Author Topic: Critique / improve my asset allocation plan.  (Read 3650 times)

flashpacker

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Critique / improve my asset allocation plan.
« on: October 14, 2014, 08:05:40 PM »
Up until now I haven't had a very well specified asset allocation plan.  I've been running numbers through portfolio visualizer and this http://bitly.com/1pakyAc allocation gives me a 96% success rate with a 4.5% withdrawal rate over 45 years, and a median end value of 680% of the initial value.

This version http://bit.ly/1wD5Zt9 is slightly less good with 95% success rate and a median end value of 580% of the starting value. However, for the international allocation it would just utilize VEA which has a lower expense ratio than separately buying small cap international and international value etfs that are included in the first scenario. 

The second allocation is pretty similar to the betterment portfolio, at least on the stocks side. 

Dodge

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Re: Critique / improve my asset allocation plan.
« Reply #1 on: October 14, 2014, 11:03:46 PM »
I wouldn't base my financial future, and my ability to retire, on such a complex slice & dice portfolio which was specifically designed to work well in *yesterday's economy*.

My recommendations is to forget about the 8 funds in that proposed portfolio. Keep it simple. I'd just go with a combination of 3 funds, total stock, total bond, and international stock, with a stock/bond ratio in line with your risk tolerance.

Le Barbu

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Re: Critique / improve my asset allocation plan.
« Reply #2 on: October 15, 2014, 06:25:35 AM »
+1 Dodge, to much slice and dice.

to much different ETF. better consider other factors, then choose ETF that match most of your situation and target.

what's your age, family situation, kids, debt, income (or saving rate), projects (buy a house, travel a bit), your actuakl stash, investing experience(2008 you know?), timeframe etc.

ex. on one end of the spectrum, I would choose 25%VTI and 75%BND (2 ETF) and on another situation, maybe 40%VTI, 30%VBR and 30%VXUS would be just fine.

VirginiaBob

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Re: Critique / improve my asset allocation plan.
« Reply #3 on: October 15, 2014, 06:53:56 AM »
One word: Vanguard

Vanguard Total Stock Market Index Fund.  Most people say mix in some bonds, but I don't.  My retirement timeline is 50 years, not the typical 30.  Argument against my approach is fear that the stock market will tank.  If the stock market tanks for 50 years (or even 30), it is more than likely that the country is in a complete shambles, china took over, nuclear winter, the big asteroid hit earth, and if you believe in that potential doom and gloom scenario, bonds won't help you either (guns and gold would be more up your alley).
« Last Edit: October 15, 2014, 09:47:47 AM by VirginiaBob »

NP

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Re: Critique / improve my asset allocation plan.
« Reply #4 on: October 15, 2014, 09:38:11 AM »
Important questions to ask yourself:
- Do you have the discipline to manage a complex portfolio well in the long term even during times of extreme market conditions, strong temptations to time the market or very stressful personal situations? (I suspect the answer is no for the majority of people.)
- If you have a partner, can the same be said about them, or do you invest separately, or can you agree that they don't interfere with investing?
And if your answers to both are yes:
- Do you want to add a REIT fund?
- Do you want to increase the weight of small caps compared to a total market index?
- Do you want to increase the weight of international small caps?
- Do you want to increase the weight of emerging markets relative to a total international index?
- Do you want to increase the weight of emerging markets small caps?
- Do you want to tilt large cap, small cap, international, anything else towards value?
- Do you want to barbell with bonds?
- Do you want to add a TIPS fund?
And so on...

These would be reasons for your asset allocation to slightly differ from that of some total index. While there's a broad consensus that the best strategy is a very well diversified portfolio, opinions differ somewhat on whether and to what degree you should change the weights of various components and what it means precisely to have good diversification for a given personal situation and time horizon. I don't claim to have the final word on that, I just suggest you research patiently and tread carefully. Simulations like the one you linked to may be useful tools for learning but keep in mind that they cannot predict the future and there's a risk you might try to overfit your allocation.

In my opinion there's nothing wrong with slice and dice as long as you don't pay excessive fees and don't make mistakes in your complicated system. What's important is that you have a balanced portfolio and get your asset allocation right (whatever that means for you). Whether you achieve it using 3 funds or 30 funds makes absolutely no difference in terms of returns. Some asset allocation targets can be reached using very few funds, others cannot.

(I don't think there's anything very wrong with either of the two portfolios you presented. I'd probably calculate with a 4% withdrawal rate at most, have less bonds if my time horizon is as long as 45 years, add some REITs, have a little more emerging markets, less U.S. equities, just off the top of my head. None of this is necessarily the best advice, though, and I'm sure many people here will recommend something else.)

wtjbatman

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Re: Critique / improve my asset allocation plan.
« Reply #5 on: October 15, 2014, 10:50:18 AM »
Looks like a solid slice and dice, value tilted AA. Don't know how far you are from retirement, but 30% in bonds is fairly conservative unless you are close. I do think you're fine with your current domestic/international AA, no need to add more emerging markets or take away US equities like NP suggested.

flashpacker

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Re: Critique / improve my asset allocation plan.
« Reply #6 on: October 15, 2014, 11:05:20 AM »
Some of you asked more about the situation -  I am 34 and my spouse is 48. We are more or less FI already but work part of the year and earn enough from that to cover our expenses, so haven't had to draw down at all yet. No mortgage.

I've been investing in ETFs since 2006. I've held VTI, EFA, IJR in roughly 40/30/30.  I didn't panic and sell during 2008/2009 but didn't add new funds nearly as aggressively as I could have.

I'd plan the above allocations to be mostly Vanguard ETFs.

NP

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Re: Critique / improve my asset allocation plan.
« Reply #7 on: October 15, 2014, 11:31:01 AM »
In case you haven't done it yet, take a look at this: http://portfolios.morningstar.com/fund/summary?t=EFA You'll see, for example, that EFA has most of its holdings in European and Japanese stocks currently. Maybe that's precisely what you want for your international allocation, just be sure you fully understand what you own when selecting the ETFs you'll invest in.

Le Barbu

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Re: Critique / improve my asset allocation plan.
« Reply #8 on: October 15, 2014, 11:52:45 AM »
Some of you asked more about the situation -  I am 34 and my spouse is 48. We are more or less FI already but work part of the year and earn enough from that to cover our expenses, so haven't had to draw down at all yet. No mortgage.

I've been investing in ETFs since 2006. I've held VTI, EFA, IJR in roughly 40/30/30.  I didn't panic and sell during 2008/2009 but didn't add new funds nearly as aggressively as I could have.

I'd plan the above allocations to be mostly Vanguard ETFs.

You must have said that before !

Considering all this, the only way I would try to "improve" this is replacing EFA with VXUS (more holdings, more country, more mid ans small cap, lower MER) and IJR with VBR (value tilt and low MER) but, you know, you should just be proud to keep things this way since 2006 and stay EXACTLY like this.

Your AA is real KICKASS and so your overhaul $$ situation, stop thinking about slicing & dicing.