Allocate your assets as follows: 70% Total U.S. Market Equity Index, 20% Total International Equity Index, 10% U.S. Bond Index. (I would put my 95% confidence interval for these numbers as +/- 20 percentage points each.)
Would you be willing to bet your $500 against my $100 that VTI (US total market ETF) outperforms VXUS (total international ETF) over the next 10 years? Or would you hypothetically accept this bet, even if you don’t want to in practice? I realize there’s a difference between being 95% confident that an investment is a good idea and being 95% confident that it will outperform over a particular time period, so I understand if you wouldn’t want to take this bet.
(If it’s not already obvious, I strongly disagree that investors should overweight US equities relative to the global market portfolio. I wrote more about this here. I think a better default investment allocation is the global market portfolio, e.g., see section 3 here.)
I agree with Michael that a 70% allocation to US stocks is way too high. US stocks’ outperformance against international developed stocks can almost entirely be explained by the increase in the US market’s valuation (which shouldn’t be assumed to continue and indeed, is more likely to reverse). See AQR’s analysis on pg 6 here. Also, what about Emerging Market stocks? This should certainly get some allocation as well, especially if you’re focused on the next 100 years. China and India will increasingly be key economic players and have capital markets that will outgrow the US in importance. In fact, 6 of the 7 largest economies in the world in 2050 are likely to be emerging economies. When it comes to investing, beware of simply extrapolating the past into the future! The US markets have done well because the US has been the dominant country in the 20th century. This is unlikely to continue during this century.
A 10% global bonds/90% global stocks portfolio is likely to be more robust and not suffer from a USD/US historical bias. Keep it simple and avoid picking bond/stock market winners.
You write that money should be added to DAFs in years when your marginal tax rate is high. What should we do with money earned in other years? I believe the answer is to invest in taxable accounts (i.e. your section “Mutual funds in a standard mutual fund advisor”). Then in years when you want to contribute to the DAF, you can move money from your taxable account to the DAF. Donate shares that have increased in value to the DAF to avoid capital gains taxes, and sell shares that have decreased to tax-loss harvest and then contribute the cash to the DAF. In fact, some people may wish to consider starting off investing in taxable accounts and waiting to open a DAF at a later time.
The section “Mutual funds in a standard mutual fund advisor” discusses capital gains tax, but this should not usually be an issue since you can donate appreciated shares to charity or a DAF. Instead, the taxes to look at are from dividends. These are taxed at the capital gains rate that you cite, and are additionally taxed as ordinary income in most states.
I think this is good advice for the most part.
Would you be willing to bet your $500 against my $100 that VTI (US total market ETF) outperforms VXUS (total international ETF) over the next 10 years? Or would you hypothetically accept this bet, even if you don’t want to in practice? I realize there’s a difference between being 95% confident that an investment is a good idea and being 95% confident that it will outperform over a particular time period, so I understand if you wouldn’t want to take this bet.
(If it’s not already obvious, I strongly disagree that investors should overweight US equities relative to the global market portfolio. I wrote more about this here. I think a better default investment allocation is the global market portfolio, e.g., see section 3 here.)
I agree with Michael that a 70% allocation to US stocks is way too high. US stocks’ outperformance against international developed stocks can almost entirely be explained by the increase in the US market’s valuation (which shouldn’t be assumed to continue and indeed, is more likely to reverse). See AQR’s analysis on pg 6 here. Also, what about Emerging Market stocks? This should certainly get some allocation as well, especially if you’re focused on the next 100 years. China and India will increasingly be key economic players and have capital markets that will outgrow the US in importance. In fact, 6 of the 7 largest economies in the world in 2050 are likely to be emerging economies. When it comes to investing, beware of simply extrapolating the past into the future! The US markets have done well because the US has been the dominant country in the 20th century. This is unlikely to continue during this century.
A 10% global bonds/90% global stocks portfolio is likely to be more robust and not suffer from a USD/US historical bias. Keep it simple and avoid picking bond/stock market winners.
Thanks, this was useful! A few comments:
There was some more discussion on this topic in the following question: https://forum.effectivealtruism.org/posts/iyPQ9fSBGrweXAMLL/investing-to-give-beginner-advice
You write that money should be added to DAFs in years when your marginal tax rate is high. What should we do with money earned in other years? I believe the answer is to invest in taxable accounts (i.e. your section “Mutual funds in a standard mutual fund advisor”). Then in years when you want to contribute to the DAF, you can move money from your taxable account to the DAF. Donate shares that have increased in value to the DAF to avoid capital gains taxes, and sell shares that have decreased to tax-loss harvest and then contribute the cash to the DAF. In fact, some people may wish to consider starting off investing in taxable accounts and waiting to open a DAF at a later time.
The section “Mutual funds in a standard mutual fund advisor” discusses capital gains tax, but this should not usually be an issue since you can donate appreciated shares to charity or a DAF. Instead, the taxes to look at are from dividends. These are taxed at the capital gains rate that you cite, and are additionally taxed as ordinary income in most states.