Author Topic: Asset allocation  (Read 5090 times)

Exflyboy

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Asset allocation
« on: May 21, 2014, 12:30:05 PM »
With the increasing murmurings of a market pullback being overdue and its going be massive blah blah blah.. I thought it might be a good idea to test my strategy.

Some of you know I have just retired at 52 with a stash of about $1.3M.  At 60 I will have access to some pension payouts for the Wife and I.

Wife will work for 3 more years ($30k) plus we have rental income ($15k).. The net of this (about $35k) adequately covers our living expenses of 25 to $30k.

The allocation I would guess is about 90% of the portfolio is in low cost stock ETF's

When Wifey retires in 3 years, If I take the current cash in the portfolio it should last another 3 years.

Bottom line from today I have a mostly stock portfolio and can live for 6 years without touching the stash.

With the above scenario.. Why would say a 100% stock ETF portfolio be a bad thing, as 6 years appears to be a reasonable time for the market to recover from a crash?

Thoughts?

Frank

matchewed

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Re: Asset allocation
« Reply #1 on: May 21, 2014, 12:34:13 PM »
Given your current assets, income, and upcoming pension payouts I don't think 100% stocks is bad at all. You have more than enough money to weather a 50% drop that lasts multiple years given your expenses.

ZiziPB

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Re: Asset allocation
« Reply #2 on: May 21, 2014, 02:18:07 PM »
You're assuming that the crash will happen soon.  What if the markets stagnate and stay around the same level they are today or grown minimally (1-2%) for another 5 years and crash then?  Are you comfortable with that scenario (potentially losing 50% in year 6)?  If yes, then I think your AA is fine.  If not, then it seems to me like you are trying to time the market with your allocation.

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Re: Asset allocation
« Reply #3 on: May 21, 2014, 03:08:08 PM »

I am hoping to be a few years behind you with a very similar ER profile so I always try to pay attention to your thoughts.  I agree with your analysis and believe you can continue to be heavy in equities.  No one knows when the pull back will be though.  So I think you should look at it as; when do I have enough?  Meaning there probably isn't a set dollar amount that is THE key number for you.  You probably have a minimum and then you have an amount that is way more than enough.  You want to land somewhere in the middle.  I believe you should set your allocation to land somewhere in that range and adjust to reduce risk as much as you can. 

aj_yooper

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Re: Asset allocation
« Reply #4 on: May 21, 2014, 06:58:17 PM »
We are retired also and have pensions; our stache will not be touched for at least 5 years and recently switched to a more conservative portfolio.  AA is 60/40 (same as earlier) with the equities now mostly in low beta funds (health, utilities, consumer staples) and some in international, REITs, and small cap value.  Our fixed is in a bond/CD ladder.  We aren't trying to hit a home run, and don't want very large gyrations.  Dampen volatility.  Sometimes markets take a long time to recover. 

Frank, you seem good at and with being a landlord.  Would it make sense to do another rental or would that be complicating your retirement?  I would not want a near 100% equity position when you basically have it made already.  I would have regrets with  a long comeback time from a stock collapse and with no fresh money or fixed income to buy during a down market.  Would it pain you not to make the average, but have lower volatility?

This commentary goes into partitioning the investments to meet multiple objectives:  http://www.gaamwealth.com/wp-content/uploads/2013/09/Boomers-Avoid-Retirement-and-Stay-Alive-article-reprint-TN-4-11.pdf 
It's some purple prose, but not too bad.
« Last Edit: May 22, 2014, 06:24:02 AM by aj_yooper »

Exflyboy

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Re: Asset allocation
« Reply #5 on: May 22, 2014, 01:07:36 PM »
Thanks all,

Well I asked the question clearly a degree of discomfort in my strategy.. otherwise I simply wouldn't have asked...:)

As an illustration I added what could be our max spend over the coming years assuming pension projections are correct etc.

