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rated:
Hi,

I'm trying to set up a portfolio of ETFs for retirement (about 70% stock index and 30% bond index). I'm going with ETFs primarily because I want something that follows the market index and has low fees.

ETF stock choice so far:Vanguard Total Stock Market Index (VTI)
However, it seems to have most of its holdings in large cap companies. Do I need to have an ETF that follows the small and midsize cap companies to balance it out (i.e VXF)? Likewise, do I need an international ETF to further diversify my portfolio (i.e. VXUS)?

I'm also having problems finding the right bond ETF now. My research has led to some potential choices like Vanguard Total Bond Market (BND) and Vanguard Intermediate-Term Corporate Bond (VCIT). But I need more help in this area especially with the Fed just raising the interest rates again.

Any advice is welcomed.
 


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rated:
You might want to take a look at the bogleheads forum.

rated:
zneloangelo said:   Hi,

I'm trying to set up a portfolio of ETFs for retirement (about 70% stock index and 30% bond index). I'm going with ETFs primarily because I want something that follows the market index and has low fees.

ETF stock choice so far:Vanguard Total Stock Market Index (VTI)
However, it seems to have most of its holdings in large cap companies. Do I need to have an ETF that follows the small and midsize cap companies to balance it out (i.e VXF)? Likewise, do I need an international ETF to further diversify my portfolio (i.e. VXUS)?

I'm also having problems finding the right bond ETF now. My research has led to some potential choices like Vanguard Total Bond Market (BND) and Vanguard Intermediate-Term Corporate Bond (VCIT). But I need more help in this area especially with the Fed just raising the interest rates again.

Any advice is welcomed.

 


  VTI is a market-cap weighted representation of the investable U.S. stock market. As a market-cap weighted fund, it obviously has more money invested in large cap stocks than small cap stocks. VTI is essentially equivalent to:

- S&P 500 (large cap): 81% ==> VOO
- Mid Cap: 4% ==> VO
- Small Cap: 81% ==> VB
https://www.bogleheads.org/wiki/Approximating_total_stock_market

If you want to increase your mid- and small-cap exposure, you can buy VO and VB (or VXF - Vanguard Extended Market ETF). Alternatively, you can buy the equivalent mutual fund shares instead of the ETFs.

rated:
Stanolshefski,

Do you think it would be wise to balance out the portfolio with more small and mid cap investments? Or should I just leave it as it is and just go with VTI?


 

rated:
zneloangelo said:   Stanolshefski,

Do you think it would be wise to balance out the portfolio with more small and mid cap investments? Or should I just leave it as it is and just go with VTI?
 

  I personally split my retirement equity allocation between:

VTI (Vanguard Total Stock Market Index Fund): 40%
VB (Vanguard Small Cap Index Fund): 40%
VXUS (Vanguard Total International Index Fund): 20%

And for fixed income I hold BND (Vanguard Total Bond Market Fund).

My equity to fixed income ratio is about 80-85% equities vs. 20-15% bonds.

My taxable account holds just VTI (which is one of the most tax-efficient funds you can hold) -- with FDIC insured accounts for fixed income.

rated:
stanolshefski said:   
zneloangelo said:   Stanolshefski,

Do you think it would be wise to balance out the portfolio with more small and mid cap investments? Or should I just leave it as it is and just go with VTI?

  I personally split my retirement equity allocation between:

VTI (Vanguard Total Stock Market Index Fund): 40%
VB (Vanguard Small Cap Index Fund): 40%
VXUS (Vanguard Total International Index Fund): 20%

And for fixed income I hold BND (Vanguard Total Bond Market Fund).

My equity to fixed income ratio is about 80-85% equities vs. 20-15% bonds.

My taxable account holds just VTI (which is one of the most tax-efficient funds you can hold) -- with FDIC insured accounts for fixed income.

  
try some of those robo site like ml edge, schwap - plug  in your Q/A, risk profile.  They all show recommended portfolio of ETF they would pick.  You can see the what they suggest, and use that as a starting point.  It takes 5 mins to do and no signup required.

rated:
I am nervous about bond funds as the Fed craws to higher interest rated, bonds achieve their increased interest rate by decreasing the value of the bonds.
Tracking some EFTs, which do have market pricing risk as well as interest rate risk, I am currently in different index ETFs which provide some dividends close to or slightly better than bonds over time. Look over DON, NOBL, SDOG, SDY. The attraction to me is diversity different than more popular index funds.
I have individual stocks which have demonstrated price risk, but current dividends are in the junk bond range of about 10 per cent.
ARR pays monthly - price range last 30 days - (21.30 - 22. 79). I have sold and repurchased some but price risk is part of that formula.
Two stocks appear to be more stable, but I have not studied them as long - I just bought more - pays dividends every 3 months. CIM (18.10 - 19.72 ) and NLY (10.54 - 11.11) XDIV soon. That is three months of dividends for a couple of weeks ownership to get started. Do your homework - take small positions - Dollar cost average.  Over a longer term, I like the price growth graphs.

