Asset Allocation
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- čas přidán 16. 07. 2024
- Asset allocation is the exercise of determining how much of each asset class you should hold in your portfolio. In general, the asset classes that we have to choose from are stocks, bonds, real estate investment trusts, and alternatives. Those categories can be broken down further, but I will leave it there for now. Except in hindsight, there is no optimal asset allocation. The best that we can do is take guidance from the academic literature.
I’m Ben Felix, Associate Portfolio Manager at PWL Capital.
Referenced in this video:
Foreign Withholding Tax - www.pwlcapital.com/foreign-wi...
Do You Need Alternative Investments? Part I: High Yield Bonds - www.pwlcapital.com/do-you-nee...
Why I prefer to avoid preferred shares (Alternative Investments, Part 2) - www.pwlcapital.com/why-i-pref...
The Illusionary Allure of Hedge Funds (Alternative Investments, Part 3) - www.pwlcapital.com/the-illusi...
The Cross Section of Expected Stock Returns - www.jstor.org/stable/2329112?...
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PWL Capital Blog Post: www.pwlcapital.com/portfolio-...
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#assets #investing #finance
After watching all of Ben's videos, the best thing to do is watch them again ;)
Doing my second watch thru of them now.
@@I..cast..fireball Same!
I put him on .75 speed even though .50 would be better but he sounds drunk then and I can’t take investment advice from a drunk guy😂😂😂
Just want to thank you for putting this information or there through CZcams and your podcast.
Having a background in science and statistics, I really appreciate your evidence based perspective.
Thanks Eric!
he has a podcast?
I find that funny because other videos he posts about fallacies and the psychology behind mistakes made, and as a social worker with a background in psychology/counselling I agree that the approach is easy for me to understand. I guess he's just good at explaining things!
@@BenFelixCSI hi Ben, my allocation atm is 30% Australian Vanguard ETF, 30% US Vanguard US total market, 30% Vanguard world excluding US, 10% bonds. Interested in your thoughts? Also I'm contemplating whether I should add some global REITS and emerging market. If so, at what allocation? Thankyou
@@jimmyzhang0305 This is a hard question to answer because it depends on your risk tolerance, time horizon, and goals. Not to mention considerations such as investment vehicle, tax status, etc.
I used to always hate thinking about money at all because I found it to be unapproachably complicated. Recently, however, I’ve begun to seriously consider my own financial future, and your videos have been an exceptionally useful foundation. While I may not understand some of the industry-specific minutiae, you break down each concept in a way that’s both intuitive and backed by lots of research, data, and rational thinking.
Thanks for turning me on to careful, thoughtful investing!
I really enjoy learning from you Ben, keep it up my man.
THANK YOU!!!
Your rigor and evidence based approach is unique on this platform. Your videos support me in challenging myself.
I had no idea how many modern AI-generated avatars were modeled after 2018 Ben Felix!
Just like books seem to search and find their readers, Ben Felix' videos seem to find their viewers - when the time is right.
I've probably already watched all your videos but still I've came across this one again, at a time in which I'm about to add small+Value factor tilt.
Thanks for sharing your knowledge!
This is Brilliant information! Thank you for explaining so clearly.
Thank you, love your videos - clear and concise! In my mid 30s, just in XBAL right now but may add a bit of XRE.
Really excellent, dense, efficient summaries
Ben,
Great video and info. A few comments and questions:
1) Co-efficient of correlation between US/Canada and international stocks are decreasing then what used to be in the past as the world is more inter-connected (less information asymmetry). That is why Buffet, Bogle and others have not been in favor of Ex-US stocks. So as a middle ground should international allocation is be such that it has more focus on international small stocks as they are more reflective of the local economy?
2) REITS have a lower correlation to stocks and bonds and that is why David Swensen in his book "Pioneering Portfolio Management" advocates a higher allocation to REITs for retail investors.
3) Private Equity as a liquid alternative - With recent news that Vanguard in entering this market (for institutional investors for now), does that mean that this is an asset class worth considering for those investors who have a very long investment horizon? I know it has very long holding period. Any thoughts?
Thanks.
Ben, you should consider putting together a Udemy course. You have a great teaching style and come across like you care about your viewers. You already have lots of great content to build it with 👍😁
Agreed.
Just entered in the investment world. I live in Italy. I have 70% in Italian bonds (I mean issued by the government) linked to inflation and 30% in Ftse all world vangard ETF. I'm still learning
legend! Can't wait to talk about this in my office and sound like the smartest guy.
The best of the best out there when it comes to financial education and wealth planning
Asset allocation is the exercise of determining how much of each asset class you should hold in your portfolio.
This gentleman is obviously very intelligent and knows his stuff. For me, it's very challenging to follow what he is saying.
You're not alone. Feels like a Masterclass in Stock Market Econometrics. What I do, is get a pen and paper, headphones, and listen slowly, taking notes, stopping and replaying many times. I actually created a playlist from all the videos (81 so far), and listen to two at a time. There are also quite great gems in the descriptions and comments. You learn a few things from others too. It has revolutionized my DIY investing. Ben is doing passionate public service. And we are very grateful for that.
@@wesleydonovan4262 that’s dope
Keep reading and researching until you are fluent in the language.
I just found your channel. I’ve been procrastinating studying for the CFA L2 exam by watching all your videos lol.
That’s at least somewhat productive procrastination I hope!
I would love to hear about REITS vs IUSV + IJS from a Canadian investor's perspective and considering tax and currency exchange. It could significantly simplify a portfolio if exposure to size and value could be had in CAD.
