A proposed mix of ETFs for my PP

[rocketdog]

Here is my target mix of ETFs for my PP and my wife's PP, once I get them up and running.  Where 2 ETFs are listed, I would buy one for my PP and the other for her PP, for added diversification.  I should mention that our accounts are at Schwab, hence the inclusion of their funds where appropriate.  I'm still reading "The Permanent Portfolio" (I'm up to the chapter on Cash), so these choices are largely based on my reading of "Failsafe Investing", HB's "Money Show" podcasts, and the forum posts here.  If the book points out any obvious flaws in my thinking then I would alter these choices as needed.  But I'm interested to hear what you think so far...

Cash    SCHO      15%
        SHY      10%

Bonds    TLT/EDV  25%

Stocks  SCHB/VTI  10%
        SPY/VOO  10%
        SCHF/VEU  5%

Gold    ZGLDUS/SGOL  15%
        GTU/IAU      10%

[Greg]

I think VTI and VOO are too close to each other to really need to have both. If you want to have the diversification of International (hence the VEU), why not do something less correlated to VTI and go with either VBK or VBR? (Small-cap growth or value)

[rocketdog]

So a foreign small growth/value fund would be permissible in the PP?  I like the idea, but I thought those would be more at home in the VP?  My impression is that we're supposed to keep each sector of the PP highly correlated, so that they can all do the "heavy lifting" together when their turn comes to make a profit?  If I mix uncorrelated assets together in one of the 4 sectors of the PP, doesn't that defeat the benefits by making them work at cross-purposes?

[Greg]

VBK and VBR aren't international small. They are U.S. Small.

I was saying if you wanted to get a broader amount of funds, you could go with:

- A fund that focuses on large, i.e. VTI which mainly focuses on large cap with a bit of small cap (since it is market cap-weighted)
- A fund that focuses on medium and small companies (something VTI only does a bit of)
- A fund that focuses on broad international as well to focus on the areas outside of the U.S.

[KevinW]

This looks pretty good. Personally I prefer to keep things simple so I'd probably use only 4 ETFs for your PP and 4 different ETFs for your wife. IMO there are good diversification benefits on having more than one fund for each asset, but the returns diminish after that point. I.e. I think having 2 gold ETFs in your household is about as safe as having 4. Likewise I prefer to hold all stock in total market funds instead of slicing and dicing it.

[Greg]

This looks pretty good. Personally I prefer to keep things simple so I'd probably use only 4 ETFs for your PP and 4 different ETFs for your wife. IMO there are good diversification benefits on having more than one fund for each asset, but the returns diminish after that point. I.e. I think having 2 gold ETFs in your household is about as safe as having 4. Likewise I prefer to hold all stock in total market funds instead of slicing and dicing it.

So you'd possible be advocating for either a Total U.S. Stock Market fund or possibly a Total World Market fund then?

[KevinW]

Yes, I think a US PP investor should use only total US stock market index funds.

[rocketdog]

VBK and VBR aren't international small. They are U.S. Small.

Sorry, I mixed up my posts.  Even so, that would violate HB's philosophy, which calls for US broad index or S&P 500 as the bulk of the stock holdings (my impression is that he warmed up towards foreign broad index funds towards the end, but not terribly so). 

[rocketdog]

This looks pretty good. Personally I prefer to keep things simple so I'd probably use only 4 ETFs for your PP and 4 different ETFs for your wife. IMO there are good diversification benefits on having more than one fund for each asset, but the returns diminish after that point. I.e. I think having 2 gold ETFs in your household is about as safe as having 4. Likewise I prefer to hold all stock in total market funds instead of slicing and dicing it.

You're probably right about the diminishing benefits of multiple funds for each asset, but HB repeatedly recommended up to 3 funds for the stock portion of the PP, to minimize the risks associated with a single fund.  Just as he recommended holding physical gold in multiple locations (e.g. - at home, in a safe deposit box, and overseas). 

[Greg]

I myself wouldn't worry about risks associated with a single fund. I might worry though about the risks of using the same brokerage (i.e. VTI/VOO/etc.). I worry about all Vanguard, etc. going down at once versus one of the however many.

