Newbie PP Allocation

[hrux]

Hi,
Long time lurker and personally have a small PP established for myself however am attempting to help a friend establish a new PP.  I am not sure if this question has been posed or not since I struggled to find any info on it however have a question on the stock component. 

Instead of allocating 25% to VTI, what are the pros/cons to allocating 6.25% each to US Large Blend, US Small Value, Int. Large Value, Int. Small Blend?

Thanks
Heather

[hrux]

I did find an old post where I actually asked a similar question, duh blonde moment

[MediumTex]

I think the short answer is probably that a stock index works as well or better than a finer slice and dice approach, though there are different views on this (I think we went on for several pages about this matter on the BH thread).

[cabronjames]

Instead of allocating 25% to VTI, what are the pros/cons to allocating 6.25% each to US Large Blend, US Small Value, Int. Large Value, Int. Small Blend?

Heather,

to eliminate any confusion, could you name a good index fund for each of these categories that is representative of the category you describe?

My guess
US Large Blend - VFINX - tracks S&P 500 index

US Small Value - VIOV - tracks S&P Small-Cap 600 Value Index

Int. Large Value - EFV - tracks MSCI EAFE Value Index. note: all Developed (eg Germany) no Emerging (eg China)

, Int. Small Blend - VSS - FTSE All-World ex-US Small Cap Index. note: 76.2% Developed, 23.8% Emerging

[Roy]

I think the short answer is probably that a stock index works as well or better than a finer slice and dice approach, though there are different views on this (I think we went on for several pages about this matter on the BH thread).

This was covered many times, and there is lots of good discussion in the old threads and here.  Indeed, one could have substituted Small Value for TSM and done better still.  If you look only at overall returns over four decades, most Slice Dice versions do better than TSM alone because the risk premia pay-off (have paid-off) over time, which is consistent for how the economic underpinnings of all extra risk premia (in bonds too) work.  Going forward, I guess that over another long time period, the same result would hold.  But looking at this question in isolation is misleading.

Over short periods (as occurred during some of '07-'09) the extra volatility of the riskier classes can cause added grief on the portfolio and emotionally on the investor, and this is not often visible by looking only at year-end totals. When the extra volatility moves downward, along with other asset classes, is where the gut-check happens, and never in the safe, analytical calm of ex post—like here and now.

My take is that the HB PP is so dominated by its broad quartile allocation—of very different asset classes—that getting finicky with the equity portion won't likely matter much over usual holding periods.  So overall, when using the HB PP, I'd stick with TSM or the S&P 500, seeing these as the better choices, but for a number of reasons and not just yearly returns.