Author Topic: Asset Allocation Draft  (Read 1510 times)

stepingum

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Asset Allocation Draft
« on: April 27, 2019, 03:55:52 AM »
I have been index fund investing for the last five years mostly in VTSAX (with some leftover bond funds from our past advisor, ~5%) after having read J Collins and desperate to get out from under our sleazy advisor. I am now rolling over my 401k from a previous employer to Vanguard and decided to take a look at asset allocation which has led me to do some reading beyond J Collins. Of course, being an engineer, that has led me to want to optimize. I started out with the target allocation suggested by personal capital, did some simplifying, added some tilt, and ended up with this:

50% VTSAX (US Total Stock)
25% VTIAX (Int'l Total Stock)
10% VSIAX (Small Cap Value)
5%  VGSLX (REITs)
10% VBTLX (US Total Bond)

I have not invested through a downturn, but I have been following MMM long enough (5 years) to understand that sticking to an AA is the most important variable, especially when markets hit the fan. That is why I want to get a target AA nailed down ASAP. I believe I am comfortable with my 90-10 stock-bond ratio... the rest is mostly interesting to me and although I could probably simplify a bit, this is more fun (and likely won't make much difference in the end).

We are 34 with 2 young children. We were on track to FIRE in 8 years, but 8 months ago we quit our high paying jobs and moved to Russia where the cost of living is really low. My husband works 30 hours a week and I don't work at all; with our house rented out back home we are still able to save ~$1250 per month. We are currently hoarding it in high interest savings accounts because we want to be able to move back home in about two years and might buy another property. That is another reason I'm comfortable with the 90-10; we have more than a year's expenses in cash (including the cost of our house mortgage). I have no idea now what our FI timeline is, but I think it's safe to call everything we have (minus the cash) long term investments. We have $15k in a taxable account and $230k in a variety of retirement accounts. We will max out ROTH IRAs this year. Our house is ~$300k, we owe $135k @4.375%, PIMI is $1450 and rent is $2k. We did a lot of updates when it was our primary residence, so don't anticipate any major expenses in the next few years.

All that to say, this is my first hack at a target asset allocation. What do you think? Any glaring problems? Does it seem like a reasonable plan? I've had fun putting this together, but I'm definitely still a novice so would appreciate criticism. I'm also working on writing an IPS, mostly to address our cash hoarding tendencies and to reinforce the importance of a buy and hold strategy (no matter what), in case I start doubting myself.

Andy R

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Re: Asset Allocation Draft
« Reply #1 on: April 27, 2019, 06:09:54 AM »
Looks just about perfect to me. Well done.
The only thing I may do is, if you are tilting to the higher risk / higher return asset class of SCV, why not do so with the higher risk / higher return asset class of EM?

Was going to say, with only one worker, 3 dependents, and in a foreign country, I would surely want more than 10% in risk-free assets, but you addressed this with having over a year of expenses separate plus rental income back home, so look good to me - provided it is not so much money that you may panic-sell in a 50% crash which should be expected to happen at least once in everyone's lifetime.

Also suggest you write down an IPS and make sure both you and the other half agree to any changes, and enforce a 3 months waiting period on any changes before acting on them to make sure it is not some sudden emotional reaction.

stepingum

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Re: Asset Allocation Draft
« Reply #2 on: April 27, 2019, 09:16:00 AM »
I was very tempted to decrease Int'l Stock and add 5% VEMAX (emerging markets), but for some reason a six fund portfolio seemed over the top. It would be easy enough to do though... I'll have to give that some thought.

FIREstache

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Re: Asset Allocation Draft
« Reply #3 on: April 27, 2019, 05:07:44 PM »
I was very tempted to decrease Int'l Stock and add 5% VEMAX (emerging markets), but for some reason a six fund portfolio seemed over the top. It would be easy enough to do though... I'll have to give that some thought.

I'm invested in about 30 funds just in my regular brokerage account, including some international, emergency markets, small cap, mid cap, S&P, total stock market, REITs, extended, value, etc.

To the OP, you don't have to stick with the same AA.  It's not unusual to reduce you equity exposure later in your career or retirement.  That's also part of the rising equity glide path, which is a method used to reduce the sequence of returns risk, in which equity exposure decreases prior to retirement and increases after retirement.

