Asset Allocation Suggestions?

[anonymous_saver]

I am currently debating what my asset allocation should be for my 403(b) and my Roth IRA (asset allocation will be for both the 403(b) and the Roth IRA combined). The following is my plans, although I am not set in the percentages yet, so I am very willing to hear any opinions on my plan. I am 25 years old.

50% Large Cap Index
20% Mid Cap Index
10% Small Cap Index
20% Foreign/International Index

I am using all Vanguard Funds. Of note, I am debating between the 500 Index (VFINX) or the Total Stock Market Index (VTSMX) for the large cap allocation. I am also slightly considering the Large Cap Index Fund (VLACX) for the large cap fund, although I like the 500 and Total Index better. I am planning on using their Mid Cap Index Fund (VIMSX) and their Small Cap Index Fund (NAESX). I am also debating between the Total International Stock Index (VGTSX) or the European Stock Index (VEURX).

Another thought was just to do 80% in the Total Stock Market Index and 20% in a Foreign/International Index. However, I think the plan above could result in better returns overall (the expense ratios are all really low).

Any thoughts/suggestions?

[jIM_Ohio]

Originally Posted by anonymous_saver

I am currently debating what my asset allocation should be for my 403(b) and my Roth IRA (asset allocation will be for both the 403(b) and the Roth IRA combined). The following is my plans, although I am not set in the percentages yet, so I am very willing to hear any opinions on my plan. I am 25 years old.

50% Large Cap Index
20% Mid Cap Index
10% Small Cap Index
20% Foreign/International Index

I am using all Vanguard Funds. Of note, I am debating between the 500 Index (VFINX) or the Total Stock Market Index (VTSMX) for the large cap allocation. I am also slightly considering the Large Cap Index Fund (VLACX) for the large cap fund, although I like the 500 and Total Index better. I am planning on using their Mid Cap Index Fund (VIMSX) and their Small Cap Index Fund (NAESX). I am also debating between the Total International Stock Index (VGTSX) or the European Stock Index (VEURX).

Another thought was just to do 80% in the Total Stock Market Index and 20% in a Foreign/International Index. However, I think the plan above could result in better returns overall (the expense ratios are all really low).

Any thoughts/suggestions?

if you do 50% VTMSX and 20% mid cap and 10% small cap, you really have more small cap and mid cap than 20 and 10%.

I think the total market is considered around 70% large cap and 30% small cap (in this regard, some acadamia suggest there really is not mid caps).

I think the allocation looks good. I am 45% large cap, 15% mid, 15% small and 25% foreign (15% large and 10% small).

I look for a 9% return, and I think your choices would approach 9% long term as well.

[autoxer]

I have a similar allocation between my 401k & my Roth. I also have a Bond fund, which is currently about 4% of my portfolio. Somewhere I read that having a small portion of bonds can reduce risk without much of an impact on performance. My 401k doesn't have offer VTSMX or VGTSX, but I do hold them in my Roth.

I think I'm currently about:
40% Large Cap
30% Mid/Small Cap
26% International
4% Bonds

If you look up VGTSX's holdings, you can see that 59% of it's assets are VEURX, but it also holds the (25%) Pacific Stock Index & the (15%) Emerging Markets Index. I guess I picked it, because it's more diversified.

[Scanner]

]50% Large Cap Index
20% Mid Cap Index
10% Small Cap Index
20% Foreign/International Index

1. Increase your foreign exposure to 30%
2. Decrease your corporate American economy exposure (80% at this time)
3. Get another asset class in there. You are 25 - do you own a home? If not, I would deploy 10-20% at least in a REIT. If you do own a home, I think it's appropriate to consider the equity in your house as a real estate holding and maybe not necessary.
4. Consider a commodity, maybe a broad commodity index if you are adverse to single commodities.

But actually, your deployment is party line so take my contrarian advice with a grain of sodium chloride

[LivingAlmostLarge]

Just put 25% in each! LOL.

