Asset Allocation

[stephen902]

I would appreciate thoughts on my asset allocation

I'm invested in low-cost index funds from fidelity. I'm 50-20-15-15 in S&P500/international/smallCap/midCap. I have no other considerable assets other than my personal home.

I'm 35. Estimate FI in 2-3 years. No plans on stopping my income ever but who knows.

Thanks for your thoughts

[sokoloff]

First, you're doing better than 99% of your peers, so you don't *need* to obsess over exact allocations.

With that in mind, I'd also be in 100% equities as you are. I think that 20% international is a bit high and is higher than I'd choose, since I take the view that your S&P 500 (and even your mid-cap) funds have substantial international exposure already.

I think that small and mid-cap exposure is important, so I like seeing that you're not 100% S&P.

[Rob_bob]

Looks okay to me too.  I like to have some REITs so I would take 5% from the international and put it in a REIT fund, but that's just me.

[Mighty-Dollar]

I'm 35.

120 minus 35 = 85% stocks
I'd put 15% in a total bond market index fund.

[grantmeaname]

I'm 35.

120 minus 35 = 85% stocks
I'd put 15% in a total bond market index fund.

I disagree. This is as possibly wrong as being 100% in equities in my eyes. There is no one-size-fits-all rule for asset allocations and there is no reason that your bond exposure should increase with your age, especially for early retirees. (My asset allocation is close to 85/15. It’s not necessarily wrong, it’s just possibly inapplicable and depends on OP’s circumstances.)

OP, do you have an investment policy statement?

IMO a total stock market index fund is simpler and cheaper than holding large/mid/small caps separately but there is no reason to sell out of what you’re doing if you’d incur tax costs to do so. So your equity allocation overall looks reasonable. The question is whether 100% of your net worth should be in equities.

IMO almost everyone should hold a bit of bonds too for the “free lunch” that the diversification gets you.

[stephen902]

I'm 35.

120 minus 35 = 85% stocks
I'd put 15% in a total bond market index fund.

I disagree. This is as possibly wrong as being 100% in equities in my eyes. There is no one-size-fits-all rule for asset allocations and there is no reason that your bond exposure should increase with your age, especially for early retirees. (My asset allocation is close to 85/15. It’s not necessarily wrong, it’s just possibly inapplicable and depends on OP’s circumstances.)

OP, do you have an investment policy statement?

IMO a total stock market index fund is simpler and cheaper than holding large/mid/small caps separately but there is no reason to sell out of what you’re doing if you’d incur tax costs to do so. So your equity allocation overall looks reasonable. The question is whether 100% of your net worth should be in equities.

IMO almost everyone should hold a bit of bonds too for the “free lunch” that the diversification gets you.

I've looked at the expense ratio for the combined index funds and they are markedly more than the separate funds. Am I missing something? And I don't understand what this free lunch you speak of is.

[NoStacheOhio]

I'm 35.

120 minus 35 = 85% stocks
I'd put 15% in a total bond market index fund.

I disagree. This is as possibly wrong as being 100% in equities in my eyes. There is no one-size-fits-all rule for asset allocations and there is no reason that your bond exposure should increase with your age, especially for early retirees. (My asset allocation is close to 85/15. It’s not necessarily wrong, it’s just possibly inapplicable and depends on OP’s circumstances.)

OP, do you have an investment policy statement?

IMO a total stock market index fund is simpler and cheaper than holding large/mid/small caps separately but there is no reason to sell out of what you’re doing if you’d incur tax costs to do so. So your equity allocation overall looks reasonable. The question is whether 100% of your net worth should be in equities.

IMO almost everyone should hold a bit of bonds too for the “free lunch” that the diversification gets you.

I've looked at the expense ratio for the combined index funds and they are markedly more than the separate funds. Am I missing something? And I don't understand what this free lunch you speak of is.

ITOT is free to trade at Fido and comes in at 0.03%

The only think I have access to that's cheaper than that is VIIIX.

[Radagast]

Since you asked, my near universal asset allocation recommendation is:

At least 50% stocks
Not more than 50% total in US or any other single country stocks
10% to 40% in bonds
Enough stocks should be allocated to international to make a difference
A small amount of an additional diversifier is fine, and maybe even desirable
Slice and dice is OK if you keep costs low and minimize stupid investor behaviour
Directly held real estate is a pretty nice addition, if you have the inclination

Obviously, use low cost diversified funds.

If you stick with that you greatly improve your odds and especially your mental situation. Then, rebalance every year or so.

Strictly speaking I am OK with 100% stocks and even 100% US stocks when you first start. You'll save a few bucks by getting to lower cost share classes first, your regular paycheck basically counts as a huge cash allocation, and with more than 10 years remaining US stocks are a reasonable guess as the foreseeably highest performing asset class (like say 40% chance).

[MustacheAndaHalf]

Age based bond allocations have two flaws here: first, they were meant for people retiring at age 65, not being financially independent at age 37-38.  Second, they hail from a time when financial advice was word of mouth, rather than provided by computer simulations.

Why not borrow Fidelity or Vanguard's advice, and peek at the appropriate target date fund?  If you are within 3 years of being able to retire, 0% bonds is too low.  Target date funds represent the best advice of companies with billions trusted to them, which makes that advice stronger than anything we can give.  If Vanguard messes up badly, retirees can sue for their mistake.  Posters here, not so much.

While Fidelity and Vanguard both offer low expense ratio funds, Fidelity doesn't do so well on target date funds.  The 0.75% expense ratios you see are a problem.  The equivalent Vanguard funds are closer to 0.15%.  But you may not be able to switch - if you have enough to retire at age ~38, the capital gains in taxable are probably significant.  It costs too much to switch.

Imitate the target date funds on your bond allocation - borrow the expert advice from the likes of Vanguard and Fidelity.

[sokoloff]

Why not borrow Fidelity or Vanguard's advice, and peek at the appropriate target date fund?  If you are within 3 years of being able to retire, 0% bonds is too low.  Target date funds represent the best advice of companies with billions trusted to them, which makes that advice stronger than anything we can give.  If Vanguard messes up badly, retirees can sue for their mistake.  Posters here, not so much.

I'd agree with this advice if it was re-worded as "intending to" rather than "being able to" retire.

Original poster wrote

Estimate FI in 2-3 years. No plans on stopping my income ever but who knows.

For a case like that, I'd rather be aggressive and stay invested in (and take the higher EV of) equities.