Author Topic: Asset allocation as we approach FI  (Read 2120 times)

Goanywhere

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Asset allocation as we approach FI
« on: February 13, 2021, 06:09:47 PM »
Hi everyone

Something I've been struggling with is what asset allocation to have at what stages of the accumulation phase. Does anyone know of any good reading material on this topic in the FIRE community?

Our situation is that my DW and I are about 4 years from FI based a conservative SWF of 3% or 33x expenses.  At this point we'll be 37 and 40 years of age. We don't plan to retire completely, and will most likely give up our high paying / high stress jobs and volunteer / work part-time.

Excluding the family home. How current asset allocation is:

20% Bonds
2% cash
78% international shares.

Thank you 

 


chevy1956

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Re: Asset allocation as we approach FI
« Reply #1 on: February 13, 2021, 07:25:39 PM »
This is really good stuff. https://earlyretirementnow.com/

My take is though it's pretty simple. Try and move towards being 100% stocks at the bottom of a bear market. Of course you aren't going to do that but that is goal. So I have a couple of years in cash and a bit in bonds. I'll sell that off if the market tanks and wait until the last possible moment to sell stocks. If the market keeps going up I'd consider selling off stocks.

McClung also has a great book on how to draw down your assets.

I haven't read this article but this it what I'm talking about:- https://monevator.com/review-living-off-your-money-by-michael-mcclung/

vand

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Re: Asset allocation as we approach FI
« Reply #2 on: February 14, 2021, 02:55:06 AM »
Realiatically a 3% WR is very safe, especially if you will still be making money and adding to the pot over time, so I think your allocation is just fine.

Chances are that you will die with more money than you retire with, and the chances of going broke are virtually zero.

swashbucklinstache

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Re: Asset allocation as we approach FI
« Reply #3 on: February 14, 2021, 06:39:50 AM »
Hi everyone

Something I've been struggling with is what asset allocation to have at what stages of the accumulation phase. Does anyone know of any good reading material on this topic in the FIRE community?
Read about bond tents, from a "withdrawal series" ...series of blog posts written by EarlyRetirementNow. It talks about asset allocation in the final years of accumulation and years immediately after retirement.

Bogleheads would tell you that your allocation should be defined by your willingness, ability, and need to take risk. Some of them would say that during your accumulation, especially as an early retiree, your ability is very high so you should be very aggressive and treat your day job income as your bond-like allocation. Same goes if you're way past your 4% WR. Others would say the opposite though, that once you've got enough to be FI with a conservative portfolio, stop risking it...

I do agree though that others, in that this matters less since you're talking about 3% plus part time. I think you're beyond "accumulation" vs "drawdown" based allocation calculations - you're already in drawdown mode, you're just working enough hours in a part-time job to make loads of contributions still. I think it's just a matter now of asking yourselves if you want to cut the tails off of the normal distribution of potential outcomes or not, which is a very personal decision.

BicycleB

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Re: Asset allocation as we approach FI
« Reply #4 on: February 14, 2021, 04:35:05 PM »
I like ERN too. One article that puts you right in the middle of the discussion you're looking for is this one: https://earlyretirementnow.com/2019/07/31/rising-equity-glidepath-4-percent-safe-withdrawal-rate-60-year-retirement/comment-page-1/

It discusses bond tents, equity glidepaths, and more. Very relevant.

If you can read graphs and follow numerical comparisons, portfoliocharts.com has some very good charts and other tools. Its intro articles explain basics of how to construct and evaluate different asset allocations. Then it gives you many examples of portfolio allocations that worked well in the past, and allows you to calculate the performance of your own chosen allocations as well. Note that it allows calculations using the perspective of different countries. Free too!