1 to 3 years: 15k rent+$54k from stash @ 4%+ $25k net Wife's salary = $94k................................. Annual expense $30k
3 to 8 years: $15k rent + $68k stash( assume 8% growth) ................... = $83k................................ $33k (assume 3% inflation)
8+ years : $15 rent + $100k stash (ass 8% growth) ............................. = $115k..............................  $38k (3% inflation)

The above is something of a best case of course, but it illustrates we should have plenty even if the market stayed totally flat and our rentals burned down. The larger of the rentals is a manufactured home on our property so is steadily decreasing in value, but it is in good shape so I'd estimate it has another 10 years of useful life.

So I think on balance having less risk for less total return (which I really don't need) is a good tradeoff.

Of course the trick will be what sort of growth can I expect from a less risky portfolio.

All one "needs" of course is to replace the 4% plus growth for inflation.

Some research required.

Frank

nereo

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Re: Asset allocation
« Reply #6 on: May 22, 2014, 01:35:50 PM »
Some of you know I have just retired at 52 with a stash of about $1.3M.  At 60 I will have access to some pension payouts for the Wife and I.

Wife will work for 3 more years ($30k) plus we have rental income ($15k).. The net of this (about $35k) adequately covers our living expenses of 25 to $30k.

With the above scenario.. Why would say a 100% stock ETF portfolio be a bad thing, as 6 years appears to be a reasonable time for the market to recover from a crash?
Maybe I'm missing something, or miss-interpreting something here...
If i understand you correctly, you have $1.3M in almost all a low-cost stock index.  You have annual expenses of no more than $30k with $15k of rental income. Your wife is still working and you have at least some pension on the horizon.

Just considering the $1.3M portfolio, annual withdrawls of $30k would give you a SWR of 2.3%.  If your rental income will make up some of hte $30k then you'll have a SWR of 1.2%
*and* you have 3+ years worth of cash-on-hand?  *and* a pension on the horizon?  *and* (perhaps) SS in another decade?

I can't see a scenario where you wouldn't be safe keeping all your money in equities that wouldn't be so devastating that our entire economy would collapse.

matchewed

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Re: Asset allocation
« Reply #7 on: May 22, 2014, 01:44:18 PM »
Some of you know I have just retired at 52 with a stash of about $1.3M.  At 60 I will have access to some pension payouts for the Wife and I.

Wife will work for 3 more years ($30k) plus we have rental income ($15k).. The net of this (about $35k) adequately covers our living expenses of 25 to $30k.

With the above scenario.. Why would say a 100% stock ETF portfolio be a bad thing, as 6 years appears to be a reasonable time for the market to recover from a crash?
Maybe I'm missing something, or miss-interpreting something here...
If i understand you correctly, you have $1.3M in almost all a low-cost stock index.  You have annual expenses of no more than $30k with $15k of rental income. Your wife is still working and you have at least some pension on the horizon.

Just considering the $1.3M portfolio, annual withdrawls of $30k would give you a SWR of 2.3%.  If your rental income will make up some of hte $30k then you'll have a SWR of 1.2%
*and* you have 3+ years worth of cash-on-hand?  *and* a pension on the horizon?  *and* (perhaps) SS in another decade?

I can't see a scenario where you wouldn't be safe keeping all your money in equities that wouldn't be so devastating that our entire economy would collapse.

This.

Exflyboy

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Re: Asset allocation
« Reply #8 on: May 22, 2014, 02:17:16 PM »
Hahah.. yeaeah I kn..

It comes down to fear vs greed.. Actually both at the same time in my case.

I am very risk adverse by nature so I can easily see a big drop in the markets, our large rental burning down (or the markets tank just after the rental trailer burns down.. Oh and those pension projections were just a scam anyway.

The greed part of me says... hey I'd rather have $3M rather than $1.5 and dammit we will travel everywhere business class when the Wife retires...

So yes very much a first world problem I would aggree.

I am much more likely to be the crazy old guy with $10M stashed in the mattress at 92 still scraping by on a $20k a year spend rate..:)

nereo

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Re: Asset allocation
« Reply #9 on: May 22, 2014, 03:35:34 PM »
Hahah.. yeaeah I kn..

It comes down to fear vs greed.. Actually both at the same time in my case.