MDM

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Re: Asset Allocation Draft
« Reply #4 on: April 27, 2019, 06:45:02 PM »
Of course, being an engineer, that has led me to want to optimize.
...
Does it seem like a reasonable plan?
Yes, it seems reasonable.

How optimal it will have been is something you (and everyone else picking an AA) will discover in hindsight.  Good luck!

TheHardenedInvestor

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Re: Asset Allocation Draft
« Reply #5 on: April 28, 2019, 07:01:49 AM »
Your assets allocation draft:

50% VTSAX (US Total Stock)
25% VTIAX (Int'l Total Stock)
10% VSIAX (Small Cap Value)
5%  VGSLX (REITs)
10% VBTLX (US Total Bond)

1) I would include cash in this list so you can see what your true asset allocation percentages are. Cash is basically just part of your fixed allocation.

2) As for VTIAX. Know that the late John Bogle and Warren Buffett basically advise a 0% holding in international. Research their reasons and decide. Interesting to note from Nov 2010 to Jan 2019 VTIAX returned 0% while VTSAX returned nearly 120%. Excluding dividends.

3) I see little reason for VSIAX and holding small caps outside of a total market index fund. All you are doing is adding more risk to your portfolio.

4) Why REITS? JL Collins has an article why he doesn’t hold REITS anymore.

My version of your assets allocation:

90% VTSAX (US Total Stock)
10% VBTLX (US Total Bond)

“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)” – Warren Buffett

Easy.

stepingum

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Re: Asset Allocation Draft
« Reply #6 on: April 28, 2019, 11:57:44 PM »
@FIREstache Thanks for the input. I realize I can change my AA over time, but I'd like to get something nailed down to reduce fiddling (or emotional buying/selling). Once our timeline is reestablished and back to 5-10 years to FIRE, I anticipate revisiting our AA.

@TheHardenedInvestor
1) Thanks for this tidbit. I went back and included cash (45k) into my spreadsheet and it was very enlightening. Essentially, not counting a fairly precise 6 month EF (and that is still very conservative because what are the chances my husband loses his job and our house guess vacant at the same time), we still have 12% in cash, which blows holes in my 90-10 comfort level. For the time being (while we are living in a foreign country and I'm unemployed), I think we will continue to keep cash on hand and our target AA will have to be 85-15 to reflect that honestly (where most of the bonds are actually in cash right now). I do need to include a solid plan for cash in our IPS, like limiting it right now to $45k, and once we move home and have an accurate picture of our expenses again, we will only keep 6 months in cash.

2) After living abroad for 8 months, I'm not a very good Patriot. I'm more comfortable diversifying internationally despite what a few pros say.

3,4) I admit small value and REITs aren't necessary, but I don't think they hurt either, so why not? I'm intrigued, so I'd like to give them a try. I used to be a pilot and flight test engineer and now I spend my days with two little toddle-beasts; I need to keep life interesting somehow. Similarly, I only buy manual transmission vehicles even though there probably isn't a benefit anymore, I just find them more enjoyable to drive. I've decided to add emerging markets into this mix too, although I have a few more days to tweak my plan before I'm committed to it.

My current plan is:
40% US stocks
10% Small Value
3% US Bonds
12% cash (this will move into bonds at a later date, as defined in IPS)
25% Int'l stocks
5% Emerging markets
5% REITs

FIREstache

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Re: Asset Allocation Draft
« Reply #7 on: April 29, 2019, 03:58:48 PM »
3) I see little reason for VSIAX and holding small caps outside of a total market index fund. All you are doing is adding more risk to your portfolio.

A note on that.  VTSAX is only about 6% small cap.  Bill Bengen and Wade Pfau have written about back-testing an AA using 18% small cap and were able to make the 4% rule the 4.5% rule.  However, that's based on a 30 year retirement.

https://retirementresearcher.com/bill-bengens-how-much-is-enough
https://www.fa-mag.com/news/how-much-is-enough-10496.html

Too bad b42 isn't around.  He would talk about how he's using REITs in lieu of bonds.

appleshampooid

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Re: Asset Allocation Draft
« Reply #8 on: May 01, 2019, 07:55:05 AM »
It looks reasonable, but consider your future desire to rebalance and track between so many funds. I know 5 isn't that many, but 3 is less than 5 :).