[wellheeled]

Depending on how much money you have, a Target Retirement Fund 2050 or 2045 might be a good choice for you.

Most of the funds require a $3k minimum, I believe (although Vanguard recently changed their fee structure).

The most important allocation you make is the split between equity/bonds. I think a Total Stock Market Fund 80% and Total Intl Stock Index 20% sounds nice and simple if you are aiming for a 100/0 stock/bond and 80/20 domestic/foreign. You could add a Small Cap Index/Growth/Value to overweight the small-caps, if you want. Be sure that you are prepared to hold a 100% equity portfolio through really really bad times (think 2000-2002) and won't sell in a panic.

If you want to use SP500 Index, you could add Extended Markets Index (midcaps and small-caps). A Total Market Index + Mid Cap Index + Small Cap Index would overweight midcaps and small caps. I'd suggest the Total Intl Stock Index over the European Index because you get exposure to Asian/Pacific and emerging markets.

I'd suggest you visit Diehards.org for more information/advice - they are very helpful, especially if you have an all-Vanguard portfolio.

[anonymous_saver]

I don't think I could ever rationalize doing a Target Retirement account. It's good for some people, but I'm willing to (and enjoy) spending time going over my accounts. Plus, I would not have any account that includes bonds at my age.

I will think about the REIT account though (I don't have a home yet, I am saving for one). I don't think I would do more than 10% though. In this situation, I would think about doing the following.

55% Total Stock Market Index
10% REIT Index
15% Mid Cap Index (Possibly a Mid Cap Growth Index, since the REIT is a Mid Cap Value Index)
20% Foreign/International Index

Another combination that is floating around in my mind is to do:

55% 500 Index
15% Mid Cap Index
10% Small Cap Index
20% European Index


Awwww all those numbers floating around!

By the way I will very soon have about $4,750 in my 403(b) and $19,000 in my Roth IRA. I realize that I wouldn't be able to hit these exact percentages right away (it may take a few years) but that's fine.

I make about $35,000/yr. and very likely will be getting a raise to the $40,000+ level next year. I also have a pension fund through my work. Next year I am planning on putting the full amount in a Roth IRA, and about $9,000 more into my 403(b).

[jIM_Ohio]

I think you are short changing yourself only doing Europe. And a REIT at 5% should smooth out volatility, even with such a small position.

Adding mid caps without small caps appears to leave a hole, IMO.

[anonymous_saver]

Jim-
I agree about the REIT, 5% would probably be an ending goal for me once I would get more money into my accounts. However, my reasoning if I only use the 55% Total Stock Market Index, 10% REIT Index, 15% Mid Cap Index, 20% Foreign/International Index mix is that the Total Stock Market does include some small cap funds.

Also you are probably right about the European Index. It's just hard for me to see the differences in their average interest earned since inception, they are 8.09% and 11.24% respectively. I know the Total International Stock Market is more diversified, it's just difficult to go with that one instead because of the lower returns.



Does anyone think it's better to do the Total Stock Market and the Mid Cap mix more than the 500 Index/Mid/Small mix?

Or does anyone have a reasoning behind choosing the European Index over the Total International Stock Index? Or any other Foreign/International Indices through Vanguard instead?

Thanks for talking this through with me, I'm sure my partner is sick of hearing about it.

[jIM_Ohio]

Originally Posted by anonymous_saver

Jim-
I agree about the REIT, 5% would probably be an ending goal for me once I would get more money into my accounts. However, my reasoning if I only use the 55% Total Stock Market Index, 10% REIT Index, 15% Mid Cap Index, 20% Foreign/International Index mix is that the Total Stock Market does include some small cap funds.

Also you are probably right about the European Index. It's just hard for me to see the differences in their average interest earned since inception, they are 8.09% and 11.24% respectively. I know the Total International Stock Market is more diversified, it's just difficult to go with that one instead because of the lower returns.



Does anyone think it's better to do the Total Stock Market and the Mid Cap mix more than the 500 Index/Mid/Small mix?