I am very risk adverse by nature so I can easily see a big drop in the markets, our large rental burning down (or the markets tank just after the rental trailer burns down.. Oh and those pension projections were just a scam anyway.

The greed part of me says... hey I'd rather have $3M rather than $1.5 and dammit we will travel everywhere business class when the Wife retires...

So yes very much a first world problem I would aggree.

I am much more likely to be the crazy old guy with $10M stashed in the mattress at 92 still scraping by on a $20k a year spend rate..:)
Well - the part of you that could have $10M and still feel poor is rooted in behavior & psycology, not economics.  Not sure how to combat that.

As for being 'risk-adverse' - there's two sides to risk.  What you could loose by doing something, and what you won't gain by doing something.  Stuffing it all under your mattress is a surefire way of avoiding loss (except through inflation) at all costs but it's also a surefire way of not seeing any gains.  So while principle is preserved it's actually more 'risky' than putting that money into a low-yield savings account.  etc etc.

I'll make this suggestion based on my own planning (still a decade+ away).  Plan on enough money for X number of years in bonds or secure bond-like investments, and put the rest in a low-cost equity index fund.  When the markets dive pull money from your bond fund until it recovers, and then replenish/rebalance with money from your equities. 
With your spending and savings, you could put a very conservative $300k - or 10 years of your spending - into a bond fund, and still keep $1M in your index fund.  Use any income from rentals, wife's job or pension towards your spending, thus reducing what you need from your portfolio.
With your assets and adversion to loss I personally don't like coming up with a specific "AA-Ratio".  Just figure out how many year's of cash you'd need to feel secure that your portfolio will weather the worst economic storm. Using the great-depression as a benchmark, 10 years seems fair even withOUT all that extra income you have on the side.

Or this:  consider that $1.3M gives you 43 years of withdraws if all you ever do is keep up with inflation.
You've got it made.  Stop worrying :-)

Exflyboy

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Re: Asset allocation
« Reply #10 on: May 22, 2014, 05:10:53 PM »
Well engineers are notoriously risk adverse as they say .. Risk: Death of thousands of people, public humiliation plus possible jail sentence.. Reward: A certificate of appreciation in a handsome plastic frame...:)

But actually Nereo you make pretty good point about psychology.. My Parents you see made every mistake in the book, our free apartment came as part of my Dad's job. They had zero savings and everything on credit. In fact I can remember as about a 12 year old being scared we'd have nowhere to live during the strikes of the time back in the UK.

I would never REALLy stuff a mattress with cash.. That 1.3M came from investing in the market.. especially down markets.

I actually feel a bit better (sleep at night test) about maybe putting 40% in bond funds right now.. with 60% stock ETF's, from my reading I should be able to get a fairly decent return on average and then this frees up money for when we do get the big pullback of 20% or more.

I mean $0.5M sitting in bonds is way more than I need.. There is nothing to say maybe putting half of that into Stock ETF's if we had say a pullback of 20% or more.

If the market does not make such a pullback, well then I just ride the gains I can get.

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Re: Asset allocation
« Reply #11 on: May 22, 2014, 05:43:50 PM »

Didn't William Bernstein ask the question: "When you've won the game, why keep playing it?"

Exflyboy

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Re: Asset allocation
« Reply #12 on: May 22, 2014, 05:49:28 PM »

Didn't William Bernstein ask the question: "When you've won the game, why keep playing it?"

Sadly NOT playing the game is not an option for almost everyone as you have t make on average at least 4% per year plus inflation.. You won't get that year year after year without some stock exposure I believe.

Frank

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Re: Asset allocation
« Reply #13 on: May 22, 2014, 06:19:10 PM »
Two things jump out at me.

First, why try to time the market? People predict crashes all the time. Why do you think you're right this time? With that said, if you're really worried, you could reduce stocks...

Second, you are at a point where you can pretty much weather anything short of the country imploding. Why worry? Stocks are going to be much better over the coming decades and chances are you'll have a good 30 years to enjoy that, if I may be slightly morbid. In that timeframe, the only two real things that can happen are stocks win or the country implodes.