One last food for thought is that, for long term safety, it may that very wide diversification is very good - maybe better than the no-US-stock approach you're currently using. I mean, you might be making a very good judgment call there, but it hard for most of us to be sure until it's too late. There's a thread that tested an idiot-style "let's just select a very wide diversification" within portfoliocharts' data set, and found diversification to be safer than almost any of the known expert "gurus' " popular portfolios. To be fair though, the choices available to the "idiots" meant that they were in about 72% stocks. Anyway, good reading if you can wade through it. It's called "Portfolio Design: Idiots vs Gurus". https://forum.mrmoneymustache.com/investor-alley/portfolio-design-idiots-v-gurus/
« Last Edit: February 14, 2021, 04:37:59 PM by BicycleB »

Goanywhere

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Re: Asset allocation as we approach FI
« Reply #5 on: February 15, 2021, 12:55:55 AM »
Thank to all.  I'll start reading through those links and then come back with any further thoughts.

Much appreciated.

HeadedWest2029

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Re: Asset allocation as we approach FI
« Reply #6 on: February 15, 2021, 07:51:49 AM »
Quote
78% international shares

Your entire equity portfolio is ex-US? Or, global equity including the US?
I get US valuations are way more stretched than non-US, but that's kinda gutsy.  I'd be interested to hear more on this.

Goanywhere

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Re: Asset allocation as we approach FI
« Reply #7 on: March 20, 2021, 08:21:19 PM »
Quote
78% international shares

Your entire equity portfolio is ex-US? Or, global equity including the US?
I get US valuations are way more stretched than non-US, but that's kinda gutsy.  I'd be interested to hear more on this.

Global including the US

MustacheAndaHalf

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Re: Asset allocation as we approach FI
« Reply #8 on: March 21, 2021, 01:42:53 AM »
Vanguard Target Retirement 2025 gives an idea how Vanguard views retirement:
https://investor.vanguard.com/mutual-funds/profile/portfolio/vttvx
(58% stocks, 41% bonds, 1% cash)

Vanguard has $49 billion in that fund, which is a lot of investors agreeing with their approach.  In general, target date funds tend to be a little conservative, with a slightly lower equity allocation.

UnleashHell

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Re: Asset allocation as we approach FI
« Reply #9 on: March 21, 2021, 04:50:40 AM »
Vanguard Target Retirement 2025 gives an idea how Vanguard views retirement:
https://investor.vanguard.com/mutual-funds/profile/portfolio/vttvx
(58% stocks, 41% bonds, 1% cash)

Vanguard has $49 billion in that fund, which is a lot of investors agreeing with their approach.  In general, target date funds tend to be a little conservative, with a slightly lower equity allocation.

Or a lot of investors approaching retirement in 4 years who don't know what the mix is and just let Vanguard deal with it and are totally hands off.

Wintergreen78

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Re: Asset allocation as we approach FI
« Reply #10 on: March 21, 2021, 07:40:58 AM »
JL Collins’ series has some pretty well written articles laying out his thought on asset allocations, among other things.

https://jlcollinsnh.com/stock-series/


Goanywhere

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Re: Asset allocation as we approach FI
« Reply #11 on: September 01, 2021, 01:50:57 AM »
Vanguard Target Retirement 2025 gives an idea how Vanguard views retirement:
https://investor.vanguard.com/mutual-funds/profile/portfolio/vttvx
(58% stocks, 41% bonds, 1% cash)

Vanguard has $49 billion in that fund, which is a lot of investors agreeing with their approach.  In general, target date funds tend to be a little conservative, with a slightly lower equity allocation.

wow that is a much larger bond proportion that I expected to see

LightTripper

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Re: Asset allocation as we approach FI
« Reply #12 on: September 01, 2021, 03:29:07 AM »
The Early Retirement Now SWR article on rising equity glidepaths/Sequence of Return risk actually mentions that Vanguard mix, as an example of how not to do it! (I think probably the one that BicycleB linked to, from memory, though there are a few similar ones) 

MustacheAndaHalf

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Re: Asset allocation as we approach FI
« Reply #13 on: September 01, 2021, 08:39:54 AM »
I personally prefer a higher equity allocation than Vanguard's, but if they're wrong they can be sued.  Their information has to be reliable, or they'll be sued.  Not true of most people's information, which is why I put Vanguard's allocation before mentioning my own.

