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Learning, Sharing, and Teaching => Investor Alley => Topic started by: jlajr on March 13, 2015, 09:54:00 AM

Title: Asset allocation
Post by: jlajr on March 13, 2015, 09:54:00 AM

I'd like to hear your thoughts regarding asset allocation under the following circumstances:

I'm 44 and I'm planning to be completely or almost completely financial independent in about 10 years.

I have a completely tax-free savings fund that will likely fund my post-FIRE, pre-pension years. I can choose from a number of asset allocations, including a "general" asset allocation, which basically allows the fund manager to allocate assets freely according to market conditions, and the asset allocation I've chosen, 100% in local-currency-denominated bonds.

I'm using post-tax income to build a taxable account that will also likely fund my post-FIRE, pre-pension years. I do not invest in local mutual funds because the IRS considers them PFICs, private foreign investment companies, which entail complicated reporting requirements and higher tax rates. Right now, this taxable portion of my portfolio is about 87% directly purchased dividend-paying stocks/13% short-term, non-linked, floating rate government bonds. I currently intend to continue to directly purchase dividend-paying stocks until I have more or less equal holdings in 15-20 companies. Almost all of these companies appear in a local dividend stock index. After acquiring stock in the 15-20 companies, I plan to then use after-tax income, plus interest and dividends, to exclusively buy government bonds until I begin living off passive income.

I have two retirement savings plans. The bigger one is a pension plan, which has a "general" allocation. Right now, it is about 50% stocks and other instruments/50% bonds. When I first opened this plan, I chose a government-bond heavy allocation, but about a year ago, changed my mind for a number of reasons, including my decision to begin saving a large percentage of my take-home salary and plan for FIRE. I hope to wait as long as possible to begin receiving payments from this or the other retirement savings plan, thus maximizing accumulation and the monthly payment amount.

For the other, smaller retirement savings plan, and its percentage of my portfolio will gradually drop over time, I have chosen an asset allocation of up to 20% stocks.

The current overall allocation, and also within the pre-pension and post-pension components of my portfolio, is about 63% stocks and others/37% bonds. It was almost exactly 60/40 until this morning, actually.

So, the question is, beyond the sort of conventional factors regarding asset allocation, what are the other factors that I might have missed when deciding the asset allocation for each component of my portfolio?

For example, I've heard that a stock-heavy allocation in the completely tax-free savings fund might be a good idea, because it is tax-free, both on contributions and withdrawals. The catch is that, to withdraw from the fund without restriction, penalty, or tax, I have to wait six years from the first deposit date. It's one of the quirks of the local financial and tax system. Many people I know withdraw all of the money at the end of the six-year period and, for example, use it to buy a car or renovate a house. As a budding mustachian who strongly prefers to rent his residence, that won't be me.

Thanks in advance.