Or does anyone have a reasoning behind choosing the European Index over the Total International Stock Index? Or any other Foreign/International Indices through Vanguard instead?

Thanks for talking this through with me, I'm sure my partner is sick of hearing about it.

I missed the total index word.

I might consider 15% European 5% total world index. It will be considerably less volatile, yet you can overweight where you think returns will be higher.

Whatever allocation you have, you should also enter with a rebalance strategy. Meaning once a year, every other year, 2% deviations, 5% deviations... something.

I rebalance twice a year. This means I look at my investments and their performance twice each year (June 1 and Dec 1). The 2% and 5% methods, IMO, require more frequent checking.

[anonymous_saver]

The rebalancing suggestion is a great one. Maybe I could do the 2% version quarterly. I could time it for when dividends come out. I also like the June 1st and December 1st suggestion. I think either would probably be pretty good.

I will ponder the the 15% European Index and the 5% Total World Index suggestion. Although from a quick look I don't think Vanguard includes a total world index (I think all of theirs exclude the US). I could be wrong though because I did only look quickly.

By the way, I'm obviously extremely busy at work today. Can't you tell with all my posts?

[jIM_Ohio]

Originally Posted by anonymous_saver

The rebalancing suggestion is a great one. Maybe I could do the 2% version quarterly. I could time it for when dividends come out. I also like the June 1st and December 1st suggestion. I think either would probably be pretty good.

I will ponder the the 15% European Index and the 5% Total World Index suggestion. Although from a quick look I don't think Vanguard includes a total world index (I think all of theirs exclude the US). I could be wrong though because I did only look quickly.

By the way, I'm obviously extremely busy at work today. Can't you tell with all my posts?

I don't index, so don't know what to call "total world". But even 5% in International Value (which is diversified across more than Europe).

The 2% or 5% techniques suggest that if balances exceed the %, you rebalance. But you need a way to monitor (check balances once per month, once per quarter...). The June 1 and Dec 1 technique is easy. I check my balances about 10-20 days before (I have an outlook reminder which comes up). In June I only adjust contributions, so I send more to the underperforming assets for 6 months. In December I reset the contributions back to normal, then buy/sell to rebalance.

Because I am also approaching 15-20 years to retirement, I add a 1% bond position at each rebalance as well *until I hit 10% bonds*.

[kv968]

Originally Posted by anonymous_saver

Also you are probably right about the European Index. It's just hard for me to see the differences in their average interest earned since inception, they are 8.09% and 11.24% respectively. I know the Total International Stock Market is more diversified, it's just difficult to go with that one instead because of the lower returns.

Although the European has still slightly beaten the Total Int'l at the 1, 5, and 10 year return marks also, never compare funds by their "since inception" numbers. Unless the two funds started practically on the same date, those numbers are basically useless when doing a comparison since they're capturing different time periods.

[autoxer]

Originally Posted by anonymous_saver

Also you are probably right about the European Index. It's just hard for me to see the differences in their average interest earned since inception, they are 8.09% and 11.24% respectively. I know the Total International Stock Market is more diversified, it's just difficult to go with that one instead because of the lower returns.

As they say, "Past returns don't guarantee future results." Are you going to chase returns each time you rebalance or are you just going to make sure it is well diversified?

[Scanner]

55% Total Stock Market Index
10% REIT Index
15% Mid Cap Index (Possibly a Mid Cap Growth Index, since the REIT is a Mid Cap Value Index)
20% Foreign/International Index

I like this one much better - 2 thumbs up.

It's simple and doesn't get all complicated like JimOhio's.



(you know I am just joshin' ya, Jim)

[EverydayFinance]

For the REIT component, may want to put 5% US and 5% international. WisdomTree has launched some excellent products that have performed incredibly. Not guarantees moving forward, but these are spread across diverse regions, hundreds of companies and have returned over 30% in some recent periods. Dan at everydayfinance.