Before 2020, I liked an even split between US equity, international equity, and bonds.  Rebalancing was easy: make all 3 match.  So there's Vanguard (46% equities), traditional retirement advice (60% equities), and the approach I took (67% equities).


20% Bonds
2% cash
78% international shares.
Allocating 0% US equities is extreme.  Take Vanguard Total World ETF (VT), which has 61% allocated to North America.  U.S. stock market capitalization is larger than the rest of the world combined.  I'd suggest setting aside your reasons for 0% U.S. equities, and allocate a chunk for the diversification benefit.

EvenSteven

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Re: Asset allocation as we approach FI
« Reply #14 on: September 01, 2021, 08:48:19 AM »
I personally prefer a higher equity allocation than Vanguard's, but if they're wrong they can be sued.  Their information has to be reliable, or they'll be sued.  Not true of most people's information, which is why I put Vanguard's allocation before mentioning my own.

Before 2020, I liked an even split between US equity, international equity, and bonds.  Rebalancing was easy: make all 3 match.  So there's Vanguard (46% equities), traditional retirement advice (60% equities), and the approach I took (67% equities).


20% Bonds
2% cash
78% international shares.
Allocating 0% US equities is extreme.  Take Vanguard Total World ETF (VT), which has 61% allocated to North America.  U.S. stock market capitalization is larger than the rest of the world combined.  I'd suggest setting aside your reasons for 0% U.S. equities, and allocate a chunk for the diversification benefit.

They clarified earlier, so it looks like it might be US/ex-US at market cap, which is reasonable:

Quote
Quote
78% international shares

Your entire equity portfolio is ex-US? Or, global equity including the US?
I get US valuations are way more stretched than non-US, but that's kinda gutsy.  I'd be interested to hear more on this.

Global including the US

index

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Re: Asset allocation as we approach FI
« Reply #15 on: September 01, 2021, 11:32:02 AM »
You could make the argument that everyone should be at least 80/20 or 90/10 Equities/Bonds because the returns are the same as 100% equity with less drawdown risk.

https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&asset1=TotalStockMarket&allocation1_1=100&allocation1_2=80&asset2=LongTreasury&allocation2_2=20&total1=100&total2=100&total3=0

I would spend some time reading on portfolio charts and observing how lower total return portfolios actually increase your SWR and mitigate sequential returns risk.

bacchi

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Re: Asset allocation as we approach FI
« Reply #16 on: September 01, 2021, 11:48:16 AM »
Hasn't Kitces walked back his hearty recommendation of bond tents? Or maybe I read some criticism (backed by historical and monte carlo runs) of it.

Goanywhere

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Re: Asset allocation as we approach FI
« Reply #17 on: September 02, 2021, 03:08:10 AM »
I personally prefer a higher equity allocation than Vanguard's, but if they're wrong they can be sued.  Their information has to be reliable, or they'll be sued.  Not true of most people's information, which is why I put Vanguard's allocation before mentioning my own.

Before 2020, I liked an even split between US equity, international equity, and bonds.  Rebalancing was easy: make all 3 match.  So there's Vanguard (46% equities), traditional retirement advice (60% equities), and the approach I took (67% equities).


20% Bonds
2% cash
78% international shares.
Allocating 0% US equities is extreme.  Take Vanguard Total World ETF (VT), which has 61% allocated to North America.  U.S. stock market capitalization is larger than the rest of the world combined.  I'd suggest setting aside your reasons for 0% U.S. equities, and allocate a chunk for the diversification benefit.

They clarified earlier, so it looks like it might be US/ex-US at market cap, which is reasonable:

Quote
Quote
78% international shares

Your entire equity portfolio is ex-US? Or, global equity including the US?
I get US valuations are way more stretched than non-US, but that's kinda gutsy.  I'd be interested to hear more on this.

Global including the US

Sorry I should have been more clear.  My equity allocation of 78% (now closer to 83%) is split 60% North America and 40% rest of the world