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  • Small Cap Tilt

    Trying to come up with the ideal asset allocation. I'm a 4th year resident who will be starting practice in 11 months. I'm very risk tolerant and won't sell low, I'm not worried at all about behavioral issues like that. I'd like to be aggressive as I can reasonably be for the first 10 years or so of my career. I've been considering the follow allocation and wanted to get some feedback. I'm currently 100% VTSAX for the last 6 years but my portfolio has grown enough it's time to start expanding.

    50% VTSAX

    25% VTIAX

    25% VSMAX

     

    Is that too much tilt? I think my next step would be to add in REITs with 50 VTSAX, 25 VTIAX, 15 VSMAX and 10 REITS.

  • #2
    There's a lot of incredibly risk tolerant newer investors, mainly because of the last 10-11 years. To answer your question about how much tilt is too much, what does your personal investment policy statement say? 25% is too much for me but may not be for you. I think your asset allocation with REITs is reasonable. It isn't what some people here would do but I certainly can't make a great argument against it.

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    • #3
      “Is that too much tilt? I think my next step would be ...”
      Not sure why you are changing from VTSAX.
      The first step in portfolio design is stock/bond allocation to primarily adjust risk.

      Constantly evolving portfolio design is a “bad habit”. Nothing wrong with changing a portfolio design WHEN you risk profile changes. What are changing for?
      Equity is equity, you already have Intl, Small Caps and REITs in VTSAX. What benefit is it? Higher returns vs higher/lower volatility?

      The problem with tinkering is the urge is stronger when things don’t look so good. I think this new one is better.
      Long term, why is 25% small caps better than 100 VTSAX long term?

      Set your allocation for the long term and stick with it. It’s the “tinkering” not your design. Strong commitment.

      That said, 10% small cap would be my preference.
      Put the other 15% in bonds. Get used to it. Don’t think you need Intl on top of VTSAX. Throw in 10% REITs if you want to get used to them too.
      Keep it simple will serve you well. Unless you see benefits, no need to change.

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      • #4
        If you can explain why, then sure

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        • #5
          why not just 100 vtsax

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          • #6
            If you are very confident that small cap will outperform total market and are really risk tolerant then why not 100% small caps?    personally I try to get my stock allocation to be like VTWAX since I have no idea which sector/market will outperform.

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            • #7




              There’s a lot of incredibly risk tolerant newer investors, mainly because of the last 10-11 years. To answer your question about how much tilt is too much, what does your personal investment policy statement say? 25% is too much for me but may not be for you. I think your asset allocation with REITs is reasonable. It isn’t what some people here would do but I certainly can’t make a great argument against it.
              Click to expand...


              Yup, everyone is risk tolerant, these days. Not sure why we are not hearing much about people long 120% long stocks. I mean, why stop at 100%?

              At any rate, the AA is fine for the equity exposure. The thing about tilts is that you may have to stay with them a very long time and experience and endure some long time periods in which your portfolio is underperforming the US total market...like the last ten years, for example.

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              • #8
                Most academic studies of equity tilting show benefits around the 20 year mark.  Your expected equity tilt holding timeframe is stated at 10 years, understand you are taking uncompensated risk and/or need to lengthen your equity tilt holding period.

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                • #9




                  ...I’m very risk tolerant and won’t sell low, I’m not worried at all about behavioral issues like that. I’d like to be aggressive as I can reasonably be for the first 10 years or so of my career. ...

                  ...currently 100% VTSAX for the last 6 years ...
                  Click to expand...


                  100% total market index is aggressive and risk tolerant? Ok.

                  ...small cap index funds are pointless and merely a fund broker company marketing thing. They obviously cater to investors looking to be "aggressive" but with no real idea of how it works (much like foreign indexes cater to "sophistication"-minded investors).

                  Relative to large and mid, small cap stocks have a high failure and also a high quadruple/quintuple/buyout/etc rate (at which point they are eventually no longer small caps). Buying all small caps just makes losers cancel out winners... for every Amazon, you have hundreds of duds. You are taking the good with the bad, getting barely any divi, and paying ER to do so. That doesn't make sense unless you are selling options on VB or whatever (tough to do since barely any professional funds use small cap indexes for options... mostly just 500 and foreign indexes).

                  Index total market or 500 makes sense due to stability and divi, and you can reinvest divi (or take them in retirement). For small caps or micro, they can just be owned in the total market. If you like, pick some individual small cap companies if you want to research or just buy ones you've heard of and try to hit it big. That is not for everyone. Grabbing index baskets of small caps makes very little sense, though; you already own them in the total market... and any "winners" become part of 500 index or large cap funds soon enough anyways. GL, you will realize what works for you.

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                  • #10
                    the only investment strategy anybody needs is to own unregulated monopolies: Apple, Amazon, Facebook, Google

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                    • #11
                      Did you see this podcast? He talks about factor investing.

                      https://www.whitecoatinvestor.com/dare-to-be-dull-with-allan-roth-podcast-113/
                      Helping those who wear the white coat get a fair shake on Wall Street since 2011

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