My favourite investing channel on CZcams! Complex topics explained in short videos in laypeople terms. You're going to put yourself out of a job soon Ben!
On his podcast, the rational reminder podcast, he recently had an episode on why the availability of investment information is not a replacement for financial advice and financial advisors, highly recommend it
Hey Ben, I'm American so I still watch your videos anyway because you give a lot of good information generally! invest with Fidelity brokerage through my company with 4.5% match of a hundred. I have 40% in s&p index, I have 15% in both mid and small-cap blend, 15% in foreign index, 10% reit mutual, 5 mutual fund bond blend
Don't add up to 100%
@@junliang7965 he said he is American don’t be so harsh on the guy
I don't have a lot of control over asset allocation in my retirement fund, so I just split it all 50/50 between the S&P 500 and a completion index. It's not perfect, but it gives me more weight in small cap than a total market index fund (which we don't have in my fund) would on it's own. I'm over twenty years from retirement, so I don't hold any bonds rn. I'm still evaluating investment in foreign markets, but the only foreign fund I have access to is very weak. I might just stick w US stocks for now.
Thanks for another great video.
Would you consider an updated version of this video, considering the research on the idiosyncratic risk of REITs?
I have a 15% Allocation to REITs, mostly Industrial. I make monthly contributions to a Total World Fund, an Asia Pacific Fund and an S&P 500 Fund. I also have a Balanced Fund with a low-cost provider. My plan is to allocate more to the Balanced Fund as I grow older.
My allocation is 44% total US equity, 28% total developed world equity, 8% emerging markets equity, and 20% total US bonds. Of course now I'm wondering if I should increase my exposure to small cap and value as you suggest. At the same time, I like the simplicity of a four fund portfolio. Decisions, decisions.
Thanks, your videos are superb! Could you make a video on how to put this into practice? How do you research specific indexes and bonds? Which tools do you use to calculate market exposure? How do you put this into a practical model, taking taxes and fees into account?
Yes please
Thankyou so much for the explanation!!
👍Watched it again🙂
Higher interest rates, concerns about a possible recession and instability in the banking system have plagued smaller stocks. I'm still at a crossroads deciding if to invest $400k on my stock portfolio. what’s the best way to take advantage of the market?
Yes true, I have been in touch with a financial advisor. With an initial starting reserve of $80k, my advisor chooses the entry and exit commands for my portfolio, which has grown to approximately $550k.
@@GeorgeNN how do I Meet this Lady?
Thanks for sharing, I just looked her up on the web and I would say she really has an impressive background in investing. I will write her an e-mail shortly.
FYI this is a classic spam-bot interaction
Thank you for having this channel with such usefull content. Im a starting DIY invester/trader. what books/information would you recommend for starters?
By far the best financial education channel I have come across! Your channel really simplified my first year as a DIY Canadian investor.
I share this channel with anyone interested in the matter.
I also read the white papers you and your colleagues from PWL capital produce, they are also very helpful.
Thank you
Thanks for watching!
Also becoming popular in Israel! Best investing channel period.
Awesome video, are there any Australians who've been able to gain this factor exposure through ETF's? Can't find any which index against Value
Thanks for the video. At first I was having difficulty absorbing the material in your videos. But, after more exposure to investing jargon I find your videos very interesting and useful. ✌️😏👍
Excellent! I decided early on that I did not want to cover entry level material. It’s great to know that you have stuck with me long enough for things to make more sense.
Ben Felix I attribute that to my stubbornness aka perseverance. Once again good job.
Thanks Ben for the wonderful videos, these are really helpful - one of the best resources available for a DIY investor.
I am a UK based investor in my 40s looking to invest with a long term horizon, although decent performance (~8%) at the end of 5 year period might just help me get to FIRE. Here the allocation, any thoughts?
1. Vanguard Developed world (VEVE) - 45%
2. Asia Pacific ex Japan (VAPX) - 5%
3. Emerging Market - 25%
4. Russia - 5%
5. Developed world Reits - 7.5%
6. Global Government Bonds - 5%
7. Global value factor - 7.5%
I know there is an overlap between 1&2 and 3&4 but I have been looking at Shiller CAPE valuations across countries and want to minimise US exposure (this still gives me about 30%) at the same time increase it somewhat for some specific countries/regions.
Hey Ben love your channel very informative! Thank you. I am a european investor and the broadest equity index available is Ftse All World ucits etf. Should i add Reits or small caps for added diversification?
100% of my current saving in ETFs:
65:15:10:5:5 NA:EU ex-UK:UK:Japan:developed Asia ex-Japan
100% of my savings account funds (planned to buy an apartment before I decided to move countries, so I was hoarding cash) are about to go into ETFs, too (since I'm a nomad now, I've decided to keep renting):
95:5 NA:Germany (these are the only two options in the country, where the savings are).
I will be putting 100% of my surplus funds (i.e discounting living expenses and emergency liquidity cash savings) in ETFs, too.
I've decided that with the rise of the EU and China, the biggest war of my lifetime will take place in Asia, hence the lower representation. I've also decided that the USA will remain the world hegemon for the foreseeable future, capturing the rent that comes with it.
I'm 100% in stocks. But trying to diversify across the 4 mentioned factors
thank you
I dollar cost average into Vanguard 100% VTSAX. There’s no better way if you want a complete passive approach. I have about 20-25 years till retirement.
Shouldn't every investment made with the time frame in mind ? if you need money in 2 years, 5 years or 25 years, the allocation should be different.
Time frame, goals, and tolerance to loss.