[rocketdog]

Yes, I think a US PP investor should use only total US stock market index funds.

The PP book allows for 5%-10% in a broad foreign index fund as part of the stock portion of the PP.  I'm perfectly comfortable with 5% in a foreign broad index fund as a small hedge, but many others may not be.  I think each investor has to weigh their own tolerance for small modifications like this.  AFAIK there's a fairly tight correlation between US and foreign broad index funds anyway, so it might not make much of a difference in the long run.  It's more of a psychological Band-Aid for me than anything.

[sophie]

Yes, I think a US PP investor should use only total US stock market index funds.

The PP book allows for 5%-10% in a broad foreign index fund as part of the stock portion of the PP.  I'm perfectly comfortable with 5% in a foreign broad index fund as a small hedge, but many others may not be.  I think each investor has to weigh their own tolerance for small modifications like this.  AFAIK there's a fairly tight correlation between US and foreign broad index funds anyway, so it might not make much of a difference in the long run.  It's more of a psychological Band-Aid for me than anything.

A single total market fund works fine and is the easiest/simplest option, but the only way you can really go wrong with the stock portion is to buy a small number of individual stocks.  HB initially recommended picking out 20 volatile stocks, but then switched to recommending stock indexes when these became more commonly available.  Several people here keep 20% of the stock allocation in an international index.  I did that after I realized that foreign investors have a large impact on the US Treasury bond market, so the international holding helps even out the ride (my impression only, haven't tested this). 

The only "rule" is to avoid buying assets with currency that is not the one you buy groceries with.  That adds currency risk which the PP is not designed to handle.

[Greg]

Yes, I think a US PP investor should use only total US stock market index funds.

The PP book allows for 5%-10% in a broad foreign index fund as part of the stock portion of the PP.  I'm perfectly comfortable with 5% in a foreign broad index fund as a small hedge, but many others may not be.  I think each investor has to weigh their own tolerance for small modifications like this.  AFAIK there's a fairly tight correlation between US and foreign broad index funds anyway, so it might not make much of a difference in the long run.  It's more of a psychological Band-Aid for me than anything.

A single total market fund works fine and is the easiest/simplest option, but the only way you can really go wrong with the stock portion is to buy a small number of individual stocks.  HB initially recommended picking out 20 volatile stocks, but then switched to recommending stock indexes when these became more commonly available.  Several people here keep 20% of the stock allocation in an international index.  I did that after I realized that foreign investors have a large impact on the US Treasury bond market, so the international holding helps even out the ride (my impression only, haven't tested this). 

The only "rule" is to avoid buying assets with currency that is not the one you buy groceries with.  That adds currency risk which the PP is not designed to handle.

That's an interesting tidbit if owning foreign stocks acts as a bit of a hedge against US Treasury Bonds. I was wondering if you'd care to expand upon your logic here for the group.

[sophie]

OK here goes...

Think of the PP as a large pigpen with 4 feeding troughs.  When the pigs run from one trough (e.g. stocks), they run toward another trough (e.g. bonds).  By owning all 4 "troughs", you don't care which one the pigs are feeding from at any given moment, but it's always going to be a subset of them. That's because US Treasuries, gold, and cash are the primary safe haven assets that people buy when they want to pull out of equities.  This is true worldwide, not just in the U.S.

After watching the 3 volatile assets bounce up and down for a while, I noticed that the movements in bonds and gold at times reflected movements in the EFA index, not the US stock market.  Depending on which way the correlation went, this would translate to either a relatively large dip or increase in the PP's total value.  By adding a portion of international stocks, I could capture some of these movements and even out these transitions.

Like I said, I haven't put this to any kind of backtest, it's intuition & observation.  But yes, I got the international stocks not as a hedge against US equities, but to harden the PP's use of gold & bonds for a US investor.

[rocketdog]

Another consideration that's been pointed out before is that most of the larger US companies also have a large foreign presence as well.  So a broad US index fund should also give you a certain level of exposure to foreign markets, albeit in an indirect manner.  In other words, if the economy is flat in the U.S. but booming overseas, then a broad US index fund should benefit from the positive financial activity in foreign markets to the same degree that the US companies in the fund are exposed to those foreign markets.