rated:
JW10 said:   I am nervous about bond funds as the Fed craws to higher interest rated, bonds achieve their increased interest rate by decreasing the value of the bonds.
Tracking some EFTs, which do have market pricing risk as well as interest rate risk, I am currently in different index ETFs which provide some dividends close to or slightly better than bonds over time. Look over DON, NOBL, SDOG, SDY. The attraction to me is diversity different than more popular index funds.
I have individual stocks which have demonstrated price risk, but current interest rate is in the junk bond range of about 10 per cent.
ARR pays monthly - price range last 30 days - (21.30 - 22. 79). I have sold and repurchased some but price risk is part of that formula.
Two stocks appear to be more stable, but I have not studied them as long - I just bought more - pays dividends every 3 months. CIM (18.10 - 19.72 ) and NLY (10.54 - 11.11) XDIV soon. That is three months of dividends for a couple of weeks ownership to get started. Do your homework - take small positions - Dollar cost average.  Over a longer term, I like the price growth graphs.

  Using dividend equity funds vs bonds significantly increases risk, and greatly reduces diversification -- since OP would already own all or most of these stocks in an S&P 500 or total stock market index fund.

Furthermore, high-dividend yield stocks also have interest-rate risk -- when rates go up the stock price should go down as well.

Also, there's no free lunch for those "three months of dividends for a couple weeks of ownership," since the share price will go down by the amount of the dividend.

rated:
All true, but I have done well over the past few months even before the Trump market effect. Of course. past performance is not a valid indication of future performance.  This gives OP additional options to consider.

rated:
JW10 said:   All true, but I have done well over the past few months even before the Trump market effect. Of course. past performance is not a valid indication of future performance.  This gives OP additional options to consider.
Please don't take it as a knock on your strategy, but (nearly) everyone does great in a bull market.

rated:
stanolshefski said:   
JW10 said:   All true, but I have done well over the past few months even before the Trump market effect. Of course. past performance is not a valid indication of future performance.  This gives OP additional options to consider.
Please don't take it as a knock on your strategy, but (nearly) everyone does great in a bull market.

  No one should judge their portfolio over a few months. Doing well should be defined as the performance over 10, 20, 30+ years.

rated:
Honestly, whether you just go for simplicity and put it all into some combination of VTI and BND, or "slice-n'-dice" more with mid-cap, small cap, international, REITs, international bonds, etc. -- the main drivers of your eventual long-term performance will mainly be (a) starting early, (b) how much can you save & invest, (c) using tax-advantaged accounts like IRAs, and (d) avoiding fees. All of those Vanguard funds are low fee, so you are on the right path whether you just use VTI for your stock allocation for simplicity, or also add some VB or VXUS.

I would recommend starting simple, just VTI and BND. Once you have it invested and are able to roll with the ups and downs of the market and not freak out, learn more, and get more experience, you can start adding new contributions to some more complex mix if it makes you happy. But don't feel like you're somehow "missing out" if you just start with VTI and BND. Most people would be very very happy if they started a Roth IRA when they were 18 and just stuck it into VTI and forgot about it for 40 years.

rated:
AlwaysWrite said:   Honestly, whether you just go for simplicity and put it all into some combination of VTI and BND, or "slice-n'-dice" more with mid-cap, small cap, international, REITs, international bonds, etc. -- the main drivers of your eventual long-term performance will mainly be (a) starting early, (b) how much can you save & invest, (c) using tax-advantaged accounts like IRAs, and (d) avoiding fees. All of those Vanguard funds are low fee, so you are on the right path whether you just use VTI for your stock allocation for simplicity, or also add some VB or VXUS.

I would recommend starting simple, just VTI and BND. Once you have it invested and are able to roll with the ups and downs of the market and not freak out, learn more, and get more experience, you can start adding new contributions to some more complex mix if it makes you happy. But don't feel like you're somehow "missing out" if you just start with VTI and BND. Most people would be very very happy if they started a Roth IRA when they were 18 and just stuck it into VTI and forgot about it for 40 years.

  I can't underscore enough how much your savings rate matters for success. I'm in my mid 30s, and 2016 was the first year that my investment return exceeded the amount of new investments.

rated:
stanolshefski said:   
AlwaysWrite said:   
 

  I can't underscore enough how much your savings rate matters for success. I'm in my mid 30s, and 2016 was the first year that my investment return exceeded the amount of new investments.