What book do i need to buy to study this? Thanks for the video
I'd be interested in your thoughts w/regard to bond funds in a stagnant/interest rate-cutting environment? Yes, I agree bonds should play a part in a long-term portfolio. Still, these days taking on additional volatility of a more stock-centric portfolio is a better bet than a traditional stock/bond portfolio given where interest rates are likely to move in the near to mid future.
CongratZ!
Great job.
Hello Ben, what do you think of an alocation 40/60 EIMI / IWDA both LSE to retire in 15 y considering that 3-4% yearly rule?
Is it true that value factor & momentum are negatively corrolated? They tend to moove in opposite directions and if so, one should then use a tilt toward only one of those 2 in the same portfolio? Thx Ben! *english is second language
My asset allocation is 60% IWDA, 10% EIMI, 10% WSML, 20% AGGU.
Will be happy to know your opinion on my asset allocation.
P.S. cool blog. It's a pleasure to find someone with good academic background.
60% global developed equity, 10% emerging markets, 10% global small cap, 20% currency hedged global fixed income.
That is a well designed portfolio. My only feedback is that WSML has meaningful exposure to mid caps and small growth. You have mid caps in IWDA. Small cap growth stocks are generally not great to own over the long-term. Paying 35 bps for overlapping mid cap and potentially detrimental small cap growth may not be sensible. If you want small you might want to look for a small value fund. I have a video coming soon on small cap stocks.
Ben Felix thanks for your response. Looking forward for video regarding small cap stocks. I have two questions/comments to you: (1) How do you know that IWDA and WSML are overlapping? According to description of these ETFs - IWDA covers 85% of market capitalization of each 23 developed countries, and WSML covers [remaining] 14%. So I guess these ETFs don't overlap. Please correct me if I'm wrong. (2) regarding small cap stocks - MSCI world small cap index had 14.27% annual return during the last 10 years, while MSCI World had "only" 11.57%. Same result (small cap vs large cap) is for the last 18 years (MSCI World small cap index has a statistics starting from December 29, 2000).
Again looking forward for video regarding small cap stocks. I'm sure it will be well grounded opinion as usually.
Admittedly I am not intimately familiar with the ETFs. I concluded that there was an overlap after reading the index description and cross referencing some other posts online. Here's the info I saw for IWDA showing that it tracks an index with mid cap exposure.
The MSCI World Index captures *large and mid-cap representation* across 23 Developed Markets (DM) countries*. With 1,634 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
www.bogleheads.org/forum/viewtopic.php?t=213693
www.msci.com/documents/10199/178e6643-6ae6-47b9-82be-e1fc565ededb
WSML, according to Morningstar, has meaningful exposure to midcaps www.morningstar.com/etfs/xlon/wsml/quote.html
Based on that info it seems like there is overlap in the midcaps between the two holdings, but again I am not familiar with these ETFs other than the brief research above.
You are correct that small has outperformed large overall for the last 18 years. However, the outperformance of small as a whole is barely statistically significant and quite weak. When you remove small growth the size premium becomes stronger in terms of magnitude and also statistically significant to a higher confidence level (higher t-stat). Based on this I am a little bit skeptical that a small (including small growth) fund will add value after fees over time. I'd go for small value if any small cap exposure.
Ben Felix thank you! Looking forward for your video regarding small cap stocks
Just to let you know - I checked the largest holdings in WSML on whether IWDA has it. No. There is no overlap between these two ETFs. So now the only question - does it make sense to hold shares of small cap companies in long term portfolio? Hopefully you upcoming video will throw light on this😊
Excellent stuff as always Ben.
Do you consider Momentum a legitimate factor?
Thank you! Momentum is certainly a legitimate factor in terms of explaining the difference in returns between diversified portfolios, but it is not a factor that I would add into a portfolio. I wrote about it here www.pwlcapital.com/trend-following-with-managed-futures/
I'm 19 and 100% in a globally diversified, low-cost index fund. I don't see a point in having bonds since my time horizon is > 25 years. Do you agree with me being 100% in stocks or am I being too offensive?
PS. I'm recommending your channel to all my friends, your content is crazy good for such a 'small' channel. Keep it up man!
Thank you!
I think 100% equity is fine. That’s what I do personally. More here if you want: www.theglobeandmail.com/investing/personal-finance/gen-y-money/article-for-young-investors-a-100-per-cent-allocation-to-stocks-can-yeild/
at your age, that makes a lot of sense since you are looking at 60+ years of investing, just remember to get more conservative as you get closer to retirement
Exactly my situation but I'm now 20.
LOL DUDE SAME. I am also in my 20s and literally just jumped into the markets
You should do a portfolio reveal
Hello Ben, I keep coming back to this video. Would it be possible to recommend some Vanguard ETFs as I am struggling to find them based on what you mention. If I was going for something like you mention in your other videos 1/3 US, 1/3 Canada and 1/3 rest of the world including emerging markets .. could you suggest where could one find these funds ? Finally what are your thoughts on more aggressive indexes like the S&P500 and the Nasdaq for lets say a 15-20 year horizon at least ? Thanks !
What wouls a good rule of thumb be for asset allocation between index funds and bonds. I'm using 120 - age for my stock allocation. Any thoughts?
All these videos make the mud a little thinner. Mind doing a video on RDSP, my daughter has this option available to her. Thank you for everything
YES! There are so few options for RDSPs and the rules around parts of them (like what happens if the beneficiary loses their DTC status) are changing, so explanation and clarification would be good. I have kids who qualify, and if I start RDSP now, they'll be in their 40s when our 20 years of contributions plus 10 years of waiting have gone by. So can they start withdrawals without penalty then?
