Author Topic: How did you arrive at your asset allocation?  (Read 10352 times)

tannybrown

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How did you arrive at your asset allocation?
« on: June 25, 2012, 06:37:00 PM »
I'm curious as to how the MMM members decided on a particular asset allocation.

ShavinItForLater

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Re: How did you arrive at your asset allocation?
« Reply #1 on: June 26, 2012, 07:08:43 AM »
Personally, my wife and I have been investing for about 15 years together, and we've put almost everything 100% into stock mutual funds, primarily broad market indexes like the S&P500 and Total Stock Market style funds, for many, many years.  There are minor exceptions--she had a retirement account from a previous employer that was evenly split among a bunch of asset classes, and we dabbled with a few individual stocks for a little while, we included some international funds, but mostly it was all broad stock market indexes.  The theory really was we have a really long time horizon for investing, so it makes sense to take equity risk for equity returns.

A few years ago I read a book about asset allocation written for financial advisors, rather skeptically at first because I thought all this modern portfolio theory stuff looked overly complicated and must be for people afraid of stock market risk.  It opened our eyes to why including other asset classes make sense.  Since then we have moved a sizeable chunk into a REIT fund, and moved more into international funds (again broad indexes).  We conceptually started with the book's argument for even weightings for different asset classes, but it also showed how most of the benefit of other asset classes came with even small percentages allocated to those other asset classes.  Based on that we've taken it more gradually--right now there is about 10% in REIT and 10% in International funds, or 20% in each if you don't count the elephant in the room (read on).  The rest of the mutual fund money is in S&P / total stock market funds.

Then there's the elephant in the room.  We also have shares in a private startup company that may go public someday--the theoretical valuation of those shares (based on the last fundraising round) is about half of our portfolio.  This causes us to want to skew towards larger companies elsewhere, which one could argue the S&P and market cap weighted indexes are, so we haven't added any small cap / micro cap exposure.  It also causes us to really want to sell those shares, because we certainly understand the huge risk it represents, but we don't have any easy way to get out until they go public--I have reached out a couple of times to try, nothing actionable yet.  It will be a very happy day if that comes to pass, but if it amounts to nothing we'll be OK.  Overall we're not panicked about it, and don't want to sell at a lowball price, but if we could exit and diversify more, it would be a Very Good Thing.

We may be interested in owning real estate at some point, but at present we have no significant spare capital to purchase any--almost all of our investments are in retirement, college savings for the kids, and HSA accounts.  Another factor is that my job is pretty high income and typically 50-60 hours a week and a lot of travel, so passive investments are a much better choice right now than signing up for the potential of calls about a leaking toilet on a Tuesday night.  That might change when FI has been achieved.

I know a lot of folks on here are into dividend stock investing--I'll just say we've never pursued that, and during an accumulation phase have looked at dividend income as a bad thing vs. price appreciation, since it would potentially mean higher taxes compared to eventual capital gains.  Since our income is high, our marginal tax rate is also high, so the math on that might be different for you.

manchops

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Re: How did you arrive at your asset allocation?
« Reply #2 on: June 28, 2012, 11:31:16 AM »
I read two books:

http://www.amazon.com/Smartest-Investment-Book-Youll-Ever/dp/0399532838
http://www.amazon.com/Bogleheads-Guide-Investing-John-Bogle/dp/0471730335

Both are quite similar, with my preference for the second. I think the information in the second may be available on the boglehead's wiki.

mechanic baird

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Re: How did you arrive at your asset allocation?
« Reply #3 on: June 28, 2012, 11:36:40 AM »
I am not too good at this yet...
The taxable account which I will use before I withdraw from my retirement is at 50/50. Half in corp bonds mixed with inter or short term bonds. Another half in stocks with mix of Us and International.

My retirement is at 65 stock and 35 bonds...

My thought was if I need the money sooner, I keep it a bit more in fixed income than equity. If I have another 15 or so years, then I keep them in mostly stocks. I might still be on the conservative side since my FI days is about 10 years away.

tannybrown

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Re: How did you arrive at your asset allocation?
« Reply #4 on: June 28, 2012, 02:15:56 PM »
I'm aiming for the 'simpleton's portfolio' below from the introduction of the Intelligent Asset Allocator.  But then when I read on in the book, I see that several different possible allocations are suggested.

25% US large stocks
25% US small stocks
25% foreign stocks
25% US short term bonds

I see a lot of different lazy portfolios suggested but I wonder how one picks the 'right one' for their situation.

velocistar237

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Re: How did you arrive at your asset allocation?
« Reply #5 on: June 28, 2012, 02:33:00 PM »
From the Shortest Book Ever on Saving for Retirement. He even includes an appendix with fund names for all the major companies. I'm thinking of tweaking it a little bit.

