On Wed, 17 May 2006 03:59:35 -0500, Juan Warez
<juan.warez[at]nowhere.com> wrote:

- quote -

It took me decades to understand this simple truth. Yet the
overwhelming percentage of questions have to do with how to invest,
where to invest, how to allocate, tax ramifications, etc. Rarely does
someone ask, "How can I save more?"


-HW "Skip" Weldon
Columbia, SC

Yes, I agree that consistent saving is most important.
However, I think that you are overweight in small cap right now.
My allocation is set as 50-50 US and International.
In each of those I have 25% Large Growth, 25% Large Value, 25% Small
Growth, 25% Small Value. This is because I can't figure
out which class is going to do better for a given year. So
I don't try. I rebalance in Jan. Hope that helps.

Ignoramus18731 wrote:
- quote -

I generalized and appreciate the additional info. I knew the Wilshire
5000 is actually more than 5000 stocks and the S&P 500 is an arbitrary
selection of companies which may or may not actually represent
something significant.

jIM wrote:

- quote -

Just a nit, but the S&P 500 is not composed of the 500 largest companies
by definition (see
javascriptopup('/servlet/Satellite?pagename=sp/sp_article/ArticleTemplate&c=sp_article&cid=1056550523571&r=1 &l=EN&b=4&s=6&ig=48&i=56&f=3&dct=13').
It is true that to be added to the index a company must be fairly
large, but companies sometime stay on the index after they cease to be
large caps. In fact, it has been demonstrated on this newsgroup (to me,
not by me) that the S&P 500 frequently contains microcaps.

The Wilshire 4500 is the Wilshire 5000 with the S&P 500 companies
removed, and as such, contains more than 4500 companies (the Wilshire
5000 contains many more than 5000 companies).

-Will

Wilshire 5000 would **replace** the Russell 1000 and Russell 2000.

Wilshire 4500 is the 4500 stocks in the Wilshire 5000 which ARE NOT in
the S&P 500.

I dealt with this when I was first learning investing and indexes, so I
understand the fustration of which indexes to use...

Within the S&P 500, it should be noted the largest companies ("mega
caps") are around 200 of the 500 companies. By the time you get down
to the 400th, 450th or 500th company, your are in mid cap territory.

The Wilshire 4500 is a mid cap/ small cap index. By definition the 500
largest companies are not tracked (these are the 500 in the S&P 500).
The S&P 500 and Wlishire 5000 are somewhat correllated to performace
(meaning the 500 largest companies impact performance much more than
the next 4500 companies combined). So the Wilshire 4500 is designed to
islote this small cap and mid cap portion of the market.

A portfolio of 20% International, 20% S&P 500 and 20% Wilshire 4500 is
a good place to start. The other 40% could be split into Value, REIT,
Bonds and microcaps as you see fit.

It's actually 40% international

Yes, I have given thought to other indexes. The Russell's just seem
pretty straightforward. I struggled for a while to define exactly what a
"large cap" and a "small cap" were. The best answer I came up with is a
large cap is in the Russell 1000, a small cap is in the Russell 2000, and
everything else is a microcap.

I realize that's not perfect. And if you have better suggestions, I'm all
ears. I currently own S&P 500 and midcap ETF's. Instead of selling
these, I think I would just count them both as being in the Russell 1000
category.

My problem with something like the Wilshire 5000 is that I don't know how
to break it down. My goal was to develop a fairly simple allocation
breakdown that would be easy to alter when the time came. If I have 50%
in the Wilshire, 20% in Russell 1000, and 30% in Russell 2000, how do I
break it down without guessing as to the makeup of the Wilshire?

Ah, I wasn't sure that was how it worked with ETF's. I just figured that
clever lawyers found a way to put one past the IRS (I should have known
that the IRS wouldn't allow this for long).

So you are basically advocating a smaller value percentage position? More
like:

18% R1000
6% R1000value

There is still overlap there, but it is less severe. I'm not saying those
are the numbers I would choose, but is that your general idea? Something
like that would probably still give me the extra value overweight that I
would prefer.

the 30% international looks OK. If you want a small cap international
fund, I like T Rowe Price International Discovery. I own this fund and
other TRP funds, and I prefer managed funds, so take this with a grain
of salt.

the overlap on the 4 Russell indexes looks high. I would choose one
"core" fund, probably a value fund, then look to buy other value funds
which compliment this while limiting overlap.

For example, maybe the Russell 1000 or S&P 500 index fund as the core,
then some managed value funds with a large cap, mid cap or small cap
bias. My core fund is T Rowe Price Equity Index (PRFDX). Around 25%
of my Roth is in this one fund. I also own Mid Cap and Small cap
funds, but put more new money in the core fund than any of the others.