There is value to this level of diversification, but in my experience (20 plus years of investing) it hasn't benefitted me at all. This may be short sighted of me, and I am not an expert by any means, but my experience has led me to my current allocation of 100% US stock index funds (VTSAX and VIIX). I feel that overthinking and overdiversifying has left a lot of gains on the table for me. Am I wrong? Maybe, but this allocation is what I believe in. I believe in the US market and I'm not wasting my time with anything else.
Correct vtsax is doing good , and vtiax and bond is dragging my portfolio making me think if 100% vtsax is the best going forward.
While I understand favoring the US market I want at least some diversification, so I'm about 80% vested in VASGX, 20% in VIOV for small-cap value exposure. It seems unlikely being 100% vested in the US market will hurt you much, and of course there are tax advantages for those of us in the US, so again there's a strong case for your approach too.
Hi Ben, YOU ARE A STAR! Keep educating us!!
Quick question, Do you need exposure to both large cap value stocks and small cap value stock to compensate Market cap weighted index fund in an specific region, or will small cap value alone compensate Market cap weighted index fund?
BTW, I recommend to you guys listening to him and his colleage Justin in Rational Reminder!
Thank you
I’m wondering this too… I think it’s the latter because he calls out small cap stocks and value stocks specifically.
@@nickdiplacido7383 Thank you!!!!
Based on current longer term policy of the Fed and BoC, what can be said in support of holding bond etfs?
Would appreciate your thoughts on bonds now that interest rates are finally increasing
Hello Felix, I added gold to my Portfolio (7%). What do you think About it? I own rental property. Would you treat the net value the rental properties (gross value - value of loan) the same as REIT-value? Thanks
Why tools like the Kelly's Criteria aren't used in asset allocations models?? It could help to stay in the optimal allocation size of each instrument given each asset intrinsic risk and don't get overexposed.... like in a biased coin toss.... y you have 5% higher probability of landing on Head, betting Heads has a positive expected value, but repeteadly betting all your money in each bet will lead you to ruin with 100% probability in the long run... but if instead you bet only a 30% of your wealth in each bet you will become rich in an exponential rate. I believe Kelly Criteria (John Larry Kelly Jr.) is the most important and underated topic in asset allocation... hope you could comment on this
Do you think that low cost SCV index funds do an adequate job giving the investor small and value factor exposure? Could be an easy way to tilt an index fund portfolio to both of these factors using one fund
In the UK I don't see low cost multi factor passive funds or ETFs. I am going to have to hunt for small cap value or settle for mid cap blended.
Factor investing may be difficult to implement as a retail investor, but with access to DFA through your financial planner, you can do it. Although, even Vanguard and others now have ETFs that have factor exposure. I agree that many of these are just the factors within a given benchmark. Do you agree with a Nick Murray that reducing risk through holding defensive assets such as bonds comes at too great a cost in returns especially over the long term?
I am always skeptical of factor products that come in an ETF wrapper. DFA has been as successful as they have due to their daily implementation. ETFs are not managed this way.
I believe that many people have an asset allocation that is far too conservative for their time horizon due to a lack of understanding of the relationship between capitalism and long term returns. I think robo advisors are exacerbating this problem by systematically recommending overly conservative portfolios.
Are profitability and momentum the same thing?
I am developing a model portfolio for retirement base on age and risk tolerance. I am debating on allocating 5% to Commodities but I am free I might be better off applying that 5% to Emerging Equities instead. What are your thoughts on this matter?
I'm 30 and have basically the same asset allocation in my rrsp and tfsa. 10 percent bonds which is on a downward path. I don't rebalance that very much. 40 percent us. 30 percent international (some EM in there). 20 percent Canadian
Sounds like a great asset allocation to me.
@Dave - can you suggest which etfs you use please ? Thanks
40% - US Equities (VTI)
15% - Developed Markets (VEA)
15% - Emerging Markets (VWO)
20% - Real State Investments Trust (VNQ)
10% - Bonds against inflation (VTIP)
I prefer 60% - US Equities (VTI)
20% - Developed Markets (VEA)
20% - Emerging Markets (VWO)
I'm not an expert, but was wondering, are Bonds against inflation a better option than a high-interest savings account these days? As the interest rate is so low now (with hardly any more room to drop further), wouldn't you expect that bonds will reduce in value once interest rates rebound back up over the coming 5-10 years?
Heavy VNQ, I like it :)
60/40 USA stocks & bonds
My asset allocation
29.35% Total Canadian Market Index
13.85% International (Developed Countries) Index
42.35% Total US Market Index
2.82% Cash
6.17% Short Term Canadian Bond Index
5.46% Aggregate Canadian Bond Index
Hi Ben, thank you for this vid. I am learning a lot. I am following your factor-investing videos and it is really helpful for me during my rebalancing. Can you comment on my current allocation. Thanks.
15% - VTI
10% - VEA
10% - VWO
5% - BND
5% - BNDX
9% - VBR
9% - SPHD
9% - USMV
9% MTUM
9% - QUAL
5% - SMT.L
5% - HVPE
Ben, I enjoyed your video very much; thanks. Maybe you can co-venture another video on asset allocation with one of the authors using this site, possibly Nick Doyle?
People always overlook owning physical rental properties. They always say Oh, it's such a hassle. That's what property managers are for. I like having enough rental income to pay all my bills so i can let my growth stocks run so I'm always in the long term gains category.
Drinking from the firehose! Anyone else feel that way
I take notes and rewatch and pause
What does that mean?
Channel your inner John Lennon and it will come to you.
So much info coming at you that you can only absorb a tiny part of it. Like only being able to take a few sips from all the water flowing out of a big fire hose.
@@Cs-hp7ru appreciate the answer..
