How to Achieve the Right Asset Allocation

Overall, a very good article and sound advice. However, the author contradicts himself about whether sub-allocation or picking individual funds is more important. Two contradictory statements may indicate his ambivalence on this point:

"...determining sub-asset allocations is far less important than determining asset allocations—and probably even less important than selecting individual stocks or funds."

"In sum, put more effort into getting the right asset allocation and second-tier diversification, and less effort in picking individual funds and stocks."

posted 9 months ago by Dave from California

As a Boglehead (follower of John Bogle; Bogleheads.org) and a Vanguard investor, I would say I very much agree with his premise and he presents good evidence.
I have heard Sheldon Jacobs speak several times....very impressive.

posted 9 months ago by Gordon from North Carolina

No matter how sophisticated you are, it's always good to step back and rethink the basics. Sometimes those get lost in the heat of battle. This was a good article.

posted 9 months ago by Robert from Massachusetts

I followed Mr. Jacobs from the mid-90's until the mid-2000's through his No-Load Fund Investor Newsletter. Although I have become a Vanguard passive investor, I still refer to his book and advice often.

posted 9 months ago by Charles from California

If you have a just little to invest or you're a novice investor this is a good primer. That said this is a model for the world of the 1970's through the 1990's, where normal business cycles, good balance sheets and earnings growth were the primary factors that determined investment success. One could diversify across and within these asset classes with occasional rebalancing, regularly dollar cost average, and sleep well.

Then came the dark pools, derivatives and uber-leverage. And in 2008 it all came crashing down. The old allocation was an unqualified disaster with no place to hide but cash. And now even cash is a negative real return.

Today markets are tossed about by the actions of politicians and central bankers who are busy debasing their currencies to save their banks at the expense of savers and individual investors. A much more robust line of defense required. Against all this, diversification calls for a position in gold, funds that offer uncorrelated hedging strategies or access to private equiry, timber, a splash of REITS. If you're lucky you'le lose money on the gold and hedging, and make money over the long term on the rest.

posted 9 months ago by Joseph from Minnesota

Great article.I will now Bogle my strategies,playing the whole market more aggressively with some small cap indices and just pick the remainder.I see a 65%whole markets 35% pickem

posted 9 months ago by Fred from New Jersey

Excellent article. I invest with Vanguard and work with one of their CFPs once a year. I was interested in the advice about small caps. Although there is the market average of small caps within the Total Stock Index which I use, I will add some more small caps via the small cap index. My biggest puzzler is the large amount of I-Bonds I hold which are 40% of my bond allocation, purchased in 2001 which have a 3% base and are currently drawing 6.1% interest tax protected and totally safe. I'm 75 and still working some and so is my wife. I will obviously at some point need to be cashing some of these I-Bonds in and will owe taxes on each portion cashed. Maybe nice problem to have but still something I need to address.

posted 9 months ago by Richard from Kansas

I like the article and agree it is aligned with the Vanguard philosophy and recommendations from their CFP's. However, I think their CFP's would say you should not "over-weight" the small-caps above market composition ("I would bring the small-cap weighting up to 20% of your domestic stock portfolio").

A question I have is should your mix of taxable vs. tax-sheltered accounts influence your allocation? If you happen to have a large percentage of your assets in tax-sheltered acounts (e.g. 50%) should you be more open to other asset classes such as REIT's which are lower in correlation but very tax-inefficient unless you can keep them in a tax-sheltered account?

posted 9 months ago by Robert from Massachusetts

very good review and one of the better articles discussing diversification.

posted 9 months ago by Barry from Alabama

This is a very excellent article.

To the poster who thinks this is a model that only worked well in previous "days gone by" you only need to look at the returns of a Total Market Index, like VTSMX, over the last couple years. Even just owning this one fund for beginning investors has out performed the majority of the professionals.

I have put Sheldon's "Investing Without Wall Street" on my Wish List.

Thanks!

posted 9 months ago by Dave from Washington

Robert,
I enjoy putting REIT's in a Roth account, or other assets weighted on the high end of the risk / return spectrum.

In an IRA type account, not so much since you have to realize that 1/4 or more of the income / profit is going to the "taxman" in most cases.

posted 9 months ago by Dave from Washington

An outstanding paper. Mr. Jacobs names pairs of equity funds. I would be interested in his choice of long, intermediate and short term bond funds.

posted 7 months ago by Malcolm Field from California

My broker and I have always been afraid of buying bond funds. my experience with them has not been good. I have partially addressed the issue by heavily waiting my investments with the Vanguard Wellesley fund which is 60% bonds and the Vanguard Wellington fund which invests 40% in bonds. These two funds have really helped when the market goes south. I would like to see your opinion on bond diversification.

posted 6 months ago by James Pace from Utah