Mr Mark

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Re: How did you arrive at your asset allocation?
« Reply #6 on: June 28, 2012, 03:15:39 PM »
I read a lot, on both sides of the divide, and was convinced that MPT, or asset allocation with non-market timed rebalancing, was the hiiden ' secret' that the whole financial industry pretty much is incentivised to not tell you.

And its supported by research, makes sense, and provides an actionable strategy. The ratchet effect of rebalancing is magical.

So, I have 85/15 ratio, as I think FI implies an infinite time horizon, even if you're 80 yrs old. And long term data from the past, along with my own excel simulations, show a peak of return at ~15 - 25% bonds. And as i think we're close to the peak of a 40yr bond run, I chose to bias to 15% right now.

Then of my stocks, 20% international avoiding Japan, and 50% of that in Emerging markets, because I think long term growth must happen outside the core economies. Then Large, mid and small cap value, med cap growth, dividend stocks, Dow stars. I wanted market exposure, but with a slight bias towards yield.

And I use Vanguard.

5% in a REIT.

smedleyb

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Re: How did you arrive at your asset allocation?
« Reply #7 on: June 28, 2012, 07:09:30 PM »
I read a lot, on both sides of the divide, and was convinced that MPT, or asset allocation with non-market timed rebalancing, was the hiiden ' secret' that the whole financial industry pretty much is incentivised to not tell you.

And its supported by research, makes sense, and provides an actionable strategy. The ratchet effect of rebalancing is magical.

So, I have 85/15 ratio, as I think FI implies an infinite time horizon, even if you're 80 yrs old. And long term data from the past, along with my own excel simulations, show a peak of return at ~15 - 25% bonds. And as i think we're close to the peak of a 40yr bond run, I chose to bias to 15% right now.

Then of my stocks, 20% international avoiding Japan, and 50% of that in Emerging markets, because I think long term growth must happen outside the core economies. Then Large, mid and small cap value, med cap growth, dividend stocks, Dow stars. I wanted market exposure, but with a slight bias towards yield.

And I use Vanguard.

5% in a REIT.

I'm no expert on allocation, but if I had to commit money to the markets, my portfolio would look substantially similar to Mr. Mark's.

Curious, but any particular reason you're avoiding Japan?  I mean, aside from attempting to avoid their 23 year old bear market? lol! (I assume this avoidance also connects to your idea that the best growth will occur outside developed economies?).

Put me down too as an investor who thinks the multi-decade bond run is in the bottom of the ninth....

James

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Re: How did you arrive at your asset allocation?
« Reply #8 on: June 28, 2012, 07:47:47 PM »
I read a lot, on both sides of the divide, and was convinced that MPT, or asset allocation with non-market timed rebalancing, was the hiiden ' secret' that the whole financial industry pretty much is incentivised to not tell you.

And its supported by research, makes sense, and provides an actionable strategy. The ratchet effect of rebalancing is magical.

So, I have 85/15 ratio, as I think FI implies an infinite time horizon, even if you're 80 yrs old. And long term data from the past, along with my own excel simulations, show a peak of return at ~15 - 25% bonds. And as i think we're close to the peak of a 40yr bond run, I chose to bias to 15% right now.

Then of my stocks, 20% international avoiding Japan, and 50% of that in Emerging markets, because I think long term growth must happen outside the core economies. Then Large, mid and small cap value, med cap growth, dividend stocks, Dow stars. I wanted market exposure, but with a slight bias towards yield.

And I use Vanguard.

5% in a REIT.


I'll second that similarity in theory with Mr Mark - wait, did I just agree with smedleyb?  :D  It's good to find common ground.


Mostly the similarity is in the 85/15 ratio (down from 20% bonds), and I also am also very much swayed by the idea of non-market timed rebalancing.  I plan to use index funds for broad coverage of market areas, I'm curious if you choose individual stocks or index funds Mr Mark?  I just moved over $100k to Vanguard today, looking forward to choosing the allocation of it when it's finished moving.  I'm appreciating reading this thread, it's very applicable to me right now.

Lars

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Re: How did you arrive at your asset allocation?
« Reply #9 on: June 29, 2012, 10:56:11 PM »
A lot of reading - more than was strictly necessary. I found the book a "Random Walk down Wall Street" and the various guides to investment on the web most helpful. Ultimately, I ended up with a very similar asset allocation to the last 3 commenters. Namely 80% stock 20% bond allocation with non-market timed rebalancing and primarily using index funds.

