Author Topic: Do I Need Asset Allocation? [at this point in my FI journey]  (Read 390 times)

mountaineer3

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Do I Need Asset Allocation? [at this point in my FI journey]
« on: February 21, 2021, 11:35:36 AM »
Hey all,

I've gone through the Investment Order steps outlined here https://forum.mrmoneymustache.com/investor-alley/investment-order/. At this point I have funds I am investing into a traditional taxable brokerage account.

I do not need to touch these finds for at least 10 years, more likely 15. Is there any reason I should not put 100% of my brokerage investments into stocks for the short term?*

*I still plan to diversify within stocks.
*I realize as I get closer to needing to draw from these funds that at that point I should move to have a more balanced asset allocation.

Thanks,

Much Fishing to Do

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Re: Do I Need Asset Allocation? [at this point in my FI journey]
« Reply #1 on: February 21, 2021, 02:55:27 PM »
IMO if you are more than 10 years out, AND you were fully invested with significant funds in March 2020 and didn't sell and could sleep at night, 100% is the place to be right now.  I saw a lot of people in early 2009 decide to "re-visit their risk tolerance"....which of course was a cloaked way of bailing out and selling low for those stock heavy and hurting.  March 2020 was a somewhat decent test of that for younger investors.

Next steps are more difficult I think.  i worked on paying off debt (including even the mortgage) as my first de-risking step before getting into bonds during my final years of work.  Some think that's a ridiculous order, I had many reasons it made since to me.

Make gradual changes so no decisions are huge and just see where it takes you.

cool7hand

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Re: Do I Need Asset Allocation? [at this point in my FI journey]
« Reply #2 on: February 22, 2021, 05:27:44 AM »
This decision is more art than science because it depends in large part on your own psychology.

One book that heavily influenced our thinking was Tony Robbins' Money Master The Game. In it, he makes a good case for the importance of not losing money, even at the risk of foregoing higher gains.

As a result of this thinking, we've been using Ray Dalio's All Seasons (aka All Weather) Portfolio for years. It is a low volatility portfolio, with a surprisingly low percentage of stock. It fits our situation, goals, and psychology.

Give it a google and see if it's right for you.

reeshau

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Re: Do I Need Asset Allocation? [at this point in my FI journey]
« Reply #3 on: February 22, 2021, 12:28:09 PM »
What asset allocation do you think you will want when you are retired? You need to work backward from that point to lay out a plan of what to do.  And of course there are pitfalls along the way.

When you are five years from retirement, then...well, you will have just 5 years to go.  If recessions make you nervous, then you are already in the red zone.  So, you should have at least some of your non-equity assets by T-5.

You are investing in a taxable account, so changing assets by selling equity and buying new will trigger capital gains.  You need to plan your tax strategy in those last year's to take that into account.  If your timing is counting on a bunch of RSU's or some other large cash out at the end of your career, that would be an unfortunate time to add cap gains, too.

For those reasons, you may want to alter your asset allocation by altering your new contributions, and avoid the cap gains.  Of course, this is limited by how much you contribute each year, vs. your portfolio growth.  You may also be giving up some growth by buying more conservative assets.  But you aren't making this move for growth, you are doing it to manage your landing in retirement.  So, you may want to start this sooner rather than later.

The heavier your target portfolio is in non-equity investments, the sooner you need to get started.  If you said you were 10 years out, and wanted to be at 90/10 by then, you could probably wait 5 years.  If you want to be 60/40, you have a lot to do, and may want expert advice to help you navigate the best path.

mountaineer3

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Re: Do I Need Asset Allocation? [at this point in my FI journey]
« Reply #4 on: February 22, 2021, 06:59:13 PM »
First, thank you all for your thoughtful replies. It's hard to find measured people to calmly talk to about money, so I appreciate your feedback.

@cool7hand - I've actually got that book but have not read it yet. Time to bump it up on my reading list. Thx for the All Weather suggestion, I'll check them out.

@Much Fishing to Do - Great point re. how March was received. I was not in the market in 2008, but this time I did have a substantial bit invested. Thankfully I've read enough Ramit Sethi to know to just hold tight. I also slept well :)

@reeshau - I have not given much through to what the mix would look like once I get there, but I see your point about planning once we get ~T-5 years or so. My wife and I are both early 30's so we are comfortable being a bit more risky for the moment. We estimated how much money we would need to retire and worked backwards from there, 4% rule, ect. At this point we are just working to live comfortable while avoiding "lifestyle inflation". Every month we save a bit more toward our goal.

Another factor we have left out so far is that we probably won't full on retire. Much more likely for us to be FI and be able to take whatever job we want, the kind of jobs we would do for free.