English isn't my first language
Hey Ben! Wondering how having a federal pension should affect my asset allocation in my additional registered investments. Might having a "guaranteed" pension mean I could invest more in Equities (rather than bonds) than I otherwise might in my personal investments? Thanks so much!
Yes- pensions are annuities/ bonds. Due to their low risk you can invest more in equities.
are you saying Canada gives tax incentives for Canadians to buy Canadian stocks in a way that doesn't apply to people outside of Canada? If so out of curiosity does the US have similar tax incentives for Americans to buy American stocks vs foreign stocks?
My conclusion of meb faber's global asset allocation was that you should not only have Bonds and Stocks. You can not define exactly how much of each asset you should have but you can say it approximately.
From his data i would say an "optimal" Portfolio Should have 50-65% in Stocks 10-20% in Commodities and/or Gold and 20-30% in Bonds. The big difference to your approach would be the recommended assets Commodities and/or Gold. I know you are not a big fan of those assets but in the period 1973-81 they made the difference from negative real returns to positive real returns. Because of that fact I think they are recommended in every portfolio. What do you think about that?
Hello Ben !
Thanks again and again for spending the time to make these great videos , I have a 40%bonds and 60% equity
in a ccp portfolio would you think adding high dividends equity etf for example only XEI to my portfolio will benefit me at all ?
There is no reason to add a dividend focused product to a diversified portfolio. A dividend fund gives you maybe some exposure to value stocks and maybe some exposure to profitable stocks, both of which have higher expected returns. However, this exposure is accidental. As a category, dividend paying companies do not necessarily have higher expected returns.
You should also not have a preference for income vs. Capital gains.
What is your personal asset allocation and which ETFs do you use?
100% of my investments are in this global equity fund. It is not available to the public for direct purchase. ca.dimensional.com/en/funds/global-equity-portfolio-f
@@BenFelixCSI What's the next best choice for us normal folks lol?
Hi Ben,
Thanks as always for your high quality content.
If the goal is to get total market exposure with a slight over-weight in small-value, why isn't it as simple as buying VTWAX for the market factor and supplementing to preference with VSIAX for the small-value factors?
Also, at 2:17 you explained why it makes sense to over-weight the Canadian market, however in 'Factor Investing with ETFs', you propose a portfolio weighted with 33% VCN. This fund holds only 203 Canadian stocks, so despite the favorable tax treatment, that seems like a lot of weight to put in a few hundred stocks to me. Did you have further rationale behind this weighting? Would you still recommend this approach for a US investor?
Thanks again. I am learning a ton by watching your videos!!
Hello Chris, I am wondering if you had any answer to this ? I was just considering going for VTSAX - total stock market index. Would I be able to ask what funds did you get into and what allocation ? Thanks
Hello Ben,
I've recently discovered your channel and am thoroughly enjoying it. Quick question to help my understanding of factor exposure and correlation.
To utilize factor exposure, which hypothetical index fund below would be optimum?
Index A: Securities that are small cap, and value, and profitable
Index B: Securities that are small cap, or value, or profitable
Index C: Securities that are exclusively one of: small cap, value, or profitable
Or perhaps these are equivalent in terms of factor exposure, and the main difference is diversification?
Thanks!
Ryan
20% home bias
70% msci world
10% msci em
Vanguard FTSE All World and Vanguard FTSE All World High Dividend Yield 60/40. Second ETF instead of bonds and I capture the value factor as well. What do you think? TY!
I don't love having a REIT position in my retirement fund because I'm a homeowner and that's obviously a sizable chunk k of my portfolio. If you're a renter then it makes a lot more sense. I'm heavier weighted in the American stocks though. 45% VOO, 16% VB, 10% XIU, 7% VEA, 7% VWO, 15% QQQ for RRSP or non-reg. Part of me just wants to go 100% XWD and call it a day...Your channel is fantastic Ben. Still waiting on your to talk more about post-retirement than pre-retirement though.
I would be a bit hesitant to include the principal residence in your asset allocation. It is an asset for sure, but excluding REITs based on the home is like excluding US equity because you own a bunch of Google shares. I don't think it's sensible to assume that a single asset within an asset class will have similar characteristics to the asset class as a whole. In any case, you probably don't need REITs anyway.
XWD would be easy, but it's just EAFE, TSX 60, and S&P 500. You miss out on any small and mid cap exposure. XAW at least gives you total market, and you just need to add in Canada. VGRO is nice too but obviously not 100% equity.
Great to know that you enjoy the channel! I'll try for some more post-retirement content.
Why not just VTI and VXUS?
We are in Canada. If you are in the US then that’s a good portfolio.
Ben Felix My bad. For a second I was just another ignorant American failing to acknowledge the world is not only The U.S. 😁
As a DIY investor, I'm trying to more or less copy the allocation shown at 5:26, since it makes sense to me. But as an American, I have to replace "Canadian" with "American" in this case. Does a 56% US Equity portfolio make sense?
Also thanks for the tips Ben, the factor investing stuff is fascinating.
you can invest in Canadian stocks and receive dividend payouts as an American. The Canadian tax system poses favorable to out of state investors by having a smaller tax rate of 15% for long term capital gains investments. With dividends, Canada collects 30%, but due to the tax treaty between USA and Ca, the tax rate is reduced to 15% with a possibility that US investors can claim a tax credit on their tax return.
Awesome video. Would the Vanguard Global Value Factor ETF (VVL) meet the requirements of the value factor?