(It probably won't implode. Just my opinion.)

matchewed

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Re: Asset allocation
« Reply #14 on: May 25, 2014, 09:17:35 AM »
Didn't William Bernstein ask the question: "When you've won the game, why keep playing it?"

Sadly NOT playing the game is not an option for almost everyone as you have t make on average at least 4% per year plus inflation.. You won't get that year year after year without some stock exposure I believe.

Frank

But you're not most people. As it was already showed you don't need 4% plus inflation. You need 2.3% plus inflation. You could go super aggressive or super conservative and you'd probably be okay. Now it's just a question of what is easier to pull off or tax minimization. A nightmare scenario that would plummet a portfolio like yours would be the same kind of scenario that is akin to canned food and guns or you just spent it all stupidly.

rmendpara

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Re: Asset allocation
« Reply #15 on: May 25, 2014, 09:47:31 AM »
With the increasing murmurings of a market pullback being overdue and its going be massive blah blah blah.. I thought it might be a good idea to test my strategy.

Some of you know I have just retired at 52 with a stash of about $1.3M.  At 60 I will have access to some pension payouts for the Wife and I.

Wife will work for 3 more years ($30k) plus we have rental income ($15k).. The net of this (about $35k) adequately covers our living expenses of 25 to $30k.

The allocation I would guess is about 90% of the portfolio is in low cost stock ETF's

When Wifey retires in 3 years, If I take the current cash in the portfolio it should last another 3 years.

Bottom line from today I have a mostly stock portfolio and can live for 6 years without touching the stash.

With the above scenario.. Why would say a 100% stock ETF portfolio be a bad thing, as 6 years appears to be a reasonable time for the market to recover from a crash?

Thoughts?

Frank

I think you'll be just fine. If you can survive the next 8 years without exceeding your principal invested (i.e. just taking income from investments), I can't see any issue with that.

Next 3 years, wife's $30k salary + $15k net rent = $15k left over each yr for 3 yrs

After 3 years, $15k net rent + 2.0% dividends from your portfolio (assuming it's broadly diversified): ~$26k = $40k

Age 60: Add in some pension cash, maybe $500/mo?
Age 70: Add in Soc. Security, maybe another $1-2k per mo?

Even if the market tanks, broad index dividends should stay fairly constant. Right now, even S&P yield 2%+, and dividends will likely AT LEAST match inflation going forward.

Exflyboy

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Re: Asset allocation
« Reply #16 on: May 26, 2014, 06:07:29 PM »
Thanks all I really do appreciate all your thoughts.

What I actually did was to go 40% bond index on my 401k only. The reason being is that Bonds do not make dividends.. Namely any dividend they give would not be tax free at 15% tax bracket. All my taxable investments I have left in ETF's and a small proportion in individual stocks.

Its interesting that bonds indexes have been climbing at about the same rate as the S&P 500 this year.

Overall this gives me roughly and 80/20 allocation overall which according to Vanguard over the long term average about 10% per year... Thats more than good enough

If we get a super pullback I'll take the opportunity to roll the bond portion into stock ETF's, but only if the correction >20%

Frank

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Re: Asset allocation
« Reply #17 on: May 28, 2014, 05:31:51 PM »
Thanks all I really do appreciate all your thoughts.

What I actually did was to go 40% bond index on my 401k only. The reason being is that Bonds do not make dividends.. Namely any dividend they give would not be tax free at 15% tax bracket. All my taxable investments I have left in ETF's and a small proportion in individual stocks.

Its interesting that bonds indexes have been climbing at about the same rate as the S&P 500 this year.

Overall this gives me roughly and 80/20 allocation overall which according to Vanguard over the long term average about 10% per year... Thats more than good enough

If we get a super pullback I'll take the opportunity to roll the bond portion into stock ETF's, but only if the correction >20%

Frank

I'm guessing this is why people here keep insisting on creating an Investment Policy Statement.  8)

Chide aside, this was an incredibly interesting and well reasoned thread.  I have a few years to go and a slightly different scenario when I FIRE, but I learned a lot from the discussion, so thanks for posting.