Folks,

In this thread, I provide the basic step to step approach on how to use US ETF to do asset Asset Allocation investing.

http://www.investopedia.com/terms/a/assetallocation.asp


The basic assumption here is the person has access to US brokerage and can any US stock including ETF.

https://personal.vanguard.com/us/funds/snap...ntExt=INT#tab=3

https://personal.vanguard.com/us/funds/snap...ntExt=INT#tab=3

The ETF to be used in this illustration are VT and BND.

If a person is convinced that they can time the market to buy and sell, this is not the approach that you want. This thread is for people that want a simple low maintenance approach to investing.

Dreamer

This post has been edited by dreamer101: Jun 10 2013, 06:27 AM

Folks,

In an asset portfolio, most of the return are determined by the stock versus bond ratio. So, for the first step of asset allocation is to determine the stock versus bond ratio.

This has to be decided by each individual. The followings are some of the guideline

A) The stock/bond ratio should be between 80/20 to 20/80. If you go above and below that ratio, you are talking too much or too little risk and do not get the optimal return.

B) Risk versus Return tradeoff.

1) If you take on higher percentage of stock allocation, your portfolio will be more volatile. You need to take the "50% test". Historically, stock can drop 50% of its value at any point of time. Can you stop yourself from selling when that happen??

2) Do you NEED to take risk?? If you have ENOUGH money, you do not need to take on higher percentage of stock allocation.

C) Age in bond rule -> A simple rule is to take you age and use that as your bond ratio.

D) All else fail, do a 60/40 asset allocation. Those are the standard ratio use by insurance company for their investment.

E) When in doubt, lower the stock ratio. The strategy only work if you can yourself from selling in a market crash. If you cannot sleep at night with your aset allocation, reduce you stock exposure...

F) Emergency fund is not part of your asset allocation. You need at least 3 to 6 months of emergency fund. You may keep longer if you feel your income is unstable.

Dreamer

jutamind,

The rule of thumb for trading cost is less than 1%. Assuming USD $10 per trade, that means the invest amount should be at least USD $1K.

Dreamer

MNet,

1) VT invest on 4,500 largest companies in the world. It is highly diversified. It is protected against any single country failure like Malaysia. Annual expense = 0.19%

2) BND invest on the whole US bond market. Annual expense = 0.1%

Their costs and diversification is unmatched by offering in Malaysia.

<<MY mutual fund market also can get that kind of return.>>

3) Return is NOT the main goal of this approach. The main goal is Risk Adjusted Return with minimal expense and maintenance.

Dreamer

Folks,

Let's assume that you pick 60/40 at step 1. Your brokerage expense is $10 per trade and you have approximately USD $10K to invest. Furthermore, let's assume that VT is at $50 per share and BND is at $80 per share.

At 60/40, you will invest $6K at VT and $4K at BND.

For VT, you buy $6,000 / $50 = 120 shares.

For BND, you buy $4,000 / $80 = 50 shares..

Given that you trading cost is $10, you will invest the amount of at least $1K to keep your trading cost down.

Dreamer

kaiserwulf,

If you open an US Brokerage A/C online and buy the ETF through that A/C, what kind of maintenance charge are you referring to??

Dreamer

jutamind,

https://forum.lowyat.net/topic/2027841/+2760

I use TD Ameritrade for stock trading. I am US Resident. Hence, I can invest on Vanguard directly without using ETF. You should ask people on above thread. I believe they either open the US A/C directly on line or open A/C on Etrade at Singapore.

Dreamer

kaiserwulf,

Check out the US stock thread on tax issue. I am not familiar with those issues. I believe as a non-US resident, you may have additional advantage of not having to pay capital gain tax for your stock gain. And, your gain is not taxable by Malaysian government too.

<<Good post. Always buy direct to keep costs low.>>

That statement is not necessary true with Vanguard ETF. Vanguard ETF is actually lower cost than Vanguard mutual fund in most cases. The only difference is I do not have to pay trading cost to buy mutual fund versus ETF.

https://personal.vanguard.com/us/funds/snap...ntExt=INT#tab=3

Total bond market mutual fund expense ratio = 0.20%

https://personal.vanguard.com/us/funds/snap...ntExt=INT#tab=3

Total International mutual expense = 0.22%

Dreamer

This post has been edited by dreamer101: Jun 11 2013, 11:14 AM

MGM and Gark,

Thanks for helping out on this thread...

Dreamer

Folks,

Now, we want to go into step of how to invest additional money.

A) You have additional 1K to invest.

VT had went up $100, BND had dropped to $60..

So, VT @ 120 share = 120 X $100 = $12,000

BND = 50 shares @ $60 = $3000

Total = $15K

VT = 12,000 / 15,000 = 80%
BND = 3000 / 15000 = 20%

Your goal is to keep the fixed 60/40 ratio. Since the BND is below the targeted 40% ratio, you use $1K to buy BND 1000 / 60 = 16 shares @ $60 = $960.

Dreamer

You have additional 1K to invest.

VT had went down $25, BND had went up to $160..

So, VT @ 120 share = 120 X $25 = $3,000

BND = 50 shares @ $160 = $6000

Total = $9K

VT = 3,000 / 9,000 = 33% < 60%
BND = 6000 / 9000 = 67% > 40%

Your goal is to keep the fixed 60/40 ratio. Since the VT is below the targeted 60% ratio, you use $1K to buy VTI 1000 / 25 = 40 shares @ $25 = $1,000.

Dreamer

You have additional 1K to invest.

VT had went down $25, BND had went down $20..