I wish. Here is an excerpt from the product description:
_A portfolio that seeks to capture the premium associated with the value factor by investing in stocks that
appear inexpensive relative to company fundamentals. The value factor has been shown to provide long-term outperformance. *An actively managed ETF with a flexible investment strategy that can adapt to changing market conditions and achieve targeted exposure to undervalued stocks*. Applications: This product may be suitable for investors with a long-term perspective and can be used as a satellite component to *add alpha to a portfolio*._
You will note that this is an actively managed product. This means that it is not purely targeting the value factor, but it is trying to use security selection to achieve better performance. As great as Vanguard, the data are not in their favor on this one.
@@BenFelixCSI reading www.vanguardcanada.ca/advisors/mvc/loadImage?country=can&docId=16011, it seems that the process that vanguard uses to choose the components of the portfolio is just rules based; does this count as the bad type of active management?
Do you need exposure to both large cap stocks and small cap value, or will small cap value alone outperform large cap stocks?
I have exactly the same question!! Ben, what do you think?
An ETF of REITs is a fund of funds, so costs upon cost, making them expensive.
Mine SIPP is on Hsbc ftse world index - I am only using one fund portfolio, any thought
They can't do much in Canada cause they have like 8 months of winter.
ADDING BOND IN PORTFOLIO TO REDUCES PORTFOLIO RISK,. ON THE CONTRARY, ADDING REIT IN PORTFOLIO WOULD WORK IN TWO WAY, INCREASE IN ANNUALISE RETURN AND PROVIDE SUPPORT IN REDUCE PORTFOLIO STANDARD DEVIATION.. SO SIR MY QUESTION IS LIKE ABOUT REIT. COULD THE MANAGER ADD REIT IN PORTFOLIO, GIVEN THE 18 YEAR CYCLE WITH 14YR AND 4YR BREAK UP PERIOD? I AM LOOKING FORWRD YOUR KIND REPLY. Thanks and Regard.
Hi Ben, you have an amazing channel.
I'm currently doing a 90/10 allocation in my TFSA.
60% XAW, 30% VCN, 10% ZAG.
I plan on contributing to my RRSP next year as my yearly income will increase.
If I invest 1k/month in a similar allocation. Would it be worth it to replace XAW with its US equivalent using Norbet Gambit ?
Thanks!
Good question Charles.
You will run into some issues with Norbert's Gambit in your situation. The issues are:
1. XAW does not have a US listed counterpart. You would instead need to break up your portfolio into the three US listed ETFs that replicate XAW (ITOT, IEFA, IEMG). This increases the mental overhead to manage the portfolio, and depending on your brokerage it may also increase the costs of implementation due to having to place multiple trades.
2. Norbert's Gambit is a relatively cheap way to convert money, but it still has costs. The trading commission on small amounts will eat away at the tax savings very quickly. For example, ITOT has a 1.8% trailing yield. Holding ITOT as opposed to a Canadian listed US equity fund in an RRSP eliminates the 15% withholding tax that the US government imposes on dividends leaving the country. So your savings are approximately 0.27% per year, or $2.70 per year on $1,000. It would take a few years for the tax savings to outweigh the costs if you convert each $1,000 contribution.
You could wait until you have a larger sum in cash before converting, but then you would be missing out on expected returns while you wait. You could also invest in XAW in your RRSP for now, and then break it out into the US listed components when you have accumulated a large sum in XAW.
I understand that a posteriori it appears that including factors leads to less risk/ seems to be a good idea for a portfolio, but given that in the past we did not have that knowledge and now we do, is the recommendation to skew to factors still valid? I suppose my point is that assuming this information is now incorporated into stock prices (i.e. higher valuations for small caps/ value stocks relative to before this information being available), an efficient market determines that we can not expect improved returns in the future by skewing towards these factors?
Would love to hear your thoughts!
I think that it is important to understand that factor exposure is exposure to risk. It is not a free lunch. For example value stocks have higher expected returns because they are riskier. If factors are risk-based, then there is little concern for them being arbitraged away. Higher valuations (lower expected returns) might be expected if the higher expected returns were a free lunch, but they are not. In an efficient market we would expect different types of securities to have different expected returns. I suggest trying this video to get a better handle on how factors relate to market efficiency czcams.com/video/yco0sC7AJ2U/video.html
Vanguard: I own small cap etf , mid caps etf, large cap etf, emerging etf , develop etf, and international REITs etf
Fidelity: i own ever U.S sector ETF. healthcare, materials, real estate, consumer staples, consumer discretionary, utilities, energy, industrials, consumer services, financials, and technology
I’m 19 years old and currently I have a 92/8 portfolio, whereas 92% goes to my Vanguard Low Cost ETF consist of S&P 500, Total U.S Stock, Growth, Small-cap, international. and 8% goes to Vanguard Bond ETF. What do you think ? Liked and followed btw, great video content
side note: if im saving for the next 10-20 years from the age of 19, would this be a good portfolio and what are your suggestions, thank you very much
Other than my comments on the other reply I have nothing to add here. I see no problem wit 90% plus in stocks for a young person with stable income and reasonable cash on hand for emergencies.
My other comments are pasted below for anyone else reading:
It's not so much over diversified as it is overlapping assets that can be an issue. For example, it probably does not make much sense to have S&P 500 and US total stock market. S&P 500 is included in US total stock market. They are both market cap weighted. You are probably underdiversified for US vs. International.
US is about 50% of the global market, so it might make sense to have more than 10% International (maybe closer to 50%?). I would not add in growth. The data on growth is not great. Value would be a better tilt. I would not add in small unless you can find small value. Small includes small growth which is not great to own. I have a video on that coming in a few weeks.