I initially had a very similar allocation (sub EMs for SCV), but cut out REITs and and the EMs and eventually settled on a 3-fund. VTSAX, VTIAX, and bonds (held in my company 401(k) for tax efficiency, so it is FXNAX, but similar profile to VBTLX).

Again, what you have is reasonable, but just give some thought to simplicity. Obviously you can change on the fly, but it gets harder and harder as you accumulate more assets to make big changes in taxable without tax consequences.

PDXTabs

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Re: Asset Allocation Draft
« Reply #9 on: May 01, 2019, 01:03:16 PM »
2) As for VTIAX. Know that the late John Bogle and Warren Buffett basically advise a 0% holding in international. Research their reasons and decide. Interesting to note from Nov 2010 to Jan 2019 VTIAX returned 0% while VTSAX returned nearly 120%. Excluding dividends.

Bogle was a pioneer, but the company he built now recommends holding international assets:
https://www.vanguard.com/pdf/ISGGEB.pdf
https://investor.vanguard.com/mutual-funds/profile/portfolio/vfifx

harvestbook

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Re: Asset Allocation Draft
« Reply #10 on: May 01, 2019, 08:07:51 PM »
Similar to my own AA, so of course it's brilliant (although I add slices of 10 percent EM and 5 percent international REITS).


“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)” – Warren Buffett


Footnote: Advice for a multi-billionaire widow may not apply to all investors.

TheHardenedInvestor

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Re: Asset Allocation Draft
« Reply #11 on: May 02, 2019, 06:44:13 AM »
Similar to my own AA, so of course it's brilliant (although I add slices of 10 percent EM and 5 percent international REITS).


“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)” – Warren Buffett


Footnote: Advice for a multi-billionaire widow may not apply to all investors.

Sure, I suppose. It all just comes down to how much risk you want. I don’t invest 90/10. I invest 75/25. However, this portfolio is more risky than Buffett’s 90/10...

40% US stocks
10% Small Value
3% US Bonds
12% cash (this will move into bonds at a later date, as defined in IPS)
25% Int'l stocks
5% Emerging markets
5% REITs

Your comments seem to suggest that 90/10 for a billionaire widow is ok bc she is a billionaire and can withstand the risk, but the above portfolio has more risk that a 90% S&P index fund / 10% short term government bond portfolio.


BicycleB

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Re: Asset Allocation Draft
« Reply #12 on: May 03, 2019, 02:35:21 PM »
Based on your goal of returning to the US and buying another property, I'd keep a higher % in bonds.

But I already keep a higher % in bonds. Bonds probably won't increase your income in good times. But they may protect you in downturns. A little more bonds/cash (maybe 25% instead of 15%) might materially improve your odds of presenting a healthy down payment without needing to sell stock.

One way to think this through is examine different countries' optimal balance of stocks vs bonds in various portfolios in the past. From what I've read, only the US has as high an advantage from portfolios with 80% or more stock. Historically in some major nations, the highest return was from 60% to 70% stock, not 80% to 90%.

Have you run examples through the calculator at portfoliocharts.com? It has options to see how at least 5 countries fared. Compare Germany to the US, for example. Eye opening.


stepingum

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Re: Asset Allocation Draft
« Reply #13 on: May 06, 2019, 08:58:50 PM »
I ended up doing a lot more reading, mostly because I felt like starting with the AA from Personal Capital was rather arbitrary and I didn't understand the theory behind it. I stumbled upon Paul Merriman's Ultimate Buy and Hold and it made sense to me. I really like numbers and data, and his portfolio is presented in a way I could understand and appreciate. I didn't like the part where it required 10 different equity funds, but I discovered a simplified version on the bogleheads forum, so that's what I went with. My target, and current allocation is now:

20% VTSAX (LB approximaton that was already in my taxable account, close enough)
20% IJS (SV)
20% VFWAX (Int'l LB)
20% VFSAX (Int'l SV)
20% Bonds/cash

I'm still wrestling a bit with how much cash we really need to keep on hand. I've been following the cash vs bonds thread and it makes a pretty good case for minimal cash.

Andy R

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Re: Asset Allocation Draft
« Reply #14 on: May 06, 2019, 09:37:02 PM »
I'd caution such an enormous tilt towards SV. It can under perform for a very long time (decade+), and can make it very hard to stay the course. I would limit it to a much smaller amount. Loads of discussions in bogleheads worth reading.