So, VT @ 120 share = 120 X $25 = $3,000

BND = 50 shares @ $20 = $1000

Total = $4K

VT = 3,000 / 4,000 = 75% > 60%
BND = 1000 / 4,000 = 25% < 40%

Your goal is to keep the fixed 60/40 ratio. Since the BND is below the targeted 40% ratio, you use $1K to buy BND 1000 / 20 = 50 shares @ $20 = $1,000.

Dreamer

This post has been edited by dreamer101: Jun 12 2013, 07:05 AM

You have additional 1K to invest.

VT had went up $75, BND had went up to $100..

So, VT @ 120 share = 120 X $75 = $9,000

BND = 50 shares @ $100 = $5000

Total = $14K

VT = 9,000 / 14,000 = 64% > 60%
BND = 5000 / 14,000 = 36% < 40%

Your goal is to keep the fixed 60/40 ratio. Since the BND is below the targeted 40% ratio, you use $1K to buy BND 1000 / 100 = 10 shares @ $100 = $1,000.

Dreamer

Folks,

We had gone through

1) Set an asset allocation ratio

2) How to invest extra money into that asset allocation.

Now, we are going into re-balancing. There are two common kind of rebalancing: time based and band based.

Let's start with time based. In this case, you pick a time to rebalance your portfolio to the fixed ratio. The most common time based rebalancing is annual rebalancing. You pick the same day every year to rebalance your portfolio.

For example, you are on 60/40. at November 1 every year, you will rebalance.

Let's assume that you have 200 shares of VT at $100 and 100 shares of BND @ $120.

200 X $100 = $20,000 of VT
100 X $120 = $12,000 of BND

Total = 20K + 12K = 32K

VT 20K /32 k = 62.5% > 60%
BND 12K / 32K = 37.5% < 40%

So, you need to sell 2.5% of your portfolio (32K) = $800 of VT to buy BND in order to get back 60/40 ratio.

You sell 8 shares X $100 of VT = $800 and buy 6 share x $120 of BND @720.

Dreamer

http://www.betterworldbooks.com/the-four-p...0071747059.aspx

JohnL77,

You can get that book used and cheaper whenever it is available on above url. Free shipping too.

Dreamer

JohnL77,

You do not get IT. That particular used book is not available at that web site at the moment. When it is available, you can get it less than $10 including FREE shipping worldwide.

Most used books in that web site sell for $4 with FREE shipping worldwide.

Dreamer

Folks,

The other kind of rebalancing is called band based rebalancing. The most commonly used band based rebalancing is 5/25. In this case, the first 5 refer to 5% of the portfolio. And, the 25 refer to 25% increase or decrease.

Let's take a portfolio of 100K, the targeted % for asset A , B, C are 60, 30, 10. 5% of 100K is 5K.

For Asset A, for it to trigger the 5 rule, A has either to be lowered than (60 - 5) = 55 or higher than (60 + 5 ) = 65. For A to triggered the 25% rule, A has to be lower than ( 60 * 75%) = 45K or higher than ( 60 * 125%) = 75K.

For 5% rule, 55 < A < 65. For 25% rule, 45K < A < 75K

For A, given that the 5% portfolio rule is narrower than the 25% rule, A will be kept between 55 and 65. When A is below 55, you buy A. When A is above 65, you sell A.

Dreamer

Folks,

For asset B, the 5% rule, means that B has to between 25K and 35K. For the 25% rule, B has be between 22.5K and 37.5K. Given that 5% rule is narrower than the 25% rule, it will be trigger first. Hence, for 5/25, B is kept between 25K and 35K.

For Asset C, the 5% rule means that C has to be between 5K and 15K. The 25% rule means that C has to be between 7.5K and 12.5K. The 25% rule win.


In summary, for 5 / 25 rule and A/B/C of 60/30/10

55 < A < 65
25 < B < 35
7.5 < C < 12.5

If A, B or C cross those threshold at ANY time, they are sold or bought back to the targeted amount.

Dreamer

JohnL77,

<<Any statistical reason why this 5/25 rule should be followed?>>

This is the most common percentage and it works for most asset classes. The GOAL is to avoid trigger rebalancing too frequently but trigger enough to avoid a bubble to overload your portfolio and expose to high risk.

For example, with asset class like commodity, the band may need to be larger since they are a lot more volatile.

<<Do you know how to value average?>>

http://www.investopedia.com/terms/f/famaan...factormodel.asp

I do not understand what you are asking... But, according to FAMA French, exposure to Small Value stock asset class is useful and rewarding. So, if you are interested, you can add small value stock index as an asset class into your portfolio and follow the asset allocation model.

Dreamer

jutamind,


1) You could but Unit Trust Fund for this strategy. But, Unit Trust is lousy investment too begin with. ETF is 0% load and less than 0.5% annual fee. Unit Trust:-( :-(. I buy Public Bank Stock because PBB make a lot of money from people buying Unit Trust.

2) Yes, you cold do that. But, it may not be practical after a while. Please note that it is good to sell. You are "Selling High" and "Buy Low" at the same time. This rule prevent you from getting caught in a bubble. It is a GOOD THING. It keep you SAFE.


http://www.amazon.com/Value-Averaging-Stra...value+averaging

JohnL77,

I have this book and I read it. I consider it as too troublesome and not worth the effort.

I am not an optimizer. And, I do not need the BEST STRATEGY. My goal is to live my life and enjoy my money. It means spend JUST ENOUGH TIME on my investment.

Dreamer

This post has been edited by dreamer101: Jun 14 2013, 11:52 PM