Other than the overlapp of the 4 Russell funds, the overall
diversification looks solid. Have you given any thought to a global
fund, mid cap fund or other indexes (Like S&P 500, Wilshire 4500 or
Wilshire 5000?).

LawsFinance wrote:
- quote -

Well you could just reduce that value allocation - rather than 12%/12%
core/value. You might not want to do that, but if you buy the R1k + R1k
value you hold a lot of stocks (600+?) twice.

- quote -

Yes if you go with ETFs, in practice that's probably going to hold true.
Just like mutual funds, ETFs are required to distribute out any net
realized capital gains but they are able to avoid it by essentially
giving out their low-basis stock during the process of redeeming
"creation units" for institutional investors. Read any iShare prospectus
if you want details on that. There are cases where gains might not be
avoidable (eg cash merger of an significant index component stock) but
the ETF should have less distributed gains year to year than the
corresponding mutual fund. A possible exception is a mutual fund that
has an ETF feeding it, like some of the VIPERs...I believe the fund
could distribute out low-basis stock in the ETF redemption process, and
have the same net result, for the holders of the mutual fund as well.

One footnote: the fact that an ETF is able to distribute out its
low-basis stock routinely shows that ETFs have a high volume of
redemptions. I believe a lot of this can be attributed to arbitrage
trading by institutional investors, but I'm not certain of that.
Regardless of where these redemptions are coming from, a consequence is
that some ETF dividends haven't been 100% qualified, though they would
be if paid from the comparable mutual fund. The reason is that the ETF
didn't meet the required 61-day holding period for some of the stocks
paying dividends.

Also in the footnote department...we haven't seen every liquidity
scenario pan out, so perhaps there are some "run for the doors"
scenarios that would result in gains distributions. Thinking it through,
it seems ETFs can't give away all their embedded gains, and over time
the same issues could develop. And I don't know enough about the tax
laws applicable to the ETF to know whether Congress is likely to catch
up with this and amend their tax accounting rules. I haven't delved into
it fully but it seems there's some money left on the table by the IRS.

On balance I think your assumption is correct...lower distributed gains,
and probably a net tax benefit vs. mutual funds even if the dividends
aren't 100% qualified (but look at it for each ETF).

- quote -

As long as you don't see a need to do small-scale rebalancing that
should work. Small-scale meaning frequently, and keeping your
allocations to close percentages, which can require some small
transactions even in a pretty big portfolio. Doesn't sound like you'd be
doing that though.

-Tad

On Wed, 10 May 2006 19:51:06 -0500, LawsFinance <lawsfinance[at]nospam.com> wrote:
- quote -

I agree. If you save, you have a good chance of becoming rich, if you
do not, you have no such chance.

- quote -

It is not perfect, but yes, it is better than nothing.

Also, there is always a risk of paying too much for anything. So, if
stocks are too expensive, relative to some alternative like bonds, it
would not be profitable to invest in them. A bond that pays, for
instance, 6% could be better than $100 worth of index of companies
that earn $1.50 on that $100.

i

I have never heard of a 401 offering quality investment choices. I guess I
just never even considered it. But if that is the case, you were
definitely wise not to mess with it.

And I must have misunderstood your other statement. I thought you were
talking about a 401 from a previous job. I definitely wansn't suggesting
that you quit in order to find better 401 investments.

Yes, I think you can't really go wrong with saving. Well, unless there are
currency issues, like you said. International exposure hedges against a
weak currency, but does it necessarily hedge inflation? It must to some
point because inflation will be taken into account in a currency's
valuation, but I don't think it's perfect. Still, it is better than
nothing.

On Wed, 10 May 2006 15:35:13 -0500, LawsFinance <lawsfinance[at]nospam.com> wrote:
- quote -


- quote -

Exactly. I diversified into commodities (bought some silver) when it
was not hot, now I am getting rid of it.

- quote -

No one knows this with any certainty, but the nice thing about
international funds is that they provide some degree of protection
against falling dollar.

The financial risk, in the broadest sense, is not volatility as such,
but losing purchasing power, and there is a non-nil possibility that
dollar could substantially fall (to rectify a large trade imbalance).
That means that a dollar would buy somewhat less goods. There is also
a possibility that it would not happen.

Whether dollar will fall or not, remains to be seen, so your
allocation may prove to be the best or it could prove not to be the
best. But in any case saving money and buying sensible things is
better than not saving money.

We are always dealing with uncertainties. Using the past to predict
the future is not always optimal, as well, so past returns are not
predictive of future returns. (and the gobbledygook about how
"commodities have similar return to stocks but lower risk" is quite
dangerous example of using the past to guide the future)

So, we can embrace uncertainty and try to do our best conservatively,
there is no other rational choice.