Ben Felix Thank you so much for your advise Ben, it means a lot to me and hopefully this can help fellow viewers. So here’s my new proposed portfolio. 50% total us stock market, 10% growth, 10% value, 30% international VANGUARD ETF. The reason why i want to keep that 10% of growth is this recent period, growth has been outperforming value. I understand that historically value outperforms growth and people like warren buffett do prefer value of growth. but how do you feel about having both growth and value etf in my portfolio. Thank you
note: the etf i proposed above is within the 92% of my stock portfolio. 8% is still going to low cost Vanguard Bond ETF.
@@HappleR The new portfolio is an improvement. I would not hold both value and growth. The market is value + growth. If you own the market + value then you have a value tilt. If you own the market + growth then you have a growth tilt. If you own market + value + growth then you are back to market. I would not focus on the recent returns of growth. There are many decades of data from around the world demonstrating that value > growth over the long-term. There are certainly periods where growth beats value, but value is still the better long-term bet. To me it's not about liking value vs. growth, it's all about the data. The data says that if you want to tilt toward something it should be value.
Why is geographic allocation considered unknown and therefore arbitrary if one could apply the same market-cap weighting principle that a total-market index fund uses - to the entire globe?
Do you hold many individual stocks, or are most of your holdings through index funds?
Personally, all index funds.
Ben, thanks for the interesting vid and topic. However I find it a bit strange that you did not mention just cash savings as being part of the asset portfolio. I have been looking at this topic from an econometric point of view. Using the sharp-ratio of the total portfolio as well as applying the theory of Markowitz. It turns our that using bonds does not improve the sharp-ratio of your portfolio. Instead if you want to decrease the risk of your overall portfolio in an optimal way you better add saving to your stocks portfolio, instead of bonds.
Good point regarding cash, but not for the reason that you described. I would say this video is about asset allocation for long-term portfolios. In aggregate, an individual would also have an allocation to cash for their emergency liquidity bucket. I typically say between 3 and 6 months of living expenses depending on the overall situation. I do not typically include that bucket in an investment policy statement, so I excluded it from the asset allocation discussion in the video. But you are correct. An allocation to cash is prudent.
Regarding mean-variance analysis (MPT/Sharpe Ratio optimization), it has to be taken with a grain of salt, or more likely many grains of salt. Sharpe ratios are based on historical returns and relationships between asset classes. This means that an optimal portfolio based on past data may well be sub-optimal going forward. This makes the idea that we can find a perfect combination of securities and then adjust for risk tolerance by borrowing or lending at the risk-free rate wishful thinking.
Further to that, mean-variance optimal is not necessarily optimal for a human investor. MPT assumes that investors are perfectly rational, but in reality they are not. For example, a MPT investor who has found the perfect portfolio and has a high tolerance for risk would borrow lots of money at the risk-free rate to invest. Most humans do not do this. MPT also assumes that stock returns are normally distributed when in reality they have fat tails and skewness.
With all of that in mind, I am not clear on your last sentence:
_It turns our that using bonds does not improve the sharp-ratio of your portfolio. Instead if you want to decrease the risk of your overall portfolio in an optimal way you better add saving to your stocks portfolio, instead of bonds._
Sharpe ratio lies on a line tangent to the steepest part of the efficient frontier. The mix of assets used to create the efficient frontier may include stocks and bonds. It depends on the type of bonds, the time period examined, and the other assets in the portfolio. To maintain that optimal Sharpe ratio you would combine cash and the optimal portfolio to meet your risk tolerance.
In real life portfolios it is not possible to capture the optimal Sharpe ratio because the magnitude, volatility, and covariance of live returns are not constant, nor are they predictable. As opposed to hoping that we can find the perfect portfolio and combining it with cash, which has no expected return, most investors will combine stocks and bonds (which both have a positive expected return) to match their comfort with risk.
Thanks for your clear and thorough response. I understand that stock returns do not have a normal distribution and that an irrational human factor is involved as well. But let's assume at a certain point of time we only have historical info on stocks, bonds and interest rate on cash available to determine the optimal asset allocation with a certain preferred volatility level. When changing the preferred volatility level your asset allocation will probably change as well. By doing this you can create a Pareto set of optimal asset allocations. Optimal means that you select an asset allocation with a certain chosen volatility level that has the highest expected return. My thesis is that in general you would not find any bonds within this Pareto set of optimal asset allocations. In other words if you want to reduce your risk with a certain Pareto set of stocks you are better off by introducing cash into your portfolio instead of bonds. With the use of the theory of Markowitz you can choose your optimal amount of cash associated with your preferred level of risk.
@@erikjanse3994 Thanks for another good comment. I am enjoying the discussion.
Markowitz shows that it may be possible to find the perfect set of portfolios using historical data. This is referred to as the efficient frontier. The steepest tangential point on the efficient frontier is the Pareto allocation. Sharpe showed that once that portfolio is found you can combine it with cash to adjust for risk tolerance, without affecting your risk adjusted returns.
The Pareto portfolio, though, may well contain bonds. It would depend on the data set that you are looking at. That dependence on data (type of bonds, time period etc.) is why practitioners do not implement this way.
As an example, bond returns in Canada have been negatively correlated with stock returns for the past 20 years, but have had a return similar in magnitude. This is not what we would expect going forward. It is driven by the bond bull market caused by falling rates. Adding bonds to stocks using the data from the past 20 years makes a portfolio look amazing but we cannot draw much insight from that.
@@BenFelixCSI Thanks again, clear!
Thought it was a given. Six months of income in emergency funds, rainy day fund, crap happens fund of car/house big ticket. If you want to lump that all together, then that's your cash savings (minimum high yield savings to keep with inflation). Just replenish what you use. At the minimum then take 6 months income and throw that in your portfolio %.
