Author Topic: Any thoughts on my asset allocation before I put it into action?  (Read 4188 times)

keepingmobens

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Hello,

I have been reading investing books and info for several years now, and been a converted mustacian for at least 18 months. I've come up with the following asset allocation and I was hoping to get some feedback from other mustacians, or diagnose any problems before I put it fully into action.

Basically, my future is uncertain. I have a high income job. Some of the time I don't mind it, but much of the time I want to get away from the stress and retire. So my time until retirement could be as little as 2-3 years or as much as 5-7 years or possibly even longer, depending. Because of this, I want to keep things flexible and I plan on never spending any principal, unless absolutely necessary. I have no debt whatsoever, and already live fairly mustacian-like with an 80% savings rate, so "personal finance" is really not an issue, just asset allocation.

Overall, I have 15% bonds, 10% reits, 75% stocks, however of those stocks I have a heavy slant towards high dividend paying stocks and utility stocks (also high dividend paying.) My thinking being, worst case I can live on the dividends and not have to touch any of the principal. I can also make up to $36,250 per year from dividends without paying ANY income taxes. I live in a non income tax state, so this is a very desirable benefit. 

I want the principal to grow aggressively, so that is the reason for the heavy weighting towards stocks. However, keep in mind that utility stocks (and to a lesser extent high dividend stocks) tend to be large companies that are very established and not nearly as volatile as the general market, so for this reason they are almost a little bit "bond like" in their behavior.

I am a major Vanguard fan, so all of these funds are Vanguard:

Stock Funds (these are all in a standard taxable account):

25% Total stock market (VTSAX) - I also have some of this in 500 index (VFIAX) however this acts almost identically to VTSAX, so I'm just going to combine these two holdings into the "total stock market" category.

20% Total International Stock Market (VTIAX). Most of what I've read says 20% is a good number for international exposure.

15% Utilities ETF (VPU) I like the stability of utilities, people are always going to need utilities and the vast majority of people pay their bills consistently. Yield is typically around 4%.

15% High Dividend Yield Index (VHDYX) Again, these are stocks with a slant towards those which consistently pay high dividends, in keeping with my philosophy that I can live off the dividends if needed at any time without needing to sell any assets.

Bonds:

7.5% Bond Index (VBTLX) Vanguards "standard" core bond index. These are also in my standard taxable account. No room left in my IRA.

7.5% High Yield Bonds (VWEHX) AKA Junk Bonds. This fund is currently closed to new investors, but I happened to buy a bunch of this in my Roth IRA before they closed the fund, and it pays well by todays standards, so I'm just going to leave it for now as half of my bond exposure. If things change in the future (or rather when they change) I may switch to a different type of bond fund (or maybe just move it into the above fund) but for now I'm leaving it as is and enjoying the high rates.

Reits:

10% Reits. (VGSLX) I already have a high percentage of my net worth into physical real estate, so I didn't want to go overboard on the reits (plus the total stock market funds also hold reits at their market percentage), so 10% seems like a good percentage for some diversification. These are also all in my IRA.

I would appreciate any feedback here, am I about to make any mistakes or have I overlooked anything? Thanks!
« Last Edit: August 06, 2013, 10:45:58 AM by keepingmobens »

Badass by 41

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Re: Any thoughts on my asset allocation before I put it into action?
« Reply #1 on: February 20, 2014, 10:31:47 PM »
This thread is right in line with my own situation.  I'm bumping this thread since it does look like there have been any responses.

I would love to hear any feedback the community has on this allocation.

dragoncar

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Re: Any thoughts on my asset allocation before I put it into action?
« Reply #2 on: February 20, 2014, 10:37:36 PM »
Sounds reasonable. 

GlassStash

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Re: Any thoughts on my asset allocation before I put it into action?
« Reply #3 on: February 21, 2014, 07:19:28 AM »
The allocation seems well thought out. I am not in the "high dividend stock" camp, but the OP persuasively explains why he/she is.

My only suggestion would be to try and keep the bonds/REITS/high dividend portion of the allocation in tax deferred/tax free accounts. See http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement for a thorough explanation.

soccerluvof4

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Re: Any thoughts on my asset allocation before I put it into action?
« Reply #4 on: February 21, 2014, 07:32:01 AM »
I share your sentiment/choices as well and am in 4 of the Vanguard funds you mentioned as well.

aj_yooper

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Re: Any thoughts on my asset allocation before I put it into action?
« Reply #5 on: February 21, 2014, 08:24:24 AM »
First, tax location: 

If you have access to a tax advantaged account, use it or, if self-employed, start it.   You can transport the money to a lower bracket when you are no longer working.  That is a way to save a lot of taxes.  This is also where I would put the bonds and REIT funds for tax efficiency.  If you run out of room, you could do a municipal bond fund in taxable.  The total market and international funds are fine in taxable.  Do you have a HSA or can you do a Roth? If so, this will give you more space for the bonds and REITs. 

AA:

85/15 is aggressive, but you are younger.   Your beta is lowered by the utility and the dividend funds so the downward fluctuations should be somewhat lower.  (The health and consumer staples funds also have lower beta.)  Overall, the AA is OK. 

You are not doing any small cap value or international value funds.

foobar

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Re: Any thoughts on my asset allocation before I put it into action?
« Reply #6 on: February 21, 2014, 08:58:57 AM »
You don't have to worry about the bonds much (they are not putting out much these days and when you retire you can spend that money) but REITS really need to go into some type of tax advantages space like the OP did as they can be decent growth and generate OI.

I think you should look at how your funds would have performed over 2007-2009 and 2000-2001 before you decide that deciding that utilities and high div funds are bond like. They might pay a nice dividend but 40% losses in a down market might be stress full And don't be fooled by the quick rebound of last time. Think how you would feel about a 3 year down market of 2000-2003.  Personally I prefer having 11k in stock rather 10k in stock and 1k in divs but I know a lot of people feel different. Having to sell 1k of stock feels different than getting a check to a lot of people.

I might up international a bit(25-30%) but in general this is pretty sound. It is a bit overweight towards large cap value stocks and underweight in small caps. I personally have about 10% of my money in small caps but I know a lot of people are happy just holding a total market fund.


First, tax location: 

If you have access to a tax advantaged account, use it or, if self-employed, start it.   You can transport the money to a lower bracket when you are no longer working.  That is a way to save a lot of taxes.  This is also where I would put the bonds and REIT funds for tax efficiency.  If you run out of room, you could do a municipal bond fund in taxable.  The total market and international funds are fine in taxable.  Do you have a HSA or can you do a Roth? If so, this will give you more space for the bonds and REITs. 

AA:

85/15 is aggressive, but you are younger.   Your beta is lowered by the utility and the dividend funds so the downward fluctuations should be somewhat lower.  (The health and consumer staples funds also have lower beta.)  Overall, the AA is OK. 

You are not doing any small cap value or international value funds.

aj_yooper

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Re: Any thoughts on my asset allocation before I put it into action?
« Reply #7 on: February 21, 2014, 09:27:09 AM »
For some of your bonds, you could also do Ibonds.  Those are held in a regular account, but no federal tax until you cash them and, no tax, if you spend them on educational expenses.