I think that within given constraints (which seem to be investing
mostly in stock mutual funds), your allocation is quite sensible, but
at some point you may want to reconsider it. For example, you could
save money and buy a rental apartment at some point in life or just
buy bank CDs or some such, or perhaps invest in your friends' venture,
or use your cash to open a law firm.

i

Got it. Alright. Well, thanks, I guess. It's good to know that some
people do share these beliefs. Although it is very easy to get caught up
in those high-fliers. Take the question about wanting to "diversify" into
commodities that was on here a couple days ago. Like everyone rightly
pointed out, that was a very loaded way to ask the question. Everybody
wants to "diversify" into whatever is hot. Human nature, I guess. And
that might be why I am looking at 40% into internationals and 36% into
small caps. They have done well recently. But I do think those
percentages may be a bit high, especially with regard to the small caps.

It is a valid point. There will be a high percentage of assets in the few
top "value" companies in the R1000. But how should I get around that? I
want a substantial portion in large caps and I want at least some extra in
the value index in addition the the holdings of the full index (a value
overweight).

Do we think that maybe further breaking down the R1000 would be the way to
go? Maybe into S&P 500 and S&P Midcap? That would shift some of the
weighting to the lower part of the R1000 index.

"LawsFinance" <lawsfinance[at]nospam.com> writes:

- quote -

Yes, but I'm talking about the IRA at my *current* job. I'm not about to
quit my job just because of a crummy 401(k) plan. :-)

Ironically, I'm still holding on to a 401(k) plan from two employers
ago because it offers a *great* selection of funds that I can't get
elsewhere. Low-fee institutional-class shares, load funds without the
load, some great funds that are closed to new investors, etc.

-Sandra

On Wed, 10 May 2006 12:14:48 -0500, LawsFinance <lawsfinance[at]nospam.com> wrote:
- quote -

I am referring to the following ``I am also a big fan of indexing. I
am also a fan of value as opposed to growth. '' That means that you
are averse to chasing highfliers of the day (internet companies 6
years ago, commodities now, etc), as well as averse to spending too
much money on buying and selling things back and forth. That's
conservative and a good thing.

i

LawsFinance wrote:
- quote -

My only remark is that when looking at the R1000 and R1000 value,
there's quite a bit of overlap. I'd think you could elimate that by
investing some in growth, some in value, but as value has beaten growth
in every time span, 11.21 vs 6.21 over the ten year period, you might
want to consider more weight in value than growth, 16%, 8% or even more.

Given the low cost of ETFs, this may be a non-issue, just my
observation, the overlap.

Joe

I'm not sure on all the rules about this, but if you change jobs, can't you
roll your 401k money into a traditional IRA? That way you could have
complete freedom as to the choice of investments.

- quote -

As you notice, I am a believer in the size effect. I haven't done white
paper type of research on it, but I do believe that small caps yield
higher net returns (with greater deviations). It is that general belief
that draws me to small caps. One of my main concerns was that this was
too heavy into small caps. And since you are the second person to have
that concern, I will definitely be reconsidering the small cap/large cap
breakdown.

- quote -

You are correct that this will lead to a high percentage of assets in a
few large cap value firms. But how can this be avoided? With 24% (or
more) being allocated to large caps and large caps generally being defined
as the Russell 1000 (maybe even the S&P 500), wouldn't there always be a
significant chunk of assets in those few large companies at the top?

- quote -

Yes, the exact allocation will depend a lot on what is available in tax
sheltered accounts. I know the Roth contribution rules and will
contribute the max available to me each year. After that, it will go
wherever I think best at the time. I am almost certain that investments
in taxable accounts will be in ETF form. That way the only tax I have to
worry about is that generated by the dividends. It is my understanding
that ETF's don't generate capital gains taxes until you sell (unlike
mutual funds).

- quote -

Again, please correct me if I am wrong, but I believe that ETF's do not
generate capital gains of this nature. There is no tax until they are
sold... Just like a regular stock, say IBM.

- quote -

The idea was to buy one ETF/month. Or, if it seems too costly, then one
ETF every two months, but that keeps money out of the market longer. I see
the fairly cheap ETF commissions as very small loads for a mutual fund.
Figure $7/2000 is a .35% load (.175% if using $4000). I could probably
live with that, especially because ETF's generally have lower expense
ratios and are much more tax friendly in taxable accounts.

- quote -

It was by design. But, like I said, the intended shifts as I age will
include: small cap to large cap, stock to REIT/bond (yes, I know REIT's
are stocks too), international to domestic. 40% is high, but I don't
think it is ridiculously high. But they have performed very well
recently, which makes me a little afraid of the internationals. Maybe the
international allocation is a little too high.


- quote -

This doesn't include my cash, as I don't consider that "invested". I do
have a stash of cash sitting around in savings accounts for emergency
liquidity needs (or tuition), but I don't expect it to be a significant
part of the portfolio.