Ben, congratulations! Despite the reservations mentioned, what is the allocation considered optimal between stocks, reits and alternatives? Can you send the link or the name of these studies? Thanks
My magical mix:
30% VTI
30% VXUS
10% VTV
10% VBR
10% BNDW
5% VNQ
5% VNQI
Any Questions ✌🏻😬
LGTM
I'm 26. My company's 401k offers an international index (MSCI ACWI ex. US), a large cap index (s&p 500) and a small/mid index (Wilshire 4500), all with expense ratio less than 0.1%. First I put 40% in international. Then regarding the 60% in U.S stock, I figure 1/3 of it in large cap and 2/3 in small/mid would be the U.S "market", so I do 30% in large and 70% in small/mid. Is this an overkill tilt? Also, is it not ideal because there is no value tilt?
Separate Question- Is there any data on large value? I'm curious about Vanguards VTV fund.
3rd Question- In my Roth IRA international allocation, I do mostly VXUS and a little (10%) in VWO. Is there too much overlap between those two?
4th Question (sorry)- you speak about getting extra small value to achieve a tilt. Would that be like 80%vti and 20% vbr? Or 60/40? How does one choose that split?
S&P 500 is 80% of US market (according to S&P). So US market would be more like 80% S&P 500 + 20% Wilshire 4500. In terms of the amount of tilt, it's subjective. Whatever you feel comfortable with. Dimensional Fund Advisors does 50% large, 25% mid and 25% small in some of their model portfolios. I think that's a reasonable tilt.
One of the challenges with tilting using something like the Wilshire 4500 is that you end up with exposure to small cap growth stocks. In general small growth are not great assets. They drag down the small cap return. It would be better to be small value as opposed to just small when tilting toward small. Yes it might be better to have a value tilt, but if value isn't available then it is what it is.
Yes there is data on large value. It has beaten large growth over the long-term in every country that we have data available to observe.
VXUS is 20% emerging markets so unless you want a tilt I don't see why you need VWO as well.
VTI is 2% small value. VBR is not 100% small value. It has mid and small exposure, and not all of the small is value (according to Morningstar) portfolios.morningstar.com/fund/summary?t=VBR®ion=usa&culture=en-US The split between the two to achieve a tilt is again subjective.
@@BenFelixCSI
Forgot to mention my 401k does have a small/mid value fund with expense ratio of 0.65... not sure if that is worth it...
Separate note- It's interesting that vbr will end up giving you a weight in mid cap and small cap, since vbr is 42% small and 55% mid. So it's more like a small/mid value tilt!
For 65 bps compared to 10 or less I would not go for it.
I agree, VBR also has some small cap growth in there. It's not easy to get clean factor exposure from ETFs.
My asset allocation is 40% S&P500 (VFIAX), 30% U.S. small/mip-cap (VEXAX), 20% emerging markets (VEMAX), and 10% developed markets (VTMGX). It used to be evenly divided 4 ways, but I was sick of 10+ years of under-performance of the developed market fund. Is it because of a higher corporate tax burden in those countries? I don't know.
If I could redo my asset allocation without triggering unwanted capital gains, I would change my U.S. holdings to a total market stock index fund (VTSAX), mostly because I like to optimize for simplicity and to save a few pennies on the expense ratio. I still have hope for emerging markets (relative to developed markets) because they're countries full of young people willing to work hard. I used to wonder what the optimal asset allocation was, but I've come to believe that it can't be known without knowing the future -- so now I'm comfortable with being a little arbitrary and going with my gut on asset allocation.
Michael Gainey doesn’t that mean more potential for growth in developed non US stocks and emerging market if they were not growing as fast as the US market? I keep hearing that 2020s will be dominated by markets outside of the US because these markets have high GDP in relation to the valuation.
At this time I'm 100% in US and Canadian equity, but with the rising risk of a market correction or crash. I feel I should move a large portion of the portfolio to fixed income. But on the other hand, my time horizon is > 25 years so I'm wondering if I should keep my allocation at 100% equity. Anyone have any suggestions? Thanks
My next video is on market timing. Maybe it will help.
Nice vid. No mention of commodities? Why not? They are uncorrelated, and often negatively correlated, to stocks.
Commodity futures have had both periods of negative and positive correlation with stocks and bonds, so it’s really time period dependent to say that they are uncorrelated. Even still, if an uncorrelated asset is going to be added to a portfolio, it should have a positive expected return. Commodities do not have positive expected returns. Commodity products also rely on active management, and in turn have higher fees and costs than stock and bond index funds. I am very skeptical that products like this deserve to edge out stocks and bonds in a well diversified portfolio. Edit: Glad you enjoyed the video, and thanks for the question!
@@BenFelixCSI Good answer. Also, I read your comment in your voice, which was fun. 😂
@@BenFelixCSI What is your opinion about gold as a small part of someone's portfolio? Like 5-10-15%?
@@mgoogyi I would not call 5-10-15% small. In any case, I would not add gold to a portfolio. There are a lot of reasons, most of which are summed up in this article by Larry Swedroe:
_The conclusion we can draw is that, while gold might protect against inflation in the very long run, 10 years-or even 20 years-is not the long run. Erb and Harvey note: “In the shorter run, gold is a volatile investment that is capable and likely to overshoot or undershoot any notion of fair value.”_
www.etf.com/sections/index-investor-corner/swedroe-dont-be-distracted-golds-glitter
aren't most total market index funds heavily weighted towards large caps so they don't actually represent the whole market?
They're heavily weighted towards large caps, which is representative of the whole market.