  Congrats on that milestone! It feels good when your money starts working harder than you.

rated:
turtlebug said:   You might want to take a look at the bogleheads forum.
  Or better yet, check out the Bogleheads wiki or the Bogleheads Guide to Retirement Planning.  Even on a site dedicated to investing/saving, there will be a hundred different answers to each of your question, all with legitimate basis. No one has a crystal ball to know what the future holds, so everyone is just guessing based upon history. Read as much as you can and pick one. You can always tweak in the future (especially if it's in a tax-free/deferred account). But as many have commented, the key is actually saving. It's going to get you to your goal a heck of a lot faster than squeezing out an extra 1% 

rated:
JW10 said:   I am nervous about bond funds as the Fed craws to higher interest rated, bonds achieve their increased interest rate by decreasing the value of the bonds.
Tracking some EFTs, which do have market pricing risk as well as interest rate risk, I am currently in different index ETFs which provide some dividends close to or slightly better than bonds over time. Look over DON, NOBL, SDOG, SDY. The attraction to me is diversity different than more popular index funds.
I have individual stocks which have demonstrated price risk, but current dividends are in the junk bond range of about 10 per cent.
ARR pays monthly - price range last 30 days - (21.30 - 22. 79). I have sold and repurchased some but price risk is part of that formula.
Two stocks appear to be more stable, but I have not studied them as long - I just bought more - pays dividends every 3 months. CIM (18.10 - 19.72 ) and NLY (10.54 - 11.11) XDIV soon. That is three months of dividends for a couple of weeks ownership to get started. Do your homework - take small positions - Dollar cost average.  Over a longer term, I like the price growth graphs.

  Not to knock anyone's investment approach, but don't get too excited about anything that pays very high (6%+ in the current market) dividends such as CIM and NLY.  It may seem like easy money, but often you will give up equivalent or greater price appreciation by chasing high dividend yields.  There is a reason the market demands high yields and the reason is risk.

As far as bond funds and dividend stocks / funds, you often hear folks complain that prices will decline as yields rise.  Keep in mind that bond funds constantly roll-over maturing bonds and replace them with new bonds which will increase your yield over time, meaning any price drop is likely to be temporary depending on the average durations of their holdings.  The same thing goes for dividend stocks as the boards of directors will need to keep their yields up to compete with fixed income.  In short, the damage done by rising interest rates on asset prices is often overstated and short-term.  Investing is a long-term activity.

I agree with those who advocate starting out with some ETFs and learning about alternatives over time.  Take your time and study.

rated:
Thanks everyone. Primarily, I wanted to have something that I can just buy and hold without doing anything additional. At least that's the goal for the retirement portfolio. It seems that a long term approach involves both VTI and BND. Am I correct in this assumption?

My non-retirement accounts (ie. taxable accounts) may involve a more hands on approach with more ETF selections. Thanks Stan for letting me know about VTI in that regards as well.

Has anyone here done any of the robo advisors like Betterment or Wealtfront? I was reading another website about how these sites should be used as an Emergency Money Account vs. having a savings because of the higher returns and tax harvesting features.

rated:
zneloangelo said:   Thanks everyone. Primarily, I wanted to have something that I can just buy and hold without doing anything additional. At least that's the goal for the retirement portfolio. It seems that a long term approach involves both VTI and BND. Am I correct in this assumption?
 

I would suggest taking in the wiki over at Bogleheads:
https://www.bogleheads.org/wiki/Main_Page

rated:
Target date funds or etfs are one-stop shopping for predetermined mixes of stocks/bonds. Auto-rebalancing and the allocation to bonds increases at you approach the Target date, The Target date is when you want to start spending the funds.

rated:
I did some work on robo-advisers a couple of years ago and did not find any particular problems. You do have to pay them annual fees depending on your account balance, and IIRC the annual fee is not very attractive with small balances. Some will give you a better annual fee if you automate periodic deposits from your bank.  I would not use a robo-adviser for emergency funds as they focus on stock and bond funds that fluctuate with the markets.  Emergency money should be liquid in money-market or savings accounts.

My gut feel is robo-advisers can be helpful for those with large balances, but I would start with a simpler approach utilizing a discount broker like schwab.com or fidelity.com. The robo-adviser is just one more party between you and your money. They are just going to go out and buy mutual funds or ETFs you could buy yourself, and you will pay them for the service.

As for Target -date funds, again, they are another party between you and your money. Again, they buy funds, re-balance and charge you for it. If they take 1% per year between expenses and trading friction, that's 12-15% per year of your expected annual return of 6% to 8%. Sounds small, but over forty years it's a killer. Like a third of your ending balance. Don't give it to them.

Just decide on your desired split among US stocks, US bonds, international, etc., buy ETFs in those proportions, and add new money as needed to keep them close to your desired split. Simple, cheap, tax-efficient. When you have a quarter-million dollars, you can do something different. You need to get the ball rolling. Remember, you can move your money from broker to broker later.

There are two phases of investment: accumulation while you are working and distribution after you retire.

In distribution it may make sense to harvest gains and losses, re-balance, etc.

In accumulation, your model is add, add, add, add, add, add,... and so on. Re-balance by adding. Stocks rise, add bonds. Bonds rise, add stocks.

Over-complicating it is expensive.

BTW, how old are you?  30% bond allocation seems high unless you are 80.

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