Allocation basics not so basic [closed]

Question

I've been trying to put together a long-term (15-20 years) ETF portfolio (stocks only, no bonds). As I read about the investment and allocation basics, I realized it's far from simple. I would like my portfolio to fulfill the following:

1. Developed : Emerging = 100% : 0%
2. USA : Europe : Asia = 50% : 35% : 15%
3. Core : Satelitte = 70% : 30%
4. Large cap + Mid cap : Small cap = 80% : 20%
5. Growth : Value = 60% : 40%

I find it overly complicated to put together a concrete ETF portfolio that would fulfill all of the above.

Am I on the right track?

Answer 1

It is a bit hard to understand your question, as I am not sure what you are trying to accomplish. Typically asset allocation models (AAMs) look something like:

80% Stocks : 20% Bonds with 15% International.

So your stock ETFs, or funds, would include about 15% exposure to international. Even that becomes tricky. Is Tesla an international or domestic company? What happens in 5 years if their international business accounts for over 60% of their revenue?

With as many competing constraints, it would tend to be very tricky to meet your model and figure out the make up of each ETF. The goal of asset allocation is to make life simple, not complicated. Also many AAMs advocate index funds, not those that are managed to save fees and for overall performance. With all those constraints you will be hunting for funds that are managed and their makeup could change at any time. Also you will be hunting based on criteria that is not present on many searches making life very difficult for you.

If it was me, I would pick the most important set of constraints and seek well performing funds that meet that line item. Then concentrate on your career and generating revenue that you can invest mindlessly.

Answer 2

I don't think you're on the right track. You're adding a lot of artificial constraints to what your portfolio should look like.

Why do you decide on 60%/40% growth vs value? Why decide on a set percentage of how much should be in Asia, compared to Europe? As Pete mentioned, companies might be headquartered in the US but do 80% of their business abroad. And we don't even know how the global stock market will be distributed in 20 years.

Instead of overly complicating your allocation, just buy the market weights. It's the principle behind index investing (and probably the weighting used within most of the ETFs you're looking at), so why not apply it to the whole portfolio?

Market weights already factor the opinions of all market participants as to what each country, large/small size, growth/value flavor is worth, and this is powerful information. A lot more careful analysis went into determining that Apple is worth 2.4 times Facebook, than into your 70%/30% core vs satellite allocation (I don't even know what you mean by that).

My advice: For stocks only, buy VT (a low-cost, whole world ETF), preferably commission-free, and forget about allocations.