I have my stocks split 60% US broad market and 40% International (including developing markets) with a slight overweighting of REITs (5% of total portfolio). Bonds are 100% intermediate duration and primarily gov't issue. I have a few things I haven't decided for sure if I should include:
Peer-to-Peer lending - maybe 5-10% - should have somewhat low correlation with other assets and decent returns
Real Estate (landlord) - maybe 25%
TIPS - switch half of bonds to TIPS
Overweight in Developing Markets - 5% - I agree with Mr. Mark but yet convinced it need to be overweighted
Overweight in Med/Small US equities - 5% - Should improve returs but will modestly increase volatility

kudy

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Re: How did you arrive at your asset allocation?
« Reply #10 on: June 30, 2012, 10:36:23 AM »
Does "non market timed rebalancing" mean that you rebalance on a schedule, despite what the market is doing at the time? How often do you rebalance - every quarter? every year?

arebelspy

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Re: How did you arrive at your asset allocation?
« Reply #11 on: June 30, 2012, 01:08:26 PM »
Does "non market timed rebalancing" mean that you rebalance on a schedule, despite what the market is doing at the time? How often do you rebalance - every quarter? every year?

Typically yes, typically yearly.
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Mr Mark

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Re: How did you arrive at your asset allocation?
« Reply #12 on: June 30, 2012, 03:15:27 PM »
Or you can buy a balanced fund like VWELX or VWINX, and let vanguard balance for you.

ShavinItForLater

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Re: How did you arrive at your asset allocation?
« Reply #13 on: July 01, 2012, 07:53:17 AM »
On rebalancing, the asset allocators typically recommend doing it annually, although I've seen some opinions that every 2 or even 3 years might have some advantages.  The argument would be over whether you should ride a trend of one asset class outperforming for a bit longer than just 1 year before rebalancing.  In my opinion we're talking fine tuning here though, in most cases you're probably only talking about a few percentage points difference.

Some also recommend rebalancing whenever you exceed a certain threshold (say 5% above your target), but the periodic time based method is what I've seen more often.  It has the added benefit of not requiring you to watch the markets and/or react to big market swings.

Mr Mark

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Re: How did you arrive at your asset allocation?
« Reply #14 on: July 01, 2012, 09:43:05 AM »
On rebalancing, the asset allocators typically recommend doing it annually, although I've seen some opinions that every 2 or even 3 years might have some advantages.  The argument would be over whether you should ride a trend of one asset class outperforming for a bit longer than just 1 year before rebalancing.  In my opinion we're talking fine tuning here though, in most cases you're probably only talking about a few percentage points difference.

Some also recommend rebalancing whenever you exceed a certain threshold (say 5% above your target), but the periodic time based method is what I've seen more often.  It has the added benefit of not requiring you to watch the markets and/or react to big market swings.


It would be great to read any quantatative work on sensitivity to rebalancing methods. % or fixed, duration? I' m using 1 year but without huge rationale apart from the early work. But would 9 mths or 15 be better? Dunno. If someone has a huge spreadsheet with all the big indexes returns incl. Yield, I'd be able to do some testing very easily...

That's one reason why I let Vanguard do the bond/ stock part, and I just buy the stock indices to balance that bit, much easier. But without a fixed method you'll be lured into market timing.

ShavinItForLater

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Re: How did you arrive at your asset allocation?
« Reply #15 on: July 01, 2012, 10:38:59 AM »
Here are some resources if you want to research rebalancing further.  The first article summarizes many of the others though, and essentially says there is no clear consensus.

http://www.mymoneyblog.com/how-often-should-i-rebalance-my-investment-portfolio-updated.html
http://www.altruistfa.com/readingroomarticles.htm#Rebalancing

Mr Mark

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Re: How did you arrive at your asset allocation?
« Reply #16 on: July 01, 2012, 10:50:19 AM »
Thanks. I like the combo - annual and/ or 5% deviation on stock/ bond.

JamesAt15

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Re: How did you arrive at your asset allocation?
« Reply #17 on: July 02, 2012, 01:21:24 AM »
Curious, but any particular reason you're avoiding Japan?  I mean, aside from attempting to avoid their 23 year old bear market? lol! (I assume this avoidance also connects to your idea that the best growth will occur outside developed economies?).

I got one - with the yen/US dollar exchange rate down in the 75-80 y/$ range, if you're going to be spending dollars to invest, you're paying more for the same amount of those sluggish Japanese companies. Not to mention many of those companies being weighed down by export-centric business models now burdened by the same strong yen problem.

Japan is set to muddle along for another ten years. Pretty sure you can find better places to spend your money.

Disclaimer: I'm just some guy who lives in Japan, and not even particularly knowledgeable about the market here or living Mustachianistically. But nobody here is hoping for anything more than being able to muddle along and not go under in the meantime. A lot of businesses would be very happy to see the exchange rate return to the familiar 110-120 y/$, so they could sell their products to overseas markets and make a profit again. Japanese companies would probably see some reasonable profits then, but they'd have to be pretty damn amazing to make up for your buying shares at 78 yen/$ and then later valuing them at 110 yen/$.
« Last Edit: July 02, 2012, 01:28:51 AM by JamesAt15 »