Asset allocation

[gluskap]

So I've been investing in a 401k since I started working full time out of college at 21 and I'm currently 38. I'm comfortable investing 100% stocks because I just dollar cost average and put everything into VTSAX and pretty much ignore investment news. Even when there were the stock market crashes I never sold. While I do plan to retire in the next 10-12 years, the majority of my money will still be in the stock market for the long term since I will only be pulling out my yearly expenses when I retire. And my retirement period will be over a long time span > 30 years.

I currently have about 3 months of expenses in checking/savings and 3 months expenses in bonds as my "emergency fund".  That way if an unexpected big expense comes up and the market is down I can sell my bonds first and not touch the stocks.  Once I get closer to retirement, I plan on putting more of my contributions to bonds so that I have 2 years of expenses in bonds when I retire. I plan on having about $1mil - $1.5mil in investments and a paid off house when I retire. I'm estimating a yearly expense of $40-50k. So with 2 years expenses in bonds, that's anywhere from an asset allocation of around 5-10% in bonds and 90-95% in stocks. I figure when the stock market is doing well then I sell off my yearly expenses in stocks. If market crashes I sell off yearly expenses in bonds. When market recovers, hopefully in less than 2 years I sell off stocks and buy enough bonds to go back to 2 years worth of expenses.

Is this a good way to think about asset allocation? Or am I doing it wrong by not rebalancing?

[NorCal]

That's not a typical approach, but I do like it.  It's conceptually simple and easy to manage.  Those are the important things.  You do take on more risk by not rebalancing, and that will bite you someday.  It's important you understand and are okay with that risk.

There is actually a portfolio drawdown strategy that is very similar to this, but a little more methodical.  Check out the book "Asset Dedication" for more details.  It's essentially a strategy of always having 2-5 years of spending in direct bond ownership (not bond funds), and refreshing spent funds only when the market is somewhat favorable.

[SeattleCPA]

Even when there were the stock market crashes I never sold. While I do plan to retire in the next 10-12 years, the majority of my money will still be in the stock market for the long term since I will only be pulling out my yearly expenses when I retire. And my retirement period will be over a long time span > 30 years.

This from a 57-year-old who experienced the '87 crash, the dot-bomb and the great recession...

I would worry you underestimate the variability in possible outcomes for your plan and therefore wonder if maybe you need to reassess your capacity to bear risk. Especially if you've mostly been saving and accumulating since the Great Recession.

BTW, that isn't a gut feel or intuitive assessment. Your rather tight range of years of work left (10-12 years) suggests this. And yet for a ten-year horizon, the range of annual real returns runs from roughly -5% to 20%. The simple chart below shows this...

P.S. I used cfiresim and Excel and the data you provided to estimate your current wealth and savings rate ... It looks to me as if have $400K right now and are saving $15K a year. On average, that puts you to $1M in ten years using a 100% stocks allocation. But at the ten year marker, you might have only $350K... or you could have close to $3M...

[boarder42]

I have considered a similar approach but in reality in a down market just normalizing your AA will accomplish most of this for you. I never really plan to hold over 10% bonds. But less than 10% doesn't really gain you much over time unless you plan a swr greater than 4%. Then it shifts some.

[gluskap]

Even when there were the stock market crashes I never sold. While I do plan to retire in the next 10-12 years, the majority of my money will still be in the stock market for the long term since I will only be pulling out my yearly expenses when I retire. And my retirement period will be over a long time span > 30 years.

This from a 57-year-old who experienced the '87 crash, the dot-bomb and the great recession...

I would worry you underestimate the variability in possible outcomes for your plan and therefore wonder if maybe you need to reassess your capacity to bear risk. Especially if you've mostly been saving and accumulating since the Great Recession.

BTW, that isn't a gut feel or intuitive assessment. Your rather tight range of years of work left (10-12 years) suggests this. And yet for a ten-year horizon, the range of annual real returns runs from roughly -5% to 20%. The simple chart below shows this...

P.S. I used cfiresim and Excel and the data you provided to estimate your current wealth and savings rate ... It looks to me as if have $400K right now and are saving $15K a year. On average, that puts you to $1M in ten years using a 100% stocks allocation. But at the ten year marker, you might have only $350K... or you could have close to $3M...

Actually my net assets right now are about $1mil.  About $300,000 is in equity from our house and $700k in investments divided between 401k, IRAs, and taxable brokerage account.  We save about $72k a year which is all invested.  I do understand that there will be a lot of variability with this aggressive asset allocation and am okay with that.  I've padded my expenses a bit and if the market were to do badly right when I retired, I could also decrease my spending to bare bones.  The plan is by being more aggressive, when the market does do well, I could do more traveling, etc.  So the trade off is that it is riskier but the reward is being able to spend more or retire earlier if the market does well.