However, I think it's a mistake for people to allocate 70% of their portfolio to a single currency/country/economy, especially when it's the the currency/country/economy they use/live/work in. Personally, I have more than 50% of my portfolio allocated to foreign investments. Regardless, the difference in risk-adjusted returns between a 30% and 70% foreign allocation is relatively small. Don't let little things (like minor allocation tweaks) stop you from investing (which is a HUGE thing).

[gull]

One more thing I forgot to mention: part of the rationale behind a US bias is the idea that many US companies do business all over the world, and although the headquarters are in the US, the capital and business may not be.

[Thremp]

gull,

I agree with both those views and after reading them twice now. I think they only fall apart in extremes (Like in argument one how they say there is no benefit). I would expect that is changes depending on corp size and some other things. But yeah, investing overseas is a pretty good idea I expect.

How do you determine which foreign markets to go into or stay out of?

[matt holland]

Thanks for the words. Good thoughts in regards to human capital and future earnings, it would seem if somebody was earning a decent salary in the US, and owned property in the US, that their asset allocation should be very strongly internationally-weighted. Interesting to wonder if, as ETFs and index funds are able to better capture international small-cap and value, allocation recommendations for US citizens will be closer to 70% international and 30% US or something like that. I wonder how global allocation recommendations are made in countries whose economies have not fared as well as the US' in the past 100 years.